ORLANDO (CN) – County employees claim the National Association of Counties enrolled them in a “high cost, high risk” deferred compensation plan through co-defendant Nationwide Retirement Services, so NACo could collect an undisclosed “multimillion dollar annual fee.” The federal class action claims that NACo did not disclose that it took money from Nationwide “for promoting and endorsing Nationwide’s plan,” until Forbes magazine disclosed it.
The class includes employees of Orange County, Fla. They call the NACo/Nationwide program “a complex, high cost, high risk, tax deferred variable annuity unsuitable for government retirement savings plans,” and say that NACo promoted it simply to fill its own pockets.
NACo, based on Capitol Hill in Washington D.C., provides “essential services to the nation’s 3,068 counties,” according to its website. It claims to offer “legislative, research, technical and public affairs assistance as well as enterprise services,” and is “a national advocate for counties.”
The class claims that for 30 years, NACo partnered with Nationwide, promoting its Section 457 Deferred Compensation Plan in exchange for a “multi-million dollar annual fee,” though NACo is not even a registered investment adviser.
“More than 360,000 county employees from over 1,900 counties currently participate in the plan, with accumulated assets of more than $8 billion,” according to the complaint.
The class claims that those “participants receive no additional tax benefit from the variable annuity format,” because the Section 457 plans are “already tax-advantaged.”
The class adds that the plan is “subject to substantial insurance charges and withdrawal penalties,” which reduces the value of the accounts and investment returns.
In addition, “the majority of the plan assets are steered into proprietary investment options and unaffiliated mutual funds that pay revenue sharing and other kickbacks to Nationwide,” the class claims.
It adds that the plan “exposes participants to significant single-issuer credit risk, i.e. Nationwide’s, for which they are not adequately compensated.”
NACo disclosed in 2009 that it had accepted a $7.4 million annual fee from Nationwide in 2008, though NACo claims it conducted a “due diligence process” before choosing the plan, according to the complaint.
The class says the quality of the plan “suggests otherwise.” It claims that “NACo intentionally gave plaintiffs and the class members unsound advice in order to collect its annual fee from Nationwide.”
County employees do not benefit from the annual fee, and “no competent investment adviser would ever advise a client to invest money that was already in a tax-deferred account (like a Section 457 Plan), into a tax-deferred investment (like a variable annuity), because there is no advantage to offset the disadvantage of the tax-deferred investment’s lower expected return,” the class claims. (Parentheses in complaint.)
The class adds that the “high fees associated with the plan enable Nationwide to pay NACo the annual endorsement fee, which reduces the net rate of return received by participants in the plan.”
The named plaintiffs, Camille McCullough and Melanie Monroe – a retired firefighter and a lieutenant for the Orange County Corrections Department – say they participated in the Nationwide plan until May 2009, when the Orange County Board of County Commissioners moved all employee and officials’ contributions to a plan managed by the Vanguard Group.
In 2006, the sheriff of Orange County brought a class action against Nationwide in Ohio federal court, claiming that the company took kickbacks from mutual fund advisers based on a percentage of assets invested through Nationwide. That complaint was dismissed in 2007.
The class demands damages and restitution for breach of fiduciary duty, aiding and abetting and ERISA violations.
Its lead counsel is Curtis Miner with Colson Hicks Eidson of Coral Gables.