Perhaps the most significant claim raised against Shell pertains to the claim that the Shell fiduciaries allowed Fidelity to use participant data to promote non-plan products and services.
A new lawsuit, challenging a number of practices in the Shell Oil Company 401(k) plan (Harmon vs Shell Oil Company) has the potential to open several new approaches to challenging fiduciary practices.
This blog will discuss some of the key new issues raised by this case. Of course, so far, we only have the complaint in this case–which reflects the plaintiffs’ version of the facts and of the law. Nonetheless, this one is worth watching.
Here are the most significant claims made in the complaint against the Shell plan fiduciaries and Fidelity, the Shell plan recordkeeper:
Perhaps the most significant claim raised against Shell pertains to the claim that the Shell fiduciaries allowed Fidelity to use participant data to promote non-plan products and services. In effect, this represented a use of a plan asset (participant data) to create an improper economic benefit to a party-in-interest. Here are the components of the data-related claims:
- As recordkeeper, Fidelity received valuable and (otherwise) confidential information: participants’ personal contact information, investment history, age (and eligibility for plan distributions).
- Fidelity shared this information with sales personnel at affiliated companies (such as Fidelity’s brokerage arm) and that access to this data provides Fidelity with tremendous advantages in selling non-plan financial products and services.
- The Shell fiduciaries failed to monitor Fidelity’s solicitations of Shell plan participants and that these activities (particularly solicitations encouraging rollovers from the Shell plan to Fidelity IRAs).
- These activities used plan assets (participant data) to improperly benefit Fidelity.
Based on these allegations, plaintiffs claimed that (i) Fidelity became a fiduciary because it had discretionary authority and control over the disposition of plan assets–in the form of participant data, (ii) Fidelity then breached that fiduciary responsibility by using the data to solicit other sales — and not solely for purposes of providing plan benefits, (iii) as a party-in-interest Fidelity engaged in prohibited transactions by using participant data to promote Fidelity products and services, and (iv) that the plan’s named fiduciaries also breached their responsibilities by allowing Fidelity to use these plan assets for non-plan purposes.
Concerns about use of participant data to promote non-plan products have started seeping into fiduciaries’ (and the courts’) consciousness in recent years. For example, prohibitions on the use of participant data to promote non-plan products have been included in judicial settlements involving Vanderbilt University and Johns Hopkins University. See our post Vanderbilt Settlement Sends Fiduciaries a Message. However, the Shell case may be the first one where these practices generate fiduciary liability–and, if successful, could take concerns over participant data and the sale of non-plan products to a new level.
The Shell plan (formally named the Shell Provident Fund 401(k) Plan) maintains a mutual fund “window” with Fidelity. Participants electing to use this fund window can then invest in any of the 300+ funds available. The Shell plan fiduciaries did not review the selection or retention/deselection of the funds available through this fund window; rather, Fidelity determined the funds that would be offered. And, the funds that Fidelity selected were primarily Fidelity proprietary funds.
This mutual fund window is a type of self-directed brokerage account (SDBA) offered in many 401(k) plans. (According to Vanguard, 19% of all plans and 34% of large plans offer SDBAs. How America Saves 2019. The structure used in the Shell plan fund window opens Shell up to a number of fiduciary challenges around fiduciary oversight responsibilities in funds offered through this kind of window. However, as noted in the Shell complaint, the window in the Shall plan offered a limited–albeit large–number of mutual funds selected by Fidelity. This is very different than an SDBA with a more open structure of funds and fund providers.
If the claims against the Shell fund window progress, it will be important to assess whether the challenge impacts SDBAs in general–or whether the challenge really only impacts windows using this Shell/Fidelity approach. After all, it is easy to see plans abandoning SDBAs if fiduciaries have any responsibility for funds selected in an SDBA.
Overall Fund Selection and Oversight
Another component of the Shell complaint challenged Shell’s general oversight of the plan’s designated investment options. The fund oversight allegations raised several issues, but emphasized (i) Shell’s use of funds focused on specific industry segments (such as the Fidelity Select Automotive Portfolio) or geographic regions (such as the Fidelity Latin America Fund) and (ii) Shell’s failure to add funds without sufficient performance history.
Although the focus on sector and regional funds may be somewhat new, the overall fiduciary challenges raised in the Shell complaint raise no novel legal theories; the alleged failure to exercise appropriate fiduciary prudence in the decisions to select and retain poorly performing investments would be familiar to anyone who has followed these fiduciary lawsuits.
The complaint against Shell also contained a far-reaching set of allegations against the managed account program offered by Shell through Financial Engines:
- The Shell managed account structure offered to use participant personal data (such as risk tolerance or spousal assets) in structuring the account. The complaint noted that this approach was more expensive–and provided no real value–over managed accounts that offered a more general allocation methodology (based on limited data elements, such as participants’ age and account balance) or non-managed account alternatives (such as target date funds).
- The Shell managed account program charged excessive fees (35 basis points (‘bps”) on the first $100,000 in an account, 30 bps on the next $150,000 and 25 bps on additional amounts) and the Shell fiduciaries failed to investigate lower fee providers.
- Financial Engines paid between $2.5 and $3.8 million per year to Fidelity (identified as a “connectivity fee”) and these amounts represented excessive fees to Fidelity and were a form of indirect compensation that should have been considered by the plan fiduciaries in assessing the reasonableness of Fidelity’s fees.
Based on these allegations, the plaintiffs asserted that the plan fiduciaries breached their responsibilities under ERISA for failing to properly determine if the fees paid to Financial Engines were reasonable in light of the services received by the plan. As a corollary, plaintiffs further claimed that the failure to monitor Financial engines’ payment to Fidelity generated additional excessive fees to Fidelity.
The complaint made other claims that are more consistent with other fiduciary suits–such as claims that the plan fiduciaries failed to manage recordkeeping fees by not seeking other bids on regular basis, by allowing excessive recordkeeping fees based on asset values rather than on a per head basis and by using plan assets to pay salaries and other expenses for Shell employees.
As noted at the beginning of this blog, these are the plaintiffs’ assertions of both the facts and the law. Nonetheless, this case bears watching. If it meets with even a modicum of success, it could change attitudes about the use of plan data and the structure of managed accounts.