Fiduciary Responsibility Unclear When Handling Participant Data? Ask the Lawyer

Retirement Committee Education

Fiduciary Responsibility Unclear When Handling Participant Data? Ask the Lawyer

By Carol Buckmann

Fiduciary responsibility has blurred-lines around the use of participant data. Can your vendors use participant data to sell participants other products and services?  This practice is called cross-selling, and it became a big issue for company fiduciaries after it was raised in some 403(b) plan lawsuits. The practice was prohibited in a voluntary settlement of the fiduciary breach lawsuit against Vanderbilt University, but not found to be illegal in a decision involving Northwestern University.  The topic was raised again in a lawsuit filed against Shell Oil Corporation and Fidelity challenging cross-selling based on 401(k) plan participant data. The new focus on this issue reflects growing worldwide concerns over data privacy, but the jury is still out on whether such cross-selling to plan participants violates ERISA.

Why Cross-Sell?

As fees trend downward due to increased competition in the 401(k) industry, vendors are searching for new sources of revenue.  Participant data needed in the ordinary course of servicing plans, such as employment, compensation history, investment choices, marital status and years to retirement, can be used to target participants to cross-sell non-retirement services such as private wealth management and products such as annuities.

Why Plan Fiduciaries Should Be Concerned

Difficult questions surface around whether ERISA participant data is considered a plan asset.  Plan fiduciaries such as investment managers, fiduciary advisers and third-party fiduciary administrators are prohibited from personally profiting from the use of plan assets. Consequently, many vendors structure their operations so that they will not be fiduciaries.

Even assuming that the vendor is a fiduciary, since there is no specific ERISA authority on point, courts will look to ordinary notions of property rights to determine whether the participant data is a plan asset. The Northwestern court found that participant data didn’t satisfy this standard, stating that participant data could not be sold or leased to fund retirement benefits. So far, no court has ruled that participant data is a plan asset.

Whether or not vendors are fiduciaries, if vendors are profiting from the use of participant data, the plan sponsor fiduciaries should be taking this into account in negotiating fees. They also may have an obligation not to facilitate the sale of inappropriate products to participants.

Plaintiffs in these lawsuits have also claimed that the data must be kept confidential. ERISA authority does not deal with this issue, and vendors need access to the data to do their jobs. However, other laws that protect participant data, such as California’s privacy act, might apply. And SEC rules might provide protection from inappropriate cross-selling as well. For example, Regulation Best Interest scheduled to come into effect later this year will require rollover recommendations to be in the participant’s best interest. The Department of Labor is working on a revised fiduciary rule that might also affect cross-selling.

What Can Plan Sponsors Do Now?

There is no need to wait for specific guidance.  Company fiduciaries should determine whether their vendors are engaging in cross-selling, and, if so, the practices they are following. They should promptly communicate any concerns and desired restrictions to these vendors.

Company fiduciaries can also seek to put provisions limiting or prohibiting the use of participant data for cross-selling in their services agreements, using the Vanderbilt terms as a model. Vanderbilt still permits its vendor to respond to unsolicited participant inquiries about other products. Of course, plan sponsors should also be monitoring their vendors to make sure that they are observing the terms of these services agreements and any restrictions that have been communicated.

Carol Buckmann is a founding partner at Cohen & Buckmann PC, and has practiced at major law firms specializing in the areas of employee benefits and executive compensation for over 30 years. Carol frequently blogs, writes articles and is quoted in the media about current employee benefit issues.


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