VALIC (aka AIG Retirement Services) Surrender Charge Litigation

VALIC – now called AIG Retirement Services – sells annuity contracts to employers of all sizes as an investment vehicle for their retirement plans.  In doing so, it gives itself the right to impose a 5% “surrender charge” or “withdrawal fee” on the participants who have invested in the contract.  This means that if someone wants to withdraw their savings, or if an employer or plan wants to leave VALIC/AIG, VALIC/AIG can take up to 5% of a participant’s retirement savings.  This discourages participants from withdrawing their savings and employers and plans from changing service providers.  Employers, plans, and plan participants end up stuck with VALIC/AIG, even if VALIC/AIG is not the best choice for them, and even if VALIC/AIG’s recurring fees are too high and its service poor.

A small dental practice and its retirement plan (“the Markhams”) have filed a class action lawsuit to challenge VALIC/AIG’s surrender charge practices.  The short name of the case is D.L. Markham, DDS v. The Variable Annuity Life Insurance Company (VALIC), Southern District of Texas Case No. 4:22-cv-00974. VALIC filed a motion to dismiss the Markhams case on the grounds that (1) it was not acting as a fiduciary when it negotiated or imposed the surrender charge and therefore did not have to act in anyone’s best interest but its own and (2) it was not a “party in interest” and did not engage in a “transaction” under ERISA when it imposed a surrender fee because the Markhams changed service providers.. The Markhams opposed the motion, but the South District of Texas dismissed the case.  The Markhams appealed to the Fifth Circuit.  The appeal has been fully briefed. The US Secretary of Labor filed an amicus brief on behalf of the Markhams.

If you are a person with information relevant to the claims described here, or if you are an employer that maintains, or maintained, a retirement plan subject to a VALIC/AIG annuity contract with a surrender charge, please contact us about this case at cbaker@bakerlp.com or david@crutcherlaw.com.  We can also be reached at 415-433-1064.  You can also send us a message using the on-line form on this webpage.

If you have questions regarding the Bobbitt v. Milberg settlement which indirectly involves VALIC, please go here: www.bobbittsettlement.com.

The Case Allegations

David and Luminita Markham own a small dental practice in Auburn, California.  They created a retirement plan so their employees could save for retirement.  Because the Markhams trusted the Variable Annuity Life Insurance Company (VALIC/AIG), they entered into something called a “Fixed and Variable Deferred Annuity Contract” through which VALIC/AIG would manage and invest the retirement savings, charging fees along the way.

Subject to certain conditions, the Contract included a provision that permitted VALIC/AIG to impose a “surrender charge” or “withdrawal fee" of up to five percent of the retirement savings in the event the savings were withdrawn.  The Contract also permitted VALIC/AIG to waive or reduce this surrender charge “under conditions and limitations set by [VALIC/AIG].”

About 18 months after the Markhams entrusted its employees’ retirement savings with VALIC/AIG, they decided that its fees were too high to justify the services they were getting.  So they tried to change service providers.  VALIC/AIG resisted, and after about six months of back and forth, VALIC/AIG informed the Markhams it would impose the surrender charge if the Markhams left VALIC/AIG.  The Markhams asked VALIC/AIG to waive the charge.  VALIC/AIG deliberated, and then it refused.  Because the Markhams nevertheless insisted on moving their employees’ retirement savings to a new service provider, VALIC/AIG charged each of the plan participants about 4.5% of their pre-fee account balances.

The Markhams contend this surrender charge violates the Employee Retirement Income Security Act (ERISA).  Employers and their retirement plans should be allowed to discontinue a service relationship with a poor service provider without having to forfeit up to 5% of their employees’ retirement savings.

The Legal Claims

Under ERISA, VALIC/AIG cannot knowingly engage in something called a “prohibited transaction” unless an exemption applies.  The Markhams contend that both the Contract and VALIC/AIG’s decision to impose the surrender charge are prohibited transactions.  They also contend the surrender charge is an unlawful termination penalty, which prevents the contract from being exempt from the prohibited transaction.

Also, a plan fiduciary must hold the plan’s assets (the retirement savings) for the exclusive benefit of the plan’s participants and to defray reasonable expenses.  The Markhams contend that VALIC/AIG, when it decided to impose the surrender charge, acted as a fiduciary and breached its fiduciary duties because it placed its own interests over those of the plan participants.

The Relief

Based on their claims, the Markhams seek, for themselves and also all employers and plans like them, the return of the surrender charges and the return of other fees imposed by VALIC pursuant to its unlawful contract and other transactions.  The Markhams also seek an injunction to stop VALIC/AIG’s ongoing use and imposition of its surrender charges.  If employers and their plans want to change service providers, they should be permitted to do so without facing a termination penalty that violates ERISA.

The Relevant Pleadings

A number of the documents relevant to this case are set forth below.