Democrats may soon find that class-action lawsuits, usually a favored method for embarrassing corporations and sharing huge settlement fees via contributions to their political campaigns, can be a knife with two sharp edges.
The class-action suit brought against the National Education Association by prominent ERISA lawyers at Keller Rohrback, lead law firm against such firms as Worldcom, takes on one of the Democrats’ major contributors anda key source of its campaign contributions: The 403(b) retirement plan for teachers offered under the auspices of the NEA.
With 2.8 million members, the NEA is the largest union in the United States. Its annual revenues exceed $347 million. Although the NEA says that only about 45 percent of public school teachers are Democrats, 94 percent of contributions made by NEA political action committees and officers went to Democratic candidates from 1990 to 2004, according to the Center For Responsive Politics.
In 2006, the NEA spent approximately $50 million on representational activities, but another $27 million on political activities and lobbying — and $74 million on contributions, gifts and grants. A Wall Street Journal editorial called the NEA “a honey pot for left-wing political causes that have nothing to do with teachers, much less students.”
The paucity of required reporting and audit of union funds makes it difficult to determine just how much went to whom, or whether it was for education-related purposes or political causes. The Democratic majority in the House of Representatives is set to vote on a reduction in the budget of the Department of Labor’s Office of Labor Management, which is tasked with union oversight.
However, discovery in the Keller Rohrback suit may expose some of these buried bones.
The suit contends that the NEA breached its fiduciary duty to its members by accepting millions of dollars of payments from the vendor of the NEA-endorsed retirement 403(b) plan. Keller Rohrback is unable to determine from public disclosures just how many millions the vendor paid NEA, or whether these payments just covered — or exceeded — administrative expenses.
This is one of the key elements to the case. The NEA says the program is exempt from ERISA requirements that a retirement plan sponsor place the interests of its beneficiaries first because it is a strictly voluntary plan that isnot sponsored by the union. NEA claims it does not receive any compensation besides the cost of administering payroll deductions.
However, the lawsuit charges that NEA did actively endorse and promote the program and is thus an ERISA-responsible sponsor.
That’s where the second major element of the case comes into play: whether the retirement program was operated in the best interests of participants, as ERISA requires. Annuity fees in the NEA plan dragged down returns by as much as 10 percent or more a year. It’s well-nigh impossible to approach long-term market performance with such a dead weight.
The suit says that teachers were lured to invest in it anyway — and without disclosure of the fees NEA garnered — by NEA assurances that it “conducted an extensive review of numerous financial services companies to find the best provider.”
W. Scott Simon, an expert on the Uniform Prudent Investor Act, writes at Morningstar that annuities such as those offered in the NEA plan “are just too costly” and don’t belong in qualified retirement plans. The Web site 403bwise.com, run by a teacher, is also a major critic of over-costly investments pushed by insurers. Mutual fund companies such as Vanguard, Fidelity and TrowePrice offer low-cost mutual fund alternatives, but they don’t provide the lucrative payments to sponsors that insurers do for endorsing annuities instead.
Successful class-action lawyers seeking high rewards don’t invest their funds and time lightly. In this case, the assets of many teachers — as well as the fortunes of many Democratic politicians — are also at stake.
Democracy-Project.com blogger Bruce Kesler, a former Fortune 100 finance and business operations executive, is an employee benefits consultant and broker in Encinitas, Calif.
