A district court decision in March has added to the sparse authority regarding the status of participant data under ERISA, particularly whether recordkeepers or other providers can use that data to offer additional products or services to plan participants. Recent cases have alleged that participant data is a “plan asset” for ERISA purposes, and that either (i) the plan sponsor violates ERISA by permitting the recordkeeper’s cross-selling based on that data or (ii) the recordkeeper takes on ERISA fiduciary status and then violates the statute by engaging in cross-selling.

To date, no court has found that such cross-selling is an ERISA violation by either plan sponsors or recordkeepers.

Prior authority

There are at least two decisions relevant to this issue that preceded the most recent developments.

• Patient Advocates, LLC v. Prysunka, 316 F.Supp. 2d 46, 47-49 (D. Maine 2004), arose in a different context: whether a state statute requiring the disclosure of health care claims and participant demographic data to a state agency was preempted by ERISA. The court found that participant data was not a plan asset for ERISA purposes, in part because claims data is not typically acquired for its value or held as an investment, and in part due to the plaintiff’s failure to produce supporting evidence in response to a motion for summary judgment.
• In litigation alleging that a retirement plan recordkeeper’s recommendation to roll over retirement plan assets into a proprietary IRA violated ERISA, the district court summarily disposed of plaintiff’s argument that the recordkeeper’s access to and use of participant data to initiate that recommendation caused the recordkeeper to become an ERISA fiduciary

While it may be improper under certain circumstances for a service provider to use confidential information for its own benefit, such an act is not a basis to conclude that the service provider is a fiduciary for the purposes of ERISA.

 Walsh v. Principal Life Insurance Co., 266 FRD 232, 248 (S.D. Iowa 2010).

Recent authority

Two recent decisions on participant data raised in the context of ERISA fee litigation followed the same analytic path as the Patient Advocates and Walsh courts.

• In Divane v. Northwestern University, No. 16 C 8157 (N.D. Ill. May 25, 2018), aff'd, 953 F.3d 980 (7th Cir. 2020), the district court first rejected plaintiff’s claim that the plan sponsor breached its fiduciary duty by allowing the recordkeeper access to participant data – which plainly is necessary to the recordkeeping function – and allowing the recordkeeper to use it for cross-selling. It then agreed with the plan sponsor’s argument that allowing the recordkeeper’s use of that data could not constitute an ERISA prohibited transaction because that data, while potentially of economic value to the recordkeeper, was not a plan asset under “ordinary notions of property rights,” the touchstone under the ERISA plan asset regulation.
• Most recently, in Harmon v. Shell Oil Company, No. 3:20-CV-00021 (S.D. Texas, March 30, 2021), plaintiffs alleged that the recordkeeper violated ERISA by cross-selling. The district court reviewed the plain meaning of the ERISA statutory and regulatory definitions of plan assets, which refer to investments but not to data, and found no reason to depart from the prior decisions, dismissing both the breach of fiduciary duty and prohibited transaction claims against the recordkeeper.

Settlement

In a divergent outcome, a 2019 settlement in an ERISA fee case that raised a participant data claim included a term that

when communicating with current Plan participants, the [recordkeeper] must refrain from using information about Plan participants acquired in the course of providing recordkeeping services to the Plan to market or sell products or services unrelated to the Plan unless a request for such products or services is initiated by a Plan participant.

Cassell v. Vanderbilt University, 3:16-CV-02086 (M.D. Tenn. April 22, 2019).

ESsentials

• To date, courts have shown no interest in advancing ERISA claims against plan sponsors that have allowed recordkeepers to cross-sell or against the recordkeepers themselves.
• It is plainly good practice to address the permissibility of cross-selling in the recordkeeping or other agreement between the plan and the service provider.
  • Depending on the facts and circumstances, the parties might reasonably agree to authorize cross-selling generally, to permit cross-selling in specified circumstances, or to prohibit cross-selling unless a participant initiates the interaction, subject of course to any participant privacy rights (which have yet to be explored in the courts).
  • Particularly if the service provider has access to a retail distribution channel, it seems impractical to prohibit cross-selling as an absolute matter, given the possibility of occurrences unrelated to plan activities or driven by a participant.
• Plan sponsors should continue to monitor the recent spike in ERISA recordkeeping and investment management fee litigation more generally; topics such as reviewing investment fund fee levels and ensuring competitive recordkeeping services and fees continue to be important.
• There may also be other steps a service provider might consider to manage its exposure on the participant data issue.

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