By Christian Nolan
The Connecticut Law Tribune
April 21, 2015
A federal judge in Connecticut has given his final approval to a $140 million national settlement in a dispute that has been pending since 2001 between the trustees of five employer-sponsored 401(k) plans and Nationwide Life Insurance.
The plaintiffs in the class action litigation consisted of various companies which paid Ohio-based Nationwide to administer their retirement plans. Nationwide chose which third-party operated mutual funds would be included in the plans. But instead of choosing funds based on investment success, the plaintiffs said Nationwide chose funds from which it received revenue-sharing payments. Some of the funds did not perform well, and the plaintiffs accused Nationwide of breaching its fiduciary duties under the federal Employee Retirement Income Security Act (ERISA).
"In other words, the trustees contend that Nationwide engages in a quid pro quo arrangement with the mutual funds, agreeing to include their funds as investment options for the plans in exchange for the revenue-sharing payments," explained U.S. District Judge Stefan Underhill in court documents.
Additionally, Underhill, who approved the settlement earlier this month, also awarded the plaintiffs $49 million in attorney fees. The plaintiffs' lawyers were led by Marc Stanley of the Stanley Law Group, headquartered in Dallas, and William Bloss, of Koskoff, Koskoff & Bieder in Bridgeport. Underhill also awarded $1.3 million in attorney expenses over the nearly decade-and-a-half long litigation.
Lawyers involved in the case declined to comment, noting that the settlement terms precluded them from speaking about it. Nationwide was defended by Elizabeth Canizares of WilmerHale in Washington, D.C., and Charles Platt of the firm's New York office.
David Rintoul, of Brown, Paindiris, & Scott's Glastonbury office, was not involved in the case but focuses on ERISA issues and authors an ERISA blog. Rintoul explained that this litigation was not between individual investors and Nationwide; instead, the plaintiffs were the executives who ran the corporate 401(k) plans. For instance, he said if X,Y,Z machine shop had a 401(k) plan and arranged with Nationwide to offer it to employees, Nationwide, in choosing the investment product for the employees, chose which mutual fund which offered to share the most revenue.
"So it's essentially a kickback," said Rintoul. "It creates the appearance Nationwide was choosing who would give it the best deal rather than the fiduciary duty of doing what was best for the plans and ultimately the participants."
Rintoul said the landscape has changed significantly since 2001 when this case began. He said there are more requirements now regarding fee disclosures.
"To some extent, Nationwide addresses an issue [in the settlement] that shouldn't exist anymore," said Rintoul.
After the two sides agreed to the $140 million settlement-which experts say is the nation's largest in a service provider revenue-sharing lawsuit-Underhill appointed an attorney with no involvement in this case but who specializes in ERISA law, to evaluate the agreement as a fiduciary for the members of the class. In a 12-page memo issued in mid-February, Nicholas Saakvitne, of Santa Monica, California, gave his blessing on the settlement, which led to Underhill's early April approval. "I believe that the settlement is a reasonable and attractive settlement for the retirement plans, which comprise the members of the settlement class, and in the best interests of participants and beneficiaries thereof," wrote Saakvitne.
On Aug. 15, 2001, Lou Haddock, as trustee of Flyte, Tool & Die Inc., a plastic molding company from Bridgeport, filed the initial lawsuit in U.S. District Court in Connecticut. Once receiving official class action certification, the plaintiffs represented all current or former trustees of retirement plans covered by ERISA that did business with Nationwide.
In the litigation, the plaintiffs claimed that Nationwide's contractual arrangements with mutual funds and its retention of revenue-sharing payments violated ERISA.
Nationwide denied violating ERISA. It argued that the mutual fund payments it received benefited the plaintiffs and the retirement plans because the payments were used to reduce administrative fees paid by the plan and participants and to compensate Nationwide lawfully and appropriately for its services, according to court documents.
The litigation continued for 14 years and included six published opinions regarding various motions. More than 600 documents were filed.
While the case was pending, the parties twice tried to resolve the litigation through mediation with two of the top independent mediators in the country. The first time was before retired Oklahoma U.S. District Judge Layn Phillips in July 2012 and then again in October 2014 with attorney David Geronemus of JAMS in New York City. In December 2014, the two sides filed a motion for Underhill to approve their $140 million settlement.
In addition to the $140 million being paid to the companies that hired Nationwide to operate its retirement benefits program, the settlement also requires Nationwide to be more transparent in its business dealings. Nationwide must disclose to new and existing customers information regarding revenue-sharing rates, expense ratios, separate account fees, maintenance fees and per-participant fees.
"The settlement of the litigation... is approved in all respects as fair, reasonable, and adequate, and in the best interests of the class," wrote Underhill. "The court notes that no written objections were filed by class members and that no objector appeared before the court at the settlement hearing."
The $49 million in attorney fees was allocated at the rate of 35 percent of the settlement total. "As independent fiduciary, I believe that plaintiff's attorney fees request of $49 million, comprising slightly more than three times their fees (at normal hourly rates) incurred to date and anticipated to be incurred to implement the settlement, is reasonable..." Saakvitne wrote in his memo to Underhill.
Legal observers said they were unaware where the $49 million ranked in terms of historic attorney fees awards in Connecticut.