The army of internet thieves doesn’t spare retirement plans. Several lawsuits have been filed against plan sponsors and their recordkeepers, including Estee Lauder, Abbott Laboratories, and recordkeeper Alight, as a result of theft of plan accounts. Those cases have not resulted in final decisions clearly defining the responsibilities of fiduciaries and service providers, but a newly filed lawsuit against Colgate-Palmolive and Alight provides another opportunity to do so.
While the DOL has not issued regulations defining responsibilities for protecting plan assets from thieves and hackers, it has released a package of best practice recommendations for plan sponsors and recordkeepers. These recommendations include third party audits of cybersecurity procedures and multi-factor authentication. However, the cases filed make the point that call center employees are a vulnerable part of any recordkeeper system, and that they must be properly trained to consult managers and/or secure additional identifying information before putting through any suspicious transactions.
The Colgate-Palmolive Case.
The Parties. A participant whose entire account worth over $750,000 was stolen by a hacker has sued the plan committee, Alight and custodian Bank of New York Mellon (all of whom are alleged to be fiduciaries) to get the account restored with attorney’s fees and costs. The complaint focuses on the specific actions of Alight and its employees. Although the alleged breach did not involve BNY Mellon employees, the complaint also cites provisions of the BNY Mellon agreement requiring BNY Mellon to maintain an information security program and to protect sensitive information against unauthorized access. The participant alleges that the plan committee rejected her benefit claim and will not restore her losses resulting from the fiduciary breach.
401(k) Red Flags. The facts as recited in the complaint read like an example of why recordkeepers need better employee training and strict identification procedures.
After several unsuccessful attempts to process changes online, a thief called the Alight call center to change the password, e-mail, address and bank account information for the participant’s account. No notice of the change was sent to the participant’s prior e-mail address or telephone number. The mailing address was not in the same country as the other contacts. A temporary password was mailed to the participant but without notifying the participant by e-mail or text that a temporary password had been requested and mailed out. The mail was intercepted by the thief. Although the SPD indicated that there would be a 14 day wait before a distribution would be made following an address change, no such waiting period was imposed and an immediate lump sum distribution was quickly made. The participant did not discover the theft until she checked her account balance, and alleges that she was told that the loss was unfortunate but that the Plan benefit “was paid in accordance with Plan terms and requirements.”
Defined Benefit Plan Procedures Prevented the Theft. Plaintiff alleges that the thief also tried unsuccessfully to access her pension under Colgate-Palmolive’s defined benefit plan, which was administered by a different recordkeeper. That recordkeeper insisted on a photo ID, which the thief was unable to provide.
Separate Litigation Involving Alight. On a separate front, the Department of Labor has been battling Alight in court over its investigation of Alight’s cybersecurity procedures. A federal district court has ruled that Alight must respond to the DOL’s subpoena seeking documents relating to the unauthorized distribution of plan assets, though Alight has appealed. Alight is also seeking an order preventing the DOL from sharing the information with other federal agencies, which could result in their own enforcement action.
Who Should be Responsible? There is as yet no general federal law providing for cybersecurity protections. Who should be responsible for this loss, which the criminal authorities are unlikely to be able to restore-the service providers and the fiduciaries responsible for hiring and monitoring that recordkeeper or an innocent participant?
ERISA provides that fiduciaries can be personally liable for losses from breaches of their responsibilities. However, trustees, even if fiduciaries for some purposes, do not generally have a duty to inquire into instructions to make distributions. Charges that Alight acted as a discretionary fiduciary here may also present a hurdle, as most recordkeepers are not fiduciaries. However, the fiduciary committee would appear to have a responsibility to hire plan service providers with adequate cybertheft protections. As the case progresses, the committee’s knowledge and monitoring of Alight’s procedures and its questionable statement that payment had been made to the thief in accordance with proper procedures are likely to be issues. Whether the plan sponsor maintained insurance or attempted to get indemnification for this loss on behalf of the participant under its service agreements may also be reviewed.
Steps to Provide Better Protection. Plan sponsors can take steps now to reduce the probability a theft like this will harm participants. Here are some practices recommended by the DOL and experts:
- Require that recordkeepers maintain cybersecurity insurance and have their procedures audited regularly by outside parties. Put these obligations in service agreements.
- Thefts can also result from hacking into employee computers at the worksite or when working remotely. Plan sponsors should also maintain cybersecurity insurance and have their procedures audited.
- Whenever contact information is changed, send texts and e-mails notices immediately using the prior contact information and alerting the participants to contact the recordkeeper immediately if they did not initiate the changes.
- Impose a mandatory delay on payment of any distributions requested immediately after a change in contact information.
- Require confirmation of identity beyond passwords, such as the photo ID requirement imposed by Colgate-Palmolive’s defined benefit plan provider or specific personal identifiers.
We need a federal solution to protect participant accounts. Binding DOL guidance on legal liability in this area is sorely needed, but the best solution may be action by Congress to provide for specific participant remedies. Such a provision could even be tacked onto the pension reform legislation currently being considered by Congress.