Overview
Recent lawsuits filed against the group health plans of two large US employers underscore the importance of implementing formal welfare benefit plan governance structures that include fiduciary committees comparable to the governance structures employer sponsors of retirement plans routinely adopt.
The origins of this trend for retirement plans are not hard to trace: In the fall of 2003, a federal district court in Texas denied motions to dismiss the Employee Retirement Income Security Act (ERISA) claims in Tittle v. Enron. The 300-page opinion caught plan sponsors by surprise. The lawsuit included claims against Enron’s board and senior management, as well as its retirement plan committee. Had Tittle v. Enron been an isolated incident, plan sponsors may have forgotten about it. But in 2006, 13 lawsuits were filed against major companies claiming that these employers violated their fiduciary obligations under ERISA by selecting funds for their 401(k) plans that charged allegedly excessive fees. These lawsuits were just the beginning of a burgeoning cottage industry among plaintiffs’ law firms against 401(k) – and later 403(b) – plans that continues to this day. Fiduciary plan committees have become a first line of defense as plan sponsors and fiduciaries seek to insulate themselves from liability.
The ERISA fiduciary standards that are at the heart of 401(k) plan litigation apply equally to all welfare benefit plans, but until recently, employer sponsors of welfare benefit plans seemed unfazed by the trends for 401(k) and 403(b) plans. The filing and initial skirmishes in Lewandowski v. Johnson and Johnson may change that complacency. Filed earlier this year, Lewandowski alleged a series of fiduciary violations involving Johnson and Johnson’s group health plan(s). The case is currently a proposed class action for breach of fiduciary duties. The putative plaintiff class alleges that the defendants failed to effectively manage the company’s prescription drug benefit program by failing to pay only reasonable amounts for prescription drugs, supervise and monitor conflicted third parties, and monitor the plan’s prescription drug formulary. While we are still a long way from any final adjudication of the matter, employers should nevertheless take note: Lewandowski signals a turning point in our view. It is time to establish a welfare plan fiduciary committee to reduce litigation risk.
In Depth
THE DEVOLUTION OF FIDUCIARY AUTHORITY
The devolution of fiduciary authority under ERISA highlights the complexity and responsibility inherent in managing employee benefit plans. Fiduciaries – whether named, functional or appointed – must navigate a landscape defined by stringent duties of loyalty, prudence and adherence to plan documents. The requirement to monitor delegated duties ensures ongoing accountability and underscores the importance of prudent oversight. These obligations are no less relevant to welfare plans than they are to retirement plans. As legal standards and regulatory expectations evolve, fiduciaries must stay vigilant and informed to fulfill their obligations effectively, ultimately safeguarding the interests of plan participants and beneficiaries – including taking any actions necessary to ensure that fiduciary obligations are met for welfare plans.
ERISA fiduciaries must, among other things, discharge their duties solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable administrative expenses. In addition, ERISA fiduciaries are held to the duties of loyalty and prudence, and they must follow plan documents, among other requirements. A person can become a fiduciary to an ERISA plan by being named in the plan (a “named fiduciary”), by position (the plan’s trustee, plan administrator and investment manager are always considered fiduciaries), by exercising discretionary authority or discretionary control over a plan’s management, assets, or administration (a “functional fiduciary”), or by being appointed to perform a fiduciary function by another person. By default, the plan sponsor (typically the employer of the plan’s participants) is the ERISA “plan administrator,” and thus a fiduciary, unless some other person or entity is appointed to the role.
Named fiduciaries can be either named in, or appointed pursuant to a procedure established by, the plan document. The named fiduciary may further delegate aspects of his or her fiduciary duty to other fiduciaries. The US Department of Labor is of the view, supported by case law, that named fiduciaries cannot fully off-load their fiduciary duties by delegating these duties to others (e.g., to a plan retirement committee or third-party administrator). Rather, the delegating fiduciary must ensure that the delegation was prudent and remains so thereafter. This requirement is the source of the “duty to monitor.” And while the contours of the duty to monitor are not perfectly defined, there is general agreement that some sort of periodic reporting backup to the appointing fiduciary is a minimum requirement.
THE FIDUCIARY COMMITTEE
The establishment of a fiduciary committee through formal action and proper documentation is crucial for mitigating fiduciary responsibilities for a company’s board of directors and senior management. By designating a committee as the ERISA plan administrator and ensuring regular reporting to the board, organizations can limit the fiduciary exposure of individuals who lack substantive knowledge of the inner workings of the company’s employee benefit plans. This structured approach not only protects board members and senior managers from detailed scrutiny during litigation but also upholds the integrity and proper oversight of the plan’s management.
