For decades, fiduciary litigation under the Employee Retirement Income Security Act of 1974 (ERISA) was largely concentrated on 401(k) and pension plans. That era has ended. In recent years, we have seen class-action lawsuits targeting health and welfare plans. Plaintiffs’ firms have begun applying the excessive fee playbook to health plans, alleging that plan sponsors have failed to monitor pharmacy benefit manager pricing, allowed excessive broker commissions, and ignored opaque indirect compensation structures.
At the same time, group health plans remain under scrutiny from the US Department of Labor (DOL). In this environment, plan sponsors may wish to revisit their health and welfare fiduciary governance structures, oversight practices, and documentation processes.
The DOL’s booklet, Understanding Your Fiduciary Responsibilities Under a Group Health Plan, provides an important baseline for sponsors of employer-sponsored health and welfare plans subject to ERISA. Although the booklet is not new, it reflects the DOL’s position and can serve as an important refresher for sponsors. The booklet outlines the core ERISA fiduciary framework and highlights certain areas of focus for plan sponsors seeking to reinforce fiduciary governance.
Fiduciary Status Is Based on Function
Under ERISA, a person is a fiduciary to the extent he or she
- exercises discretionary authority or control over plan management;
- exercises authority or control over plan assets; or
- has discretionary authority or responsibility in plan administration.
Fiduciary status turns on actions, not titles, making fiduciary status a functional test. HR professionals, corporate officers, and other employees or vendors may act as fiduciaries when exercising discretionary authority over plan administration. Moreover, benefits committees and their members, even when not specifically designated as fiduciaries, can be fiduciaries under this functional test.
Selecting and Monitoring Service Providers
In its fiduciary booklet, the DOL expressly notes that “hiring a service provider in and of itself is a fiduciary function.” Selecting a third-party administrator, claims processor, pharmacy benefit manager, consultant or other vendor is not simply a business decision, it is a fiduciary decision subject to ERISA’s prudence and loyalty standards.
Moreover, fiduciary responsibilities do not end at selection. Ongoing monitoring of service providers is required to ensure performance remains consistent with the terms of the engagement and the interests of plan participants and beneficiaries.
Fees and Reasonableness
Fees are one of several important factors fiduciaries must evaluate when selecting and monitoring service providers. Neither ERISA nor the DOL set fee levels. Rather, ERISA requires that plan assets be used only to pay reasonable expenses of plan administration.
A prudent process for determining the reasonableness of fees, as described by the DOL, may include the following:
- Reviewing what services are included in quoted fees
- Determining whether services are bundles or separately priced
- Confirming that the plan is not paying for unnecessary services
Understanding indirect or third-party compensation, such as commissions, finder’s fees, or revenue sharing arrangements, is also important, as such compensation can not only affect the reasonableness of fees but also may create or reflect conflicts of interest.
Importantly, fee review is not a one-time exercise. Fees and compensation structures should be monitored to ensure they remain reasonable in light of services provided.
Claims Procedures and Plan Administration
The DOL booklet also underscores fiduciary responsibilities relating to claims and appeals procedures and summarizes some differences that may arise depending on the type of claim at issue. In all cases, fiduciaries must ensure that
- the plan maintains compliant claims procedures;
- determinations are made in accordance with plan terms;
- required timelines are followed; and
- denial notices include appropriate explanations and appeal rights.
Given the increase in litigation challenging benefits determinations, particularly with the introduction of automated and AI-driven tools into claims processing, plan sponsors should confirm that third-party administrators are adhering to regulatory requirements and plan terms to ensure that participants are receiving a full and fair review consistent with the DOL claims regulations.
Key Takeaways
The DOL booklet serves as a timely reminder that group health plan administration carries meaningful fiduciary responsibility. In the current regulatory enforcement and litigation environment, revisiting fiduciary governance practices, particularly around service provider selection, fee monitoring, and oversight, can reduce exposure and strengthen overall fiduciary compliance.
If you would like assistance reviewing fiduciary governance practices or vendor oversight, contact the authors of this blog post or your Morgan Lewis contacts.