California teachers: In-plan annuity rider fees unfair; lawsuit in mediation

Image shows the words "403(b) Plan" — A California lawsuit challenges the costs associated with in-plan annuities.

By John Hilton

Several California teacher lawsuits over in-plan annuity costs have been consolidated into one case involving rider fees.

The judge is giving participants plenty of leeway for mediation, with a trial dates scheduled for November and December 2026.

The initial lawsuits, filed in the Northern District of California, alleged several violations of the California Education Code and the California Unfair Competition Law. Teachers claimed the cost of the annuities ate into their 403(b) retirement plans.

California teachers do not contribute or receive Social Security funds. According to the California State Teachers’ Retirement System, the largest educator-only pension fund in the world, the average teacher who retired in 2020–21 had 25 years of service and a monthly benefit of $4,813, or $57,756 a year.

The insurers named as defendants are Life Insurance Company of the Southwest (LICS), North American Company for Life and Health Insurance, and Midland National Life Insurance Company.

The cases were filed in 2023. Plaintiffs allege that the insurers are “charging teachers millions of dollars in undisclosed and unauthorized fees on their supplemental retirement savings plans, in violation of” the California laws.

The insurers denied all allegations in the lawsuits, according to court filings. In July, Judge P. Casey Pitts granted a partial summary judgment dismissing several claims central to the lawsuits.

Pitts set a schedule last month that calls for a trial to conclude in mid-December 2026. According to the schedule, the plaintiffs and defendants are to spend the initial months of 2025 in mediation talks.

Marketing to teachers

The initial lawsuit describes robust sales of financial products marketed to California’s more than 300,000 public school teachers. Federal law permits public schools and non-profits to offer employees tax-advantaged employer-sponsored retirement plans known as 403(b) plans. For many years, vendors did not have to fully disclose the fees associated with plan options, the lawsuit states.

“As a result of insurance companies’ aggressive marketing tactics and incomplete disclosures, teachers were often funneled into indexed annuities that came with high fees and low returns while providing huge profits for the insurance companies peddling them,” the LICS complaint says.

In 2002, the California Legislature passed a bill that included the creation of the website 403bcompare.com. The impartial website provides full product and fee information to help employees decide.

The plaintiffs alleged that Life Insurance Company of the Southwest is a habitual violator of the disclosure law. They claim the insurer’s fees average over 3.4% per year since 2019—and that its sales agents are among the highest paid, earning commissions between 8% and 10%.

“All of which have resulted in Defendant’s customers seeing some of the state’s lowest returns on their investments,” the lawsuit states. “Fees this high are disastrous for teachers trying to save for retirement, cutting their nest egg nearly in half by the time of their retirement.”

Partial summary judgment

Plaintiffs claimed that the use of participation rates, caps, and spreads unfairly masked the true cost of the annuity products. Most plaintiffs purchased the LICS’s SecurePlus fixed indexed annuity, which yielded far less return than advertised due to these adjustments, the lawsuit explains.

Judge Pitts rejected these claims and sided with the insurer.

“Parameters like cap, spread, and participation rates are a key feature of deferred indexed annuities, and it is hard to see how a customer could make an informed decision about purchasing a deferred indexed annuity without understanding what those rates were and how they were likely to change,” Pitts writes. “But because the statutory text of [California law] does not impose such a requirement, plaintiffs’ policy arguments must be directed to the California Legislature.”

But the judge allowed a claim of “undisclosed rider fees” to proceed. Plaintiff Danielle Krimbow paid for a guaranteed lifetime income rider and claimed that the plan's 403bCompare.com listing stated that the rider fee would range from 0.65% to 0.75% of the account balance, the complaint says.

However, the insurer actually charged a fee of 0.90% for the rider.

“If a fee is not disclosed on 403bCompare.com, a vendor may not charge it,” Pitts writes. “If [the plaintiff] paid a fee that LICS was not entitled to charge, this is an economic injury that provides standing to pursue her … claim whether or not the fee was disclosed elsewhere.”

The lawsuit was consolidated with two similar claims:

Plaintiff Barry Blisten claims North American charged a 1.5% “strategy fee” rider, a fee that "was not disclosed on 403bCompare.com," court documents say.

Plaintiff Veronica L. Taylor claims that Midland National offered the “Retire X-Cel Rider,” a guaranteed minimum withdrawal benefit. "This rider, which carried an annual charge of 0.95%, was in no way disclosed on the website," court documents say.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.