A federal judge in Connecticut ruled that while Nationwide Financial Services can legally countersue trustees of five 401(k) plans in a revenue sharing dispute, such counterclaims would be unsuccessful in this case.
U.S. District Judge Stefan R. Underhill of the U.S. District Court for the District of Connecticut ruled that plan fiduciaries can bring contribution and indemnification claims against co-fiduciaries under the Employee Retirement Income Security Act (ERISA). To take away a fiduciary’s chance to make a counterclaim against another party also potentially liable for any plan misdeeds would not be fair to potential defendants in fiduciary breach cases.
“To prohibit fiduciaries from seeking contribution or indemnification from jointly and severally liable co-fiduciaries would permit total liability on whomever the plaintiff elected to sue. It would promote a ‘race to the courthouse’ mentality among fiduciaries seeking to recover for fiduciary breaches on behalf of the Plans,” Underhill asserted in his opinion.
The trustees argued in their suit against Nationwide that the company breached its fiduciary duty by accepting revenue sharing payments from mutual fund families selected to have fund options in the plans (see Nationwide ERISA Suit Survives Challenge).
According to Underhill, Nationwide’s counterclaims could not ultimately be successful because it—not the plans —was the only recipient of the revenue sharing payments. If the counterclaim was allowed to succeed, the remedy would be a return of the revenue-sharing funds. Nationwide could countersue the trustees if it could prove their acceptance of the revenue sharing arrangement hurt the plans in some way; Underhill pointed out Nationwide did not allege the plans were harmed by the trustees’ actions.
The trustees filed the suit in 2001 alleging that the revenue sharing arrangement represented a prohibited transaction under ERISA. In response, Nationwide contended it was not subject to ERISA’s prohibited transaction rules because it was not a plan fiduciary and the revenue sharing payments were not plan assets.
Nationwide argued further that it should be allowed to countersue the trustees because they had the ultimate responsibility for purchasing annuity contracts and making changes to investments options, they knew of the revenue sharing payments, and they received cost-savings from those revenue sharing payments.
The case is Haddock v. Nationwide Financial Services Inc., D. Conn., No. 3:01cv1552, 8/11/08.