“But Our Vendor Handles Everything — How Can We Still Have Fiduciary Liability?”
As the rules governing retirement and health plans grow more complex, employers often need professional help in order to keep up with the day-to-day management of the employee benefit plans they sponsor. From third-party administrators and financial advisers hired to manage the operations and investments of 401(k) plans to administrative service organizations and pharmacy benefit managers engaged to process health care and prescription drug claims, employers increasingly outsource the administration of their benefit plans.
While many vendors’ contracts make it clear that they are not acting in a fiduciary capacity with respect to an employer’s plans, other providers may take on all or nearly all of the fiduciary liability for the administrative services they provide. Agreeing to take on that responsibility may serve as a selling point, setting these vendors apart from their more risk-adverse competitors.
When a vendor agrees to assume all or part of the employer’s fiduciary responsibility for the maintenance of the employer’s benefits plans, the employer may believe it is no longer responsible for those plans. Unfortunately, that is not the case. Not all fiduciary obligations can be avoided via the terms of a vendor contract. To avoid potentially expensive surprises when engaging such vendors, employers must, therefore, understand the scope of their fiduciary obligations.
Fiduciary Duties Under ERISA. Under the Employee Retirement Income Security Act of 1974 (ERISA), a “fiduciary” is a person (either an individual or an entity) that exercises discretionary authority or control over an employee benefit plan’s administration or assets. Employers are fiduciaries of the plans that they sponsor for the benefit of their employees.
ERISA imposes various duties on fiduciaries. Chief among them is the requirement that fiduciaries administer their plans prudently, acting in the best interests of plan participants and beneficiaries and with the exclusive purpose of providing them with benefits. To do so, an employer may need expertise in a variety of areas — the selection of investments, plan administration and legal requirements, etc. If the employer does not have that expertise in-house, it will need to engage outside vendors or service providers to assist in carrying out these duties.
Selection and Monitoring of Service Providers. The initial selection of a service provider is a fiduciary action. So, when hiring outside professionals, the employer must consider:
The reasonableness of compensation to be paid to the provider (when compared to the services to be provided, and to the fees charged by other providers)
The provider’s experience, quality, and ability to provide the requested services
The provider’s business practices and procedures
Any other facts necessary to assess the provider’s competence and value
If a vendor will not agree to assume fiduciary liability for its services to a plan, the employer will retain fiduciary liability for any errors or failures the vendor causes. (The vendor may, however, be contractually obligated to indemnify the employer for any losses.) As a result, the employer will need to monitor the vendor’s performance on an ongoing basis.
Even if a service provider agrees to assume fiduciary liability for its provision of services, the employer is not being released from its fiduciary duty to monitor the provider. Accordingly, employers should establish a regular review process to appropriately monitor providers. As part of that process, the employer should:
Provide a timely review of any notices or reports regarding the provider’s performance, issues related to the plan, possible changes to the provider’s fees, etc.
Periodically check the fees the provider charges to ensure they match the fees stated in the provider’s contract
Understand the provider’s administrative practices and procedures, as well as any changes to those processes
Investigate any participant concerns or complaints to ensure they are resolved, and, if possible, insist the provider change its practices and procedures to avoid future problems
Hiring an outside vendor to administer their employee benefit plans or to provide specialized services to those plans may give employers a false sense of security that they have satisfied their own fiduciary obligations with respect to the plans. To avoid future fiduciary surprises, however, employers must monitor the performance of all of their service providers, regardless of the level of fiduciary liability those providers agree to assume.