Tips and Best Practices for Plan Sponsors and Fiduciaries of Health and Welfare Plans By: Kathy AslingerEsq.
For the past decade, retirement plans have been the focus of breach of fiduciary duty claims under the Employee Retirement Income Security Act (ERISA).  Much of the litigation, including the seminal case of Tibble v. Edison International, 135 S. Ct. 1823 (2015), has focused on excessive fees affecting a participant’s account balance in the plan.
With so much emphasis on retirement plans, it can be easy to overlook a plan sponsor’s duties and responsibilities under its health and welfare plans, particularly if an employer sponsors a fully insured plan that outsources most of the discretionary duties to an insurer.  Not all responsibilities may be outsourced, however, and plan sponsors and fiduciaries should periodically review their own fiduciary practices and procedures to determine whether they are ERISA-compliant.  To that end, this article summarizes the fiduciary duties under ERISA and offers some best practice tips for meeting those duties.

Who is a fiduciary?

Generally, a person is an ERISA fiduciary with respect to a plan to the extent he or she: 
  • Exercises any discretionary authority or discretionary control respecting management of the plan or exercises any authority or control respecting management or disposition of plan assets; 
  • Renders investment advice for a fee or other compensation, direct or indirect, with respect to any assets of the plan, or has any authority or responsibility to render the investment advice; or 
  • Has any discretionary authority or discretionary responsibility in the administration of the plan.  

Investment advice fiduciaries are less common in the health and welfare plan context, although some plan sponsors of self-insured plans have established voluntary employees’ beneficiary association (VEBA) trusts or other funding mechanisms to set aside and invest assets to pay for benefits.  Most employers and plan sponsors will, however, have discretionary authority or control regarding the management or administration of their health and welfare plans. 

In most circumstances, the plan sponsor or plan administrator is the “named fiduciary” under the plan document and the entity ultimately responsible for the plan, but the named fiduciary may delegate fiduciary responsibilities to outside experts who are functional fiduciaries based on their actions.  When that occurs, the named fiduciary can limit its own fiduciary responsibility to the prudent selection and monitoring of the fiduciary service providers and the maintenance of appropriate written plan document. This is frequently what occurs when an employer sponsors a fully insured plan. 

ERISA Fiduciary Duties

ERISA sets forth four general fiduciary duties:   
  1. Duty of Loyalty.  Also called the “exclusive benefit rule,” this duty requires a fiduciary to discharge duties for the exclusive benefit of plan participants and their beneficiaries. 
  2. Duty of Prudence.  This duty requires a fiduciary to act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity” would act.   This is an objective standard based upon how a person with experience and knowledge of a certain area would act in a given situation.  If a fiduciary lacks the expertise for a certain area then the fiduciary must obtain expert help.
  3. Duty of Diversification.  A fiduciary must diversify investments in order to minimize risk of loss unless it would be considered prudent to not diversify investments.  ERISA does not set percentage limits for investments, but instead considers such factors as the amount of plan assets, the cash needs of the plan, and the investment portfolio as a whole. 
  4. Duty to Follow Plan Documents.  A fiduciary must act in accordance with the plan documents, but only to the extent that the plan is consistent with ERISA requirements.  Thus, a fiduciary must know and act in accordance with the plan and must have sufficient knowledge of the ERISA requirements.

Scope of Fiduciary Liability

A fiduciary who breaches his or her fiduciary duties may be personally liable to the plan and beneficiaries.  Damages could include restoring any losses caused by the breach to the plan and disgorging any profits made from the transaction that resulted in the breach.

Additionally, fiduciaries may be subject to civil penalties, criminal penalties, and excise taxes.  ERISA permits the DOL to impose civil penalties equal to 20% of the amount recovered from the fiduciary as a result of a court order or DOL settlement.  If a fiduciary willfully violates any provision of ERISA, the fiduciary may be convicted of a criminal offense and fined up to $100,000 ($500,000 for an entity), imprisoned up to 10 years, or both. Finally, if the fiduciary engages in a prohibited transaction, he or she will be subject to liability for excise taxes.  The excise tax is 15% of the amount involved in the transaction for each year.  If the transaction is not corrected within the taxable period, the Internal Revenue Service (IRS) imposes a second tier tax equal to 100% of the amount involved. 

Fiduciary Best Practice Tips

Plan sponsors and fiduciaries who are well-organized and prepared and who document their processes, procedures, and decisions will be better positioned not only to fulfill their fiduciary responsibilities but also to defend against claims of breach.  The following non-exhaustive list of practice tips may help.  

Practice Tip No. 1: Maintain up-to-date and accurate plan documents and claims procedures and provide an ERISA-compliant summary plan description (SPD) to participants.  As the sponsor of an ERISA-covered health or welfare benefit plan, an employer is required to have a written plan document and SPD.  In most circumstances, the certificate of coverage issued by an insurer of a fully insured plan does not contain all the disclosures or claims procedures required by ERISA, and the plan sponsor, not the insurer, bears the responsibility for satisfying those requirements.

