In another, "why am I the only guy blogging on this", story, Nationwide had a potentially huge class action case filed against it in the state of Florida by a Sheriff in Orange County, FL.
The suit was filed in Ohio, the home of Nationwide's headquarters, and alleges that the annuities sold to public pension plans under the section 457 retirement provision over the past 15 years were part of a long standing kickback scheme that allegedly increased the cost, and thus reduced the asset values for the public employees using the annuities to fund their pension plans. According to the complaint, Nationwide received kickbacks from the firms whose funds it used as the investment options inside the variable annuity contracts based on the percentage of assets under management in the accounts. Essentially you have a situation where the fund manager is paying Nationwide for "shelf space" in the annuity, and the more money steered to the manager would then increase the rebate or revenue share to Nationwide. The cost of variable annuities can run as high as 2% to 3% per year once the life company charges and investment firm fees are totaled up, and it is often difficult to justify this level of expense relative to the performance that could be obtained by going with other options. In the Florida case they had recently switched to Vanguard to manage the accounts and the fees were reduced by about 2/3rds according to the report in the Forbes article.
The firm handling the litigation on behalf of the sheriff and other potential class members is Stanly, Mandel & Iola, and they seem to be zooming in on these payments back to Nationwide and the fact that they weren't specifically agreed to or disclosed in the annuity contract, and that the fiduciary wasn't supposed to be doing side deals. The Nationwide response sounds familiar to many of us in the settlement industry. " These service fee payments are legal business agreements where mutual fund companies provide payment for administrative services they would otherwise provide themselves...and This practice allows Nationwide to provide deferred compensation plans that offer significant choice and value and lowers overall cost to plan participants."
Let me interpret that for you. " We got caught squeezing the mutual fund companies for giving them access to the billion dollars in retirement assets inside these accounts but we are going to try as best we can to illustrate some value to the annuitants for taking money we weren't entitled too. "
However, the plot thickens even more. There is an organization called NACO, the National Association of Counties, which it is further alleged received payments from Nationwide in return for the endorsement of the firms 457 variable annuities to it's county government members. (Can anyone see the parallel to the ATLA "preferred vendor" program?) While the Nationwide spokesperson didn't comment on this, the NACo executive director, Larry Naake was quoted in the article as confirming that his organization had received payments from Nationwide and they had in fact endorsed its 457 variable annuities since the early 1980s. NACo in turn shared the payments with the 42 state affiliates, however it does not disclose the payments to the county employees sold the product, again claiming according to the Forbes article that the payments are part of a confidential "business arrangement."
Forbes has been one of the very few news outlets covering the growing scandals and marketing practices in the annuity and retirement product industry, and was instrumental in bringing to light the NY state teacher unions case that recently was settled by then NY Attorney General Spitzer. In that situation the union received $3 million in undisclosed payments from ING in exchange for promoting it's variable annuities and funds to the union members, again with out disclosing the "revenue sharing" business arrangement, on the grounds, I would suppose, that it was none of the union members business. That little "business arrangement" ended up costing ING $30 million in fines and payments.
So, once again we have some interesting comparisons. Undisclosed business arrangements where in a life company, broker or agent is required to "pay to play" to get access to a profitable source of annuity premium business, and the end user who is ultimately paying the cost of this "business arrangement" are totally in the dark as to this revenue sharing.
Sound familiar anyone?