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Participant Data Claims Dismissed in Excessive Fee Suit

Fiduciary Rules and Practices

ADP got something of a split decision in an excessive fee case—with a federal judge allowing claims regarding high record-keeping fees and expensive investments to proceed—but culling claims about the use of participant data.

The Suit

The suit was filed in mid-May 2020 in the U.S. District Court of the District of New Jersey against the fiduciaries of the $4.4 billion ADP TotalSource Retirement Savings Plan (including third-party investment consultant NFP Retirement Inc.) on behalf of participants in the MEP by the law firm of Schlichter Bogard & Denton.

At a high level, the allegations made in this suit (Berkelhammer v. ADP TotalSource Group Inc., D.N.J., No. 20-cv-05696, complaint filed 5/7/20) were that the ADP defendants: breached their fiduciary duties and engaged in prohibited transactions by failing to monitor and control the Plan’s recordkeeping fees and causing the Plan to pay excessive fees; breached their fiduciary duties and engaged in prohibited transactions by unlawfully paying themselves from Plan assets; and selected and retained imprudent investments in the Plan[1].

The Issue(s)

Turning to the participant data claim, U.S. District Judge Esther Salas (Berkelhammer et al. v. ADP TotalSource Group Inc. et al., case number 2:20-cv-05696, in the U.S. District Court of the District of New Jersey) restated the issue—that the fiduciary defendants breached their fiduciary duties by disclosing plan participant data to Voya, which used, through VFA, the data to sell non-Plan, retail, and expensive investment products to Plan participants”—and that “Defendants' transfer of plan participant data to Voya constituted a party-in-interest transaction prohibited under § 1106(a)(1)(D).”

Judge Salas noted that “in opposing Defendants' motion to dismiss, Plaintiffs do not offer a single case supporting their fiduciary breach claim”—and perhaps no wonder, as she continued, “One district court observed that there is not "a single case in which a court has held that releasing confidential information or allowing someone to use confidential information constitutes a breach of fiduciary duty under ERISA. This Court will not be the first...."—and then went on to note, “Nor will this Court be the first, at least not on these pleadings.”

She continued to cite the example of that case (Divane v. Northwestern University), noting that not only was it not imprudent to allow a recordkeeper "to have access to each participant's contact information, their choice of investments, their employment status, their age and their proximity to retirement”—“If anything, it might be imprudent not to disclose that information to Voya as recordkeeper. The recordkeeper ‘need[s] that information in order to serve as record keeper.’"

“To be sure,” she acknowledged, “Plaintiffs argue that Defendants should have limited Voya's use of plan participant data solely for purposes of its recordkeeping functions. But absent from their Complaint are sufficient facts supporting this theory. First, they do not explain what processes were flawed with respect to permitting Voya, through VFA, to use plan participant data for non-plan purposes. Second, they do not articulate any harm to the Plan—i.e., diverted investments that would otherwise have increased Plan assets. Third, while they claim that participants of the Plan paid higher fees when investing through non-Plan investment products—which were marketed to them by use of their data—these allegations are vague, general, and conclusory.”

Moreover, Judge Salas explained that the plaintiffs “…do not allege what Plan participants, specifically, paid in fees; instead, they allege, generally, that "revenue generated by ... sales [of non-plan products] is significant,” but commented that nothing specific to the plan or Voya. “Nor do they allege that these non-Plan products performed so poorly that the fees were unjustified. Fourth, Plaintiffs do not outline the conduct of comparable fiduciaries in like situations (e.g., Fiduciary X of Plan Y limited Recordkeeper Z from using plan participant data for non-recordkeeping purposes). While they allege that fiduciaries of two other plans considered limiting recordkeepers' use of plan participant data, they do not allege that those fiduciaries actually limited the recordkeeper.”

And then proceeded to dismiss this claim—but dismissed without prejudice, explaining that the court “cannot rule out the possibility that Plaintiffs might plausibly allege that a reasonable fiduciary in Defendants' situation would have conditioned use of plan participant data only for recordkeeping purposes.”

Prohibited Transaction?

With regard to the claims that sharing the data constituted a prohibited transaction, Judge Salas explained that they needed to “plausibly allege that plan participant data are ‘assets of the plan’”—and that meant they had to “do more than simply allege that plan participant data are plan assets.” But then Judge Salas explained that “the Court could not uncover, and Plaintiffs have not cited, a single case that has held plan participant data are plan assets under ERISA. And at least three courts[2] have squarely rejected such a proposition.” And with no citation in favor of their position—and with judicial precedence to toe contrary, “In light of Plaintiffs' deficient pleadings, the Court follows that consensus.”

Judge Salas did turn to ERISA for a definition (29 C.F.R. § 2510.3-101, which is titled "Definition of 'plan assets'—plan investments”) that noted that “generally, when a plan invests in another entity, the plan's assets include its investment, but do not, solely by reason of such investment, include any of the underlying assets of the entity. However, in the case of a plan's investment in an equity interest of an entity that is neither a publicly-offered security nor a security issued by an investment company registered under the Investment Company Act of 1940 its assets include both the equity interest and an undivided interest in each of the underlying assets of the entity….”

She then concluded “this regulation cannot be read to define plan assets to include plan participant data. As one district court has observed, this regulation expressly defines plan assets in terms of investments but conspicuously "makes no mention of any 'data.'"

“Plaintiffs appear not to dispute that the Secretary of Labor's regulations fail to capture plan participant data as plan assets,” she writes. “Instead, Plaintiffs argue that the Secretary of Labor does not exclusively define plan assets. In support, Plaintiffs point out that the Secretary of Labor did not define plan assets until twelve years after ERISA's enactment, and that the regulations merely describe, as opposed to definitively define, the term plan assets.” She was not, however, persuaded. “Absent the minimum allegation that plan participant data is something of value to the Plan, Plaintiffs fail to allege that plan participant data are plan assets.”

“Accordingly,” Judge Salas concluded, “Plaintiffs' Count X is dismissed. However, Count X, like Count IX, is dismissed without prejudice because the Court cannot rule out the possibility that Plaintiffs may plausibly plead that plan participant data, when collected and aggregated, can be used as something of value to benefit the Plan and participants of the Plan.”

What This Means

To date, common wisdom (as well as judicial precedent) would seem to suggest that while there is clearly value in participant data that relates both to the plan, and in some cases beyond, that wouldn’t seem to constitute being a plan asset. However, as Judge Salas notes in leaving that door open, you never know when an open-minded judge might decide otherwise. Prudent fiduciaries should, at a minimum, be mindful of the potential arguments, and prudent as to the access and application.

Footnotes

[1] Judge Salas concluded that the plaintiffs had presented ample evidence that they were paying $80-$124 in record-keeping fees per participant from 2014 to 2018—some 400% higher than the $25-$30 that the plaintiffs had alleged was reasonable to expect for a plan of this size. She also found that he evidence presented regarding bad investment options was sufficient to establish a “plausible” case of malfeasance.

[2] Harmon v. Shell Oil Co., No. 20-0021, 2021 U.S. Dist. LEXIS 66312, [2021 BL 126207], 2021 WL 1232694 , at *2-3 (S.D. Tex. Mar. 30, 2021); Divane, [2018 BL 186065], 2018 U.S. Dist. LEXIS 87645 , [2018 BL 186065], 2018 WL 2388118 , at *12; Patient Advocs., LLC v. Prysunka, 316 F. Supp. 2d 46 , 48-49 (D. Me. 2004).