It’s increasingly common for 401(k) recordkeepers and some advisers to offer financial wellness programs for plan participants, typically using participant and employee data to customize their advice and educational services.
It’s a logical approach. But recent lawsuits challenge that use of participant data, posing a risk to plan sponsors and committees that they should take steps to minimize.
The trend responds to the high level of financial unwellness in the U.S. workforce – so problematic that as many as 83% of employers with over 100 employees have instituted programs to help. Financial wellness programs can incorporate a wide array of services to help employees deal with increasingly complex financial issues.
Retirement plan participants may be offered advice on salary deferment practices and tradeoffs, managing student debt and contributing to Health Savings Accounts. Guidance offered can have a long-term financial impact on a participant; it can be customized when provided by the plan’s recordkeeper, which has “participant data” for plan administration purposes. Using the data, which also can be shared with the adviser for financial wellness advice, makes for better quality guidance.
This didn’t present a fiduciary problem until plaintiffs’ class action law firms began including a claim of fiduciary breach in its lawsuits against plan sponsors and committees. The lawsuits mainly claim the fiduciary fault in managing investment and recordkeeper expenses. A claim over use of participant data is an add-on.
Only one such case has been decided, and in favor of the plan sponsor, Northwestern University. But the issue continues to be litigated in other cases. Plan sponsors and committees should be aware of the issue, find out if their service providers are using participant data to offer financial wellness programs, and decide if these should be offered to their plan’s participants.
They can start by understanding the plaintiffs’ attorneys claims.
Claim #1: Service providers use the participant data to sell expensive services and investments to the participants.
The claim isn’t necessarily true, but plan committees can protect themselves by having their service providers explain the financial wellness services being provided and their quality and costs. This should include how conflicts of interest are disclosed and managed. Then, the committee, with the plan’s adviser and attorney, should determine whether the services are valuable to the participants, their quality and costs are reasonable, and conflicts are properly managed. The recordkeeping or advisory agreement should be reviewed and align with the committee’s review and decision.
Plaintiffs’ attorneys argue that participant data should not be used unless a participant affirmatively says that it can. But that’s not the law. (Such a provision has been included in voluntary settlements – but those have not been part of a court decision.) ERISA requires a prudent decision-making process by fiduciaries. If a committee reasonably concludes that financial wellness services are helpful to their participants, and engages in an informed and reasoned process to evaluate and approve the services and costs, the “prudent man” rule will have been satisfied.
Claim #2: If service providers make money from the participant services, profits from that revenue should be factored into the service provider’s fees.
To avoid that claim, committees should, with help from their plan advisers, determine whether the cost of the recordkeeper’s services are reasonable, taking into account all of the revenues being received related to plan and participant services.
The use of participant data is an emerging issue for plan sponsors and committees. Since the fiduciary rules in this area are not clearly defined, the best course for plan committees is to thoughtfully weigh the quality and value of the financial wellness programs being offered to plan participants.
The views expressed in this article are those of Fred Reish, and not necessarily of Faegre Drinker. The article is for general information only and is not intended to provide investment, tax or legal advice, or recommendations for any particular situation. Please consult with a financial, tax or legal advisor on your circumstances.
HUB International’s retirement plan fiduciary advisors provide ongoing guidance on your plan’s setup and management to ensure it meets regulatory compliance guidelines and the interests of your employees. Contact HUB to request an assessment of your group retirement plan.
Fred Reish is a partner with the law firm of Faegre Drinker who specializes in retirement law, focusing on fiduciary and best interest standards of care, prohibited transactions, conflicts of interest, and retirement plans.