Nationwide Life Insurance and two affiliates were sued by the Orange County Sheriff's Office, Orlando, Fla., on behalf of its $50 million 457(b) deferred compensation plan, seeking restitution of revenue-sharing payments collected from mutual funds and other investment advisers, according to the lawsuit. The class-action suit was filed Nov. 15 by Orange County Sheriff Kevin Beary, who oversees the sheriff's office plan, in U.S. District Court in Columbus, Ohio — where Nationwide is based — on behalf of all U.S. 457(b) plans that have had variable annuity contracts with Nationwide. The other two defendants are Nationwide Financial Services and Nationwide Retirement Solutions.
Nationwide has been requiring mutual funds to make revenue-sharing payments since 1996, based on a percentage of participants' assets invested in the mutual funds through Nationwide — ranging from about 25 basis points to more than 58 basis points annually on total assets, according to the suit, which seeks an accounting of the revenue sharing and for Nationwide to pay participants all the revenue-sharing payments it received.
The suit calls Nationwide's revenue-sharing payments a breach of its fiduciary duty. "As a fiduciary … Nationwide is prohibited from receiving benefits in connection with them not specifically agreed to by class members in their annuity contracts with Nationwide," the suit states. "The revenue sharing payments themselves constitute plan assets in Nationwide's hands because Nationwide received the payments as a result of its fiduciary status. … In other words, the revenue-sharing payments effectively constitute the proceeds of … participants' investments."
Nationwide Life provided investments to the plan through variable annuity contracts, whose underlying investments were in mutual funds, many owned or operated by Nationwide or its units, according to the suit. Nationwide provides annuities for about $20 million of the sheriff's office plan, said Edward Siedle, an attorney and president of Benchmark Financial Services, Ocean Ridge, Fla., who is helping to represent the sheriff. The other annuity providers aren't part of the suit, he said.
Erica Lewis, Nationwide spokeswoman, said: "We are in the process of reviewing the complaint. ... The service payment, revenue sharing, in the case is a well-known and accepted practice in the industry. These payments describe the practice of fund companies entering into lawful business agreements where fund companies are paying for administrative services they would normally provide. The overall effect is to lower plan cost to participants."
The plan recently hired Vanguard to replace Nationwide as administrator of the plan, Mr. Siedle said. "Despite having been terminated as administrator, Nationwide will continue to mange certain assets of the fund over the next few years, due to certain withdrawal restrictions," he said. Vanguard also manages $30 million for the plan, he added.
