More Queries on Insurer's Handling of Its Pensions

By: Danny Hakim
The New York Times, May 30, 2001 

Internal documents from the New York Life Insurance Company raise more questions about how the company handled the nest egg of its employees and whether it used those funds to bolster its mutual fund business.

The documents, disclosed in connection with an employee lawsuit, show that a New York Life executive served from 1993 to 2000 as the president of New York Life's mutual fund business while also serving as investment adviser to the company's pension fund.

That dual role posed a conflict of interest, the lawyer leading the lawsuit said. According to a motion filed yesterday in United States District Court in Philadelphia, the New York Life executive, Linda Livornese, was put in an "untenable position" by her superiors. She was supposed to increase mutual fund assets, the motion says, while, in another capacity, she had to help decide if the pension fund should be invested in the company's Mainstay mutual funds. 

"They put the mutual fund fox in charge of the pension plan hen house, and the trustees pretended not to notice," said Eli Gottesdiener, lead lawyer in the suit, which has yet to be certified as a class action. 

New York Life continues to contest the suit and said that Ms. Livornese served merely in an advisory capacity."The trustees have the ultimate responsibility for the investments of the pension fund," said George J. Trapp, a New York Life executive vice president.

"The investment adviser provides some counsel to the trustees," he added. "She carried out the trustees' directions."

The year-old suit shows how complicated it is for financial services companies to run their own retirement plans. 

These companies are permitted to invest pension assets in their own products, but federal law requires that retirement funds be managed only for the benefit of workers and retirees.

A tentative settlement was reached in April in a similar suit that Mr. Gottesdiener filed against First Union Bank and its management of its 401(k) plan. In that case, First Union agreed to pay $26 million and hire an independent financial adviser to help oversee the plan.

Sherwin Kaplan, a former top lawyer with the Labor Department who now advises companies on how to operate their retirement and health plans, said Ms. Livornese's role "sounds like it could be a problem."

"The general rule is that the decision maker with respect to a plan cannot personally benefit as a result of the decision," he added. 

It is unusual for pension funds to be invested in mutual funds since they are big enough to diversify on their own and do not need funds intended for individuals.

"For a plan of that size, it is generally not done," said Joshua Dietch, a consultant for Cerulli Associates, a benefits consulting firm. 

Unlike 401(k) accounts, pension plans are overseen by an employer. Since individuals do not manage their assets and cannot shift money on a whim, the plans are less expensive to operate and are usually run for lower fees than those charged by mutual funds. 

But New York Life's institutional funds are actually quite expensive, according to the suit. For example, its Standard & Poor's 500 index fund is significantly more expensive than the comparable fund from the Vanguard Group. 

The suit was prompted by James Mehling, a former New York Life executive turned whistle-blower who said that he was dismissed in 1999 for raising concerns about the pension plan and its pricing structure. The company has said Mr. Mehling was dismissed for unrelated reasons.

In late March, Judge Bruce W. Kauffman of United States District Court in Philadelphia said a trial could proceed to consider whether New York Life violated its fiduciary duties by overcharging its workers and agents for managing their pension fund. Judge Kauffman dismissed a racketeering count, as well as complaints that New York Life's use of internal funds violated the Employee Retirement Income Security Act. 

The motion filed yesterday asked the judge to reconsider these counts.

One reason is that it was recently disclosed, near the end of a 299-page regulatory filing that New York Life has pulled out all $1.8 billion of the company's pension money invested in its Eclipse mutual funds.