Compliance

Court Approves Settlement of New York Life Self-Dealing Case

A federal judge in Pennsylvania has approved a $14 million settlement of a nine-year legal battle over allegations New York Life Insurance Co. improperly directed employees’ and agents’ retirement savings into its proprietary mutual funds.
Reported by Fred Schneyer

U.S. District Judge Bruce W. Kauffman of the U.S. District Court for the Eastern District of Pennsylvania approved the settlement deal between the company and employees and agents who were in the New York Life defined benefit and 401(k) programs. According to Kauffman’s order, $9.8 million plus interest will be distributed to 401(k) participants who had an account between January 1, 1994 and December 31, 2005. The remaining $4.2 million plus interest, less attorneys’ fees and costs, will be allocated between the Employee Pension Plan and the Agent Pension Plans.

Kauffman said the payments to the pension plans will not be distributed to individual participants but “will be used to strengthen the funding of (the) pension plans.”

The settlement ends a 1999 lawsuit filed by current and former employees and agents who accused the company of an Employee Retirement Income Security Act (ERISA) fiduciary breach. The plaintiffs charged that New York Life transferred pension and 401(k) assets from separately managed accounts to the company’s Mainstay Institutional Mutual Funds because the expense to the plans of using mutual fund management was far greater than the expense of hiring individual account managers.

The plaintiffs also accused New York Life of violating the Racketeer Influenced and Corrupt Organizations (RICO) Act.

In his most recent ruling, Kauffman asserted that the settlement was appropriate because the plaintiffs could face “serious legal challenges” if the case were litigated. For example, Kauffmann pointed out, New York Life could have argued at trial that using mutual funds in a 401(k) plan was a common practice – a defense Kauffman said could have “limited or negated” recovery by the plaintiffs.

In addition, the court noted that the plaintiffs had estimated that the full amount of excessive fees the plans paid during the period from 1994 to 2005 was $70 million, making the $14-million settlement approximately 20% of the “best possible” recovery if all theories of liability were accepted by the court. The court noted that this 20% of “best possible” recovery was comparable to other class settlements approved in the Eastern District of Pennsylvania.

The ruling in Mehling v. New York Life Insurance Co., E.D. Pa., No. 99-5417, 3/4/08, is here.