How is
New York Life taking the class-action suit filed yesterday on behalf of
Gary Mehling? Not lying down. The insurance company has adopted an aggressive strategy of fighting the allegations both in court and in the media. The suit, filed yesterday in Federal court in Philadelphia, alleges that New York Life overcharged four retirement plans by using its proprietary
MainStay Institutional Funds family as investment vehicles.
The insurer's strategy of sharing its side of with the media as well is a response to tactics taken by the
Sprenger & Lang, the lead-counsel representing the plaintiffs, according to a New York Life spokesperson. The insurer is represented by
Morgan Lewis and Bockius of Philadelphia. It has also retained the
Groom Law Group to act as its
ERISA counsel.
New York Life began to educate the media about what it sees are the issues and the merits of the lawsuit at the end of May. Its strategy included contacting the media proactively and circulating a multi-page "background" sheet to reporters.
"One of the things that we were shocked by was that the letter from the attorney representing the plaintiff was stacked with press clippings from the First Union and the SBC cases,"
William Werfelman, a spokesperson for New York Life told the 401kWire.com. He noted that Sprenger & Lang had also represented the plaintiffs in those cases.
Werfelman explained that the insurer decided under the circumstances that it was important to explain the situation to reporters before the complaint is filed.
"We felt that it is important to give reporters a background on this case," he explained. He added that one of the reasons to be proactive was to allow reporters time to understand the issues in the case before the suit was filed since many of the reporters work on tight deadlines.
So what is the story that New York Life is trying to get out to reporters?
New York Life contends that the suit is not designed to help plan participants, but merely to enrich the law firm bringing the suit. "There is no economic benefit [in the suit] to either employees or agents," he said.
"It is remarkable that plaintiffs attorney have not attracted a single employee, agent, retired employee or former employee to the suit," he added noting that there is only one named plaintiff in the filing.
"The suit is unfounded and we intended to demonstrate that in court," said Werfelman. He added that the opposing lawyers will be "unable to prove that participants lost a single dollar" of benefits due to New York Life's conduct.
The suit is unique in that it claims participants in two of the company sponsored defined benefit plans were harmed by excessive fees in the MainStay Institutional Funds and that New York Life executives plotted to harm participants by converting the plan investments from separate accounts to funds in 1991.
This claim has struck many in the industry as odd since defined benefit plans guaranty a level of benefits no matter the performance of the underlying assets or the fees associated with those assets.
Stephen M. Saxon, principal of the Groom Law Group representing New York Life agrees, "At the end of the day the company guarantees the benefits of the plan," he said.
"Because of the trustees' decisions the defined benefit plans ended the nineties at a $900 million surplus," said Saxon. He pointed out that the surplus grew from $25 million in 1991 even though New York Life made no contributions to the plans in the 1990s. The trustees "Turned out to be very prudent indeed," he claims.
The defined benefit aspect of the suit appears to have struck a nerve in the industry. Saxon says that this issue was one raised by many 401(k) professionals attending the semi-annual legal briefing he conducted at this weeks meeting of the
Society of Plan Administrators and Record Keepers (SPARK) in Washington this week.
Saxon made the argument that the changes to the plans in 1991 had no material impact on the plan and that they actually benefited the participants.
All New York Life did was "take the label off the separate account and register it as an investment company," said Saxon. He characterizes that change as "form over substance." He also points out that the mutual funds actually had a lower fee structure than the all-in cost of the separate account which saved the plan $175,000 in fees in 1991, the year that the change was made.
The savings was $125,000 for employees' plan and $50,000 for the agents plan, according to Saxon. He said that the insurer had run projections on the cost differential and found that by 1999 the theoretical annual savings of changing the structure of the investments had grown to $600,000.
He also points out that ERISA includes exemption to allow insurance companies to invest their
own plan money under section 408(b)5 and that prohibited transaction exemption 77-3 also o.k.'s the practice for financial institutions. "It would be contrary to normal plan practice for financial institutions to be required to invest their money outside of the financial institution," says Saxon.
Like his client, Saxon is also confident that the suit will be decided in New York Life's favor and that it is motivated more by the economic interests of the counsel than the plan participants. "The only people who can make money out of this lawsuit are the lawyers. I have yet to see a Federal judge redesign a plan to payout more benefits than called for under the plan," Saxon observed.
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