A ruling in an excessive fee case against a health benefit plan sponsor reminds sponsors that the Employee Retirement Income Security Act (ERISA) requires proper monitoring and selection of service providers and their fees for health plans as well as retirement plans.
United States Secretary of Labor R. Alexander Acosta brought a 10-count amended complaint against 11 defendants, but the only ones left after years of proceedings were Chimes D.C., Inc. Health & Welfare Plan and its alleged fiduciaries and service providers, including Chimes District of Columbia, Inc. The Secretary contends that the defendants charged the plan excessive fees for services and engaged in prohibited transactions by receiving commissions, kickbacks and inappropriate reimbursements.
U.S. District Judge Richard D. Bennett of the U.S. District Court for the District of Maryland concluded that:
- The Chimes defendants took reasonable measures to oversee and monitor the plan and its service providers, and they made reasoned decisions that were consistent with that of a prudent person acting in a like capacity in similar circumstances;
- Chimes D.C.’s agreements with service providers FCE and BCG were for the provision of necessary services to the plan, for which they were paid reasonable compensation;
- The Chimes defendants did not engage in prohibited transactions when the Chimes Foundation, which is not a party to the litigation, received charitable contributions from FCE, BCG and their principals;
- The plan’s fees in the aggregate were reasonable, so there is no evidence of loss to the plan;
- Regardless whether FCE committed a fiduciary breach by its collection of commissions and fees, Chimes D.C. was not aware that such monies were not paid into the plan and did not knowingly participate in any misconduct; and
- There was no evidence of denied benefit claims that were not afforded a proper review.
Bennett issued judgment in favor of the Chimes defendants under Rule 58 of the Federal Rules of Civil Procedure.
Background in the opinion says Chimes D.C. elected to pay the fringe benefit amounts into a trust pursuant to a health and welfare benefit plan, rather than provide cash payouts, because of the severe disabilities many of its employees faced, which would have made it difficult, if not impossible, for them to purchase benefits in the marketplace by themselves. Chimes D.C. executives felt that the company could not administer the plan by itself and chose the Boon Group as the third-party administrator (TPA).
The number of employees continued to grow as Chimes D.C. took on new contracts, in some cases assuming contracts that were under collective bargaining agreements, which required Chimes D.C. to work collaboratively with the unions. As the size and complexity of the plan increased, Chimes D.C. executives decided to look for a new TPA, specifically one with Service Contract Act experience that would be capable of providing a self-funded plan with coordinated stop-loss insurance to reduce the exposure to catastrophic medical expenses. Chimes D.C. was concerned that Boon was moving towards implementing a defined contribution plan, under which a monthly per-employee premiums would be paid to the insurance provider, precluding an employer from saving any money left over from the premium amount following payment of claims and benefits.
A separate plan was created in May 1995, and BCG became the plan’s broker and plan representative, and FCE was selected as TPA for the plan. Chimes D.C. was the plan sponsor, plan administrator and named fiduciary as defined by ERISA. Because Chimes D.C. had delegated its fiduciary duties to FCE to administer the plan and to an individual defendant to act as trustee, Chimes D.C.’s obligation was to monitor the others, Bennett noted.
Bennett’s analysis of Chimes D.C.’s actions are similar to the analyses conducted in ERISA 401(k) and 403(b) litigation.
According to the opinion, in light of the unique circumstances of its disabled workforce, Chimes D.C. did not issue any requests for proposals (RFPs) to other TPAs before selecting FCE to replace Boon. However, Bennett found the plan sponsor engaged in an adequate investigative process, including contacting other organizations in similar circumstances and being informed that FCE was a reputable, credible, and effective health and welfare plan manager and administrator for benefits under the Service Contract Act.
Chimes D.C. relied on its broker to monitor the TPA marketplace. The broker kept tabs on the marketplace, received and reviewed proposals and marketing packages from start-up companies, assisted other service providers searching the marketplace, provided regular reports and pricing information, and presented comparison information during plan review meetings. Searches for alternate TPAs resulted in a decision that a change was not in the best interest of the plan and its participants.
Although, Chimes D.C. did not send out formal, written RFPs for the purchase of TPA services, Bennett found that all witnesses credibly testified that their informal search activities were the functional equivalent given the few choices available, and they believed that sending out a formal RFP did not make practical sense. Bennett noted that even Acosta’s expert, Andrew Naugle, acknowledged that had Chimes D.C. issued a formal RFP, it “could have selected FCE again.”
“Chimes D.C. chose to take a ‘best value’ approach to their searches—not just looking for the cheapest price, although mindful of cost, but looking for a good fit that meets the needs and provides the best benefits,” Bennett wrote in his opinion. “There is no requirement under the law to engage in a formal, written RFP process. Certainly, ERISA does not require a fiduciary to ‘scour the market’ to find and offer the cheapest possible deal for plan participants.”
As for the charge of excessive fees, Bennett found that every year, the Chimes D.C. Board and executives conducted an annual review of the plan with FCE and BCG, and sometimes the plan’s trustee, to review the plan as a whole, including the costs and fees paid by the plan to its service providers. “In addition to relying upon the information reported by their service providers, the Chimes executives also relied upon the plan’s trustee, reasonably believing that the trustee had the duty to ensure that the fees charged to the plan were consistent with the terms of the TPA Agreement,” Bennett wrote. He also found that Chimes D.C. continually negotiated fees with both FCE and BCG, and renegotiated lower fees for the plan from 2005 to at least 2016.
While Bennett found both Acosta’s and Chimes D.C.’s experts credible and helpful in the analysis of total plan fees, he pointed out that the Chimes Plan has unique requirements that make comparisons a challenging exercise. “Naugle, however, did not appear to fully appreciate the implications of the Service Contract Act complexity or the 75% disabled participant population comprising the Chimes Plan. Since few TPAs specialize in SCA contracts, it is reasonable to expect that a plan may pay more than a median rate for that expertise,” Bennett wrote. Based on the testimony and evidence on the record, and in light of the plan’s unique characteristics, Bennett said he found that the fees paid by the Chimes plan in the aggregate were not excessive in contrast to comparable plans, and that the plan’s fees were reasonable.