Tucked into a series of agreements to settle an ERISA case against Vanderbilt University's 403(b) plan is a requirement that some ERISA attorneys and defined contribution consultants find unsettling.
The requirement restricts the record keeper from using participant data "acquired in the course of providing record-keeper services" to market products and services unrelated to the plan to participants. ERISA attorneys and consultants say this appears to be the first time such a provision has been part of an ERISA settlement.
Vanderbilt agreed to tell its current and now sole record keeper, Fidelity Investments, that it cannot use record-keeping data in discussing non-plan products and services "unless a request for such products or services is initiated by a plan participant," the settlement document said.
Vanderbilt admitted no wrongdoing. Fidelity wasn't a defendant or a signer of the settlement agreement, which also covered allegations of excessive administrative and management fees and offering underperforming investment options.
Efforts to reach Vanderbilt representatives were unsuccessful.
"This raises some concerns," said David Kaleda, a Washington-based principal at Groom Law Group, referring to non-investment services offered to sponsors.
"A lot of record keepers have programs like wellness programs to help employees," said Mr. Kaleda, whose firm wasn't involved in the Vanderbilt case. "Will that be a problem for sponsors? It might make them think twice even though they know it's not a precedent."
Although settlements don't establish legal precedents, some attorneys and consultants said the Vanderbilt terms could encourage other plaintiffs' attorneys to file similar claims or seek similar settlements.
"It is very interesting to see where this goes," said Earle W. Allen, a New York-based partner at consulting firm Cammack Retirement Group Inc. Right now this provision is simply an agreement between a plaintiff and a defendant, he noted. However, "this could have profound implications" if the requirement became part of a legal precedent via a court ruling that claims an ERISA violation, he said.
"This will make people nervous," said Lori Wright, an Atlanta principal and senior defined contribution consultant for Mercer. "Participant data is a huge issue for all of defined contribution."
Ms. Wright said her firm is telling DC clients to make sure how participant data is treated in discussions with — and contracts with — record keepers. "There will be more scrutiny in the future," she said. "I expect there will be more firewalls between the record-keeping data and the organization that is selling products."
The data provision was negotiated by Jerome Schlichter, founding and managing partner of Schlichter Bogard & Denton LLP, as part of a $14.5 million settlement announced in April in the case of Cassell et al. vs. Vanderbilt University et al.
The provision "is for the protection of workers going forward," Mr. Schlichter said in an interview.
He alleged that some sponsors are giving record keepers "unfettered access" to participant data. Such data shouldn't be used for record keepers to sell "IRAs, wealth management and other services," he said. "Some universities prohibit this. Others don't."
Among the other terms, Vanderbilt agreed to identify to participants the fees and performance of investment options. Plan fiduciaries must "consider the cost of different share classes available for the plan's current investment options," the settlement document said.
Plan fiduciaries must conduct — no later than April 2022 — an RFP seeking at least three qualified firms, the settlement document said. The plan isn't obligated to change record keepers, but the plan must tell the record keeper it cannot use participant data "to market or sell products or services unrelated to the plan to plan participants" unless participants make such a request.
The allegation about data use wasn't in the original lawsuit field in August 2016, but it was included in an amended complaint filed in June 2018. The participants claimed that the university "failed to protect vital and confidential information" from being used by then-record keeper TIAA-CREF, "to aggressively market a variety of TIAA's financial products to plan participants," according to court documents. "Defendants thus allowed TIAA to exploit its position as record keeper, contrary to the best interests of participants." TIAA-CREF, which at one time was one of four record keepers, was not a defendant.
Although he negotiated the data provision settlement with Vanderbilt, Mr. Schlichter tried unsuccessfully once before to get court recognition of this issue in another 403(b) case.
Plan participants sued Northwestern University, Evanston, Ill., alleging fiduciary breaches in two 403(b) plans. The participants, in their initial complaint filed in August 2016, didn't allege data-protection problems.
However, they sought to amend their complaint, alleging that the record keeper, TIAA-CREF, was allowed by the university "to obtain access to participants' contact information, their choices of investments, the asset size of their accounts, their employment status, age, and proximity to retirement," according to court records. "Plaintiffs allege that the information about participants constitutes a plan asset and that defendants breached their fiduciary duties."
U.S. District Judge Jorge L. Alonso ruled on May 25, 2018, against allowing the data-protection complaint to proceed.
Participant data isn't a plan asset, he ruled. Participants couldn't cite any case "in which a court has held that releasing confidential information or allowing someone to use confidential information constitutes a breach of fiduciary duty," he wrote. "This court will not be the first."
The judge also dismissed the rest of the original complaint that included allegations of too many investment options, high fees and poor-performing investments. The plaintiffs have appealed.