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    Alleged Mutual Fund Kickback Case Allowed to Proceed as Class Action

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    Financial lines insurers may want to take a closer look at revenue-sharing agreements between pension plan administrators and the mutual funds they offer plan participants as investment options, in the wake of a Connecticut federal court’s decision to certify a class action against ING Life Insurance & Annuity Company.  The current administrator of a 401(k) plan successfully argued that ING, the former administrator, was a fiduciary for purposes of ERISA, with the result that it could proceed with its claims that certain revenue-sharing agreements between ING and the mutual funds it chose to make available to plan participants amounted to illegal kickbacks.  The decision is Healthcare Strategies, Inc., et al. v. ING Life Insurance & Annuity Co., No. 11-cv-282 (D.Conn. Sept. 26, 2012).  A copy of the decision is available here.

    HSI administered two 401(k) plans.  Until March 2011, ING had managed the retirement plans’ assets pursuant to various group contracts.  ING controlled which investment options were made available to the plan participants, and it provided advice about those investment options.  All of the plans that ING offered allowed participants to allocate their 401(k) contributions among various investment options, with which allocation the plan participant purchased units of participation in pooled separate accounts.  Those separate accounts, in turn, owned underlying investments, including shares of mutual funds.  ING was the owner of the separate accounts, the assets of which were then used to invest in mutual funds on behalf of the plan participants.  ING thus was the only direct shareholder in each of the respective underlying mutual funds.  At all times, ING controlled the investment of the separate account assets, and it retained authority to change the mix of mutual funds available through the separate account.

    HSI alleged that ING used its control over investment options to obtain revenue-sharing payments from certain mutual funds and to engage in other self-dealing, all in violation of ERISA.  HSI’s complaint contended that ING included certain mutual funds as investment options based on the funds’ revenue-sharing payments to ING, rather than the funds’ potential to benefit the plan participants – in essence, that ING chose the mix of mutual funds it would offer the 401(k) plan participants on the basis of the fee income that would be shared with ING by the mutual fund.

    The court found dispositive the fact that ING had the authority to make changes in the menu of investment options that it offered to plan participants, and that ING did not also permit participants to reject any changes to those options and still keep their plans.  That, the court held, was sufficient to qualify ING as a fiduciary under ERISA.  Accordingly, because the purported class otherwise satisfied the requirements of numerosity, commonality, typicality, and adequacy, the court certified the case.

    The action continues.  ING vigorously disputes HSI’s allegations.  But the case should serve as a caution for insurers who write coverage in the financial sector, and encourage them to scrutinize all possible risks closely.

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