What Aspects of ERISA Fiduciary Duty Can Plan Sponsors Outsource?

Q: Can an Employer Plan Sponsor Delegate Its Fiduciary Obligations?

Jamie Greenleaf, co-founder, Fiduciary in a Box; Julie Selesnick, executive director, legal and compliance, Judi Group and founder and principal attorney, Health Plan Legal Counsel; Rory Akers, vice president, senior ERISA compliance attorney, Lockton Companies; and Jacob Mattinson, partner, McDermott Will & Schulte, answer below:

A: The short answer is: no, not entirely.

While a plan sponsor may delegate certain administrative and fiduciary functions, it cannot delegate away its fiduciary responsibilities—or fully eliminate potential liability—under the Employee Retirement Income Security Act.

Employers frequently engage third-party administrators, recordkeepers and advisers to support them in the administration of their employee benefit plans. Both ERISA and regulators recognize and understand that employer plan sponsors hire outside service providers to manage many of the day-to-day functions, especially seeing that employers cannot be experts in all areas of health and welfare administration.

However, outsourcing administrative services—such as claims processing, eligibility tracking or compliance support—does not absolve the employer plan sponsor of ultimate fiduciary status under the plan or ERISA.

Plan sponsors may allocate or delegate specific plan administrative functions, some of which could result in a service provider having a level of fiduciary discretion over certain aspects of the plan. Keep in mind though, the act of delegation creates an additional fiduciary responsibility—not a release from one. Specifically, the plan sponsor retains a duty to prudently select plan service providers and monitor their performance on an ongoing basis. These obligations are themselves fiduciary functions and cannot be delegated away.

As one example, plan sponsors are increasingly adopting fiduciary committees to oversee their health plans. These committees will typically oversee requests for proposals from plan vendors and engage third parties to perform specific tasks for the health plan, such as preparing a mental health parity comparative analysis. Overseeing this delegation would be a fiduciary function. Similarly, a delegation to a health plan third-party administrator would need to be prudently monitored, particularly when that TPA is performing a fiduciary function like appeals adjudication. The plan sponsor committee should consider reviewing those delegations during one of its periodic committee meetings. 

ERISA’s framework—and supporting guidance—makes clear that fiduciary accountability ultimately remains with the plan sponsor. Failures in selecting or monitoring service providers can result in liability.

Employer plan sponsors will want to implement effective fiduciary strategies in selecting and monitoring service providers to the plan, including:

• Clearly defining roles between the plan sponsor, fiduciary committee, and service providers. This includes ensuring service provider contracts are clear as to the status and extent the service provider is a fiduciary to the plan.
• Documenting a prudent selection process for selecting service providers to the plan as well as establishing a process to monitor the service providers (e.g., regular reviews, benchmarking, and performance assessments) to ensure they are fulfilling their obligations to the plan.
• Ensuring alignment between plan documents, service agreements, and actual operational practices.

When done correctly, delegation can help distribute the workload, leverage specialized expertise, and demonstrate a prudent fiduciary process—while maintaining appropriate oversight. But keep in mind, although a plan sponsor can delegate tasks and even certain fiduciary functions to a third party, it cannot delegate ultimate fiduciary responsibility for the plan.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

Do YOU have a question about health benefit fiduciary duties? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issmarketintelligence.com with Subject: Health Plan Fiduciary How-To, and the experts will do their best to answer your question in a future column.