The firm that created the current generation of excessive fee suits, and that branched that focus into university 403(b) plans, has grafted concepts of both into a fresh cause of action – and put recordkeepers – and their use of participant data – in their crosshairs.
The St. Louis-based law firm of Schlichter, Bogard & Denton has done so on behalf of four participant-plaintiffs in Shell Oil Co.'s $10.5 billion 401(k) plan, filing a proposed class action in the Southern District of Texas (Harmon v. Shell Oil Co., S.D. Tex., No. 3:20-cv-00021, complaint 1/24/20).
Most of the suit covers familiar grounds – excessive fees are the heart of the case, and there are concerns about the heavy reliance by the plan on the proprietary funds of its recordkeeper, Fidelity – challenging the mutual fund window and the “haphazard lineup of over 300 options, most that were proprietary to Fidelity.” The suit claims that the Shell defendants “agreed to allow Fidelity to automatically put its mutual funds in the Plan without any initial screening process by Shell Defendants to determine whether the funds are prudent options for participants to invest their retirement assets,” and that they left them in the plan “without conducting any ongoing monitoring of the funds in the Fund Window to ensure that they remain prudent.”
Window ‘Dressing’
There’s an inspiration from the 403(b) suits that complained of the “dizzying array” of choices in those programs, in this case (unfavorably) comparing the window and its 300 choices with a couple of industry surveys that suggested the average was more in the 12-15 fund range. “Had Shell Defendants engaged in a reasoned decision making process consistent with similarly situated defined contribution plan fiduciaries, Shell Defendants would have concluded that participants’ interests would be better served by eliminating the unmonitored fund window and moving to a fund lineup of 13 to 16 investments spanning each investment style and appropriate asset class.”
As open as this window seemed to be, the plaintiffs also took issue with several of the funds that were in that count. “Contrary to the practices of knowledgeable and diligent fiduciaries, Defendants included excessively risky and inappropriate sector and regional funds in the Plan, including but not limited to, the Fidelity Select Automotive Portfolio and Fidelity Latin America Fund,” they claim, and that not only did the plan fiduciaries “not assess the role of these excessively risky funds in the Plan, but instead added to the Plan every sector and regional fund Fidelity offered.”
Ultimately, the plaintiffs claim that the “retention of underperforming funds, sector and regional funds, funds without a sufficient performance history, and failure to eliminate the over 300-option Fund Window diverged from the practices and actions of knowledgeable and diligent fiduciaries of similar defined contribution plans,” and that the “failure to monitor funds in the Fund Window and to remove imprudent investments as described herein caused the Plan and its participants to lose over $222.4 million in retirement savings.”
Asset ‘Test’
Acknowledging that “paying for recordkeeping with asset-based revenue sharing is not per se violation of ERISA,” they nonetheless caution that it can lead to excessive fees “if not monitored and capped.” That, they argue happened here, certainly in circumstances such as the 25% increase in the S&P 500 in the stock market in 2019 (and thus the fees based on asset values), though “the services have not changed.” They argue that if, however, the market declined “participants will not receive a sustained benefit of paying lower fees, because the recordkeeper will demand that the plan make up the shortfall through additional direct payments.”
They proceeded to cite a number of examples from Form 5500 filings: Nike, New Albertson’s, Inc., Albertson’s LLC, that paid per participant fees in the $20-$30/participant range. And then, as has been argued in a number (perhaps all) of the excessive fee cases to date, the plaintiffs claim that, “based on the Plan’s features, the nature and type of administrative services provided by FIIOC the Plans’ combined participant level (roughly 33,000-38,000), and the recordkeeping market, the maximum outside limit of a reasonable recordkeeping fee for the Plan would have been $1,155,000 to $1,333,500 per year (an average of $35 per participant with an account balance).” Consequently, they argue that “the Plan paid between $2.4 million and $6.3 million (or approximately $65 to $190 per participant) per year from 2014 to 2018, over 5 times higher than a reasonable fee for these services, resulting in millions of dollars in excessive recordkeeping fees each year.”
Managed ‘Accounts’
If the fund window had issues, so did the managed account that the plan offered. While they claim that “from 2012 to 2014, managed account service providers that offer a personalized service reported that generally fewer than one-third, and sometimes fewer than 15 percent of Plan participants using the managed account service furnish this personalized information,” that appeared to be the case here with the plan’s offering by Financial Engines.
