There is a line between using participant contact information to reach out to assist and educate participants and using participant contacts for the purpose of marketing additional products and services to them. If the allegations in a recent complaint filed by the Schlichter law firm are correct, Empower’s practices are on the wrong side of that line. Although they are not named as defendants, plaintiffs also contend that the sponsors of the plans in which the plaintiffs participate breached their fiduciary responsibilities and engaged in prohibited transactions by failing to adequately monitor cross-selling practices and revenue. What does this mean for plan sponsors and plan committees?
The Heart of the Complaint
Empower is accused of using information it obtained in the course of administering the plans in order to target participants for the purpose of selling them unnecessary and overpriced services through a premium IRA product. This required that plaintiffs receive plan distributions and roll them into the IRA product. Plaintiffs claim that they weren’t informed of the higher fees, Empower’s conflicts of interest, that the product didn’t really provide personalized investment services, and that the investment choices were largely limited to Empower products. (Of course, we can’t yet know if all of this is true. The complaint is full of hyperbole but describes a plan to conceal material facts and profit from use of participant data.)
The Challenges
While the GAO and the SEC have expressed concern about cross-selling to retirement plan participants, and the SEC has entered into settlements with and fined TIAA, Vanguard and defendant Empower for violating securities laws (including, in Empower’s case, Reg BI) in their marketing practices, there is no body of case law specifically holding that plan data is a plan asset or that cross-selling violates ERISA. Further, courts have blocked enforcement of the Department of Labor’s rollover advice rule that makes rollover advice a fiduciary activity if there will be an ongoing advice relationship after the rollover. Faced with these challenges, plaintiffs have cast a wide net in their attempt to recover from Empower.
Potential ERISA Violations
The complaint alleges multiple ERISA violations as well as fraud and fraudulent concealment on Empower’s part. The laundry list of claimed violations includes violations of the duties of prudence and loyalty, prohibited transactions involving self-dealing by Empower and the payment of unreasonable fees by the plan because the plan sponsor fiduciaries weren’t taking the additional income received by Empower into account in evaluating plan fees. If the total compensation was unreasonable, this could make the exemption in ERISA section 408(b)(2) for paying reasonable fees for necessary services unavailable.
By laying out the plan sponsors’ failure to monitor or control cross selling, of which Empower was said to be aware, and by citing cases holding that third parties participating in fiduciary breaches and prohibited transactions can be liable even if they are not fiduciaries, plaintiffs are seeking to close off the “I was not a fiduciary” defense by Empower.
Comprehensive Relief Requested
The complaint asks for a list of monetary and equitable relief. Plaintiffs are seeking disgorgement of “ill-gotten gains” through a constructive trust, restitution or surcharge, and orders that Empower provide an accounting of the profits. Plaintiffs also claim that ERISA’s usual six year statute of limitations for fiduciary breach doesn’t apply here because of fraudulent concealment by Empower. There is even a demand for a jury trial, though courts outside the Second Circuit haven’t found that ERISA provides for jury trials and this case was filed elsewhere.
Will This Potentially Huge Class Action Succeed?
The potential class of plans using Empower is huge, but it isn’t clear that plaintiffs will be able to make their case now given the absence of good precedent. However, after the Supreme Court’s Cunningham decision, it seems clear that at least the prohibited transaction claims will survive a motion to dismiss.
Regardless of how this case progresses, the allegations in the complaint are troubling if true and many recordkeepers besides Empower engage in cross-selling practices of different types. Some recordkeepers even have provisions asking plan fiduciaries to agree to uses of participant data such as cross-selling as part of their standard service agreements. This complaint should be a wake up call for plan sponsor fiduciaries to investigate their provider’s cross-selling practices, as they could be defendants in similar lawsuits.
What Should Plan Sponsors Do?
Fiduciaries should discourage plan recordkeepers from contacting participants or plan sponsors solely for the purpose of selling them additional products or services. Often, these pitches fail to mention alternatives or the potential benefits of keeping assets in the employer plan. The recordkeepers have, after all, been hired to administer the plan and assist participants to prepare for retirement, not to make them lifelong customers. Just as they ought to be paying attention to the float income practices of their service providers (see DOL FAB 2002-3 for guidance on how to fulfill similar monitoring obligations), plan sponsor fiduciaries ought to know about and, if necessary, restrict their recordkeeper’s cross-selling practices. Here are some tips:
· Review your service agreement to see if it currently authorizes cross-selling. Ask for changes if necessary, particularly if you are renewing and being asked to sign new documents.
· Consider requiring that the service agreement prohibit discussing additional products and services with participants unless participants independently initiate the discussion by requesting specific information. Some plan sponsors already do that.
· Ask the recordkeeper to represent that it has disclosed all compensation that it and its affiliates expect to receive a result of the relationship with the plan and related conflicts.
· Review the 408b-2 disclosures, 5500 information and any Forms ADV received from your recordkeeper to see if there are any disclosures about cross-selling and related income.
· Try to get reports of the additional income cross-selling is generating and determine whether it seems excessive.
· Contact the recordkeeper to ask about its cross-selling practices and how it monitors how its sales staff deals with plan participants. For example, does it review recordings of phone conversations with participants to see if sales staff crosses the line? Does its compensation program provide incentives for moving participants to managed accounts?
· If they are participants in the plan, company fiduciaries can check out the kinds of responses their participants get when they ask for information by calling themselves to ask for advice. Will services they didn’t ask about be pitched to them?
· Fiduciaries can require that they vet and approve all recordkeeper communications about services and products before they are sent to participants.
This is a Wake-Up Call for Recordkeepers, Too
Recordkeepers should review their training of sales staff and how their communications with participants are controlled and monitored to confirm that they comply with ERISA and its rules regarding when a person becomes a fiduciary and prohibiting self-dealing. They should also review how their sales staff is compensated in connection with managed accounts and what is included in their 408b-2 disclosures and ERISA reporting. Any recordkeepers who do not cross-sell may want to include that in their promotional material, as it is a good selling point and important for plan sponsors and committees to know.
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