Court Approves Mutual Fund ERISA Settlement

Pittsburgh, PAA US district court judge has approved a $14 million settlement between New York Life Insurance Co. employees and the company. The plaintiffs alleged that the company improperly put employees' and agents' retirement savings into the company's own proprietary mutual funds when there were more appropriate investments that charged lower fees.

The lawsuit was filed after employees and agents of New York Life Insurance Co. alleged the company violated the Employee Retirement Income Security Act (ERISA). The plaintiffs further alleged that the New York Life violated the Racketeer Influenced and Corrupt Organizations (RICO) Act, although that portion of the lawsuit was later dropped. According to the lawsuit, New York Life transferred employee pensions and 401(k) assets into the company's Mainstay Institutional Mutual Funds because the expense of using mutual fund management was greater than the expense of having individual managers for the accounts.

Essentially, the company made more money off fees from the mutual fund accounts than it would have by keeping the assets in individual accounts. At the same time, the funds lost money because of the excessive charges, estimated to be around $70 million between 1994 and 2005. The investments had lower returns than they would have had the Plans been managed with lower fees.

The plaintiffs further alleged that trustees breached their fiduciary duties by: failing to inquire into the appropriateness of the Plan's investments, including the appropriateness of the fees and expenses associated with the investments; failing to use their own knowledge in making the investments; and failing to overcome the influence of their own interests in the success of the investments.

Part of the settlement will be given to those who were involved in the company's 401(k) plan between January 1, 1994 and December 31, 2005. The other part of the settlement will strengthen the pension plans' funding. In addition to the $14 million settlement, New York Life plan fiduciaries must hire an independent adviser who will advise the company about appropriate investments for the plans.

Employees in other financial firms are investigating the possibility of filing lawsuits against their employers, alleging that their money was inappropriately invested in the company's own mutual funds despite high fees associated with those funds. They allege that, based on the size of their investments, it would have been more appropriate to hire money managers to negotiate smaller fees for their investments. As a result, they have been charged higher fees than necessary and received lower returns on their investments.