Class Action: Nationwide Mutual Insurance Co. Employees Lost $142 Million Due to Alleged 401(k) Plan Mismanagement

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Three plaintiffs have filed a proposed class action lawsuit in which they allege Nationwide Mutual Insurance Company employees have lost upward of $142 million as a result of “disloyal and imprudent” management of the insurer’s employee 401(k) plan.

Filed against Nationwide and the Benefits Investment Committee of the Nationwide Savings Plan, the 23-page suit begins by explaining that for a defined contribution plan like that in which the plaintiffs participate, fiduciaries “lack a direct incentive” to prudently vet investment options and maximize returns. Unlike in a traditional pension plan where an employer is responsible for providing plan participants a fixed monthly payment, defined contribution plans allow participants to be paid based on the performance of their investments, the suit says. The potential for improper conduct among financial services companies like Nationwide “is especially high” given companies can benefit themselves in wielding a 401(k) plan’s assets to further their own business interests rather than those of the plan’s participants, according to the case. 

At issue, the plaintiffs allege, is Nationwide’s failure to negotiate contractual terms for its 401(k) plan’s Guaranteed Investment Fund (GIF) that are comparable to those negotiated on behalf of its separate employee pension plan. Nationwide’s Guaranteed Investment Fund (GIF) is a fixed-interest insurance contract that guarantees an investor’s principal and pays out a fixed interest rate over time, the suit explains, with that rate ultimately set and typically adjusted quarterly by the insurance company sponsor—in this case, Nationwide’s wholly-owned subsidiary Nationwide Life Insurance Company, according to the lawsuit.

Whereas the interest rate for a Guaranteed Investment Fund is set either at an insurance company’s discretion or terms negotiated with the contract owner, this process, with regard to Nationwide’s dealings with the plaintiffs’ 401(k) plan, “is tainted by an inherent conflict of interest,” the suit claims. According to the complaint, funds invested in Nationwide’s GIF are deposited by the company into a general account that “in turn invests in securities that generate a much higher rate of return” than the guaranteed rate Nationwide remits back to GIF participants. The difference in the amounts is retained by Nationwide, which gives the defendants a “powerful financial incentive” to pay GIF investors at the lowest possible interest rate, the plaintiffs allege.

While the Employee Retirement Income Security Act of 1974 (ERISA) aims to protect investors against fiduciary impropriety, the defendants’ conflict of interest yielded for 401(k) GIF investors a much lower interest rate than was paid by the otherwise identical investment held within Nationwide’s pension plan, costing proposed class members more than $142 million.

From the complaint:

“Participants in the Pension Plan are entitled to a specific benefit amount—rather than the earnings on Pension Plan investments—with Nationwide bearing the responsibility to make up any shortfall between Pension Plan investment returns and benefits payments. Thus, there is no financial incentive for Nationwide to ‘shortchange’ the Pension Plan because it would be shortchanging itself, rather than participants (while simultaneously creating additional corporate tax liability). As a result, the fact that the Pension Plan’s fixed-interest investment earns a much higher interest rate than the GIF—despite the fact that both accounts’ assets are invested in the exact same pool of investments within Nationwide’s General Account—demonstrates that Defendants succumbed to Nationwide’s self-interest rather than prudently and loyally dealing with 401(k) Plan investments in the sole interests of Plan participants and beneficiaries.” 

According to the suit, Nationwide’s conduct in setting the interest rates for its Guaranteed Investment Fund “does not align with that of other fiduciaries acting under similar circumstances.” Whereas other fiduciaries have been able to negotiate comparable contractual terms in both their 401(k) and traditional pension plans, Nationwide’s failure to do so stems from its apparent ignorance of “the obvious deficiencies” in its Guaranteed Investment Fund.