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Challenging Changes for Prudent Plan Fiduciary | Phia Group

By: Kaitlyn MacLeod, Esq.

Being a Plan fiduciary carries a lot of responsibility and potential risk for liability – even more so now thanks to a recent retirement fund ERISA case, Hughes v. Northwestern University. Even though the Hughes case dealt with retirement funds, this case has significant implications for plan sponsors of self-funded health plans under ERISA.

The Hughes case concerned retirement plans offered by Northwestern University and the suit was filed against the plan’s fiduciaries for violating their duty of prudence in the selection and management of investment options and paying excessive recordkeeping fees. The university provided a range of arguably prudent investment options with reasonable fees, while also offering arguably imprudent investment options with extremely high fees to their participants. The plan fiduciaries argued that providing a choice for the participants to independently choose the more prudent options was enough to satisfy their duty of prudence.

The Supreme Court in the Hughes case declined to adopt the “entire menu defense” (that providing a mix and range of investment options in a retirement plan insulates a fiduciary from liability). The Court instead held that a fiduciary that offers some prudent investment options, as well as some arguably imprudent options, is not protected against breach of the fiduciary duty of prudence.

What does this mean for plan sponsors of self-funded group health plans?

As you know, fiduciaries are subject to strict standards of conduct to act on behalf of participants in a group health plan and their beneficiaries. This includes acting solely in the interest of plan participants with the exclusive purpose of providing benefit, holding plan assets in trust, following plan documents that are in effect, and most importantly, acting prudently.

Acting prudently is one of the core responsibilities under ERISA that requires having or showing careful and good judgement. This includes taking into account all of the possible factors and potential outcomes in order to make the right decision. Being prudent does not always mean utilizing the cheapest option or following the same set of rules in every situation regardless of the circumstance – but instead putting thoughts into perspective and making reasoned decisions.

The Hughes case is one example of an expansion of the duty to act prudently – and happens to coincide with the new Transparency in Coverage rules. The new transparency rules require brokers and other covered service providers to disclose direct and indirect compensation received in connection with providing services to the plan, including bonuses, commissions, or other compensation received by the entity. For example, if a TPA receives commissions from stop loss carriers for retaining business of the group for another year, that commission would likely need to be disclosed.

Here is where the Hughes case comes into play – once the fiduciary of the plan is aware of the compensation received by these contracted entities for providing services to the plan, the fiduciary has the responsibility to ensure that the fees are reasonable for the plan participants as well as in the interest of providing benefits to the participants.

Have questions on the Transparency rules or fiduciary duties? Our consulting team is happy to help. Send your questions to PGCReferral@phiagroup.com today!