Word of a threatened class action lawsuit by employees of New York Life is circulating, and the insurer may not be alone in its exposure to this type of suit. Last year, employees of First Union filed a lawsuit against the bank over the use of its own funds in its retirement program. The New York Life case sounds similar. Pensions & Investmentments has reported that the insurer may be the target of a class action lawsuit over the use of its MainStay Funds in its retirement plans. The suit, according to the story, may be filed as early as next week. As of today, there is no suit filed.

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New York Life has put together a "media backgrounder" on what it is calling "The Mehling Lawsuit". According to the insurer Sprenger & Lang (a Washington, D.C.-based lawfirm) have threatened to file a class action lawsuit against New York Life, charging the company with a failure to exercise its fiduciary responsibilities for four of its retirement plans.

Sprenger & Lang did not offer comment for this story.

In its backgounder, New York Life says that there are four likely issues of contention that are likely to be presented in a lawsuit. The issues cover the insurer's two defined benefit and two 401(k) plans. The insurer is basing these conjectures on conversations it has had with Sprenger & Lang.

The dispute appears to resolve around the contention that New York Life benefited by using its own MainStay family of funds in the plan rather than separate account products. By using the funds New York Life could presumbly received higher fees than in a separate account. The use of fund products also meant that the plan -- not New York Life -- paid the investment management fees for the investments. These issues echo those brought in the First Union case.

What are the issues likely to appear in a suit? New York Life says they are:

1. That the insurer made improper investment of the traditional defined benefit peniosn plan's assets in New York Life's proprietary institutional MainStay mutual funds. New York Life's response is that the plans payouts are not related to the fees charged by the funds.
   
2. That the insurer made improper investment of the 401(k) plans's assets in New York Life's proprietary mutual funds. In short, the insurer responds that such investments are accepted and common practice and that they are allowed under ERISA the prohibited transaction exemption 773.
   
3. That the insurer failed to release the pension plans from outmoded, disadvantageous deposit administration contracts. New York Life responds that the contracts returned 8-10% annually and that they served as part of the fixed income portion of the plans' portfolio.
   
4. The individual claims of Mr. Mehling, the former employee leading the suit.

Any suit on could impact the fund industry by calling into question the practive of many financial institutions of using their own investment products when they sponsor a retirement plan. The claim that New York Life's plans overpaid by using mutual fund investments rather than separate accounts could also prove worrisome for the fund industry. If that claim is supported the logic could be applied to non-financial plan sponsors who opt to use retail funds rather than separate accounts in their 401(k) plans.

Even without a lawsuit filed, the threat of this type of action is a harbringer of change roiling the retirement industry. The 401(k) business has, until recently, suffered relatively few lawsuits in proportion to the amount of assets involved.

More importantly for vendors, that they follow the law may not be a guarantee that they avoid this type of litigation.

"People are saying 'hey that isn't good enough - there is a higher standard," says Ward Harris, principal at McHenry Consulting. "It is not the fact pattern, the law, or the appeals panel that sets the standard. It is going to be the appearance of fairness, and that people feel empowered. It is perceived as being "my money."

Harris points out that the speed that these issues move at is increasing as information moves more quickly through society. For example, both the individuals covered in the current cash balance litigation and those in the First Union litigation have created Web sites to track the progress of the cases and to get the word out. 

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