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For more than 17 years, the National Education Association (NEA) has been siphoning off millions in kickbacks for exploiting its members’ trust and convincing them to invest in annuities and other investment vehicles that charge outrageous fees and underperform compared to similar plans available on the open market.
In 2007, the New York Times first reported on a lawsuit, Daniels-Hall v. National Education Association, that had been filed in Washington by two NEA members alleging the union breached its fiduciary duty by promoting its “Valuebuilder Plan.”
Valuebuilder is an investment portfolio the NEA markets exclusively to its members.
The lawsuit claimed the plan charges exorbitant fees and, by putting its own name on the plan as a sponsor and taking kickbacks, the NEA puts its own interest above that of its members.
The article chronicled how some of the plans charged fees in excess of 10 percent, making it nearly impossible to generate a positive return. By comparison, similar plans outside of the Valuebuilder portfolio charge fees between one and four percent.
NEA marketed these plans through a subsidiary, NEA Member Benefit and, according to the 2007 lawsuit, NEA members had invested more than $1 billion into Valuebuilder.
In return for ripping off its members, NEA Member Benefit rakes in more than $50 million per year on top of the $1 million in kickbacks NEA affiliates take in directly.
The lawsuit states:
“In exchange for the NEA’s role in marketing the Valuebuilder annuities, Nationwide and Security Benefit paid royalties and annual fees to the NEA, took on the salaries of 110 NEAMBC (NEA Member Benefit) representatives, and contributed to NEA charitable foundations.
NEA’s royalty income from Security Benefit alone amounted to approximately $2 million per year.
Nationwide and Security Benefit, in turn, received fees from investment companies whose mutual funds were made available through the Valuebuilder annuities.
“The NEA did not fully disclose to its members the nature or amount of the payments it received from Nationwide and Security Benefit, or the fact that Nationwide and Security Benefit received payments from investment companies whose mutual funds were included in the Valuebuilder annuities.
Instead, the NEA marketed the Valuebuilder annuities provided by Nationwide and Security Benefit as the most favorable retirement option for its members, despite the fact that Valuebuilder annuities charged fees that were as much as ten times those charged on comparable annuity contracts.
Plaintiffs participated in their school district employers’ section 403(b) retirement plans, and selected Valuebuilder annuities-instead of other annuities made available by their employers-because of the NEA’s enthusiastic endorsement.”
Up until 2000, Nationwide was the exclusive provider for NEA’s Valuebuilder portfolio.
When it was purchased by Security Benefit for $72 million, it boasted well over $800 million in assets.
The earliest record of Security Benefit lining the union’s pockets came to light in 2005, when Security Benefit filed a form LM-10 with the United States Department of Labor detailing payments made to various labor unions, primarily NEA affiliates.
Form LM-10 federal financial disclosure forms are required for employers making payments to labor unions or union officers, as well as employers who hire consultants to speak with their employees about union matters.
Security Benefit protested the filing but did not include a reason why it didn’t meet the filing requirement despite having clearly made financial contributions to multiple labor unions for services rendered in marketing its products.
The form showed relatively small dollar amounts going to four NEA affiliates.
A fifth affiliate, Alabama Education Association, was the largest cash recipient and received five payments of $17,500 each.
The next financial disclosure filed by Security Benefit did not occur until 2019 and showed the frequency, amounts, and number of unions receiving payments increased substantially, most notably four quarterly payments of nearly $900,000 each to NEA Member Benefit.
In 2020, all factors increased again with NEA Member Benefit receiving five payments of more than $950,000.
In 2021, NEA Member Benefit once again experienced similar increases in the amounts sent to unions, as well as the number of unions receiving payments.
It is likely the payments continued between 2005 and 2019, when there was a gap in LM-10 filings.
However, without the official disclosure, it’s impossible to know the full extent of the payments during that time period.
In any case, NEA clearly has a vested interest in pushing these plans on its members, but the more pressing question is how members feel about their lack of options.
After all, the NEA’s primary responsibility should be to look out for its members’ best interests.
Prior to the first lawsuit against Security Benefit, NEA could have claimed ignorance — and, in fact, did so, in a roundabout way, while trying to avoid being included in the suit.
Union officials claimed just because they put their name on the benefit program didn’t mean they had any actual control over the portfolio.
In point of fact, NEA exploited its position of trust to encourage participation in the Valuebuilder portfolio while receiving millions in kickbacks every year.
The payments to NEA are undeniable, and the union will undoubtedly attempt to spin the true nature of the payments toward some benevolent purpose. Security Benefit actually went as far as describing payments in unusually plain language on the federal filing:
“Payments are for administrative services provided to subsidiary of filing employer and endorsement fees for retirement products sold to members of the union with the endorsement and assistance of the union and a wholly owned subsidiary of the union, pursuant to a written agreement between the subsidiary and the filing employer.”
What do these plans do and why is NEA being sued over them?
In 2020, another lawsuit, Clinton v. Security Benefit Life Insurance Co., was filed against Security Benefit, although NEA was not named this time. The lawsuit had nine plaintiffs who had purchased annuities under various indexes.
The case file provided a synopsis of the plaintiffs’ experiences, and each claimed deceptive sales tactics were used by cherry-picking historical index data to illustrate the best possible scenario for their investment vehicle.
