A suit charging that New York Life Insurance Co. breached its fiduciary duty as a sponsor to two pension plans and two 401(k) plans, is entirely without merit, the company said in a statement issued prior to the suit's filing.

The class-action lawsuit was filed June 14.

The suit, filed in federal district court in Philadelphia by former vice president and New York Life employee James Mehling, alleges that over a ten year period, New York Life intentionally abused its stewardship of the plans, established for New York Life employees and its agent sales force, by exploiting the plans' large pool of assets for corporate gains. In the suit, Mehling accuses New York Life of transferring hundreds of millions of dollars in employees' defined benefit pension plan assets out of separate accounts and into its proprietary mutual funds in an effort to jump start the then newly established New York Life Institutional Funds. The funds were later renamed the MainStay Institutional mutual funds.

The MainStay Institutional mutual funds were established to help the retail MainStay mutual funds which were struggling to gain assets, the suit claims. The funds are managed by McKay Shields, another New York Life subsidiary.

Mehling charges that New York Life at that time, with no prior mutual fund experience, was acting solely for its own benefit and to make the new funds appear more desirable to prospective outside clients, predominantly third-party 401(k) plans.

"New York Life was able to create the illusion that the funds were safe and attractive investments," the suit says.

Mehling further charges that New York Life, again in 1994 and 1995, "raided" another $150 million from two employee 401(k) plans in order to seed other new Mainstay mutual funds. Without the employees' captive retirement plan assets, New York Life's mutual fund group would have collapsed,

the suit claims.

The suit also charges that New York Life officials knowingly placed these assets in these mutual funds which had high fees and mediocre performance when New York Life should have looked for a lower cost investment alternative. New York Life's "self-dealing" earned the insurance firm tens, if not hundreds of millions of dollars in asset management fees and expenses, the suit says. Those "ill-gotten" fees and expenses hurt the plans and their participants, according to the suit.

Mehling is also seeking relief for being fired by New York Life in March 1999 in what Mehling calls an attempt by New York Life officials to prevent him from "blowing the whistle" on the "fraudulent scheme." The

suit says Mehling was illegaly denied early retirement benefits.

Mehling was president and chief investment officer of Monitor Capital Advisors of Princeton, N.J. from late 1989 until his firing in 1999, according to the suit. Monitor is an indirect wholly-owned subsidiary of New York Life. Monitor acted as the sub-adviser to the MainStay Institutional Funds.

The lawsuit was filed on behalf of Mehling and other potential plaintiffs. It is an amended version of a June 24, 1999 lawsuit filed by Mehling.

New York Life claims that its two pension plans have always been completely funded and all administrative charges paid for by New York Life, not by employees.

New York Life claims that using its mutual funds as the underlying investment vehicle for its various retirement plans is a perfectly legal practice.

"Using internally managed mutual funds in a financial services company's defined contribution plan is [an] accepted and common practice," allowed under the Employee Retirement Income Security Act (ERISA), the law which governs retirement plans, the company said.

New York Life also said the fees for three of its funds are above average for institutional funds. For three others, they are below average, it said.

New York Life also said that eight of 10 of its institutional funds outperformed their peer group since inception.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.