In this Ropes & Gray podcast, litigation & enforcement partner Dan Ward, ERISA and benefits partner Josh Lichtenstein, and benefits principal David Kirchner discuss the recent $12 million settlement that has been agreed to in the Oracle 401(k) fee litigation, which includes some non-monetary requirements that could have a ripple effect on the routine cross-selling activities of third-party recordkeepers and other service providers to plans.
Dan Ward: Hello, and thank you for joining us today on this Ropes & Gray podcast, I'm Dan Ward, a partner in our litigation & enforcement group based in Boston. Joining me are Josh Lichtenstein, an ERISA partner based in New York, and David Kirchner, a principal in our benefits consulting group also based in Boston. Today, we are going to be talking about the recent settlement ending the long-running Oracle 401(k) fee litigation. The parties agreed to settle back in October 2019—the same day that trial proceedings commenced—and the terms of the settlement were disclosed on February 27. Josh, can you provide us with a little background about the case, and explain what was unique about this settlement?
Josh Lichtenstein: Of course, Dan. Oracle is one of the most recent examples from the wave of lawsuits that have been filed in recent years targeting 401(k) plan sponsors generally alleging excessive fees and inappropriate fund selection. The Oracle complaint, which was filed in the U.S. District Court for the District of Colorado all the way back in 2016, alleged that the company breached its fiduciary duties under ERISA by failing to negotiate reasonable, fixed-fee recordkeeping and administrative services from its recordkeeper, Fidelity, which resulted in losses to the 401(k) plan of more than $40 million. It is important to note that Fidelity was not a named defendant in the lawsuit. The plaintiffs also alleged that Oracle and its 401(k) Committee breached their fiduciary duties under ERISA by selecting and/or retaining imprudent and unreasonably expensive mutual funds and investment options in the plan, which the plaintiffs alleged caused the plan to engage in prohibited transactions. Finally, the plaintiffs alleged that Oracle failed to monitor the performance of the other plan fiduciaries.
The settlement in this case is interesting because beyond the $12 million of monetary relief, Oracle agreed to instruct Fidelity, it's recordkeeper, in writing that in performing the previously agreed upon recordkeeping services for the 401(k) plan, it "must not solicit current plan participants for the purpose of cross-selling proprietary non-plan products and services, including, but not limited to, individual retirement accounts (IRAs), non-plan managed account services, life or disability insurance, other investment products, and wealth management services, unless those solicitations were in response to a request or expressed need by the 401(k) plan participant." Moreover, in the event that Oracle enters into a new recordkeeping agreement with Fidelity or another recordkeeper during the three-year settlement period, Oracle has agreed that it will include a contractual provision that will restrict any subsequent recordkeeper from soliciting current 401(k) plan participants for the purpose of cross-selling proprietary non-plan products and services.
While there have been many settlements with corporate 401(k) plan sponsors over the last few years in connection with these allegedly excessive restrictive fees, restrictions on cross-selling are novel in the 401(k) world. Up until this point, plaintiff's firms have largely only sued colleges and universities for alleged mismanagement of their 403(b) plans based on this type of theory relating to cross-selling.
Dan Ward: Great, thanks for those insights. David, do you think this settlement will affect a 401(k) plan sponsor that's either looking at hiring a new recordkeeper or is in the process of renewing its contract with its current one?
David Kirchner: I think it will, Dan. Cross-selling and the use of participant data are two emerging areas where plan sponsors are going to have to be much more vigilant. They will need to make sure that they fully understand how service providers will make use of this data. In other words, while up to now, cross-selling might not have been addressed in the RFP process of a recordkeeper or other type of service provider to the plan, the Oracle settlement, as well as the 403(b) settlements reached with Johns Hopkins and Vanderbilt, suggest that the topic should be addressed more directly.
As a specific example, a plan sponsor would know whether the recordkeeper offers a variety of individual investment products and services like IRAs, insurance or annuities, and how it may market them to plan participants. Depending on what products and services the recordkeeper offers, plan sponsors may want to include explicit prohibitions in contracts on cross-selling, and restrictions on sharing participant data even if some sharing is required to perform the recordkeeping services for the plan. Failing to do so could leave the plan sponsor vulnerable to potential litigation down the road.
Plan sponsors should also be aware that prohibitions on cross-selling could have a big impact on vendor pricing. That's because cross-selling is often priced (at least implicitly) into the contract it signs with the sponsor, since the revenues from non-plan products and services can help to offset more recent declining margins for recordkeeping fees. But if the recordkeeper is going to be prohibited from engaging in those activities, that could increase the direct cost of recordkeeping fees paid by plan participants.
Josh, what other impacts could this have on the recordkeeping business? For example, could a cold call from a financial advisor who is employed by the recordkeeper violate these cross-selling restrictions?
Josh Lichtenstein: That's a great question Dan. I think this is a bit of a gray area of the law right now. While the Oracle settlement explicitly provides an exception for reverse inquiries—that is, where the recordkeeper is only marketing the non-plan products or services in response to a request or expressed need that comes from the plan participant—absent an explicit exception like that for other plans, is unclear to me whether reverse inquiries could be a violation of this type of prohibition. Plan sponsors may want to ensure that their recordkeepers have a process in place for tracking and documenting how these types of reverse inquiry requests arise.
Moreover, as we've been discussing, the legal theory motivating this settlement is that cross-selling could constitute a misuse of participant data, and that data could be a plan asset under ERISA. At this time, we don't have any guidance—either regulatory or in the case law—that makes it clear whether participant data is a plan asset. But in this current climate and in light of new privacy regimes that have been adopted in states like California intended to strengthen the privacy rights of individuals and consumers—there is definitely a risk that a court could be concerned about participant information under ERISA as well, and that such a court could find that the plan data is a plan asset. If that happened, cross-selling could be a prohibited transaction under ERISA, which would mean that the recordkeeper either would have to find an exemption to cover its use of participant data, or it would need to request a new exemption from the Department of Labor.
Dan Ward: Well that's all of the time we have. Thanks to both Josh and David, for joining me here today. And thank you to our listeners. For more information on the topics that we discussed or other topics about 401(k) litigation risk mitigation, please reach out to Josh, David or me. You can also subscribe and listen to other Ropes & Gray podcasts wherever you regularly listen to podcasts, including on Apple, Google and Spotify. Thanks again for listening.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.