April 5, 2007

Trust Sued Over Backing Retiree Plan

A lawsuit filed in federal court in Manhattan last week contends that a retirement plan offered by the New York State United Teachers breached its fiduciary duty when it accepted millions of dollars in payments from an investment firm in exchange for endorsing the firm's products to plan members.

The lawsuit, filed as a class action on behalf of participants in the New York State United Teachers Member Benefits Trust, taps into a growing concern among retirement plan participants that excessive fees are enriching investment firms while diminishing their savings. The suit also signals to those overseeing plans that the investment offerings must be appropriate and suitable to plan participants.

According to the court filing, the teachers' trust exclusively endorsed a high-fee annuity investment offered by ING Life Insurance and Annuity Company, a subsidiary of the ING Groep, a Dutch investment firm.

In return, ING reimbursed the trust for salaries of some employees whose jobs were to promote the company's products to plan members. ''The excessive costs of the plan compared to lower cost equivalents resulted in tens of millions of dollars of lost retirement savings'' for the trust's members, the filing said.

The New York State United Teachers is a federation of local unions representing 575,000 people who work in or are retired from schools, colleges and health care facilities across the state.

''This suit involves the Member Benefits Trust, a financial and legal entity that is separate from the union,'' said Carl Korn, a spokesman for the union. ''The suit came as no surprise; the trust will be providing an appropriate legal response.''

The suit is an outgrowth of an action brought last year by Eliot Spitzer, then attorney general of New York and now its governor. After a yearlong investigation, Mr. Spitzer found that ING and the trust had an endorsement arrangement that was not disclosed to trust members.

He settled with the trust last June and with ING last October. Without admitting or denying the accusations, ING agreed to pay $30 million. About 55,000 beneficiaries of the trust were to receive approximately $450 each under the settlement.

Mr. Spitzer's office criticized the trust for not disclosing its endorsement agreement with ING. In 2005, the trust began making more detailed fee disclosures. In its settlement with Mr. Spitzer the trust paid $100,000 and agreed to a series of changes. Under the Employee Retirement Income Security Act, or Erisa, those overseeing a retirement plan have a fiduciary duty of loyalty to the participants, said Marc Machiz, a partner at Cohen Milstein Hausfeld & Toll in Philadelphia, who is not involved in the suit.

''The case is important as part of a recent trend to bring cases challenging the fees being posed on Erisa plan participants,'' Mr. Machiz said. ''Whether it will be a tidal wave or not it's too soon to say, but I think we're going to see a lot more of these lawsuits.''

In 2001, according to the lawsuit, the trust and ING agreed to an annual payment schedule, reflecting the endorsement fee, beginning at $1.85 million and increasing to $2.4 million in 2006. Plan participants were not advised of these and other fee arrangements.

Since the trust's inception in 1989, participants have been charged expenses as well as an insurance charge on their investments. Currently, the suit said, the insurance fee consists of 1 percent of a participant's fund balance, and the average variable fund cost is an additional 0.68 percent. The fees grow larger when surrender charges for early withdrawals apply. The trust has investments exceeding $2.3 billion.

Derek W. Loeser, at Keller Rohrback in Seattle, is one of the lawyers representing the plaintiffs. He said the people overseeing the trust ''operated in a fiduciary function and their conduct was marred by self-dealing and self-interest that put them directly at odds with the people whose assets they were in our view duty bound to protect.''

According to the lawsuit, the trust brochures made it seem that its officials had conducted extensive due diligence to identify top investments. ''You needn't spend a lot of time searching for quality insurance and investments,'' one brochure said. ''We already did.''

Union leaders did not benefit directly from the arrangement with ING. But in 2001, the suit said, the trust hired six people to act as liaisons with ING and to oversee the ING programs. Their salaries were paid entirely by ING, the suit said; they accompanied the firm's sales representatives to conferences where ING marketed its products and they provided it with sales leads.

Edward A. H. Siedle, a lawyer and president of Benchmark Financial Services in Ocean Ridge, Fla., a company that investigates money managers on behalf of pension plans, is also representing the plaintiffs. He said: ''When unions and insurance companies get together and cut endorsement deals, it's almost always a bad deal for retirement plan participants.''