Revenue-sharing suit filed

COLUMBUS, Ohio — A Florida county 457(b) deferred compensation plan sponsor filed a class-action suit against Nationwide Life Insurance Co. and two affiliates, seeking restitution of revenue-sharing payments from mutual funds and other investment advisers.

The suit was filed in U.S. District Court in Columbus on Nov. 15 by Orange County Sheriff Kevin Beary, who oversees the $50 million Sheriff's Office of Orange County Section 457(b) Deferred Compensation Plan.

Nationwide is based in Columbus.

The suit was filed on behalf of all 457(b) plans in the country that have had variable annuity contracts with Nationwide. The other defendants named are Nationwide Financial Services Inc., a subsidiary of the insurer, and Nationwide Retirement Solutions Inc., a unit of Nationwide Financial.

Roger L. Mandel, attorney with Stanley, Mandel & Iola LLP, Dallas, who represents the plaintiff, said in an interview that the court will have to rule on whether the suit can maintain its class-action status.

The suit seeks an accounting of the revenue sharing. It demands Nationwide pay participants all the revenue-sharing payments it received.

"Nationwide is breaching its fiduciary duty to 457 plans by taking kickbacks from mutual funds," Mr. Mandel said. The revenue sharing "was not provided for in the variable annuity contracts, nor was it disclosed by Nationwide."

This case can be summarized in three words: "pay to play," Edward Siedle, an attorney and president of Benchmark Financial Services Inc., Ocean Ridge, Fla., who also represents the sheriff in the case, said in an interview.

In response, Erica Lewis, Nationwide spokeswoman, said: "We are in the process of reviewing the complaint ... The service payment — revenue sharing in this 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."

Revenue sharing in general has come under intense scrutiny in recent months, including being the focus of a number of class actions. Nine corporations were sued in class actions this fall for allegedly failing to disclose revenue-sharing fees in their 401(k) plans: Boeing Co., with $23.7 billion in 401(k) assets; Lockheed Martin Corp., $14 billion; United Technologies Corp., nearly $14 billion; Northrop Grumman Corp., $11 billion; Caterpillar Inc., $4.5 billion; General Dynamics Corp., $5.96 billion; International Paper Co., $4.4 billion; Bechtel Corp., $3.9 billion; and Exelon Corp., $3 billion.

Nationwide has as clients 8,000 public employee deferred compensation plans, whose combined assets total $40 billion, said Karah Brody, a Nationwide spokeswoman.

The suit states that since 1996, Nationwide has required mutual funds to make revenue-sharing payments, based on a percentage of participants' assets invested in the mutual funds through Nationwide. The payments range from about 25 basis points to more than 58 basis points annually on total assets, the suit states.

"Nationwide implicitly or explicitly made it a condition to offering a mutual fund family's funds that the mutual fund family pay it revenue sharing on a majority of all of its funds offered by Nationwide," the suit claims. The asset-fee arrangements "bear no relationship whatsoever to the cost of providing the services or a reasonable fair market value of the services," the suit states.

"Simply put, whether a plan participant has $10,000 or $100,000 in his or her account, the cost to handle transactions and maintain records is the same," according to the suit. "In an open market, such services would be provided between unrelated parties on an annual per-participant basis, as Nationwide provided them prior to its implementation of the revenue-sharing scheme, and not on a percentage of assets basis."

The suit calls Nationwide's revenue-sharing payments a breach of its fiduciary duty. "As a fiduciary … Nationwide is prohibited from receiving benefits … 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."

Mr. Mandel said he didn't have an estimate of the amount of revenue-sharing payments Nationwide received.

Nationwide Life provided investments to the Orange County sheriff's plan through variable annuity contracts, whose underlying investment options were mutual funds, many of which are owned or operated by Nationwide or its units, the suit states.

Nationwide provided annuities for about $20 million of the plan, said Mr. Siedle.

As of Nov. 1, the plan switched to Vanguard Group, Malvern, Pa., to replace Nationwide and the other two providers to the plan — Hartford Financial Services Group, Simsbury, Conn., and ING, Hartford, Conn., Mr. Mandel said.

"Despite having been terminated, Nationwide will continue to manage certain assets of the fund over the next few years due to certain withdrawal restrictions," Mr. Siedle said. The two other providers might continue to also manage assets because of the restrictions, Mr. Mandel added, saying he didn't know how much money the former providers still manage. Hartford and ING are not part of this suit, he said. Mr. Mandel declined to say if the two companies received revenue sharing from investment managers.

The sheriff is also represented by the law offices of Jeffrey C. Engerman PC, Los Angeles; and Allen C. Engerman PA, Boca Raton, Fla.