NEA ALLEGEDLY FAILED TO DISCLOSE FINANCIAL INCENTIVE FOR RECOMMENDING HIGH-FEE ANNUITIES TO ITS TEACHER-MEMBERS. DID THE NEA RECEIVE KICKBACKS?
by Lawrence C. Melton, Esq., lmelton@dhayeslaw.com
THE HAYES LAW FIRM, www.dhayeslaw.com
The New York Times says two teachers in Washington State have filed a case in federal court against the National Education Association, alleging that that N.E.A. received kickbacks for recommending high-fee annuities to its members. (Gretchen Morgenson, Lawsuit Says Teachers Are Overcharged on Annuities, nytimes.com, July 17, 2007). http://www.nytimes.com/2007/07/17/business/17suit.html?ref=busniess
The N.E.A. sponsors a retirement plan for its members. The NEA membership consists primarily of teachers. As part of the retirement plan, the N.E.A. recommended that its members purchase annuities from the Nationwide Life Insurance Company and the Security Benefit Group. There apparently was a kickback agreement between the NEA and the two financial firms. The law suit says Nationwide Life Insurance and Security Benefit Group paid the N.E.A. a fee, estimated at $2 million a year, to recommend their annuities. This has not yet been proved. (Gretchen Morgenson, Lawsuit Says Teachers Are Overcharged on Annuities, nytimes.com, July 17, 2007).
This is similar to the pay-to-play arrangements found in the 401K context:
PAY-TO-PLAY ARRANGEMENTS: Some mutual-fund companies that run retirement plans take a portion of the money they collect from investors and use it to pay consultants. The consultants, in turn, recommend which funds are included in a retirement plan. Some consultants recommend only those fund companies that make such payments. That is why these deals are pay-to-play arrangements. The arrangement is basically a kickback.
ANNUITIES IMPOSE EXCESSIVE FEES THAT DEPLETE RETIREMENT: The teachers are correct in arguing that annuities impose excess fees that most likely will deplete their retirement. According the NASD NTM 04-45, variable annuities subject investors to the following fees or charges.
- Surrender Charges: paid by investor when he or she withdraws money from the annuity before a specified period.
- Management Fees: assessed against the sub-accounts.
- Mortality and Expense Risk Charge: charged by the insurance company for the insurance risk it takes under the contract.
- Administrative Fees: charged for record keeping and other administrative expenses.
- Underlying Fund Expenses: relating to investment options.
- Charges for Special Features and Riders: e.g., provisions for stepped-up death benefit or a guaranteed minimum income benefit.
The added expenses associated with variable annuities cannot be justified unless the annuity is held for an extended period of time. It follows that variable annuities should not be sold to individuals who are retired or close to retirement.
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