This question is now the basis for a new claim against record-keepers servicing 401(k) ad 403(b) plans. Unfortunately, Federal law is silent on this matter as is ERISA. The only provision in ERISA that remotely applies to this issue is that fiduciaries must act in the best interest of plan participants and beneficiaries for the exclusive purpose of providing retirement benefits. If, in fact, the answer is yes, the group of responsible fiduciaries liable for fiduciary breach will expand to include record-keepers and their related entities and the transaction would be considered a “prohibited transaction.” This is an emerging issue in litigation and until it is clearly defined the courts can go either way.
Some of the questions that arise are:
• To what extent can the people that have access to the information benefit from it?
• Can the information be sold to third parties to use in their marketing programs?
• Can the record-keeper solicit terminating participants to purchase products they offer, e.g. life insurance, wealth management for their IRA, etc.?
• When a participant terminates employment does the concept that the participant’s data may be a “plan asset” continue?
On January 24th a class action suit was filed against Shell Oil’s 401(k) plan and its record-keeper. The record-keeper, Fidelity Investments Institutional Operations Co., used the plan information to market various financial products and services that were not part of the plan assets. In another filing in 2018 against Northwestern University’s plan in which the record-keeper was TIAA, a federal judge ruled that participant data was not a plan asset. That case has been appealed to the U.S. Court of Appeals. As part of three recently settled cases, ABB Inc., Vanderbilt University and Johns Hopkins University, based on high plan fees, the settlement included provisions that the service providers were prohibited from marketing their products and services to plan participants. As fees paid to record-keepers continue to be under pressure to be reduced those same record-keepers are seeking other revenue sources to make up for that loss.
In a case against New York University an employee was solicited by TIAA to take approximately $300,000 out of her 403(b) plan and invest it outside in a managed account with higher fees. The representative from TIAA also tried to sell life insurance to the employee. This case is also in the appeals process.
What should an employer/plan sponsor do to protect against this potential fiduciary breach?
• First review service agreements to be sure the document prohibits the use of participant data for any purpose other than administration of the retirement plan. At the least this includes record-keepers, administrators and investment advisors.
• Keep abreast of industry updates on this developing area of fiduciary compliance.
Stephen Abramson, CPC APS Pension Services Inc. firstname.lastname@example.org