A condition buried in the recent settlement of a lawsuit brought against Vanderbilt University by famed fiduciary breach attorney Jerry Schlichter is raising eyebrows among 401k advisors, providers, and recordkeepers.
In order to resolve Loren L. Cassell, et al., v. Vanderbilt University, the Nashville-based institution of higher learning agreed to block its recordkeeper (in this case, Fidelity) from marketing to participants if the information used in the pitch was gleaned from the plan.
Specifically, the settlement reads:
Vanderbilt University shall inform Fidelity, the Plan’s current recordkeeper, that when communicating with current Plan participants, Fidelity must refrain from using information about Plan participants acquired in the course of providing recordkeeping services to the Plan to market or sell products or services unrelated to the Plan unless a request for such products or services is initiated by a Plan participant.
While there’s general agreement against annoying and intrusive sales pitches, certain products and services recommended by advisors can help in the quest for better participant outcomes, one reason the settlement term is so disquieting.
It’s something Phil Troyer, Chief Compliance Officer with Kansas-based Resources Investment Advisors, has watched since the April announcement of the Vanderbilt case resolution.
Troyer sat with 401(k) Specialist to discuss its possible implications for advisors, sponsors, participants and more.
Q: Is this really about a perceived violation of the plan participant’s privacy?
A: That’s the allegation, yes, and the university agreed that they would not allow their recordkeeper to continue to solicit their participants.
Plan sponsors have a duty to protect participant information. Plaintiffs claim, in part, that the university violated that by allowing, in most cases, recordkeepers to have access to their participants to be able to sell products. So, it’s raised the question of what it means for the industry and if walling participants off in that manner is really the right approach.
Q: Obviously some of what advisors and others offer is appropriate and beneficial. How will they thread that needle?
A: That’s my point. When we’re negotiating terms and conditions for our client agreements, I’m starting to get pushback from plan sponsors that say, “We want to make sure that your privacy policy says that you can’t market anything or talk to participants.” I view that as a mistake. I think that, instead, plan sponsors need to take on a fiduciary responsibility to decide that, at some point, their participants are going to have quite a bit of money in their accounts. Because of that, they’re going to be targets.
If you have a participant who works for a manufacturing company retire at age 65 with half a million dollars in his or her account, this idea that they’ll be completely walled off while inside the plan but open season when it’s time for them to retire is a problem. It’s great for the guy down the street who wants to sell them an annuity and take advantage with a high-fee product just to make a quick buck.
I just don’t think that serves participants well.
Q: But what about sponsors that want you to engage with employees. Again, where’s the line with advice versus their definition of marketing?
A: We have our own proprietary employee financial wellness service called Financial Elements. What we’ve started to see is several plan sponsors come to us and say, “Hey, we want you to take care of our employees.” They want us to reach out to their participants to talk about budgeting, debt consolidation—all of those things—while they’re in the plan. They have also specifically said, “We’re going to contract with you for rollovers at an agreed fixed lower rate, so when our participants retire, we want to know that they’re going to be taken care of, and we’re giving you access to them.”
That’s a much more educated and thoughtful response to the issue, as opposed to completely walling them off without a plan so then it’s just open season.
Q: Has that generally been the reaction?
A: Rather than us pushing it to the plan sponsor, the plan sponsors have been bringing it to us, by saying, “We want to bring you in because you’ve got this financial wellness program with a call center to make those outbound calls and we want that type of interaction.”
And they actually initiated the handling of rollovers at a fixed rate. On the flip side, we’ve received inquiries about contract language to make sure we won’t try to sell employees anything.
Q: Do cases like these settle the issue from a precedent standpoint, or open it up to a slew of new interpretations about what “solicit” means?
A: Unfortunately, it’s the latter. But what also happens is that advisors or plan sponsors will read about this and think they need to shut vendor dialogue down, not understanding there’s really nothing wrong with it.
Plan sponsors should instead be actively involved in those decisions. It can be us as the plan advisor, or Fidelity, or Empower or a completely different third party; any of those are fine as long as the sponsor is involved and makes a conscious decision.
Q: A company like EvoShare seems to be an intriguing solution to a lower quality plan or lack of a match, but a recordkeeper would not be able to offer it to participants?
A: Exactly. What we’re afraid of is that a plan sponsor would say, “No, you can’t market to our participants so they can’t take advantage of that. But it’s something that benefits the participant and gets more money into their retirement plans, which is the goal.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
