It’s no secret that the use of proprietary funds has been on a steady decline for years. As a result, the largest providers (mutual fund and insurance companies) are scrambling for new sources of revenue, including demanding shelf space (or the vaguely worded ‘infrastructure’) payments from fund companies and additional fees to plan sponsors and participants.
Enter Big Data. The dominant providers in the 401(k) business (mutual fund and insurance companies) are mining participant data to reveal opportunities for cross-selling other financial products and services.
While not a concern to Northwest Plan Services (NWPS), as we are not an asset gatherer and have nothing to sell to participants, this last effort (cross selling) is being examined in a new and significant light.
Enter tort terror Jerome Schlichter, the notable protector of participant costs and now apparently, participant data.
In the recent Vanderbilt University case, Schlichter and his clients, the participants of the University’s 403(b) plan, claim the University allowed excessive fees to permeate their plan. Plaintiffs then filed an amended complaint accusing the University of failing to protect plan data by allowing their service providers (at the time Fidelity, TIAA and 2 others) to market products and services to plan participants.
Vanderbilt recently settled the case for $14.5 million and as part of the settlement, Fidelity (the sole remaining recordkeeper) agreed not to use participant data acquired in the course of providing services to market or sell products or services unrelated to the plan unless initiated by the plan’s participants.
So much for data mining!
While not a judgement, the settlement has potential implications for asset gathering recordkeepers and advisors alike. Under the guise of financial wellness for example, will advisors be able to manage a rainy-day account for a participant? How about traditional wealth management for that key committee member? What about a 529 plan for their kids? And what are the ramifications for separately managed accounts which rely on personal data to create individualized investment strategies?
To be sure, neither TIAA or Fidelity did anything legally wrong. However, emboldened by the terms of the settlement, Schlichter and others are likely to bring similar suits focusing on the use of participant data, which should raise a red flag of concern for plan sponsors, recordkeepers, then advisors. Might we get to a day where participant data is considered a plan asset (and a valuable one at that) and thus the use thereof becomes a prohibited transaction?