A new chapter may be opening in the ongoing saga of litigation against plan fiduciaries.
This new chapter could lead plan sponsors and advisors to rethink – and expand – their view of the scope of their fiduciary responsibility.
On January 10, the plaintiffs in the lawsuit against New York University’s plans filed an amended complaint. The majority of the allegations in this new complaint reiterated claims made in previous complaints – challenging the NYU plans’ use of multiple recordkeepers, recordkeeping fees, and investment decisions. However, there are several noteworthy new wrinkles in the amended complaint.
Wrinkle Number 1: Use of Participant Data and Sale of Ancillary Products
The amended complaint alleges that:
• “Private, confidential information which recordkeepers obtain about plan participants is information of value belonging to the plan and its participants. This information is a plan asset.”
• The plans’ recordkeeper (TIAA) “used its position as recordkeeper in the NYU Plans to obtain access to participants, learning their ages, length of employment, time until retirement age, the size of their accounts, and choices of investments, and used that information for its benefit to market and sell lucrative investment products, insurance, 529 plans, IRAs, and wealth management products to participants as they neared retirement and before retirement.”
• The participant information obtained by TIAA “was even more lucrative for TIAA because the NYU Defendants are using TIAA as a recordkeeper and for the Plans’ investments, thereby giving endorsement to TIAA.” In effect, this enhanced TIAA’s ability to sell these ancillary products.
• The plan fiduciaries were aware of this sales activity and “fully enabled it.”
• There were actions that NYU could have taken. “Prudent fiduciaries protect participant account information from being exploited for commercial purposes and take affirmative steps to prohibit service providers from using confidential participant information to solicit participants with various products outside of the plan (and unrelated to the service provider’s function in servicing the plan). Specifically, prudent fiduciaries establish clear limits on the proper use of confidential participant information.”
• TIAA’s role as plan recordkeeper, in effect, represented a “stamp of approval” for TIAA’s non-plan products.
Based on these assertions, plaintiffs claimed that the NYU fiduciaries breached their fiduciary duties under ERISA by (i) failing to act in the “exclusive benefit” of plan participants, and (ii) permitting TIAA to engage in a prohibited transaction under ERISA by allowing TIAA to utilize a valuable plan asset (participant data) for TIAA’s financial benefit.
There is so much to discuss here, one blog post may simply not be enough.
• There is increasing awareness that data is a valuable economic asset. Indeed, an article in The Economist magazine last year was entitled “The world’s most valuable resource is no longer oil, but data”. And, detailed knowledge about employees (such as age, account balance, and plans for retirement) would clearly enhance the ability of a vendor to sell ancillary products.
• As previously discussed in another blog post (http://retireaware.com/2017/12/16/twenty-one-years-hipaa-added-protections-health-information-financial-information/), there are few legal limits on the ability of financial firms to share participant data. Rather, any limits must be contractually established by plan sponsors.
• There is also an increasing awareness that providers engage in these cross-selling practices. Industry insiders have been aware of these practices for years and a New York Times article, cited in the NYU complaint, placed these practices in the public eye.
• The challenged cross-selling activity occurred outside of the NYU plan itself and plan fiduciaries may not view such “non-plan” activities as the fiduciaries’ responsibility. This complaint seeks to disabuse fiduciaries of any such notion.
Of course, these are simply allegations in a complaint and a fair amount of legal wrangling will occur before anything is resolved. Indeed, even if all of these factual allegations are true, plaintiffs will also need to convince the court that these actions (legally) represent a breach of the plan fiduciaries’ responsibilities. Nonetheless, plan sponsors can now be considered as “on notice” that vendors’ use of participant data for non-plan purposes and cross-sales activity will be triggering additional scrutiny in the months and years to come.
Wrinkle Number 2: Outside Fiduciaries’ on the Hook
Another aspect of the new complaint is the inclusion of the plans’ outside investment advisor as a defendant. The complaint maintains that the advisor, as an outside fiduciary, is also responsible for many of the fiduciary breaches alleged in the complaint.
Specifically, the complaint seeks to hold the advisor liable for providing flawed investment advice, the use of inappropriate benchmarks that supported the plans’ use of high-cost, poorly performing funds, and failure to engage in a prudent process for monitoring – and removing – funds. The complaint also claims that the advisor “knowingly participated in and enabled” the breaches committed by the NYU fiduciaries, including “TIAA’s use of confidential participant account information to cross-sell products and services for its own benefit.”
A (Legal) Procedural Note
Long before any trial can occur, the defendants will try to get the plaintiffs’ legal case dismissed. At this stage, such a dismissal occurs only if there is a legal flaw in the case; for example, if the alleged actions (even if true) do not create legal liability. And so, the next rounds of the battle will focus on the legal basis for the claims. In focusing on the legal nature of the claims, the court will treat the allegations as true – not because the court actually accepts that these specific allegations are true, but because the standard for reviewing the legal claims requires that the court treat the allegations as true – so the court can focus solely on the legal claims.
So, we can expect one or more decisions in this case that accept the allegations as true. Please note, such “acceptance” is not what it seems.
As noted, these are allegations in a complaint and the legal wrangling – about both the allegations and the legal implications of the allegations – is just beginning. Nonetheless, the circumstances alleged in the NYU complaint are not unique. Plan sponsors – and fiduciaries – are now faced with the reality that plaintiffs’ attorneys, the media and (possibly) participants will start paying more attention to the use of participant data and cross-sales. Responding to this attention is fiduciaries’ next move.
This blog post previously appeared at the blog site for PrincipalReview.com