ING to pay New Hampshire state workers $2.75m

Financial services giant ING Group has agreed to pay New Hampshire state workers $2.775 million as part of a settlement with the state Hampshire Bureau of Securities Regulation.

The settlement also requires ING – which handles $180 million in state workers’ individual retirement plans – to spell out in dollars and cents on how their fee structure would affect an employee’s return, in the state and nationally.

“Disclosure is the name of the game,” Securities Bureau Director Mark Connolly told New Hampshire Business Review. “This is a win for investors because it calls attention to where the problems lie.”

The 18-month investigation – which converged with a similar investigation conducted by New York Attorney General Elliot Spitzer — culminated after four months of negotiations, which began after the bureau filed a cease and desist order against ING on June 8.

At that time, the bureau accused ING of holding back information on market timing activity and with pushing its own mutual funds without disclosing that those funds were sharing more revenue with ING.

ING, a Dutch-owned firm with U.S. headquarters in Hartford, Conn., manages the state’s 457(b) accounts, similar to a private employee’s 401(k). The ING funds are completely unrelated to the New Hampshire Retirement System.

About a quarter of the state’s 12,000 employees contribute to the fund, which the state does not pay into. ING offers state workers a variety of fund options – such as those offered by Fidelity, Vanguard and Janus — but nearly 65 percent of the money is held in various ING mutual funds.

The state Deferred Compensation Commission – which oversees the fund – hired Aetna Life Insurance and Annuity Company to handle the finances in 1999, but ING acquired Aetna in 2000. The commission had the final decision on what funds to offer state workers, but these decisions were usually based on ING’s recommendations.

What the commission didn’t know about was that ING had certain payment arrangements with its own funds – specifically ING, Oppenheimer and American Mutual. Instead, the bureau charged that ING “led the Commission to believe that the funds were chosen solely based on performance” when ING actually required that those particular funds “target revenue back” to ING.

In addition, ING allegedly tolerated third-party market timing activities, allowing brokers to move large amounts of money and diluting gains for ordinary shareholders, such as those in the state fund.

ING had disclosed the market timing issues back in 2004, but Connolly felt the disclosures didn’t go far enough, and when the bureau tried to get more information about the actions, ING claimed privileges over certain documents. That made the bureau suspicious, finally resulting in the cease and desist order.

When the bureau ran into Spitzer’s investigation the two decided to work together. The New York settlement is much larger — $30 million for 50,000 New York state teachers. But the average settlement – slightly more than $500 per worker – is about the same. But many workers will receive either a lot more or a lot less than that.

The bureau will receive $275,000 to reimburse it for expenses, bringing the total settlement amount to $3 million. Connolly and other bureau employees who participated in the negotiations will be excluded from collecting any money as a state employee to avoid any conflict of interest issues, Connolly said.

It’s also unclear how state workers will get the money, whether it will be deposited in their retirement accounts or whether they will receive a check in the mail. ING has to come up with a distribution plan or plans, taking into account tax ramifications for the employees.

“We don’t want it to be like in the lottery where someone wins the prize all at once and gets a huge tax hit,” Connolly said.

The disclosure statement, however, is clear. It is a one-page attachment that will be included in 2007 statements explaining: “This retirement product is not free.”

The statement discloses that many fund companies pay ING in return for being offered as an investment option and that funds are selected based in part on those fees. Then it shows the effect of those fees on the return over two decades in five-year increments, based on assumption that the portfolio will increase at a rate of 7 percent a year.

Under the agreement, ING will provide that disclosure in all of its plans — “a landmark” that could have ramifications in the entire retirement system, said Connolly.

“This goes beyond what current federal regulations require,” Connolly said. “Mutual fund investors need to be told all important facts, including conflicts and costs, associated with their retirement plans.”

In the settlement, ING doesn’t admit to any wrongdoing, but it also can’t make any statement that would deny allegations made in the agreement, which references the cease and desist order.

In a statement, ING said that it “takes its regulatory responsibilities very seriously and seeks to work cooperatively with regulators. ING is pleased to have these matters resolved and fully supports improved transparency and disclosure.”