Understanding Your Fiduciary Responsibilities in Employee Benefits

The following are key takeaways from our recent webinar, which you can watch here.

Just as with retirement plans, every employee benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) must designate a named fiduciary, often called the lead fiduciary. This individual or entity is ultimately responsible for the plan's operation and compliance. While some carriers and third-party administrators (TPAs) suggest they can assume ERISA fiduciary responsibility for an organization, most attorneys will tell companies they cannot transfer their fiduciary responsibility.

Typically, the plan sponsor, usually the employer, appoints the lead fiduciary. The lead fiduciary’s role is crucial because they hold the final authority on discretionary decisions regarding the plan's management. They ensure that all fiduciary responsibilities are carried out correctly and that delegated tasks are monitored adequately. The lead fiduciary is the keystone, ensuring the plan remains compliant and operates in the participants' best interests.

Core Fiduciary Duties Under ERISA

Fiduciaries under ERISA are bound by several key duties:

Duty of Loyalty: This requires fiduciaries to act solely in the interest of plan participants and beneficiaries, prioritizing their financial well-being above all else.

Duty of Prudence: Fiduciaries must execute their responsibilities with the same care, skill, and diligence that a prudent person familiar with such matters would use. This often means seeking expert advice when necessary to make informed decisions.

Duty to Diversify Investments: While primarily applicable to retirement plans, this duty ensures that plan investments are sufficiently diversified to minimize the risk of large losses.

Duty to Follow Plan Documents: Fiduciaries must adhere strictly to the plan documents, provided these are consistent with ERISA. This includes ensuring that plan terms, such as eligibility and benefit levels, are applied consistently and fairly.

Additional Considerations for Fiduciary Compliance

Beyond the core duties, there are additional considerations that fiduciaries must keep in mind to ensure compliance and avoid potential pitfalls:

Monitoring Delegates: The lead fiduciary retains ultimate responsibility even when tasks are delegated. This means regularly monitoring and assessing the performance of third-party administrators, brokers and other service providers.

Avoiding Conflicts of Interest: Fiduciaries must avoid any conflicts of interest that could compromise their ability to act in the best interest of the plan participants. This includes disclosing any potential conflicts and taking steps to mitigate them.

Maintaining Documentation: Good record-keeping is essential. Fiduciaries should document all decisions and the processes followed to reach those decisions. This documentation can be crucial in demonstrating compliance with fiduciary duties in the event of an audit or legal challenge.

Common Fiduciary Pitfalls and How to Avoid Them

Despite the best intentions, fiduciaries can sometimes fall into common pitfalls that jeopardize their compliance with ERISA:

Neglecting to Monitor Plan Service Providers: Failing to review and assess service providers' performance regularly can lead to suboptimal plan performance and potential breaches of fiduciary duty. Regular audits and performance reviews are essential.

Ignoring Plan Document Updates: Plan documents must be regularly updated to reflect changes in the law and plan operations. Failing to do so can result in non-compliance and potential penalties.

Overlooking Participant Communications: Clear and timely communication with plan participants is critical. This includes providing required notices and disclosures and responding promptly to participant inquiries.

Fiduciary Best Practices

To ensure fiduciary compliance and protect against potential liabilities, organizations should adopt the following best practices:

Focus on Process Over Outcome: Ensure your decision-making process is thorough and well-documented. Having a prudent process in place is more important than always choosing the lowest-cost option. Documenting your decisions and the reasoning behind them can protect you in case of future disputes.

Regularly Review and Document Decisions: Establish a regular cadence for reviewing and documenting fiduciary decisions. This could involve forming a committee that meets quarterly or annually to discuss plan management. Keeping detailed records of these meetings can provide a clear trail of your fiduciary actions.

Carefully Select Committee Members: If you have a fiduciary committee, choose members who do not have conflicts of interest. Avoid appointing individuals who may have competing interests, such as those with business relationships with plan vendors. Ensure that any potential conflicts are disclosed and managed appropriately.

Understand the Role of Plan Assets: Be aware of what constitutes plan assets and focus on managing these prudently. Participant contributions are plan assets, and any decisions involving these funds should be made with the participants' best interests in mind.

Hire Experts When Needed: If your organization lacks the expertise to manage certain aspects of the plan, hire external experts. This could include consultants, TPAs, or legal advisors who can provide guidance and support.

Stay Informed on Legal Developments: The landscape of fiduciary responsibilities and healthcare plan management continually evolves. Stay informed about new regulations, legal developments and best practices to ensure your plan remains compliant and well-managed.

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By understanding and adhering to these fiduciary responsibilities, organizations can ensure that their employee benefit plans are managed effectively, in compliance with ERISA and in the best interest of plan participants.

Related Reading: Navigating Employee Benefits Changes Under a New Administration

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