One recently settled lawsuit contended employers should have protected employees from plan administrators using their information to sell them products.
Companies have stepped up efforts to offer lower-cost retirement plans over the past decade. On average, the fees 401(k) participants pay for investments and administrative services fell from 0.65% of assets in 2009 to 0.51% in 2015, according to BrightScope Inc. and the Investment Company Institute, a mutual-fund-industry trade group.
That has meant millions of dollars in lost revenue for asset managers and record-keepers, which process enrollments, track account balances and provide customer service, among other administrative tasks. Companies that provide administrative services for 401(k) plans, as well as 403(b) and 457 plans used by teachers and state and local government employees, saw record-keeping fees fall to their lowest level in 2016 and remain virtually flat since, consulting firm NEPC LLC said.
In response, some 401(k) administrators are pursuing new sources of revenue.
“Record-keepers may not be charging as much for record-keeping these days, but they are seeking to make money in other areas,” said Bonnie Treichel, a 401(k) consultant at Multnomah Group Inc.
Some are pushing higher-cost advisory services, while others are offering discounts on administrative services for employers that choose the record-keeper’s proprietary investments. Many are promoting “wellness” services—programs that combine financial education with guidance from apps and advisers, for which they may charge extra.
In late April, participants in two Vanderbilt University 403(b) plans announced a proposed $14.5 million settlement with the school of a lawsuit filed in 2016. The agreement would require the university to bar Fidelity Investments, its current record-keeper and the nation’s largest for 401(k)s, from “using information about Plan participants…to market or sell products or services unrelated to the Plan” and to “contractually prohibit” future record-keepers from such practices. The settlement was submitted for approval to the U.S. District Court in Nashville, Tenn.
The plaintiffs alleged that Vanderbilt failed to “protect confidential participant information from being used by” a previous record-keeper, TIAA, to market a range of TIAA’s financial products to participants.
Neither TIAA nor Fidelity, whose parent company is FMR LLC, was named as a defendant in the lawsuit. A TIAA spokesman said the company’s “consultants on campus don’t cross sell” but rather “deliver financial education, guidance and advice on plan assets.” A Fidelity spokesman said the company “takes great care to safeguard customer data” and that there “were no factual allegations in this lawsuit that Fidelity engaged in any improper marketing or ‘cross-selling’ practices.”
A Vanderbilt spokesman said the settlement “was made solely to avoid prolonged litigation” and the school “continues to deny all the allegations.”
Jerome Schlichter, a St. Louis-based attorney who represents the plaintiffs, said employee data “should not be used to sell other products any more than a doctor should use confidential patient information to sell products to patients.”
A lawsuit filed in February in a Massachusetts federal court by a participant in a retirement plan offered by T-Mobile US Inc. contends that, because of fee pressure in various parts of its business, Fidelity charges an infrastructure fee on some mutual funds that, if not adequately disclosed, is prohibited under the Employee Retirement Income Security Act. A Fidelity spokesman said at the time that the company denied the allegations and would vigorously defend against them.
The Wall Street Journal reported in late February that the Labor Department was examining Fidelity over the fee, which the firm appears to have started imposing in 2016 on some mutual funds. Fidelity says that “the infrastructure fee has been fully disclosed to 401(k) plans and their sponsors” and “is not intended to generate new revenue.”
“Fidelity has not been contacted by the Department of Labor regarding our infrastructure fee, and it is typical for the department to contact a party that it is investigating at the beginning of its investigation,” the company said in a statement.
Multnomah Group’s Ms. Treichel said the Vanderbilt settlement may prompt more employers to try barring record-keepers from cross-selling. One of her clients recently added such a clause to its record-keeping contract out of concern “that the participants may think the recommendation to use these products is coming from the employer,” she said.
Courts haven’t always agreed that claims over cross-selling have merit.
In 2016, employees in two of New York University’s retirement plans sued the university, alleging harm from excessive fees. Marie Monaco, an associate professor at NYU School of Medicine, testified at a trial in 2018 that an employee of TIAA, the retirement plan’s record-keeper, contacted her “a number of times” to discuss investments. She eventually transferred some of her retirement funds into a managed account.
Prof. Monaco said the TIAA representative also tried to sell her life insurance, which she declined to purchase. “She told me it would be wise for me to buy life insurance. In the event that I predeceased my dogs, they would be better taken care [of] had I life insurance.”
A federal-district court judge in Manhattan ruled in favor of NYU in July, a decision the plaintiffs have said they would appeal.
NYU declined to comment for this article, but a spokesman said at the time of the judge’s ruling that the university “is and always has been a careful, conscientious steward of the retirement plans for its employees and retirees, and the plaintiffs failed to meet their burden of proof to suggest otherwise.”
The TIAA spokesman said: “Plan sponsors frequently want their employees to be informed of advice and solutions available to them to support their financial needs.”