Explaining that “without personalized information from Plan participants, managed accounts are similar to other lower-cost asset allocation solutions,” that “customized and personalized managed accounts often offer little to no advantage over lower-cost funds of funds, such as target-date funds, risk-based funds and balanced funds,” and that as “managed account service providers obscure their fees, the duty of a plan sponsor—held to the standard of a prudent expert under ERISA—is to carefully analyze fees charged by multiple providers.” And, according to the plaintiffs, “the only way for a Plan sponsor to accurately compare fees of managed account providers is to perform competitive bidding through a request for proposal.” Which, as you might expect, the plaintiffs argued the Shell fiduciaries failed to do.
The plaintiffs went on to argue that “Financial Engines charged Plan participants over 350% more than other managed account providers that provide a similar service.” In total, they allege that the plan participants paid from $7.8 million to $9.3 million per year to Financial Engines, and that “Shell Defendants never investigated Financial Engines’ growing revenue or determined whether Financial Engines’ fees were reasonable.”
Financial ‘Enjoins’?
The plaintiffs also charge that Fidelity Investments Institutional Operations Co (FIIOC, the plan’s recordkeeper) “…also received additional indirect compensation from another Plan service provider – Financial Engines. Specifically that for the managed account services receives a fee based on the percentage of assets in the participant’s 401(k) account – and then “shares over 25% of that asset-based advice fee with FIIOC, even though FIIOC provides no investment advice.” The plaintiffs claims that FIIOC “actively conceals the nature of the payment it receives from Financial Engines,” referring to these payments as “misleadingly” called “Data Connectivity” charges. The plaintiffs note that this charge has been assessed against participant accounts “since at least 2009,” and that “the payments to FIIOC have grown exponentially since that time, ranging from $825,759 in 2009 to over $3.8 million by 2016—over 450% increase.” Citing a 2014 GAO study regarding data connectivity, the plaintiffs argue that in establishing this connection “a recordkeeper incurs a maximum one-time cost of roughly $400,000,” and that “once this data connectivity feed is established, there is near zero cost to the recordkeeper to allow electronic data connectivity to the managed account provider on an ongoing basis.”
Rather, they argue, this “Data Connectivity” charge is “a charge designed to further FIIOC’s undisclosed business relationship with Financial Engines,” and that “based on publicly available Form 5500s for the Plan, this business relationship appears to be based on an asset-based revenue sharing agreement that is unrelated to data connectivity, but instead represents virtually pure additional profit to FIIOC with no additional services provided to the Plan.”
Data ‘Minding’
Speaking of fees (and there’s a lot of that), the plaintiffs caution that “the entities that provide services to defined contribution plans have an incentive to maximize their fees by putting their own higher-cost funds in plans, collecting the highest amount possible for recordkeeping and managed account services, rolling Plan participants’ money out of the Plan and into proprietary IRAs, soliciting the purchase of wealth management services, credits cards and other retail financial products, and maximizing the number of non-Plan products sold to participants.”
And, sure enough, starting on page 49 of the 81-page complaint, things took a decidedly different turn. “Plan participants have an expectation that their Confidential Plan Participant Data will be protected by the Plan sponsor and not disclosed outside of the Plan for nonplan purposes, such as allowing the Plan’s recordkeeper to proactively solicit participants to invest in retail financial products and services,” they argue.
However, they point out that “after FIIOC receives Confidential Plan Participant Data, it shares that data with salespeople at its affiliated companies, including, but not limited to, Fidelity Brokerage Services, LLC and Fidelity Personal and Workplace Advisors, LLC,” that that information is uploaded to Salesforce, and that “each time a Fidelity representative has an interaction with a customer, he or she is required to enter information concerning that interaction (i.e., the substance of the discussion) in the “Comments” or “Notes” section of Salesforce, at or around the time that the interaction occurs,” and that that data is “shared across all Fidelity affiliates, including all Fidelity Defendants, and is used by Fidelity Defendants to solicit the purchase of nonplan retail financial products and services.”
“Fidelity forwards Confidential Plan Participant Data to its local sales representatives when those participants experience triggering events, such as 401(k) distributable events and other events that Fidelity learns of in its role as the Plan’s recordkeeper (e.g., adding a new beneficiary or changing marital status).” And they specifically cite the experience of Plaintiff Brian Coble, who lives in Seattle, and who was “repeatedly called” by one Laurie Ovesen, a Fidelity salesperson based in Seattle, “using his Confidential Plan Participant Data in an attempt to solicit the purchase of non-Plan products.”
