Fiduciary Responsibilities: Understanding the Impact of New Transparency Requirements

As part of Hylant’s employee benefits insights webinar series, Hylant Employee Benefits Compliance Practice Leader Holly Wahl and Hylant Chief Operating Officer – Employee Benefits Mark Nixon discussed the transparency requirements and recent litigation related to fiduciary responsibility. Watch the recording to listen to the full discussion or read this blog post for a partial summary.

Fiduciary Responsibilities Under ERISA Transparency Requirements

As we approach the 50th birthday of the Employee Retirement Income Security Act of 1974, better known as ERISA, we’re seeing increased attention on the fiduciary requirements within that law and others relating to employee benefits. What are ERISA’s expectations for fiduciaries, and how can you ensure your organization remains in compliance?

ERISA’s Expectations for Fiduciary Responsibility

Although ERISA has been around for 50 years, the transparency regulations included in the Affordable Care Act’s (ACA’s) Transparency in Coverage rule as well as the Consolidated Appropriations Act of 2021 aim to provide employees with more information regarding their healthcare costs. This has brought attention to the fiduciary responsibilities as it relates to health and welfare benefit plans.

Plan Sponsors Hold Ultimate Responsibility

While some carriers and third-party administrators (TPAs) suggest they can assume ERISA fiduciary responsibility, most attorneys will tell companies they cannot transfer their fiduciary responsibility. Fiduciaries hold four key responsibilities:

• The “exclusive benefit” rule, in which the plan must operate for the exclusive purpose of providing plan benefits to participants and beneficiaries (or paying reasonable administration expenses)
• The duty of prudence, meaning fiduciaries must act with the appropriate care, skill, prudence and diligence a knowledgeable person would use (or hire that expertise)
• The duty to diversify plan assets or investments to minimize the risk of large losses, which primarily applies to retirement plans
• The duty to follow plan documents

The rules recognize that those with fiduciary duties are sometimes also responsible for making business decisions related to their plan. However, when these individuals are acting in their fiduciary capacity, they’re expected to ensure that those decisions are implemented solely with a focus on being loyal and prudent regarding the plan participants and beneficiaries.

The Four Key Transparency Requirements

Multiple acts of Congress have addressed transparency. However, these four provisions are receiving increased attention and prompting legal action:

1. Fee Disclosures

While brokers and consultants must now disclose direct and indirect compensation, plan sponsors must obtain those fee disclosures before entering into an agreement.

2. Online Price Comparison Tools

Plans must offer online tools for members to estimate their out-of-pocket cost based on remaining deductibles, co-pays, and similar information.

3. Machine-Readable Files

Machine-readable files are huge files detailing the contracted rates for covered services at network providers as well as historical non-network reimbursement rates. This data is intended to be fed into artificial intelligence or similar systems for analysis rather than be easily read by humans. This allows plan sponsors to compare what services would cost with different providers.

4. Prohibition on Gag Clauses

Plan sponsors cannot enter into agreements with service providers that would restrict access to price information and quality of care information.

Recent Fiduciary-Related Lawsuits

Since 2006, multiple lawsuits alleging breach of fiduciary duties have been filed against retirement plans, with most focusing on vendor selection, unreasonable fees, and investment performance. Suits have also been filed against carriers or third-party administrators from health plans or health plan sponsors (including employers and unions) alleging breaches of their fiduciary duty. Here are four of the most prominent:

Knudsen v. MetLife Group Inc.

The plaintiffs pointed to the plan’s use of pharmacy benefits manager (PBM) rebates to pay for sponsor expenses as a breach of fiduciary duty, claiming that using those rebates to fund benefits would have lowered the plan cost to participants. The court dismissed the case, stating that individual participants have no right to plan assets as long as the plan provides what it promises. An appeal is pending.

Bricklayers, Craftworkers and Sheet Metal Workers Unions vs. Elevance Health (Anthem)

Multiple unions accused Elevance of not allowing the unions, plan sponsors or their third-party administrator to access their claims data in violation of ERISA. Elevance argued the case didn’t have standing because they didn’t have a fiduciary duty and were not subject to the gag clause.

Massachusetts Laborers’ Health and Welfare Fund v. Blue Cross Blue Shield of Massachusetts

The Fund claimed Blue Cross prioritized its financial interests over its fiduciary duties and overcharged for healthcare and administrative services. The court dismissed the case, stating that the plaintiffs failed to allege that Blue Cross Blue Shield was an ERISA fiduciary with respect to the actions.

Lewandowski v. Johnson & Johnson (J&J)

A February 2024 class action lawsuit filed against J&J by an employee/plan member in the company’s role as plan sponsor alleged multiple breaches of fiduciary duty. The largest issue was Lewandowski’s claim that J&J failed to adequately consider non-traditional pass-through PBMs, forcing members to pay higher amounts for prescription drugs. One example was a specialty generic medication that was widely available for roughly $50 but priced at nearly $10,000 for plan participants. Another point was an allegation that J&J failed to obtain a full disclosure of all direct and indirect compensation. This is likely the first of many similar lawsuits we’ll see.

Best Practices for Fiduciaries

Today, being a fiduciary involves much more than simply choosing the lowest-cost vendor. Based on what we’re seeing in the marketplace and court filings, five concepts stand out:

• Fiduciary obligations focus more on the process than the result/outcome. You need to be able to demonstrate that you’re performing due diligence and analyzing options holistically.
• You need to not only document the decisions you make but also explain why you made them.
• It’s wise to establish a committee with regular meetings and detailed minutes to provide that documentation.
• Your energies should be focused on how plan assets are managed and used.
• Never lose sight of the duty of prudence.

More Depth and Insight

The webinar explored the topics discussed in this post in much greater depth, with plenty of practical applications and tips. View the recording here.

For help exploring cost containment strategies for your organization, contact a Hylant advisor.

Related Reading: Navigating the Funding Options for Your Healthcare Plan

The above information does not constitute advice. Always contact your employee benefits broker or trusted advisor for insurance-related questions.