Vanderbilt 403(b) Decision Marks Emerging Data Issues for Fiduciaries

In conversation with PLANSPONSOR, three Groom Law Group principals suggested the settlement of an Employee Retirement Income Security Act Lawsuit (ERISA) by Vanderbilt University demonstrates plaintiffs’ and litigators’ emerging focus on retirement plan data.

According to Allison Itami, Kevin Walsh, and David Levine, there is a lot that plan sponsors and their service providers can learn by reviewing the Vanderbilt settlement agreement, which was submitted for approval this month in the U.S. District Court for the Middle District of Tennessee.

By way of context, back in January 2018, Chief United States District Judge Waverly D. Crenshaw, Jr. dismissed some claims, but moved forward others pertaining to the Vanderbilt University Retirement Plan and the Vanderbilt University New Faculty Plan. The plaintiffs’ claims suggested that the Vanderbilt fiduciaries had not managed the retirement plan with loyalty or prudence, in violation of ERISA. Judge Crenshaw’s 2018 decision dismissed all claims for breach of duty of loyalty, saying the court found the plaintiffs did not alleged sufficient facts to show that the defendants engaged in transactions involving self-dealing or material conflicts of interest. But the decision also ruled that the plaintiffs had sufficiently alleged that defendants’ failure to secure competitive bids for certain plan services under these circumstances was not consistent with that of a prudent man or woman acting in a like capacity—i.e., a potential ERISA violation.

As Itami, Walsh and Levine observed, most of the terms of the settlement agreement match those that have been proposed by the parties in similar lawsuits targeting other well-known universities and their 403(b) plans. However, the trio said that the settlement agreement’s focus on how plan data will be treated moving forward is new and significant. In short, the agreement stipulates that plan data will not be used by service providers such as recordkeepers or asset managers for the purposes of cross-selling unrelated products or services to plan participants.

“In terms of the settlement, there are some interesting implications around the use of plan data,” Itami said. “From our perspective, it was an interesting settlement in that it particularly called out what the plan fiduciaries can do with plan data. Specifically, they have to request that the current recordkeeper Fidelity refrain from using plan data that it gathered in the course of performing its recordkeeping duties in order to market or sell unrelated products to the Vanderbilt plan participants. In the future, the sponsor will have to contractually prohibit that type of use of data. This is something different from what we have seen previously in such settlements.”

Walsh and Levine agreed that they have not yet seen a lot of specific interest among litigating parties in terms of what a fiduciary can or cannot due with plan data, but the conversation is heating up. 

“This adds a very interesting angle to these suits moving forward,” Levine said. “Vanderbilt is a large organization, but a lot of the time, depending on the size of the plan sponsor, you might have real difficulty in negotiating the terms this way and stipulating exactly what a provider can or cannot due with data. And there is the core question of how to define what plan data is, and what is the proper use of plan data. This all is still to be fleshed out.”

Taking a step back, Wash noted that “the plan data movement” within ERISA litigation is reflective of the broader evolution of the digital economy.

“Five years ago, nobody was really focused on plan data,” Walsh said. “There wasn’t a good recognition of what could be down with it, but this has since changed, I think in part due to the 2016 presidential election and the Facebook data scandal. It’s not that ERISA is a focal point for new issues about data management and the law. Rather, this is playing out very broadly around the world. Plan data has always been an issue but it’s now rising to the level of being a pressing and actionable concern for plan sponsors.”

The attorneys all agreed that plan data is becoming a higher profile issue and one that is increasingly concerning to plan sponsors.

“I don’t think that participant data is going to be treated exactly the same way as account balances, but in the world in which we now live, where the use of data is coming under more and more scrutiny in the U.S. and abroad, if retirement plan operations aren’t carved out of the changing rules for how data is treated, the shifting landscape could have a big impact on plan operations,” Walsh suggested. “That’s the big picture here. We have all this data today and it’s necessary for plan operations, but it’s also useful in many other ways to providers. We need to define the balance of how to use the data and how to protect participants.”

In terms of how common it is for plan sponsors today to have stipulated specific data-use provisions in their contracts with recordkeepers or other providers, Itami said the marketplace is all over the board.

“It depends on who your attorneys are,” Itami joked. “We’ve been thinking about this for some time, so you’ll see these types of provisions in the contracts we help to negotiate. But it’s far from universal at this stage, and I would not say this has become a standard in any type of template agreement.”

“And you also need to think about the different ways this could play out over time,” Leveline said. “Advisers are creating more products that gather a lot of data. I’ve helped to negotiate adviser agreements with plan sponsors where we made sure the language in there was very broad about how the adviser could use data to support participant outcomes. And then there are the third-party wellness providers to think about. How much data do they get access to and what can they do with it? Can the data be shared with other parties? What would their responsibilities be?”

According to the attorneys, it’s important to note that this discussion is about a settlement, not a decision by a court.

“If this was a decision rather than a settlement, I think it would be an even bigger deal, clearly,” Walsh said. “One other important caveat here is to remember that, through this settlement requiring tough terms of providers’ use of data, this will make it harder for the plan sponsor to be tough on other elements of the contract negotiations. Plan data is important, but if you focus myopically on data, it may limit your ability to negotiate on other critical terms.”