Fidelity sales tactics called out in settlement of retirement plan lawsuit

Attorney Jerry Schlichter won a provision that prevents Fidelity from using participants' data to cross-sell products to them

Apr 23, 2019 @ 2:40 pm

By Greg Iacurci

The marketing and sales tactics Fidelity Investments uses with retirement savers were called out in a lawsuit involving alleged retirement-plan mismanagement by Vanderbilt University, bringing into focus the ongoing and seemingly increasing tension felt between plan sponsors, participants and their service providers, many of which are seeking out additional revenue in the face of fee compression.

Monday, Vanderbilt University reached a $14.5 million settlement with the plaintiffs, represented by attorney Jerome Schlichter — the largest settlement to date by a university.

The lawsuit claimed the university caused employees to overpay for investment and administrative services in two retirement plans because of excessive fees, allegations which the university denies.

As part of the settlement, Vanderbilt also agreed to some provisions regarding the operation of its 403(b) plans, a type of defined-contribution plan for nonprofit employers — one of which related to Fidelity, the plans' record keeper. According to the settlement, Vanderbilt must tell Fidelity to refrain from using participants' information that it acquires in the course of its work to market or sell them products unrelated to the retirement plan.

In other words, Fidelity cannot use participant data — such as their investment choices, retirement age, number of dependents and employment information — to cross-sell to them, unless they specifically request that Fidelity do so.

Fidelity is not in legal trouble because of the practice, nor was it a defendant in the Vanderbilt lawsuit. But attorneys say this type of provision to protect against a record keeper's use of participant data is significant because it hasn't appeared in prior lawsuit settlements.

"This is something new," said Mr. Schlichter, who pioneered litigation against corporate and university employers for excessive retirement plan fees. "It's important, that's why it's part of the relief."

Record keepers, Mr. Schlichter said, have attempted to "gain revenue by other means" as the charges for providing record-keeping services have declined over the past several years, a trend that's at least partly attributable to the threat of litigation.

"One could call it Whac-a-Mole — revenue is down for record keepers, so some record keepers in some plans have sought to use their position to sell products outside the plan to those plan participants, using confidential information obtained as a record keeper," Mr. Schlichter said.

Median record-keeping fees fell by half over the past decade — to $59 per participant in 2017 from $118 in 2006, according to consulting firm NEPC. Record keepers have had to make up for that lost revenue elsewhere, especially as retirement-plan sponsors and their advisers increasingly have ditched the practice of using a record keeper's in-house investment products.

Mr. Schlichter said that Fidelity has, in general, looked for ways to increase revenue in light of fee compression, including by selling products to plan participants. He declined to comment on whether and to what extent that practice was occurring in the Vanderbilt 403(b) plans.

Michael Aalto, a Fidelity spokesman, said the company "takes great care to safeguard customer data and follow its clients' directions" regarding the nature of Fidelity's communications with participants.

"There were no allegations in this lawsuit that Fidelity engaged in any improper marketing or 'cross-selling' practices, and Fidelity plans to comply fully with the direction Vanderbilt may provide as a result of the settlement agreement," Mr. Aalto said.

Fidelity has been in the spotlight over the past few months after several 401(k) participants brought lawsuits claiming the firm accepted "secret payments" from investment providers for making their products available to retirement savers. These kickbacks, plaintiffs claim, made the investments more costly and weren't disclosed. The Labor Department and Massachusetts Secretary of the Commonwealth William Galvin have opened separate investigations of Fidelity's fees.

Marcia Wagner, principal at The Wagner Law Group, said she hasn't previously seen a provision regarding record keepers' use of participant data in lawsuit settlements. The practice isn't illegal under existing retirement law, she said, since it doesn't apply to the assets in a retirement plan.

"I think [Mr. Schlichter] views that confidential information as something of value that shouldn't be utilized," Ms. Wagner said.

"Because he couldn't get there by law, he got there by contract," she added, referring to the settlement agreement.

Plaintiffs made a similar claim in another 403(b) fee lawsuit against Northwestern University, said Duane Thompson, senior policy analyst at fi360 Inc. In that case, also brought by Mr. Schlichter, plaintiffs alleged that plan record keeper TIAA used participants' information to market other products to them. The case, Divane v. Northwestern University, was ultimately dismissed.

Roughly two dozen prominent universities have been sued since August 2016 for alleged mismanagement of their 403(b) plans. Results have been mixed.

Vanderbilt's $14.5 million settlement in the case, Cassell v. Vanderbilt University, was the largest to date among similar lawsuits. Brown University reached a $3.5 million settlement in March, while Duke agreed in January to pay $10.7 million and the University of Chicago settled for $6.5 million in May 2018.

Damon Maida, a spokesman for Vanderbilt, said the school believes it has prudently managed its retirement plans and settled "solely to avoid prolonged litigation."

Lawsuits filed against the University of Pennsylvania, Northwestern University, Washington University in St. Louis and Georgetown University were dismissed pre-trial, and New York University won its case after a trial.

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