Who Is the Fiduciary of Your Employer Group Welfare Plan?
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that governs the formation and operation of certain employer-sponsored benefit plans. While ERISA is a complex and detailed law, one of ERISA’s fundamental principles is the fiduciary responsibilities that apply with respect to operation of the plan. One of the best ways to avoid ERISA-related litigation and liability is to understand ERISA’s fiduciary governance requirements and establish proper fiduciary structures and processes.
Who Is an ERISA Plan Fiduciary?
As a matter of law, every ERISA plan has one or more fiduciaries. The “plan administrator” is always a plan fiduciary. Under ERISA, the employer (as plan sponsor) is the default “plan administrator” and therefore a plan fiduciary. However, ERISA recognizes that more than one entity may be a fiduciary. A person or entity who exercises discretion in administering and managing a plan or controlling plan assets may be a fiduciary with respect to exercises of that discretion. Fiduciary status is based on the functions performed for the plan, not a person or entity’s title.
For example, delegated fiduciaries are parties to whom plan fiduciary responsibilities are expressly delegated in a contract or other document. ERISA also recognizes that certain plan service providers, by reason of their plan duties, may be functional fiduciaries with respect to certain plan functions. Functional fiduciaries are parties who are not named delegated fiduciaries but who:
- Exercise discretionary authority or responsibility in the administration of the plan;
- Exercise authority or control concerning management and disposition of plan assets; and/or
- Render investment advice regarding plan assets for a fee or other compensation.
Employers often delegate many health plan administration tasks to outside service providers, such as TPAs or PBMs. TPAs and other service providers generally agree only to act in a ministerial capacity, applying plan terms to claims, and disclaim fiduciary status. Occasionally, if a TPA is acting with discretion (whether under a formal delegation or functionally), it may be considered a plan fiduciary for certain purposes. However, even if a TPA or other service provider is considered a plan fiduciary with respect to certain specific aspects of plan operation, a plan sponsor retains overall fiduciary responsibility for the plan.
What Does a Fiduciary Do?
ERISA requires that plan fiduciaries administer and operate the plan for the exclusive benefit of plan participants. ERISA fiduciaries are responsible for the day-to-day operations of the plan, investment and disposal of plan assets (if applicable), selection and monitoring of plan service providers, communication with plan participants, and maintenance of the tax-qualified status of the plan. In performing these fiduciary functions, the plan administrator’s fiduciary duties include the duty of loyalty and the duty of prudence. These duties require that fiduciaries act:
- Solely in the best interests of plan participants and beneficiaries; and
- With the skill, care, and diligence that a prudent person familiar with the matters at issue would exercise under the circumstances.
- Applicable fiduciary duties also include the duty of diversification (if plan assets are involved) and the duty to follow plan terms.
Why Are Plan Fiduciaries Important?
Fiduciaries must properly administer their ERISA plan in order to protect both plan participants and the employer(s) sponsoring the plan. Failure to follow these duties can result in investigation and imposition of civil penalties and excise taxes by the DOL or IRS, and civil lawsuits from participants.
