One of the novel claims in 401(k) and 403(b) plan litigation has been that vendors violate ERISA when they use participant data to cross sell other products and services to plan participants. These can include products such as annuities, life insurance, and brokerage accounts and wealth management services.
A closely watched case was filed in Texas against Shell Oil Company and a number of Fidelity entities-all referred to as Fidelity here- alleging that Fidelity, the plan’s recordkeeper, engaged in a prohibited transaction by profiting from the use of participant data through its cross selling practices. A ruling for plaintiffs would have required the court to go further than other courts that have addressed this issue and make a threshold determination that participant data is a plan asset. Once that hurdle was cleared, plaintiffs would have had to show that Fidelity was a fiduciary violating the ERISA prohibition in Section 406 against benefiting from the use of plan assets. However, on March 30, the Shell court dismissed the claims against Fidelity for failure to state an ERISA claim. (Charles Harmon v. Shell Oil Company, no. 3:20-cv-0021, S.D. Texas, Galveston Division).
Recent Similar Decisions.
This decision follows on the heels of the Divane v. Northwestern case in which the same charge was also rejected. The district court’s decision in Divane was affirmed by the Seventh Circuit Court of Appeals. However, a lawsuit against Vanderbilt University that also raised this claim resolved the claim in a settlement that prohibited Fidelity from contacting participants about other Fidelity products and services if they did not request information.
ERISA Lacks a Clear Rule.
ERISA does not contain a definition of “plan asset”, and the Shell court found that the plan asset regulation issued by the Department of Labor discusses plan assets by reference to investments. As the Shell court pointed out, another regulation on when participant contributions are plan assets also failed to cover the situation. In the end, the reasoning in Divane and Shell-and in a prior decision in which Fidelity’s float practices were challenged unsuccessfully- was that plan assets should be determined by reference to ordinary rules of property law, under which participant data would not be considered a plan asset, even though it may have some value. In a footnote, the Shell court also cited two earlier and lesser known federal district court decisions, Patient Advocates, LLC v. Prysunka, a 2004 Maine decision, and Walsh v. Principal Life Insurance Co., a 2010 decision by a federal district court in Iowa, which it said reached a similar result. The Patient Advocates case was cited for finding that participant information is not a plan asset, and the Principal case for holding that service providers are not fiduciaries when using plan data to market retail products.
The Shell court did not need to reach the question of whether Fidelity entities were functioning as plan fiduciaries with respect to participant data, as there could be no prohibited transaction unless a party benefited from plan assets.
Relief for Recordkeepers and Affiliates.
Plan recordkeepers need individual information about participants such as age, marital status and retirement dates in order to do their jobs properly, so merely maintaining participant data is not problematic. After this decision, vendors can breathe a sigh of relief that no court has determined that their cross selling practices can result in prohibited transactions. If plaintiffs had ultimately prevailed on the plan asset question, additional issues would have been raised for hiring fiduciaries. Did their vendor fees needed to be negotiated by assigning a potential value to cross selling, or were the fees already lower than they would have been had cross selling not been taken into account? Were fiduciaries even under an obligation to monitor cross selling to make sure that inappropriate products were not being sold?
Where Do We Go From Here?
So far, the courts have declined to extend the definition of plan assets to include participant data, although this issue may still be raised on appeal of lower court decisions or in other courts where the decisions discussed here aren’t precedent. However, nothing in the decisions prevents hiring fiduciaries from putting restrictions on use of participant data into their vendor service agreements as Vanderbilt did in its settlement. Apart from ERISA issues, the question arises whether participants have privacy rights that require that their data not be shared beyond those who need it to perform the jobs for which they were hired. Like Vanderbilt, fiduciaries could negotiate for a restriction that the vendor and its affiliates would not make unsolicited contact with participants for the purpose of selling the participants unrelated products and services.