Fiduciaries …. Don’t forget ALL your duties!
The penalties for not effectively executing on one’s fiduciary duties are steep.
Fiduciary — a word anyone that advises employers, and their benefit plan representatives, knows well. Many relish the designation, still more fear it. One thing is for sure, too many cannot fully appreciate what it actually means, what is required of them, nor how to correctly execute on the obligations imposed upon them by it. Being a fiduciary sometimes means making what may feel like the less favorable decision; but, as many on either side of the political arena will say to support their subjective opinion — “facts don’t care about feelings.”
So, what is a fiduciary, and as it relates to employer-sponsored health benefit plans, what are their obligations? Generally, a fiduciary is defined as an adjective that means a relationship “involving trust, especially with regard to the relationship between a trustee and a beneficiary.”
Related: Supreme Court ruling highlights an expansive definition of plan fiduciary
The definition that is relevant to benefit advisors, however, is quite a bit more specific. The Department of Labor (DOL) is the entity that governs the law relating to fiduciaries under the purview of the Employee Retirement Income Securities Act of 1974 (ERISA). The DOL defines a fiduciary as any “person or entity who exercises discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan or has any authority or responsibility to do so”. Examples of fiduciaries include plan trustees, plan administrators, and members of a plan’s investment committee.
With a fiduciary role under ERISA comes very important obligations to employer-sponsored benefit plans and their representatives. Perhaps the most well-known are the obligations to diversify a plan’s investments and minimize the risk of large losses. There are two very prominent obligations that are also of utmost importance that in many instances are conflicting and accordingly result in misunderstanding; those are the duty to follow the terms of plan documents, and the duty to be prudent with plan assets.
The confusion is undoubtedly justifiable! How does one act both prudently with plan assets, and in strict compliance with a plan’s terms, if a plan’s specific terms require the plan to act in such a way that would ultimately cost the plan more than the alternative? Imagine a scenario where a health benefits plan, for example, was required — subject to a strict reading of its terms — to enforce its requirement that plan participants reimburse the benefit plan, in full, on all third party recovery disputes; but, an objective evaluation of the cost to do so (on a case by case basis) clearly shows that enforcing the terms would be more costly, such as when litigation may be necessary.
Put more simply, if one decision costs you $5,000.00 (not enforcing a right to full recovery), but fighting for your right to enforce that decision would cost you $50,000.00 (engaging in a lawsuit to enforce that right) — perhaps the more prudent choice would be to simply choose the less costly approach, not enforcing that right to full reimbursement.
Strict conformity with plan terms is often considered without sufficient thought about the duty to be prudent with plan assets. Decision-makers for plans will often get caught up in the principles, or their fear of creating precedent, and then send themselves down expensive paths that will very obviously result in the plan being in a worse position than if they had not chosen to enforce their terms; even if the plan is successful in the dispute — the ends simply did not justify the means.
Why is this such an important topic? Well, because the penalties for not effectively executing on one’s fiduciary duties are steep. Fiduciaries who fail in their duties can be held personally liable to restore any losses to the plan, and/or restore profits made through an improper (or, shall we say … imprudent?) use of plan assets. Courts are empowered to take whatever action they may deem appropriate against fiduciaries, including disgorgement or even removal of that fiduciary.
ERISA’s prudent man standard paints quite a broad stroke; although by its terms it seems to focus on investment and retirement plans rather than health and welfare benefit plans, the principles are transferable. Much like corporations are empowered with the flexibility to make business decisions, like settling a lawsuit rather than take on the burden and collateral damage of proceeding, so, too, can benefit plans and their fiduciaries be empowered to act in kind. Fiduciaries who feel they do not have the flexibility to do so should evaluate the plan language they believe constrains them, and rework that language to provide them the ability to comfortably make reasonable decisions when doing so makes financial sense.
Plans, and their fiduciaries, that are not willing to address these issues could easily be found to be making decisions that are negatively impacting the finances and viability of benefit plans. Those decisions could be vulnerable upon an evaluation of the plan’s practices subject to a plan member’s allegation of a breach of fiduciary duty under ERISA, or, perhaps even worse, a DOL audit.
The good news is benefit plans and their fiduciaries do not need to go it alone! There are all kinds of experts that can be utilized to help guide plans through these decisions and either preemptively, by helping them draft their plan documents to allow the flexibility they need to feel empowered to make prudent decisions, or by helping them determine whether their decisions are prudent in accordance with their current plan terms.
Make no mistake, any plan with hard, inflexible rules will undoubtedly encounter issues where strict conformity may compel them to act in a way that would challenge objective analyses of whether they acted prudently. Making sure to have the proper language, and the proper processes in place to avoid breaching that important, oft-ignored, duty of prudence is imperative.
So, are you a plan fiduciary? Are you sure your plan language and processes are compliant with ERISA and would give you the flexibility you need to act prudently? Ask yourself, do you have sufficient means to be held personally liable if you are wrong? If you are a fiduciary, or are afraid you might be based on the definition of one, do not go it alone – call an advisor; not doing so, would be, well, imprudent!
Christopher M. Aguiar, Esq, is vice president of legal recovery and stop-loss services for The Phia Group, LLC.
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