While it is possible to avoid even residual fiduciary responsibility on the part of a board of directors – a plan could, for example, designate a fiduciary committee as the named fiduciary by its terms – few plans attempt this. A more common approach is for a plan to designate (say, in a basic plan document) the plan sponsor as the named fiduciary unless otherwise specified in the corresponding adoption agreement. Under the default rule, the board of directors (of a corporation) or the managers (of a limited liability company) or the partners (in a partnership) are the named fiduciaries.
However, with proper planning and documentation, it is possible to ensure that an organization’s board of directors or managers, as applicable, retain only residual “duty-to-monitor” obligations by having the board or members formally vote and pass resolutions to establish one or more fiduciary committees (e.g., one retirement plan and one welfare plan committee). The fiduciary committee would not ordinarily include board members for reasons explained below. It is also possible to ensure that a company’s senior managers have no fiduciary duties by excluding them from committee participation and otherwise ensuring that they keep their distance from plan maintenance and operation.
To understand the stakes, consider a company has a group health plan but no formal fiduciary committee. In this example, by default, the board is the plan administrator, and members of management have likely exercised discretion over plan management, thereby making them fiduciaries as well. The plan is sued. The plaintiff’s lawyers will depose the board members and senior managers, asking them detailed questions about plan maintenance and operation. It takes little imagination to understand that these depositions will not go well. Now consider the alternative: Assume that the board has formally voted and passed resolutions to establish a welfare plan fiduciary committee, which is designated as the ERISA plan administrator. The vote also adopts a committee charter (or delegates that task to the committee) and might also include guidelines for the committee’s operations. The committee is required to report at least annually to the board on its operations, thereby facilitating the board’s oversight. Now again assume that the plan is sued. While the board members will likely be deposed, the plaintiff’s inquiry will be limited to their oversight of the committee’s actions.
The above examples illustrate two important principles:
- Individuals without substantive knowledge of an employee benefits plan should not be given substantive fiduciary responsibilities.
- In the event of litigation, it’s easy to impeach or at least embarrass such an individual by exposing their lack of substantive knowledge.
This is one lesson of Tittle v. Enron. It is for this reason that, in the absence of special knowledge or expertise, board members or organization managers should not participate on fiduciary committees. It is one thing to ask a board member about the substance of their day-to-day actions as a fiduciary; it is quite another thing to ask about their proper oversight of others.
There is another, equally compelling lesson in the above examples. The grant of authority and the establishment of the committee requires formal action. The appointment of a welfare plan fiduciary committee without a vote designating the committee as the plan administrator is insufficient. Failure to observe the formalities leaves the board or members with full-blown fiduciary status, which is usually unintended and does not reduce litigation risk exposure.
APPOINTING THE FIDUCIARY COMMITTEE THE RIGHT WAY
Plan sponsors should begin with a clear intention concerning the purpose and role of their fiduciary committee. In most cases, the committee is designated as the ERISA-named fiduciary and is responsible for ongoing plan administration. The stakes are high, as fiduciary liability is personal liability. Remedies for breaches of fiduciary duties can include restoration of losses, disgorgement of profits or other equitable relief, such as removal of the fiduciary. Therefore, participation in a fiduciary committee should not be taken lightly. Comprehensive, periodic and well-documented fiduciary training for committee members is essential.
ACTION ITEMS
Plan sponsors should consider the following measures relative to their employee benefit plan fiduciary governance, particularly as they begin to consider the next steps for their health and welfare plans:
- Formalize Committee Establishment: Conduct a formal vote to establish the fiduciary committee(s).
- Ensure Proper Delegation: Formalize the delegation of fiduciary duties through board resolutions and committee charters, clearly establishing the purpose and role of the fiduciary committee(s), including the types of plans they will oversee.
- Implement Duty to Monitor: Maintain oversight by requiring periodic reports from fiduciary committees to the board for any delegated responsibilities.
- Provide Comprehensive Training: Conduct comprehensive, periodic and well-documented fiduciary training for all committee members to ensure they are well-informed and capable of fulfilling their duties.
- Obtain ERISA Fiduciary Insurance: Secure ERISA fiduciary insurance in addition to an ERISA fidelity bond to provide comprehensive coverage for fiduciary responsibilities.
- Avoid Conflicts of Interest: Ensure that individuals without substantive knowledge of employee benefit plans do not have significant fiduciary responsibilities, particularly senior managers and board members.
- Document Fiduciary Actions: Maintain thorough documentation, such as meeting minutes, of all fiduciary actions, decisions and training to provide a clear record of compliance and diligence.
- Evaluate Fiduciary Processes Regularly: Periodically review and evaluate fiduciary governance processes to ensure they remain effective, compliant and aligned with best practices.
