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Schlichter Makes His Case for Participant Data as Plan Asset


The plaintiffs in an excessive fee suit have reiterated their argument that participant data is a plan asset—and that the use of that data for non-retirement plan related purposes constitutes a fiduciary breach.

The response—asking for a denial of Fidelity’s motion to dismiss a suit that, at least in part, alleged that Fidelity “misappropriated a Plan asset to derive substantial additional income and continues to do so while receiving excessive recordkeeping fees for managing that asset.”

The Suit

The response came from the St. Louis-based law firm of Schlichter, Bogard & Denton on behalf of four participant-plaintiffs in Shell Oil Co.'s $10.5 billion 401(k) plan in the Southern District of Texas, following a suit filed earlier this year. The suit covered a lot of new ground, but picked up on an argument that Schlichter-supported plaintiffs had previously made in a couple of 403(b) excessive fee suits—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 while the matter raised here certainly seems a new one,[i] the plaintiff’s motion begins by claiming “Plaintiffs’ theory is not novel.”

They go on to note that, “Before ERISA was enacted, courts routinely recognized the same types of data sets that Fidelity Investment Institutional Operations Company, Inc. (“FIIOC”) misappropriated from the Plan are assets.” 

The argument consumes much of the 38-page response (Harmon et al. v. Shell Oil Co. et al., case number 3:20-cv-00021, in the U.S. District Court for the Southern District of Texas), noting that “it is well settled under the common law as it existed at the time ERISA was enacted, and has been confirmed repeatedly by Fidelity in its many lawsuits and affidavits in various courts, that the data set of retirement plan participants’ financial information is an asset, and that it is the Plan’s asset.” 

There seems little dispute that the participant data is, in fact, an asset (though the response, to its credit, does lay that groundwork), nor that it has value[ii]—the question seems to be if it is a plan asset.

The response claims that it “—is a ‘plan asset’ by the term’s plain meaning,” though it admits that “ERISA does not define ‘plan assets.’ It only authorizes the Secretary of Labor to define the term by regulation.” And that, the response claims “…means ‘plan assets’ has the meaning of the term at common law at the time ERISA was enacted, unless the statute (or, in this case, the Secretary of Labor) dictates otherwise.”

Connecting the Dots

Here’s the essence of their argument: “Under the common law meaning at the time of ERISA’s enactment, a data set of intimate knowledge of financial and personal information combined with insider knowledge of exploitable triggering events, such as years to retirement, marital status and beneficiary status, was clearly an ‘asset.’” And since “…this information is collected by the Plan for the exclusive purpose of administering the Plan and providing benefits to participants, it is a Plan asset, not property of the Plan’s recordkeeper or custodian of that information, such as FIIOC.” 

As for the notion that this is a connection not intended by Congress when it passed ERISA, the plaintiffs argue that if they had “intended to limit ‘plan assets’ to things such as investments, securities, money, contributions, and income it would have done so by using those qualifiers in the ‘plan assets’ definition. ERISA’s text contradicts Fidelity’s position that ‘plan assets’ is limited to a subset of ‘assets.’ 

“The fact that the Secretary did not exercise its statutory authority to define by regulation ‘plan assets’ for 12 years further demonstrates that ‘plan assets’ had and has the same meaning as under the common law,” they argue, going on to claim that “by allowing ‘plan assets’ to be defined by DOL regulation (29 U.S.C. §1002(42)), Congress intended the term to have its common law meaning.

“Around 60% of Fidelity Brokerage’s business comes from the Plan participant data set provided by FIIOC,” the plaintiffs assert. “Fidelity pays nothing for this tremendously valuable asset; instead, the Plan pays FIIOC excessive recordkeeping fees to maintain the data set asset.” 

Nor, according to the response, are the injuries suffered by this practice theoretical. It recounts the circumstance of plaintiff Harmon, who allegedly suffered “financial loss from reduced returns on his investment and restricted investment opportunity after Fidelity utilized his intimate personal and financial details to convince him to move Plan assets into a Fidelity IRA.” Having been persuaded to do so, “Mr. Harmon has retirement funds sitting in a Fidelity IRA and can never put those funds back into the Plan’s lower-cost LifePath Retirement Fund Class F commingled pool that is only available to the Plan, which is where his funds were invested prior to his partial rollover.” 

This was ostensibly set in motion because Fidelity was aware of the “triggering event” of Harmon’s retirement, upon which the response claims “FIIOC informed local Fidelity sales representatives.” While they apparently aren’t currently injured, the response claims that “Mr. Vallejos and Mr. Lawrence also have standing for injunctive relief because they receive targeted solicitations and are at risk of additional targeted solicitations during triggering events based on FIIOC’s misappropriation of a Plan asset.” The response also claims that the “plaintiffs are also subject to efforts by Fidelity to prevent Fidelity’s competitors from offering them competitive quotes for financial services and products.”

Alternative Argument

Should the court not concur with its assessment that the data is a plan asset, the response has an alternative view: that since Fidelity “…is providing advice based upon the learning of personal intimate details of the financial affairs of the participants so as to cultivate a confidential and intimate relationship—which unquestionably makes Fidelity a fiduciary. Thus, even if the participant data set was not a plan asset, Fidelity is a fiduciary because of the confidential and intimate relationship it cultivates using the intimate financial details that the data set provides.”

The plaintiffs here allege that FIIOC, not Shell, is a fiduciary “because it exercised control over the data set, which is a plan asset, and committed a prohibited transaction by causing the Plan to transfer the data set to itself and/or to its affiliates, parties-in-interest, in violation of §1106(a)(1)(D).” They also allege that “FIIOC knew, or reasonably should have known, that providing the data set to its parent and subsidiaries constituted a direct or indirect provision of plan assets to or for the use or benefit of parties in interest,” and that “Shell’s intent regarding this transaction is irrelevant.”

‘Exclusive’ Purposes?

“If Fidelity’s position were adopted, recordkeepers could use insider knowledge of participants’ investment choices, asset balances, triggering dates, social security numbers, and other information for their own financial benefit, rather than solely for the limited purpose for which they have been entrusted with the information and without taking on the duties of a fiduciary adviser. Participants have never granted permission for such use of this sensitive data for Fidelity’s financial benefit,” they write.

“Treating the data set at issue as the Plan’s asset also means it will be held “for the exclusive purpose of providing benefits to participants in the plan” and not for improper purposes of targeting vulnerable participants for exploitation during triggering events or otherwise.”

In sum, the plaintiffs argue that ”the data set at issue is a plan asset according to a century of precedent and the representations of Defendants. FIIOC’s exercise of control and authority over this asset by forwarding the data set to its affiliates makes FIIOC a fiduciary. Fidelity’s motion to dismiss should be denied.”

Will the arguments be persuasive? We shall see.

[i]For more on this issue of the use of participant data, and the legal implications, check out "Data Driven," a feature article in the Summer Issue of NAPA Net the Magazine

[ii]“The combination of information linking each customer to their most highly confidential information such as investment history, identity of their investments, account balances, investment contribution amounts, investment goals, social security numbers, age, income, marital status, and call center notes combined with knowledge of triggering events such as retirement, changes in employment status, marital status or beneficiary status. It is this combination of elements that makes the data set highly valuable to the Plan and financial services firms.”