By: HUB’s EB Compliance Team
Following our introduction to fiduciary duties and discussion of the exclusive benefit rule, we’ll continue our look at fiduciary duties for health and welfare plans with an examination of duty of prudence. The goal of the duty of prudence is not to require fiduciaries to always make perfect decisions, but to have a process that shows the decisions were well-considered. As some ERISA lawyers are fond of saying, “prudence is process.”
Duty of Prudence
ERISA doesn’t specifically define prudence, however in describing the prudent person standard of care it says “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and…with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
Note that this standard under ERISA is sometimes referred to as the “prudent expert” rule since fiduciaries are supposed to act as a prudent person “familiar with such matters” would. This does not require the fiduciary to be an expert in all aspects of plan administration. However, if a fiduciary is not an expert, the fiduciary must find the expertise to assist. This is why selecting service providers is a key function in exercising ERISA’s duty of prudence.
At its heart, prudence must be exercised in the decision making process. For health and welfare plans this primarily means prudence in selecting and monitoring plan service providers. The service providers themselves may or may not be fiduciaries, but even if the service provider is not a fiduciary, the service provider can advise the fiduciary on matters that allow the fiduciary to make an informed decision.
Qualifications, Quality and Fees
The Department of Labor (“DOL”) laid the groundwork for prudence as it applies to the selection of plan service providers in a 1998 Opinion Letter. In this letter, the DOL said “the responsible plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided.” Recognizing that no two situations are the same, the letter goes on to say “What constitutes an appropriate method of selecting a health care provider, however, will depend upon the particular facts and circumstances.”
Together this means that other factors beyond cost must be considered by plan fiduciaries. While cost may be the primary driver for some plan sponsors, it need not (and cannot) be the only factor. Fiduciaries must also consider the quality of the service provider, the services they offer, and the fit for the plan’s population. Importantly, plan fiduciaries are not required by law to choose the lowest cost providers.
Comparison of Service Providers
One way plan fiduciaries support their positions of making prudent decisions is by comparing various service providers. After all, if a fiduciary only knows the services and fees of a single provider, how can they determine if those fees are reasonable, or the services are of the requisite quality? In addition to comparing fees, plan fiduciaries should compare the scopes of services of the various service providers. While most service providers will likely provide similar services, there may be some differences that justify cost differences. For example, some COBRA vendors will send out the initial notice while others will not. It is important to know the difference.
From a quality perspective, it helps to ask for references and evaluate their responses. It may also be worthwhile to contact other companies that the plan sponsor knows that also use similar service providers (or maybe even the same ones) to determine what their challenges are. For insurance carriers, AM Best ratings can provide some helpful information on financial wherewithal. For providers that handle protected health information, asking about HIPAA protocols and if they’ve been the subject of a breach (and how they handled it if they were) can provide insight into their HIPAA practices. All of these (and additional similar questions) can help provide a full picture of the service provider’s quality.
Obtaining cost, quality and qualification information from service providers allows plan fiduciaries to understand what the plan participants and beneficiaries would receive, how they would receive it, and what the cost would be. This helps compare apples to apples, even when those apples look different.
Note that service providers can take on many different forms. Insurance carriers and Third Party Administrators (“TPAs”) are service providers. COBRA administrators and FSA vendors also fall under this umbrella. Brokers, consultants and other professionals such as CPAs and attorneys do as well. The scope of service providers is quite wide.
Monitoring of Service Providers
Under ERISA, hiring a service provider is not a “set it and forget it” proposition. Fiduciaries must monitor their service providers to ensure they are providing the agreed upon services at the agreed upon prices. The only way to know whether the service provider is delivering their services as promised is by monitoring them. This monitoring must be ongoing as well, especially since services and fees can change over time. Additionally, as service providers have turnover in their workforces, the level of services can change. Finally, sometimes service providers will offer new services, but not make those immediately available to existing clients, so it is good to inquire.
One aspect of monitoring is conducting periodic requests for proposal or requests for information. This allows the plan fiduciary to compare what they are receiving from their current provider with what is available in the marketplace. While RFPs/RFIs do not need to be conducted every year, conducting them for major service providers every three to five years helps ensure that the fiduciary is checking the market for the latest in fees and services.
Being a fiduciary is significant and requires acting in a prudent manner and prudently selecting and monitoring service providers. This is not something a fiduciary can completely outsource to a third party; it is ultimately the responsibility of the plan sponsor to ensure that service providers to the plan are being appropriately selected and monitored. Having a prudent process for selecting and monitoring service providers is key. Coming up next month: the requirement to follow the plan document.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.