How can there be anything wrong with a company offering financial planning services to its employees as an employee benefit? Or offering student loan repayment services? Certainly there can't be anything wrong with an employer providing employees with budgeting, personal debt management, or other financial wellness programs? The answer to these questions is that all of these wonderful new employee benefits being discussed in the marketplace and The Wall Street Journal can create big problems for employers depending on who is paying for the services and how they are being offered. If the employer and the employees are paying for 100% of the fair market value of these services, there shouldn't be too many issues. But if the employer (or more likely a service provider) is leveraging the company's retirement plan to offer these benefits, there could be big problems for the employer and the fiduciaries of the employer's retirement plan. And by "big" we mean financial damages, civil penalties, attorneys' fees, reputational harm and personal liability.
Over the last 10 years, the cost to administer retirement plans has decreased substantially, down over 50% according to the consulting firm NEPC, Inc. This is due to a number of factors—technology, competition, consolidation, Department of Labor mandated fee transparency, more sophisticated consumers and, of course, ERISA class action litigation. Employers have paid over $6 billion in ERISA settlements over the last decade. Most of this litigation relates to employers' failure to prudently monitor the administration and investment costs charged to their retirement plans. As a result of all of these factors, retirement plan service providers have been forced to reduce the fees they charge. In addition to all of this fee pressure on service providers, as the baby boomer generation continues to retire, the Institutional Retirement Income Council reports that over $1 billion leaves employer-sponsored retirement plans every day for IRA custodial accounts and annuities. That is a lot of lost revenue for retirement plan service providers.
Recently we have seen retirement plan administrators, consultants, TPAs and recordkeepers try to recoup this lost revenue in new and creative ways. Some recordkeepers, most notably Fidelity Investments, have started charging "infrastructure fees" to various mutual fund families if those mutual funds want to be available on the recordkeeper's investment platform. Earlier this year, The Wall Street Journal reported on the Department of Labor's investigation of Fidelity's infrastructure fees and the lack of disclosure of such fees to investors. According to Fidelity's own internal documents, the infrastructure fees were a means to recoup lost recordkeeping revenue and fix a "broken" revenue model suffering from "unsustainable economics." Empower, another leading recordkeeper, also requires mutual fund families to pay for access to small and mid-sized retirement plans.
Perhaps more troubling is a trend of recordkeepers offering proprietary products, ancillary services or access to ancillary services. These products include target date funds, managed accounts and stable value funds. Some recordkeepers will even pay their employees, advisers and representatives incentive compensation encouraging the sale of these products. In addition, many administrators are promoting "wellness" services through personal advice and web-based apps. These services go beyond financial education related to the company's retirement plan and include student loan and other debt consolidation services, and access to budgeting software and other financial service apps. Other administrators are re-evaluating the transaction fees they charge participants. These include fees for distributions, loans, QDROs, and even paper statements.
In addition to leveraging the employer's retirement plan to sell these ancillary services, some administrators appear to be mining participant data to market and sell other products and services. In April of this year, Vanderbilt University announced a $14.5 million settlement that would bar any plan recordkeeper from using information about its plan participants to market or sell products unrelated to the plan. The plaintiffs alleged that Vanderbilt, as a fiduciary to its retirement plan, failed to protect confidential participant data from being used by the plan's administrator in ways that did not directly relate to the administration of the plan. Other universities and plan sponsors are dealing with similar lawsuits.
ERISA fiduciaries must protect their participants' assets. As we have learned over the social media boom of the last 20 years, one "asset" that we each own is the data regarding our behavior and interests. ERISA fiduciaries must not only watch over and preserve the financial assets in an employee's 401(k) account, but they must also protect their employees' non-financial assets that are potentially being harvested by administrators and other service providers to the plan. ERISA's prudence requirement mandates that ERISA's fiduciaries safeguard all of their participants' assets, not just the dollars in their account. Even though an employer may legitimately see the value in offering financial wellness and other services to their employees, doing so by granting third parties access to mine and monetize retirement plan data could very well be the next good deed that gets the employer and the plans' fiduciaries punished.
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