Compliance February 3, 2021

AIG Fined for Unlicensed PRT Business in New York

AIG has agreed to transfer the handling of transactions from American General Life Insurance Co. to its New York-based subsidiary, The United States Life Insurance Co. in the City of New York.

Reported by

Linda A. Lacewell, superintendent of New York’s Department of Financial Services (DFS), has announced that AIG will pay a $12 million penalty to New York state for New York Insurance Law violations related to its subsidiary, American General Life Insurance Co. (AGL), and that company’s pension risk transfer (PRT) business.

A DFS investigation found that from January 1, 2014, to June 17, 2019, AGL entered into four large-scale PRT deals and bid on several others. In addition, during this time period, several of AGL’s PRT employees were based out of New York and New Jersey.

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According to the consent order filed by the DFS, Section 1102 of the insurance law prohibits any person, firm, association, corporation or joint-stock company from doing any insurance business in New York unless it is appropriately licensed pursuant to the insurance law or exempted from licensing by the insurance law. In addition, an unauthorized insurer may not make telephone calls, provide access to web portals (except in limited circumstances) or engage in any other manner of communication with any person in New York from outside New York, other than by mail, including email. Also, an unauthorized life insurer may not solicit, negotiate or sell group annuity contracts (GACs) through in-person meetings, telephone calls, mail, email, access to web portals or any other form of communication from a location in New York.

As part of its agreement with DFS, AIG will transfer the handling of transactions from AGL to its New York-based subsidiary, The United States Life Insurance Co. in the City of New York.

An AIG spokesperson told PLANSPONSOR, “We are pleased to have resolved this matter with the New York State Department of Financial Services. We have been working closely with our regulator throughout this process and are taking all necessary steps to ensure alignment with their industry-wide guidance. There has been no disruption for our pension risk transfer corporate clients or for their New York-based retirement plan participants who will continue to receive their benefit payments as usual. We remain fully committed to serving as a strategic partner in this important market.”

In September 2019, after learning that unauthorized life insurers and their representatives were operating in the PRT market, Lacewell issued a circular letter to all life insurers and insurance producers warning them of their obligations under the insurance law and putting them on notice to fix any violations.

The AIG penalty is the second enforcement action the department has taken. In April, Lacewell announced that Athene Holding Ltd. would pay a $45 million penalty to New York state for violations related to its subsidiary, Athene Annuity & Life Co., and its pension risk transfer business.

Compliance February 3, 2021

ERISA Fiduciary Breach Lawsuit Targets Coca-Cola Bottler MEP

The complaint alleges the defendants failed to choose less costly and equally or better-performing investment options for the plan, or to use the plan’s size to reduce recordkeeping fees.

Reported by

A new Employee Retirement Income Security Act (ERISA) lawsuit filed in the U.S. District Court for the District of Kansas claims a bottlers’ association working for Coca-Cola has committed fiduciary breaches in the operation of its multiple employer plan (MEP).

According to the complaint, the defendants failed to act for the exclusive benefit of the plan and its participants and beneficiaries by not acting to leverage the plan’s sizable assets to qualify for lower-cost versions of the same investments. Furthermore, the complaint alleges, the defendants failed to choose less costly and equally or better-performing investment options for the plan, or to use the plan’s size to reduce recordkeeping fees.

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In addition to these claims, which are common in ERISA lawsuits filed against individual employers, the complaint suggests the defendants imprudently included as an option the Coca-Cola Common Stock Fund, which they call “an undiversified investment,” instead of well-diversified options, even though the Coca-Cola Co.’s common stock allegedly performed poorly in comparison to its benchmark.

Importantly, such claims have met varying levels of success across the federal court system, based mainly on the degree to which a given complaint establishes that an imprudent fiduciary management process was potentially in place. In other words, it is not enough for a potential class of plaintiffs to merely point out that their plan has relatively expensive investments or administrative fees relative to its peers. See Davis v. Salesforce and Kurtz v. Vail Corp. In this latest case, much of the complaint’s real estate is used in comparing the plan’s investment options to those of its peer group, rather than speaking directly to the evaluation process used by fiduciaries.

The Coca-Cola Bottlers’ Association (CCBA), a Georgia corporation with its headquarters located in Atlanta, is named as the main defendant by the complaint, along with various individuals in positions of corporate leadership. As detailed in the complaint, the CCBA members consist of all 65 U.S. independent bottlers of Coca-Cola, as well as associate members that include bottler-owned production cooperatives.

According to the complaint, as of December 31, 2018, the plan included 24 investment options, including 22 mutual funds, one collective investment trust (CIT) fund and the Coca-Cola Common Stock Fund. According to the plan’s 2019 Form 5500, as of December 2019, the plan had just shy of $800 million in net assets.

“Defendants failed to consider and select lower cost investment options that were similar to or in the same investment style as those being offered in the plan,” the complaint states. “For example, defendants should have realized that the T. Rowe Price target-date mutual funds were directing a substantial portion of their assets into the proprietary T. Rowe Price Equity Index 500 fund, which charged a fee that Morningstar called ‘outrageous.’ … Defendants served up target-date funds [TDFs] that, for at least part of the class period, directed a substantial portion of their assets to an S&P 500 fund that charged more than seven times the market rate.”

Similar points are raised by plaintiffs with respect to the failure to offer collective investment trusts in the plan.

“Even though the Wells Fargo Stable Return Fund Class N has been available since October 1, 1985, at a cost of 41 basis points [bps], the plan was using the Wells Fargo Stable Return Fund Class N35 during the class period at a cost of approximately 76 basis points—more than 85% more expensive than its identical Class N counterpart,” the complaint states.

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