District Court Rejects Cross-Selling Claims in Mixed ERISA Ruling

Much of the ruling sides with plaintiffs and permits the case to move to discovery, but the defendants successfully defeat claims related to cross-selling and data-sharing among providers.

The U.S. District Court for the District of New Jersey has filed a mixed ruling in a long-running piece of Employee Retirement Income Security Act litigation targeting the payroll and human resources services firm ADP, Inc.

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According to the complaint, the plaintiffs in the case are participants of a multiple employer defined contribution plan, called the ADP TotalSource Retirement Savings Plan. They allege that ADP administers the plan through its subsidiaries, one of which is defendant ADP TotalSource Group.

The plaintiffs claim that defendants caused the plan to pay excessive recordkeeping fees to Voya Institutional Plan Services, which has allegedly served as the plan’s recordkeeper since August 2013. According to plaintiffs, the plan at issue is “massive,” serving over 114,000 participants with accumulated assets worth $4.4 billion. But despite the size of the plan and its concomitant ability to negotiate service pricing, the plaintiffs allege that defendants caused the plan to pay Voya recordkeeping fees that were higher than fees paid by smaller plans.

The plaintiffs further claim that, during the relevant period, defendants allegedly permitted recordkeeping fees to increase while fees in the market either remained the same or decreased. This occurred in part, plaintiffs say, because the defendants failed to conduct a competitive bidding process for the plan’s recordkeeping services from before 2014 until at least 2018. The plaintiffs further allege that defendants caused the plan to pay unnecessary administrative fees to TotalSource, maintained overly expensive and poorly performing investment options and inappropriately permitted ADP to use participant data for allegedly lucrative “cross-selling” purposes.

The new ruling in the case comes after oral arguments were heard in June 2021 and in response to a variety of cross-motions filed by the concerned parties, including a dismissal motion from the defense targeting all counts. In all, the litigation includes 12 distinct counts, which are each addressed in their proper order by the court’s new ruling. The ruling first addresses the plaintiffs’ claims for breach of fiduciary duties. It then addresses their claims for prohibited transactions before moving on to address their claims related to plan participant data. Finally, the ruling addresses the remaining derivative claims.

In most instances, the ruling agrees that the plaintiffs have sufficiently alleged their claims to make summary dismissal inappropriate.

“Bearing in mind the necessarily fact-intensive inquiry of this claim, plaintiffs have sufficiently alleged fiduciary breach with respect to the allegedly excessive recordkeeping fees,” the ruling states. “Plaintiffs allege, and the court accepts as true, that defendants caused the plan to pay exorbitant recordkeeping fees to Voya. In particular, Plaintiffs allege that the Plan’s approximate payment per year for recordkeeping services from 2014 to 2018 was between $6.9 million and $10.5 million—or approximately $80 to $124 per participant. That amount, according to plaintiffs, was over 400% higher than a reasonable fee for these services. … Considering these facts in combination and bearing in mind that the prudent man standard presents a fact-intensive inquiry, plaintiffs sufficiently plead that the defendants breached their duty of prudence.”

The ruling uses a similar line of argumentation to reject most of the dismissal motion, with the court repeatedly emphasizing the fact-intensive nature of ERISA claims and the relatively low bar required for plaintiffs in such matters to secure a right to a discovery process and potential trial.

The defendants found more success in combating the claims that pertain to cross-selling, or ADP’s alleged use of participant data to engage in sales activities unrelated to the plan in question. As the ruling recounts, the plaintiffs allege that defendants breached their duties of loyalty and prudence by disclosing plan participant data to Voya, which allegedly used the data to sell non-plan, retail and investment products to plan participants. By doing so, plaintiffs allege, the defendants failed to act in the exclusive interest of plan participants.

“To be sure, plaintiffs argue that defendants should have limited Voya’s use of plan participant data solely for purposes of its recordkeeping functions,” the complaint states. “But absent from their complaint are sufficient facts supporting this theory. First, they do not explain what processes were flawed with respect to permitting Voya to use plan participant data for non-plan purposes. Second, they do not articulate any harm to the plan—i.e., diverted investments that would otherwise have increased plan assets. Third, while they claim that participants of the plan paid higher fees when investing through non-plan investment products—which were marketed to them by use of their data—these allegations are vague, general and conclusory.”

Accordingly, the court dismisses plaintiffs’ claim for breach of fiduciary duty in Counts IX and X. However, they are dismissed without prejudice, as the court cannot at this juncture rule out the possibility that plaintiffs might plausibly allege that a reasonable fiduciary in defendants’ situation would have conditioned use of plan participant data only for recordkeeping purposes.

The full text of the ruling is available here.