Legal Matters: Why you can’t just let your third-party administrators run on autopilot

If your company has outsourced the administration of your health or retirement plans to a service provider, you may be at more risk for liability than you think.

Overseeing employee benefit plans comes with no shortage of administrative tasks. There are legal, accounting, recordkeeping, investment and custodial duties to track and execute. In an effort to reduce costs, minimize mistakes and keep key personnel focused on growing revenue instead of mired in administrative compliance, most employers choose to outsource at least some of these tasks to third-party administrators (TPAs). TPAs can assist employers with everything from the preparation of Form 5500s to discrimination testing to drafting and mailing needed participant notices.

Having retained a qualified TPA to perform these duties, many employers mistakenly believe their part of the job is complete. Federal courts and the Department of Labor, however, disagree.

Under the Employee Retirement Income Security Act of 1974 (ERISA), employers who sponsor benefit plans such as health or retirement plans are fiduciaries. As fiduciaries, sponsoring employers owe certain duties to plan participants and beneficiaries. Most employers are already aware that these duties include the duties of loyalty and prudence — in other words, fiduciaries must make prudent decisions with only the benefit of plan participants in mind.

Less commonly known, however, is the duty to monitor. For example, the Supreme Court in Tibble v. Edison International has recognized that a fiduciary’s duty in relation to prudent investment includes not only the duty to select prudent investments for the plan, but to continually monitor them once selected.

When fiduciary actions are delegated away by employer plan sponsors, employer plan sponsors will generally not be held responsible for individual decisions made by the delegee. However, employer plan sponsors must regularly and consistently monitor the delegee to ensure the plan is being managed and administered in prudent and loyal ways.

This remains true when TPAs, rather than an internal committee, have been appointed to manage or administer the plan, even in part. The Department of Labor has stated that generally, it is sufficient for employer plan sponsors to “adopt and adhere to routine procedures sufficient to alert them to deficiencies in performance which could require corrective action.” But regular adherence to this schedule and taking corrective action when necessary is also required.

Liability for failing to monitor TPAs is increasing. There has been an increase in lawsuits by plan participants against employer plan sponsors for failing to monitor the decisions and administration of their delegates. But the Department of Labor is also cracking down on failures of monitoring. One case, Acosta v. Chimes, decided earlier this year, involved an employer who contracted with TPA for claim administration and other assistance. The Department of Labor brought an action against the employer, as well as its delegates, claiming that a failure by the employer to monitor the TPAs it had selected resulted in the commission of prohibited transactions such as kickbacks and improper commissions.

The court considered the monitoring actions taken by the employer plan sponsor. These included, among others, the review of annual reports, the renegotiation of fees, and monitoring the claims administration process. After determining that there “was no evidence that the [plan sponsor] simply delegated and then ‘turned a blind eye,’” the court ultimately determined the plan sponsor had fulfilled its duty to monitor.

So, what specifically should you as an employer do in order to ensure you are fulfilling your duty to monitor? The following partially summarizes guidance available from both federal courts and the Department of Labor on this important duty:

1. Memorialize Your Policy in Writing

• Formally adopt a monitoring policy that details what information and processes will be reviewed and how frequently those reviews should occur. The Department of Labor recommends review at “reasonable intervals.” The length of these intervals will depend on the type of plan you sponsor and its individual needs.

2. Exercise Prudence in Selecting a TPA

• Selecting a prudent and loyal TPA to begin with can prevent problems before they arise and setting an expectation and pattern of consistent monitoring from the beginning is crucial.

• Seek out multiple bids. While a formal RFP process is not required, it can protect you from claims of imprudence, and soliciting multiple offers for TPA services is always advisable.

• Receive a written commitment from your service provider to regularly provide you with information regarding the services it provides.

• If the service provider will handle plan assets, check to make sure that the provider has a fidelity bond.

• Ask questions about the systems and procedures utilized by the TPA so you can better tailor your monitoring of these systems going forward.

3. Ongoing Monitoring

• Regularly review plan participant comments or any complaints about the services provided by TPAs and follow up on them.

• Routinely reassess, and renegotiate as needed, any fees charged by your TPA. Fees charged to the plan by TPAs should be reviewed each year. Your contracts with TPA contracts should also be reviewed on a regular basis. It may be convenient to align your review of TPA selection with your regular review every few years of plan documents.

• Check to make sure that the fees you are being charged by the TPA actually match the fees for which you contracted.

• Monitor plan recordkeeping. Even if recordkeeping is a task you have largely delegated to a TPA, check in regularly to make sure that these documents are being properly maintained by the TPA and that you have been provided copies.

• Read carefully all reports provided to you by your TPA and engage with your TPA about any questions. Do not just shuttle TPA reports off directly to a rarely opened file folder. 

Careful and diligent monitoring protects you and the participants and beneficiaries of your sponsored plans. Implementing a monitoring routine is a simple and effective way to ensure that the TPAs you have selected are working in the best interests of the plan and plan participants.

Brooke Nelson is an ERISA attorney who specializes in assisting clients with their employee benefit needs. She practices with Durham, Jones & Pinegar in Salt Lake City.