Practice Tip No. 2: Identify all named and unnamed fiduciaries, including the persons employed by the plan sponsor or other named fiduciary who are exercising the discretionary control over plan administration or investment of assets, if applicable, and clearly identify and document their roles and responsibilities.  If the plan sponsor is named as the plan administrator, consider appointing an administrative committee to act on behalf of the plan sponsor.  If assets are set aside and invested to fund benefits, consider appointing an investment committee to select, monitor, and replace investments or choose an independent fiduciary to assume those investment responsibilities.  Depending on the size of the organization and available resources, one committee may serve both roles. Committee appointments should be appropriately documented through Board resolutions or other official action.    

Practice Tip No. 3:  Retain independent knowledgeable professionals (i.e., ERISA attorneys, accountants, actuaries, etc.) to advise you.  Remember that fiduciaries are held to a standard of a “prudent person acting in a like capacity and familiar with such matters,” not that of a layperson.  If you lack expertise in a particular area, you must obtain the requisite education or advice to make an educated, prudent decision.

Practice Tip No. 4:  Determine the level of fiduciary/investment responsibility you wish to delegate. If you sponsor a fully insured plan, you are automatically delegating a significant amount of responsibility to the insurer, which is responsible for managing and paying claims for benefits under the plan.  If, however, you sponsor a self-insured plan, carefully consider how much of the discretionary authority you wish to maintain and what authority you want to delegate to your contract administrator.  Also, if you maintain a VEBA trust to fund benefits, consider whether you want to hire a professional, corporate discretionary trustee to hold the assets and select investments pursuant to ERISA §§ 403(a) and 3(38), or whether you would prefer to hire an investment advisor under ERISA § 3(21), but retain ultimate responsibility for making investment decisions.

Practice Tip No. 5:  Adopt a prudent process to select all fiduciary and non-fiduciary service providers, taking into consideration such things as qualifications, experience, services performed, quality of health care services offered, and costs.  Read and understand all service contracts before they are signed and ensure that the contracts properly reflect the relationship and that the providers assume the appropriate levels of responsibility. Remember that unless the service provider acknowledges fiduciary status or actually exercises discretionary control, fiduciary responsibility remains with the plan sponsor.   

Once the provider is selected, monitor the performance of the provider on a regular basis, and remove and replace any provider or advisor that fails to perform adequately or properly.

Practice Tip No. 6:  Educate the individuals on the administrative and/or investment committee and employees performing services for the plan on their fiduciary responsibilities and liabilities, as well as the role of each insurer, service provider, and consultant, and document that training.  As part of the training process, remind employees that all questions regarding benefit claims should be referred to the appropriate inside or outside claims administrator.  Inaccurately promising an employee that certain benefits are covered under the plan could create liability for the employer.

Practice Tip No. 7:  Hold regular meetings with consultants, service providers, and other advisors to review information about the operation and investment activities of the plan and to evaluate methods for improvement, making sure to keep detailed minutes of the items discussed and decisions made. Plan sponsors or appropriate committees should have at least one annual in-depth review in which they compare plan operation to plan documentation and verify compliance with IRS and DOL documentation, reporting, and disclosure requirements.

Practice Tip No. 8: Review plan financial reports and other information provided by the service provider immediately and ask questions about anything you do not understand.  Correct any inaccuracies timely.

Practice Tip No. 9:  If you maintain a VEBA trust, adopt a written Investment Policy Statement for the plan, setting out the investment goals, strategies, and appropriate benchmarks. Review it annually, make any necessary changes, and document the process.  Also, if responsibility for investment selection has not been delegated to an independent fiduciary, the individual trustees, investment committee, or appropriate officers of the plan sponsor must prudently select, monitor, and replace the plan investments. The investments should be well diversified; consistent with the written Investment Policy Statement; suitable and appropriate for the plan; and based on generally accepted investment theories and prevailing investment industry practices. Competent advisors may be engaged to assist in understanding and applying these principles.

Practice Tip No. 10: Identify potential conflicts of interest between service providers or between a service provider and the named fiduciary and avoid prohibited transactions.  Remember that prohibited transactions can result in significant excise taxes and penalties.

Practice Tip No. 11:  Obtain fiduciary liability insurance coverage for plan fiduciaries.  

Practice Tip No. 12: Document all activities, including the process of selecting and monitoring insurers, service providers, and investments, and include the process, conclusions, and the basis for conclusions in written minutes or reports. Regardless of the process used, a fiduciary should be able to demonstrate compliance with the legal standards.
Kathy Aslinger

Kathy Aslinger is a leader of Kennerly, Montgomery & Finley, P.C. pension and employee benefits practice, Kathy D. Aslinger assists public and private employers and plan fiduciaries maneuver through the complex world of audits, fiduciary liability issues, DOL and IRS compliance, and state law obligations,...

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