ING hid kickbacks from fund firms in 12(b)-1 fees: Suit

Healthcare Strategies Inc., a retirement plan administrator, has filed a class action against ING Life Insurance and Annuity Co., charging that the insurer received kickbacks from the mutual funds it offered to its plan clients.
ING provided plan services and group variable annuity contracts to Healthcare Strategies’ 401(k) plan, along with others in the class, according to the suit, which was filed on Wednesday in the U.S. District Court for the District of Connecticut.
The plans’ assets were invested in fixed accounts, a general accumulation account that offered a guaranteed rate of interest and separate accounts that invest in mutual funds. Healthcare Strategies argues that ING was a fiduciary to the plan because it had discretion over the plan’s assets.
The plan administrator claims that ING received kickbacks from the featured mutual funds in the form of 12(b)-1 fees, service fees and other revenue-sharing payments, which not only raised the funds’ costs but also put the insurer in violation of its fiduciary duty to plan clients.
“ING explicitly made it a condition to offering a mutual fund family’s funds to the plans that the mutual fund family share revenue on all or most of the funds offered and/or recommended by ING,” Healthcare Strategies asserted. The payments were at least 25 basis points of the plans’ total assets for each year, the firm alleged.
Further, the plaintiff charges that ING improperly profited from the spreads it earned on retirement assets in its fixed accounts, and that the insurer made money off securities lending in the separate accounts. None of the compensation from the revenue sharing or the earnings from the separate and fixed accounts were disclosed to the plans, according to the suit.
ING spokesman Dana Ripley said, “We reject the allegations of any wrongdoing. We intend to vigorously defend ourselves, and we expect to prevail.”
The insurer may indeed prevail. The Healthcare Strategies case against ING is similar to a handful of 403(b) lawsuits filed by teachers who alleged that plan service providers had received kickbacks. Those cases have failed to gain much traction. Jeffrey G. Robertson, a partner at Barran Liebman LLP, said those suits have fallen short because the plaintiffs have not shown that a service provider is giving advice to the plan. Those suits also failed to prove that there was a lack of disclosure when administrators presented fund choices to plan sponsors.
“This case may or may not have more legs,” Mr. Robertson added. “It depends on how much of that revenue sharing information was disclosed and how much choice did the plan sponsor truly have.”