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Plan Sponsors Are Being Sued for Recordkeeper Use of Participant Data

June 2020 
By Fred Reish

Several fiduciary lawsuits have been filed against plan sponsors and fiduciaries for use of participant data by their 401(k) recordkeeper. Plan sponsors should evaluate how the data is used and decide on a course of action to prudently oversee that use.

Fred Reish is an ERISA attorney whose practice focuses on fiduciary responsibility, retirement income, and plan operational issues. He has been recognized as one of the “legends” of the retirement industry by both PLANADVISER magazine and PLANSPONSOR magazine.

Several fiduciary lawsuits have been filed against plan sponsors and fiduciaries for use of participant data by their 401(k) and 403(b) recordkeepers. The plaintiffs’ attorneys assert that there is a fiduciary duty to protect participant data from use by recordkeepers to sell products and services unrelated to the plans. That could include, for example, rollovers to IRAs with proprietary investments, and sales of mutual funds and insurance products outside of the plan. 

While participant data is needed for purposes of administering 401(k) and 403(b) plans—and no one disputes that use—there is no clear guidance on whether plan fiduciaries have a responsibility to manage the use of that data for other purposes. However, class action plaintiffs’ attorneys are asserting that there is a duty to oversee use of the data to ensure that the recordkeepers do not take advantage of the participants. 

The first three cases to be resolved were the Vanderbilt Univeristy, Johns Hopkins University, and Northwestern University lawsuits.1  

The Vanderbilt and Johns Hopkins cases were settled. The Vanderbilt settlement agreement included the following: 

“The Plan’s fiduciaries shall contractually prohibit the recordkeeper 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 to Plan participants unless a request for such products or services is initiated by a Plan participant . . .”

In other words, the settlement requires an “opt in” process where the recordkeeper could only market “out of plan” products or services if a participant asked for help. The Johns Hopkins settlement agreement had a similar provision.

On the other hand, the Northwestern case went to trial. After the trial, the court found that participant data was not a plan asset. As a result, the court said that there was not a duty to manage it. Unfortunately, trial court decisions, while informative, are not binding on other courts. 

In addition to those cases, there have been at least another three lawsuits asserting fiduciary responsibility for managing participant data.2


What can fiduciaries do at this time?

Plan sponsors and committees, and their advisors, should evaluate these issues and decide on a course of action. Two alternatives are (1) to do nothing until there is definitive guidance or a decision by a higher court (e.g., a court of appeals), and (2) to prohibit their recordkeepers from using participant data for “out of plan” purposes. 


There is nothing in ERISA that prohibits the use of participant data.


But there is also a middle course. Plan fiduciaries may want to engage in a prudent process to evaluate the issues and make a decision to allow out-of-plan services that benefit participants and that include appropriate safeguards. 

While the starting point for that process is to consult with the committee’s ERISA attorney—and that should always be done—here are some other thoughts for plan committees (with the help of their advisors and attorneys) to consider:

  • Review the recordkeeping agreement for the plan. What does it say about the use of participant data? Does the agreement reflect the understanding of the committee—and its desired outcome?
  • Have a representative of the recordkeeper attend a committee meeting to explain the ways that the recordkeeper (or an affiliate) use participant data—and how participants are protected from conflicts of interest; whether only reasonably priced products and services are offered; and how the process is managed so that participants are only offered quality products (e.g., how are the products and services selected and monitored).
  • Decide whether some or all of those products and services provide value to the participants and whether the conflicts, expenses and quality are properly managed.
  • Document the process the committee used (e.g., the meetings and discussions), the fact that the plan’s advisor and attorney were consulted, and the decisions reached.

This list is a basic outline for a prudent process. There may be other factors to consider. ERISA requires that committees properly inform themselves about the relevant factors and engage in considered process to evaluate that information. Then the decision must bear a reasonable relationship to that information and process. 

The key is to be thoughtful and informed. There is nothing in ERISA that prohibits the use of participant data; the only question is whether fiduciaries have a duty to prudently oversee that use.


To learn more, please contact your Hartford Funds representative.

1 Divane v. Northwestern University, No. 1:16-cv-08157 (N.D. III. May 25, 2018), Cassell, et. al. v. Vanderbilt University, No. 3:16-cv-02086 (M.D. Tenn. April 22, 2019), Kelly v. The Johns Hopkins University, No. 1:16-cv-02835-GLR.

2 Troudt v. Oracle Corp, et al., Case No. 1:16-cv-00175-REB-SKC (D. Colo. 2016), settled; Tracey v. MIT, Case No. 1:16-cv-11620 (D. Mass. 2017), settled; Harmon et al. v. Shell Oil Company et al., No. 3:20-cv-0021 (S.D.Tex. 2020).

The views expressed here are those of Fred Reish. They should not be construed as investment advice or as the views of Hartford Funds or the employees of Hartford Funds. They are based on available information and are subject to change without notice. The information above is intended as general information and is not intended to provide, nor may it be construed as providing, tax, accounting or legal advice. As with all matters of a tax or legal nature, please consult with your tax or legal counsel for advice. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Fred Reish.

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