Increase in consumer data protection laws against plan trustees
There is a growing trend of using member data to cross-sell financial products unrelated to plan record keeping by large registrars and asset custodians of employer-sponsored pension plans . Given that plan trustees are ultimately legally responsible for the management and mismanagement of a pension plan, this tendency to use member data can raise issues for employers in their role as plan sponsors. plans and trustees.
Recently, many plan trustees have been swept up in a wave of excessive fee litigation for failing to provide prudent investment options at reasonable fees to plan participants – a trend that is likely to continue and affect more plans. of retirement. Litigation over excessive fees has prompted plan trustees to renegotiate and monitor the fees charged by service providers. Due to reduced fees, service providers have looked to other options to grow their business. Some service providers use member data acquired in the course of administering pension plans to sell and market non-plan related services.
There is no definitive case law or other legal guidance prohibiting or restricting service providers from using personal information of plan participants to cross-sell financial products. Nevertheless, there are several reasons why plan trustees may be reluctant to allow such personal information collected from plans to be used for purposes unrelated to the plan.
Excessive fee litigation
Some of the claims in the excessive fee litigation cases against plan trustees include fiduciary breaches for authorizing excessive record keeping and investment management fees. Arguments that participant data is an asset of the Employees Retirement Income Security Act (ERISA) plan have fallen flat. However, several regulations for instances of excessive charges have included conditions that require a contractual restriction on the service provider’s ability to cross-sell products or services unrelated to the plan or to plan participants, unless a participant makes a prior request. Protecting participant data has become part of the solution to excessive expense cases, as it helps to mitigate the movement of plan assets from a lower-cost retirement vehicle (the pension plan) to a lower-cost retirement vehicle. higher cost (an Individual Retirement Plan or IRA).
Fiduciary duty and personal data
Although the argument that participant data is an asset of the ERISA plan has not persuaded the courts, participant data still has value and plan trustees must oversee the services of service providers, who do not are generally not trustees of the plan. A trustee may determine that the use of participant data to sell off-plan financial services constitutes an inappropriate use of that data. Plan sponsors may want to limit the activities of service providers, including limiting the use of member data for purposes other than pension plan administration. Participants’ personal data is valuable to service providers. Plan trustees can monitor and prevent service providers from using data in ways not intended.
In its plan verification reviews, the United States Department of Labor (DOL) has requested the use of plan participant data. Specifically, the DOL requests records and communications describing the plan sponsor’s or any service provider’s use of participant data for the direct or indirect purpose of cross-selling or marketing products and services. The DOL is asking about cross-selling by service providers as part of its audit review, and it is likely to formulate a position that will examine the use of participant data in this context.
DOL fiduciary rule
Issued by the DOL in 2017, the fiduciary rule provided that pension advisors must act in the best interests of their clients and make certain disclosures to their clients. The rule would have treated service providers who recommended or solicited plan participants to renew pension plan assets as trustees. If a service provider were treated as a plan fiduciary, it would likely not use plan participant data to cross-sell non-plan financial products due to increased legal risk. The Fifth Circuit Court of Appeals canceled the rule in March 2018, so it never entered into force. Nevertheless, the DOL is considering reviving the fiduciary rule. The DOL has an eye on retirement rollover operations and wants to provide additional protections to participants.
State Privacy Laws
Several states have passed consumer data protection laws and others are considering adopting them. These laws may require an additional layer of compliance for data retained by service providers for plan administration. Certain state laws contain important exclusions for employers and for the use of information for employment purposes; however, the plan’s pension services are distinct from the individual pension products marketed to participants through cross-selling, and these individual pension services are arguably outside the scope of the employment relationship. Plan fiduciaries who permit service providers to use participant information may be at risk of violating state privacy laws. Allowing cross-selling could raise significant compliance issues under state law for plan trustees and service providers.
A plan trustee’s obligation extends to limiting the plan’s litigation risk. The law surrounding the use of plan data for solicitation purposes is unsettled, but as DOL actions and new state laws suggest, it is an area of growing concern at the corporate levels. states and the federal government. A fiduciary can direct the actions of the service provider and can also act to prevent unauthorized use of personal data.
Key points to remember
Plan trustees may wish to draft language for plan service agreements that limits the use of member information acquired while providing record-keeping services similar to provisions required in excessive expense regulations. Regardless of the approach plan trustees take to managing participant data, under ERISA they are ultimately responsible for the management — and mismanagement — of their pension plans.
© 2022, Ogletree, Deakins, Nash, Smoak & Stewart, PC, All rights reserved.National Law Review, Volume XII, Number 97