Teachers Sue VALIC over 403(b) Investments

The lawsuit filed in the U.S. District Court for the District of Arizona claims VALIC agents targeted plan participants for sales of certain annuities that they knew to provide no additional tax advantages, but subjected the participants to high fees and surrender charges on withdrawals.

The filing points out that tax-deferred retirement plans already offer the same tax advantages of the annuities—namely the ability to accrue earnings tax-deferred and to switch investments inside the accounts without triggering current taxation.

The suit seeks class-action status on behalf of all individuals who purchased an individual deferred annuity contract or who received a certificate to a group deferred annuity contract that was used to fund a qualified retirement plan under Internal Revenue Code sections 401, 403, 408, 408A, or 457 and issued by VALIC from January 1, 1974, to the present. The plaintiffs contend that they and other class members would not have purchased the annuities had they been informed during the sale that the tax-deferral benefit of the annuities is already provided by the retirement plans.

The suit alleges that VALIC agents were, in part, driven by the fact that they received lower commissions for selling more appropriate investment vehicles for retirement plans. The plaintiffs also claim that because VALIC agents call themselves financial advisers and not insurance agents, they and other class members were more likely to trust them.

Also named as defendants in the suit are VALIC subsidiaries Variable Annuity Marketing Company and VALIC Financial Advisor, Inc., VALIC Separate Account A, and various VALIC executives, including former chairman, CEO, and President John A. Graf. They are charged with fiduciary breaches and material misrepresentations and omissions.

The suit seeks compensatory damages for plaintiffs and class members, an order enjoining defendants from soliciting sales of the annuities for qualified retirement plans, an order enjoining VALIC from charging surrender fees for the annuities, and punitive damages.

In response to the lawsuit, VALIC said in an official statement: “Although we have not been served with this suit, we understand it alleges facts and claims that appear to be identical to another class action dismissed by an Arizona federal judge in 2005 and affirmed by the federal appeals court.  As with that case, VALIC believes these allegations to be without merit.” The case referred to is James Drnek and Maureen Tiernan, et al. v. VALIC, et al.

The current complaint is Hall v. The Variable Annuity Life Insurance Company, et al.