Compliance October 5, 2007

Fiduciary Breach Suit Against Nationwide Survives a New Challenge

A federal judge in Connecticut has cleared the way for the trustees of five 401(k) plans to pursue their claims that Nationwide Financial Services was a fiduciary because it could change the plans’ investment lineups.

Reported by

Fred Schneyer

The latest ruling by U.S. District Judge Stefan R. Underhill of the U.S. District Court for the District of Connecticut in the six-year legal battle turned on a procedural issue: whether named plaintiffs Lou Haddock, Peter Wiberg, Alan Gouse, Edward Kaplan, and Dennis Ferdon had given up their right to make the fiduciary claim by not leveling the charge in the earlier versions of their complaint.

The trustees charged that Nationwide is a fiduciary under the Employee Retirement Income Security Act (ERISA) because it helped select the investment options made available for plan investments and because it had a unilateral right under its service contracts to stop offering certain investment options and substitute others. The trustees first filed a lawsuit in the case in August 2001.

Underhill, in a March 2006 order, turned away Nationwide’s dismissal request of allegations that it had engaged in an ERISA-prohibited transaction by keeping revenue sharing payments from providers of funds selected for the plans. Underhill ruled in the 2006 opinion that the plaintiffs had raised enough of an issue about whether the revenue sharing payments constituted plan assets under ERISA.

Plaintiffs charged that Nationwide, during the mid-1990s, began a system which saw fund providers making the revenue sharing payments based on the percentage of assets invested in each fund offering.

Nationwide subsequently filed a motion for summary judgment, contending it was not subject to ERISA’s prohibited transaction rules because it was not a plan fiduciary and because the revenue-sharing payments were not plan assets.

In his 2006 decision Underhill denied the summary judgment motion, ruling that a reasonable jury could find that Nationwide acted as a fiduciary through its indirect control over the participant contributions made to the mutual funds.

The latest decision in Haddock v. Nationwide Financial Services Inc., D. Conn., No. 3:01cv1552 (SRU), 9/25/07 is here. Underhill’s 2006 decision is here.