Interest fee

Participant data claims dismissed in excessive charges lawsuit

ADP won a split decision in an excessive fee case — a federal judge allowing claims about high registrar fees and costly investments — but denying claims about use of participant data.

The suit

The lawsuit was filed in mid-May 2020 in the U.S. District Court for the District of New Jersey against the trustees of the $4.4 billion ADP TotalSource Retirement Savings Plan (including third-party investment consultant NFP Retirement Inc.) on behalf of MEP participants by the law firm Schlichter Bogard & Denton.

At a high level, the allegations made in this lawsuit (Berkelhammer v. Groupe ADP TotalSource Inc.., DNJ, No. 20-cv-05696, complaint filed 7/5/20) were that the ADP Defendants: Breached their fiduciary duties and engaged in prohibited transactions by failing to monitor and control the plan’s record keeping costs and causing the plan to pay excessive fees; breached their fiduciary duties and engaged in prohibited transactions by illegally paying themselves out of plan assets; and selected and retained imprudent investments in the Plan[1].

The problems)

Regarding the request for participant data, U.S. District Judge Esther Salas (Berkelhammer et al. vs. Groupe ADP TotalSource Inc. et al., Case Number 2: 20-cv-05696, in the U.S. District Court for the District of New Jersey) restated the issue – that fiduciary defendants breached their fiduciary duties by disclosing plan participants’ data to Voya, who used, through VFA, the data to sell off-plan, retail and expensive investment products to plan participants” – and that “defendants’ transfer of plan participants’ data to Voya constituted a prohibited party transaction under section 1106(a)(1)(D).”

Judge Salas noted that “in opposing defendants’ motion to dismiss, plaintiffs do not offer a single case to support their claim of breach of trust” – and it may not be astonishingly, as she continued, “A district court observed that there is not ‘a single case in which a court has held that disclosing confidential information or allowing someone to using confidential information was a breach of fiduciary duty under ERISA. be the first, at least not on these pleadings.

She continued to cite the example of this case (Divane v. Northwestern University), noting that not only was it not unwise to allow an administrator “to have access to each participant’s contact information, choice of investments, employment status, age and proximity to retirement” – “If anything, it might be unwise not to release this information to Voya as archivist.[s] this information in order to serve as a record keeper.'”

“To be safe,” she acknowledged, “the plaintiffs argue that the defendants should have limited Voya’s use of plan participants’ data solely for the purposes of its record-keeping functions. But absent from their complaint are sufficient facts to support this theory. First, they do not explain what processes were flawed to allow Voya, through VFA, to use plan member data for non-plan purposes. Second, they do not express any prejudice to the Scheme, i.e. misdirected investments that would otherwise have increased the assets of the Scheme Third, although they claim that Scheme participants paid higher fees when investing in non-Plan investment products – marketed to them through the use of their data – these claims are vague, general and conclusive.

Further, Justice Salas explained that the plaintiffs “…are not alleging what plan members, in particular, paid in fees; instead, they allege, broadly, that “revenue generated from … sales [of non-plan products] is significant,” but commented that nothing specific to the plan or Voya. “Nor do they allege that these non-Plan products performed so poorly that the charges were unjustified. Fourth, plaintiffs fail to describe the conduct of comparable trustees in similar situations (e.g. trustee X of plan Y prevented accountant Z from using plan participant data for purposes other than record keeping) . Although they allege that the trustees of two other plans considered limiting the use of plan member data by the archivists, they do not allege that those trustees actually limited the archivist.

And then proceeded to dismiss that claim, but dismissed without prejudice, explaining that the court “cannot rule out the possibility that plaintiffs could plausibly allege that a reasonable fiduciary in defendants’ position would have conditioned the use of the plan participant data for record keeping purposes only”.

Transaction prohibited?

Regarding claims that data sharing constituted a prohibited transaction, Judge Salas explained that they had to “make a plausible allegation that plan participants’ data are ‘plan assets'” – and that meant that they had to “do more than simply allege that plan participant data is plan assets. But then Judge Salas explained that “the Court could not discover, and plaintiffs did not cite , a single instance where plan participant data is plan assets under ERISA, and at least three courses[2] flatly rejected such a proposal. And without any citations in favor of their position – and with case law to the contrary, “in light of the plaintiffs’ deficient pleadings, the Court follows that consensus.”

Judge Salas turned to ERISA for a definition (29 CFR § 2510.3-101, titled “Definition of “plan assets” – plan investments”) which noted that “generally, when a plan invests in another entity, the assets of the plan include its investment but do not, solely by reason of that investment, include any of the underlying assets of the entity.However, in the case of an investment of a scheme in a participation in an entity which is neither a security offered to the public nor a security issued by an investment company registered under the Investment Companies Act 1940, its assets include both the interest and an undivided interest in each of the entity’s underlying assets…”.

She then concluded that “this regulation cannot be interpreted as defining plan assets to include plan participant data. As a district court observed, this regulation expressly defines plan assets in terms of investments, but clearly “makes no mention of ‘data'”.

“The plaintiffs do not appear to dispute that the Secretary of Labor regulations fail to capture plan member data as plan assets,” she wrote. “Instead, plaintiffs argue that the Secretary of Labor does not exclusively define plan assets. In support, plaintiffs point out that the Secretary of Labor did not define plan assets until twelve years after ERISA was enacted, and that the regulations merely describe, rather than definitively define, the term plan assets. . Yet she wasn’t convinced. “Absent the minimal allegation that plan participant data is something valuable to the plan, plaintiffs do not allege that plan participant data is plan assets.”

“Accordingly,” Judge Salas concluded, “Plaintiffs’ Count X is dismissed. However, Count X, like Count IX, is dismissed without prejudice because the Court cannot rule out the possibility that the plaintiffs may plausibly argue that plan member data, when collected and aggregated, may be used as something of value for the benefit of the plan and plan participants.”

What does that mean

Common wisdom to date (as well as legal precedents) would seem to suggest that, while there is clearly value in member data that relates both to the scheme and, in some cases, beyond it, this would not appear to be a plan asset. However, as Judge Salas notes in leaving that door open, you never know when an open-minded judge might decide otherwise. Prudent fiduciaries should, at a minimum, be aware of potential arguments and cautious about access and application.


[1] Judge Salas found that the plaintiffs presented ample evidence that they paid $80 to $124 in record-keeping fees per participant from 2014 to 2018, about 400% more than the $25 to 30 that the plaintiffs had alleged that it was reasonable to wait for a plan. of this size. She also concluded that the evidence presented regarding the poor investment options was sufficient to establish a “plausible” case of wrongdoing.

[2] Harmon v Shell Oil Co., no. 20-0021, 2021 US Dist. LEXIS 66312, [2021 BL 126207], 2021 WL 1232694, at *2-3 (SD Tex. 30 Mar 2021); couch, [2018 BL 186065], 2018 US Dist. LEXIS 87645 , [2018 BL 186065]2018 WL 2388118, at *12; Patient Advocs., LLC v. Prysunka, 316 F. Supp. 2d 46, 48-49 (D.M. 2004).