PLANSPONSOR - September/October 2024 - 38

FIDUCIARY FORUM
Time for a Welfare
Fiduciary Checkup
Get ready for a new 'suit season' -it could be an extended one
F
or more than 10 years, the 401(k)/403(b) retirement plan
world has been the subject of numerous class actions alleging
fiduciary breaches with respect to plan administration
and fees. While the focus primarily has been on retirement plans,
for a variety of reasons, we have been expecting-and are now
seeing-fiduciary class actions with respect to welfare plans.
Several suits were recently filed against plans of this type-
with claims of fiduciary breaches regarding prescription drug
and pharmacy benefit manager or third-party administrator
costs and/or regarding paying out-of-network providers.
Plan participants get annual wellness checkups as a preventive
measure, and we urge welfare plan fiduciaries to conduct
their own " checkup " to prevent or mitigate fiduciary litigation.
When acting as an Employee Retirement Income Security
Act fiduciary with respect to a welfare plan, as for a retirement
plan, it is important to keep in mind ERISA's fiduciary responsibilities.
These include, for example, acting solely in the interests
of participants and beneficiaries, acting for the exclusive purpose
of providing benefits-at a reasonable expense-and complying
with the prudent person standard. Fiduciary functions in the
welfare plan context may include activities such as: selecting and
monitoring TPAs, pharmacy benefit managers, networks, consultants
and other vendors; determining that fees paid by plans are
reasonable; appointing and monitoring other fiduciaries; interpreting
plan provisions; and exercising discretion in deciding
benefit claims and appeals.
In light of this, we are taking lessons learned from retirement
plan litigation and recommending that plan sponsors take
a look at their governance structure and procedures with respect
to welfare plans. We think it's worth examining the welfare
governance structure to: 1) confirm whether documents reflect
the current governance; 2) determine whether that structure still
makes sense and is appropriate; 3) consider whether additional
reviews/steps should be taken; and 4) ensure the decisions and
actions described are being documented properly.
Some specific steps welfare plan fiduciaries may want to
consider include (but are not limited to) the following:
Fiduciary Governance Structure
* Identify fiduciary activities performed by each key player-e.g.,
the board, the CEO, human resources, the committee, etc.
* Review plan documents-e.g., the plan document, the summary
plan description, the committee charter, TPA agreements, etc.
38 PLANSPONSOR.COM September - October 2024
Art by Joseph Ciardiello
* Compare what plan documents say against how fiduciary activities
are performed; and
* Consider and implement process improvements relating to the
plan's operational and administrative activities.
Fiduciary Governance Process Improvements
* Change fiduciary practices to align with those used for the
company's retirement plan, if appropriate;
* Create a work plan identifying fiduciary and settlor activities
and the responsible key players;
* Understand and address potential conflicts of interest;
* Consider forming a dedicated health and welfare committee
responsible for welfare plan fiduciary decisions, similar to the
retirement plan committee; and
* Provide welfare plan fiduciaries with fiduciary training.
As one of the issues being raised in welfare fiduciary litigation
relates to the selection and monitoring of service providers,
fiduciaries may want to do some or all of the following: evaluate
the services and fees of each service provider to the plan,
including consultants, TPAs, pharmacy benefit managers,
insurers, etc.; review service provider contracts for clarity and
commercially reasonable terms; avoid conflicts of interest and
prohibited transactions; document the selection process; monitor
performance on an ongoing basis; and perform a periodic review
of service provider fees and, if appropriate, conduct requests for
proposals for new service providers and/or fee structures.
Disclosure obligations associated with health plans have
expanded, and the information can be used to help the fiduciaries
with the selection and monitoring process. In particular,
covered service providers should supply compensation and
service information before entering into or renewing contracts,
as retirement plan service providers do. The information can
be used by welfare plan fiduciaries to evaluate ongoing and
potential engagements and determine the reasonableness of
the arrangement.
This " ounce of prevention " may help the fiduciaries avoid or
mitigate litigation issues we've seen in the retirement plan world.
Summer Conley and Heather Bader are partners in the Los
Angeles office of Faegre Drinker Biddle & Reath LLP, both in
the firm's employee benefits and executive compensation
practice group. Conley serves as the practice group leader.
Bader co-leads the firm's financial services industry team.
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