Litigation trend puts health plan fiduciaries on notice

ERISA requires fiduciaries of employee benefit plans — retirement savings plans, such as 401(k)s, as well as health and welfare plans — to act in the best interests of plan participants and beneficiaries by exercising care and prudence in the selection, management, and maintenance of the benefit plans and service providers. This includes defraying reasonable plan administration expenses and owing a duty of loyalty to plan members/beneficiaries.

But who exactly is a fiduciary for purposes of meeting these requirements?

A plan fiduciary can be named in plan documents or identified by the services he or she provides to a plan. Whether identified by name or not, a person who exercises discretionary authority or control over the benefit plan or its assets is considered a functional fiduciary. Benefit plans subject to ERISA can have multiple fiduciaries. This means any employee, director, officer, or benefits committee member who selects, manages, or maintains employee benefit plans are deemed to be fiduciaries.

Fiduciary liability risks stem from regulatory enforcement or private litigation, such as the class-action lawsuits filed against JPMorgan Chase, J&J, and Wells Fargo. Examples of such liability for violating fiduciary obligations can include fines, personal liability for plan losses, bans on providing future services to benefit plans and even prison sentences. Regulatory fines and criminal charges for ERISA fiduciary violations typically occur in the most egregious cases. Private civil actions remain the principal driver of ERISA litigation.

With fiduciary liability exposures increasing, having appropriate insurance coverage in place is important. Plan sponsors, however, must understand the limitations of different kinds of policies, so they can ensure optimum risk transfer for fiduciaries and executive leadership teams.

Organizations may already have a variety of relevant insurance policies in place, including directors and officers liability (D&O) insurance, which is intended to cover wrongful acts in managing corporate entities. Fidelity bonds, meanwhile, can protect the plan against losses from fraud or dishonesty, and employment practices liability (EPL) coverage protects employees from employment-based litigation.

Individual fiduciary responsibilities, however, differ from those of corporate directors and officers. For this reason, sponsors should consider purchasing fiduciary liability insurance, which is designed to cover losses arising from the specific acts of selecting, managing, and maintaining employee benefit plans and service providers. At a minimum, committees and companies should undergo the underwriting process to determine if they are deemed to be insurable risks and then complete cost-benefit analyses when buying such coverage.

Fiduciary liability insurance protects fiduciaries against claims alleging mismanagement, negligence, or breaches of fiduciary duty in the administration of employee benefit plans, trusts or other fiduciary responsibilities. This coverage is particularly relevant for fiduciaries overseeing employee benefit plans governed by ERISA, such as 401(k) plans, pension plans, and health and welfare plans.

Fiduciary liability policies typically provide coverage for:

• Legal defense costs. Policies generally cover attorney fees, court costs, and other expenses incurred in defending against related claims, even if those claims are unfounded. Unlike other policies — general liability, for example — defense costs are included within aggregate limits.
• Settlements and judgments. Policies pay for settlements and damages resulting from covered claims, up to the policy limits.
• Insured persons. Fiduciary liability policies protect both individual fiduciaries, such as benefit committee members, and organizations sponsoring covered plans.

Fiduciary liability insurance is distinct from other forms of insurance, though it may complement them. D&O insurance, for example, protects corporate directors and officers from claims related to their management decisions, but policies typically contain broad “based upon or arising out of” exclusions for ERISA violations and the fiduciary duties specific to employee benefit plans. Fiduciary liability insurance fills this gap.

Fidelity bonds, meanwhile, satisfy requirements under ERISA that sponsors of most benefit plans be bonded to protect against theft of fraud by plan administrators. These bonds, however, do not provide coverage for alleged breaches of duty or negligence, which are covered under fiduciary liability insurance.

While insurance can serve as an important backstop in the event of losses, plan sponsors should also take additional steps to promote diligence in plan administration. This can mitigate fiduciary liability risks and potentially reduce the likelihood of litigation.

Among other actions, plan sponsors may benefit from:

• Establishing governance committees. A committee is a wise idea to formalize plan decision-making and foster a thorough, cautious approach to administering employee benefit plans. This is best done in collaboration with legal counsel to draft a committee charter. Meetings should be regularly scheduled.
• Documenting all committee activities. Plan sponsors should create and maintain minutes of each committee meeting and document all the actions taken by benefit committees.
• Identifying fiduciaries and implementing training. A fundamental step in mitigating liability risk is to make fiduciaries aware of their responsibilities and support them in fulfilling their duties. Creating internal checklists for fiduciaries’ key functions is also a smart move.
• Developing policies and procedures. Any benefit plan may encounter unusual situations. Policies and procedures developed with the assistance of expert advisors can empower fiduciaries to address common and uncommon plan administration scenarios.
• Conducting reviews of plan documents and provider contracts. Fiduciaries should look closely at contracts with PBMs, third-party administrators (TPAs), and other service providers for terms, fees, services provided, performance guarantees, and other items.
• Negotiating indemnification agreements with service providers. These agreements should be included in contracts to protect the plan and plan sponsor from errors caused by a provider.
• Holding RFPs every three to five years, at a minimum. Extending an invitation to consider proposals from plan vendors on a recurring basis is one way to demonstrate that fiduciaries are looking out for plan participants/beneficiaries’ interests and seeking the highest value from service providers for the plan.
• Ensuring the annual federal Form 5500 is properly updated. Companies should not simply carry over information year over year. Instead, they need to consider and update critical responses around reviews of plan designs and fees.