Plaintiffs Press Participant Data Claims

Citing the “imminent harm of being solicited for non-Plan services,” the plaintiffs in an excessive fee suit have filed a response to a motion to dismiss the case by fiduciaries of the $4.4 billion ADP TotalSource Retirement Savings Plan.

 

The suit was filed in mid-May in the U.S. District Court of the District of New Jersey on behalf of participants in the ADP multiple employer plan by the law firm of Schlichter Bogard & Denton. ADP filed the motion to dismiss the suit earlier this month.

 

Many of the claims made here (Berkelhammer et al. v. ADP TotalSource Group Inc. et al., case number 2:20-cv-05696)—charging excessive recordkeeping fees (“which far exceeded what a prudent and loyal fiduciary would have obtained, because of the business partnership between ADP and Voya”), choosing higher fee share classes than necessary (which allegedly resulted in “nearly $9 million in losses”), and providing investment options “that consistently underperformed their benchmarks or passively managed equivalents and should not have been provided in the Plan”—are standard fare for this litigation genre. There are, however, some relatively unique elements: (1) this suit involves a MEP; and (2) “Defendants allowed third parties to unlawfully use confidential participant data to solicit non-Plan business.”

Data Minding

 

Tellingly, the response claims (including its own parenthetical commentary) that “allowing a plan service provider to use confidential participant financial information for the service provider’s own business purposes is failing to act solely in the interest of Plan participants (it is acting for the benefit of the service provider) and failing to act for the exclusive purpose of providing benefits to participants (it has nothing to do with Plan benefits) or defraying reasonable expenses of administration (Defendants did not even get a reduction in recordkeeping expenses)” and thus, “because of the business partnership between ADP and Voya,” the plaintiffs say that it is “easily inferable that the Defendants allowed Voya to use this plan information to enhance Voya’s business.”

 

The plaintiffs note that they not only provided “specific examples of other fiduciaries that required their plan’s recordkeeper to contractually agree not to use this information to solicit non-plan business,” but as you might expect, they also noted that “in many settlements of fiduciary breach claims, ERISA fiduciaries have expressly committed to preventing plan recordkeepers from soliciting outside business from plan participants.” They acknowledged the defendants’ reference to the district court’s rejection of a similar claim in Divane v. Northwestern University but brushed it aside, noting that it was an issue not addressed on the appeal by the Seventh Circuit (while also noting that the plaintiffs in that case, represented by the Schlichter law firm, have petitioned the Supreme Court for a writ of certiorari). 

 

 

The plaintiffs here push back on the notion that participant data isn’t a plan asset because ERISA doesn’t label it as such by noting that “ERISA does not define ‘plan assets’ at all,” but “only authorizes the Secretary of Labor to define the term by regulation and specifies particular things that are not plan assets”—none of which are confidential participant data, they comment. They then reiterate their earlier claims that “generally, undefined terms used in ERISA have the same meaning as in the common law when ERISA was enacted,” that “the determination of whether something is a plan asset under ERISA is largely dependent on the specific facts of a given case” and that it’s an issue that “should not be determined on a motion to dismiss.” They also note that “when ERISA was enacted, courts generally recognized under the common law that financial information of potential customers, such as Plan participants, are valuable property and thus assets” and that plan participants provide the Plan with intimate financial data “with the understanding the data set will be used solely in their interest and to administer the Plan,” and that, once they do so, not only do “the Plan’s fiduciaries control the asset,” but that having done so, “…have long had a duty under the common law to hold that information in trust for that purpose.”

 

They conclude that “Participant data in this context is a plan asset and Defendants as fiduciaries had a duty to use that asset solely in the interest of Plan participants and for the exclusive purpose of providing benefits to the participants,” and that “transferring that asset to Voya or for Voya’s use in its own business solicitations was a prohibited transaction under 29 U.S.C. §1106(a)(1)(D).”

 

 

Despite Voya performing what appears to be the same services to the Plan, ADP TotalSource paid itself nearly $10 million from Plan assets putatively as reimbursement for administrative services provided to the Plan.

 

With regard to those administrative expenses, the plaintiffs highlighted a certain irony in the defendants’ arguments that the administration of the MEP was “far more difficult and expensive to administer and recordkeep than the single-employer plans that Plaintiffs use as comparisons.” Instead, the plaintiffs respond that “…the Plan had inherent administrative efficiencies by combining employees from thousands of employers and their retirement assets under a centralized retirement plan structure,” and that “combining employers together in this manner enabled the Plan to achieve substantial economies of scale by spreading costs across a larger participant and asset base.” 

 

The plaintiffs go on to also invoke claims often made by MEP proponents that “further cost efficiencies were obtained in part because ADP TotalSource was required only to submit a single annual Form 5500 filing, a single IRS qualification filing, and a single annual independent audit.” Oh, and if that weren’t sufficient, they also note that “…the Plan had uniform features across all participating employers that can be easily automated to reduce costs.”

 

 

The plaintiffs also take issue with the use of managed accounts, claiming that “managed account services do not differ in quality but primarily in price,” and that they “…often have little to no advantage over lower-cost funds, such as target date funds, risk-based funds and balanced funds.” The plaintiffs claim that “despite the Plan’s substantial bargaining power to obtain lower managed account services fees, Defendants caused the Plan to pay uncapped, asset-based managed account services fees that were as much as 2,000% more than what other managed account providers charge for superior or equivalent services.” Moreover, they allege that “despite Voya Retirement’s asset-based compensation dramatically increasing since 2014, Defendants did not control this revenue and never put the Plan’s managed account services out to competitive bidding to obtain a reasonable fee.”

 

As for the other issues, the plaintiffs argue that “in light of the effect of fees on expected investment returns, loyal and prudent fiduciaries carefully scrutinize whether the added cost of actively managed funds is justified by an expectation of higher returns net of all expenses,” and that “during their selection process, fiduciaries must make a reasoned determination that an actively managed investment option provided to plan participants will outperform its benchmark index or passively managed equivalent net of investment expenses.” Moreover, they allege that, “as part of their continuing duty to monitor plan investments, when an investment underperforms over a trailing three-year period, fiduciaries remove it from the plan because once an actively managed fund has underperformed over that relevant period, it is highly unlikely it will outperform in the future.” 

 

Of course, the plaintiffs argue that “defendants did not satisfy out their fiduciary obligations in providing investment options to Plan participants,” going on to allege not only that they “selected and maintained five investments that consistently underperformed their benchmarks or passively managed equivalents available to the Plan,” but that “by providing these high-cost and poorly performing investments, Defendants failed to make a reasoned determination that providing these investments was prudent and in the exclusive interest of Plan participants.”

 

Despite the detailed allegations, the response notes that “since Defendants never disclosed how they made these decisions, Plaintiffs cannot be expected to plead specifically how that decision-making process was deficient. But the facts they can and do plead, and the reasonable inferences drawn from those facts, plausibly show that Plaintiffs state fiduciary breach claims.” 

 

We’ll see how the court sees things…