Compliance December 21, 2010

9th Circuit Clears NEA in Annuity Sales Case

A federal appellate court has ruled that the National Education Association (NEA) cannot be held liable for a fiduciary breach because of its endorsement and marketing of annuities in 403(b) plans offered to NEA members.
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The 9th U.S. Circuit Court of Appeals asserted that the annuities were component parts of 403(b) plans not subject to the Employee Retirement Income Security Act (ERISA). The appellate panel rejected plaintiffs’ arguments that the annuities established by the teachers’ union and were themselves ERISA-governed pension programs.

Writing for the appellate court, Judge Diarmuid F. O’Scannlain affirmed a lower court decision in the suit filed in Washington state by a group of public school teachers who charged that the NEA had committed the ERISA breach by improperly paying millions of dollars in undisclosed commissions to Nationwide Life Insurance Co. and Security Benefit Life Insurance Co. and then taking millions of dollars in kickbacks for its endorsement of the annuities offered by Nationwide and Security Benefit.  Nationwide and Security Benefit provided annuities sold under an NEA-endorsed program the plaintiffs referred to as the “Valuebuilder Plan.”

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After receiving the appeal of the lower court’s order in favor of the defendants, the 9th Circuit asked the U.S. Department of Labor (DoL) to file a friend of the court brief addressing whether the NEA is legally capable of establishing an ERISA-governed 403(b) plan. The DoL argued it is not.

O’Scannlain concluded: “We are therefore satisfied that the NEA, which is not even registered to sell securities, did not ‘establish or maintain’ the annuity contracts in question. These annuity contracts cannot, therefore, be ‘employee pension benefit plans’ covered by ERISA.”

The case is Daniels-Hall v. National Education Ass’n, 9th Cir., No. 08-35531.

In Practice December 21, 2010

SPARK Announces Effort to Develop Standards for Fee Disclosure

The SPARK Institute has issued a Compliance Alert regarding potential fee disclosure problems and fiduciary issues for plan sponsors and certain providers of plan investment options.
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Larry Goldbrum, SPARK General Counsel, noted that plan sponsors face potentially significant fiduciary issues if an investment provider is unable or unwilling to provide the information that the plan needs to comply with participant disclosure regulations.  The Institute also announced that it has begun an initiative to help address the disclosure issues. 

“Under the Department of Labor’s (“DOL”) participant disclosure regulations, plan sponsors are required to provide participants with information about all of their plans’ investment options in a single chart or similar format to facilitate the comparison of each option offered under the plans,” Goldbrum said, in a news release. “However, many investment managers and providers of non-registered investments, such as bank collective funds, separately managed accounts and annuities, may be surprised that they will have to make significant new information available in order for plan sponsors to comply with the new regulations.”   

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Goldbrum added: “Some non-registered investment providers may not have the information readily available, and developing the information and cost-effective methods for providing it to plan sponsors and plan recordkeepers could be complex and time consuming.”    

Goldbrum said the new initiative to develop data standards for retirement plan recordkeepers and providers of non-registered investment fund providers to enable them to electronically share information with each other and with existing investment information aggregators leverages the experience and expertise SPARK has from developing information sharing standards for 403(b) plans and lifetime income solutions.

The Compliance Alert is posted on The SPARK Institute Web site at http://www.sparkinstitute.org/comments-and-materials.php.

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