Indeed, the plaintiffs argue that “a significant portion of Fidelity Defendants’ business is derived from selling non-Plan retail financial products and services to Plan participants using Confidential Plan Participant Data,” and that “the revenue generated by these sales is significant and often represents multiples of the recordkeeping fees received by the service provider.”
They go on to state that, “upon information and belief, based on the size of the Plan and the amount of rollovers of assets reported on the publicly available Form 5500, over $200 million in Plan participants’ assets transfer to Fidelity Defendants’ IRAs per year, so Fidelity Defendants’ expected additional revenue solely from rollovers since 2014 is well over $26.4 million.”
‘Implicit’ Understanding?
Moreover, they note that “Fidelity’s role as the 401(k) plan’s provider serves as an implicit endorsement of its products by Shell to Plan participants,” because, as a 2011 GAO study observed, “participants may mistakenly assume that service providers are required to act in the participant’s best interest.” However, they note that “FIIOC’s disclosure of Plan participant data to Fidelity Defendants for the purpose of soliciting the purchase of nonplan products was a fiduciary breach in that the disclosure was for the purpose of providing benefit to Fidelity Defendants and not for the exclusive purpose of providing benefits to Plan participants and beneficiaries.”
The suit states that “Shell Defendants knew or should have known that by retaining FIIOC as the Plan’s recordkeeper year after year and allowing FIIOC to receive unfettered access to Confidential Plan Participant Data which its affiliates used to market Fidelity Defendants’ non-plan products to Plan participants, Shell Defendants caused the Plan to engage in transactions that constituted a direct or indirect transfer to, or use by or for the benefit of a party in interest, a valuable asset of the Plan, Confidential Plan Participant Data, in violation of 29 U.S.C. §1106(a)(1)(D).”
‘After’ Math
The plaintiffs also expressed concern that “allowing the recordkeeper access to Confidential Plan Participant Data creates additional harm to the Plan because it allows the Plan’s recordkeeper to maintain Confidential Plan Participant Data after termination of the recordkeeping contract, enabling the targeting and solicitation of plan assets on an ongoing basis with no fiduciary protections, which contributes to participants moving their assets out of the plan and into less favorable retail investment, insurance, and banking products.”
The plaintiffs also took issue with the use of plan assets to “pay four employees $2,124,886 from 2014 to 2018, including paying one employee $201,032 in 2015. Shell Defendants also used Plan assets to pay United Airlines $7,404 in 2014 for airline tickets,” though the “Plan’s Regulations and Trust Agreement provide that the Plan Administrator shall serve without compensation from the Plan.” They go on to note that “by establishing expense reimbursement accounts and revenue credit programs that delivered revenue sharing to Shell Defendants in the form of reimbursement of employee salaries and other expenses instead of delivering revenue sharing to the Plan and by paying itself from those accounts, Shell Defendants acted on behalf of a party whose interests were adverse to the interests of the Plan or the interests of its participants or beneficiaries (namely, itself).”
Among other things, the suit asks the court to temporarily or preliminarily enjoin the defendants from the “improper use of confidential, highly sensitive financial information that is solely the property of Plan participants, improper use of a plan asset, which is confidential, highly sensitive financial information that is solely the property of the Plan participants, loss of confidentiality of Plan participants’ records and financial dealings, continued solicitation of Plan participants, using their Confidential Plan Participant Data, under the auspices of being the chosen Plan service provider to purchase nonplan retail financial products and services.”
The plaintiffs also ask that there be a preliminary injunction from the defendants:
- soliciting any business from Plan participants whose name became known to Fidelity Defendants by way of FIIOC’s position as the Plan’s recordkeeper;
- using, disclosing, transmitting, and continuing to possess, for the purpose of solicitation of Plan participants, the information contained in the records of the Plan, including, but not limited to, the names, addresses, and confidential financial information of the customers Fidelity Defendants learned through FIIOC’s position as the Plan’s recordkeeper.
What This Means
While recordkeepers and recordkeeping fees have been a near-constant in these cases, and while the relationship and fees between recordkeepers and managed account providers (and specifically Financial Engines) is hardly unique, this does appear to be the first case in which a recordkeeper is named as a party to the suit alongside the plan fiduciaries.
This suit is somewhat unique in its focus on the usage of participant data to promote services outside the plan, but it’s not the first time that the issue has been mentioned – though this is the first time it has arisen in the 401(k) context.
Though it seems unlikely to be the last.