Among the complaints:
- Plaintiff Ella Clinton purchased five Total Value Annuities in Florida in 2015 for a total of $500,000 and allocated 100 percent of the account value to the BPHD Index. After an initial two-year period, Clinton’s account was credited with 0 percent interest. She ultimately reallocated 75 percent into a
different index before surrendering all five annuities.
- Plaintiff William Carrick purchased a Total Value Annuity in Florida in 2014 for $1 million and allocated 50 percent of its account value to the ALTV Index. After the five-year period, the portion attributable to the ALTV Index was credited with 0 percent interest.
- Plaintiff Howard Rosen purchased a Secure Income Annuity in California in 2014 for $53,000. He allocated 75 percent of his account value to the MSDA Index. After a two-year term, he was credited with 0 percent interest. During a subsequent two-year period, the portion of the account linked to the MSDA Index was credited with 1.68 percent interest.
- Plaintiff Terri Stauffer-Schmidt purchased a Total Value Annuity in Illinois in 2013 for $249,000 and allocated 75 percent of her account value to the ALTV Index. After a five-year term, her account was credited with 0 percent interest. As of one year into a second five-year term, the account is still earning 0 percent interest.
- Plaintiff Wai Hee Yuen purchased a Total Value Annuity in Illinois in 2012 for $100,000 and allocated 75 percent of the account value to the ALTV Index. After a five-year term, the account was credited with 0 percent interest.
- Plaintiffs Donald and Martha Cox purchased three Total Value Annuities in Arizona in 2013 and allocated 75 percent of their account value (approximately $275,000) to the ALTV Index. After a five-year term, their accounts have been credited with 0 percent interest.
- Plaintiff Michael Webber purchased two Total Value Annuities in Illinois in 2014 for $492,000 and $116,000. He allocated 50 percent of his account value to the ALTV Index. But after a five-year term, his accounts were credited with 0 percent interest.
- Plaintiff Jean Wright purchased a Total Value Annuity in Nevada in 2013 for $98,000 and allocated 100 percent of her account value to the ALTV Index. After a five-year term, her account was credited with 0 percent interest. As of one year into a second five-year term, the account is still earning 0 percent interest.
What were the outcomes of these cases?
The 2007 lawsuit, Daniels-Hall v. National Education Association, was filed under the Employee Retirement Security Act (ERISA), which governs and sets minimum standards that most voluntary retirement plans must meet in the private sector.
The lawsuit was dismissed on a technicality due to the Valuebuilder Plan not falling under ERISA jurisdiction.
Further, ERISA does not have a fiduciary duty provision that would apply to the nature of NEA’s relationship to its members and the Valuebuilder plan.
The case was appealed and, in 2010, the 9th Circuit Court of Appeals upheld the district court’s decision to dismiss.
It’s unclear why the attorney representing the plaintiffs filed the lawsuit under ERISA since he did not respond for comment.
But presumably, the suit would have had a stronger case if it had been filed under the Labor Management Reporting and Disclosure Act (LMRDA), which does contain a fiduciary provision that would prohibit a labor union from acting in its own best interests above that of its members.
LMRDA was brought about after the famous McClellan hearings, centered around Jimmy Hoffa, in which more than 8,000 subpoenas were issued for witnesses and documents during an investigation into corruption, criminal infiltration, and illegal activities in the nation’s large labor unions.
The hearing lasted for 270 days, during which 1,526 witnesses were interviewed and 343 invoked the Fifth Amendment.
After the hearings, it was clear a special statute needed to be written to govern labor unions, and the result was the Labor Management Reporting and Disclosure Act.
LMRDA, in essence, says that a union’s coffers belong to its members and, as such, they have a right to see how the money is spent and periodically vote on union officers.
LMRDA also lays out a broad fiduciary responsibility for the labor union to put its members’ interests ahead of its own.
Presumably, a situation where a union is profiting heavily from a third party for marketing investment plans to its members that are unarguably more costly and generating inferior returns to comparable plans would fall squarely under the jurisdiction of LMRDA’s breach of fiduciary duty.
Sadly, due to the lack of jurisdiction, the facts of the case were never truly explored.
But it shouldn’t take a victory in court to see the exorbitant fees being charged in the Valuebuilder Plan benefit NEA far more than its members, especially those tricked into investing in it.
The 2020 lawsuit Clinton v. Security Benefit Life Insurance Co. originally began as two separate lawsuits with similar allegations, but the cases were combined into a single class action.
Similar to the 2007 suit, the case was dismissed on technicalities. Once again, like Daniels-Hall v. NEA, Clinton v. Security Benefit Life Insurance Co. did not explore the real question of whether Security Benefit employed deceptive marketing practices to push people to invest in plans that have no hope of providing a positive return of investment.
NEA has now been sued directly by its members for the products offered by Security Benefit and has seen Security Benefit is at the heart of multiple lawsuits making the same allegations.
Which begs the question: Why would NEA continue to not only use Security Benefit for its Valuebuilder portfolio, but actively market its products to its members?
Perhaps it isn’t much of a stretch to think the millions of dollars NEA is pocketing could be partially in exchange for overlooking the poor performance of its Valuebuilder plan.