Key Takeaways
- ERISA imposes a fiduciary duty on anyone who exercises discretionary authority or control over an employee benefit plan — including employers, plan administrators, and investment managers.
- The fiduciary duty has four core components: loyalty, prudence, diversification (for investment plans), and adherence to plan documents.
- Health plan fiduciaries are personally liable for breaches — personal assets are at risk, not just plan assets.
- The most significant emerging fiduciary risk for health plan sponsors is the failure to control plan costs — courts and the DOL are increasingly scrutinizing whether employers are acting prudently on behalf of plan participants.
- Documenting fiduciary decisions — vendor selection, fee review, plan design changes — is as important as making the right decisions.
What Is a Fiduciary Under ERISA?
ERISA defines a fiduciary functionally — not by title. Anyone who exercises discretionary authority or control over the management of an employee benefit plan, its assets, or the administration of benefits is a fiduciary. This includes the employer as plan sponsor, the plan administrator (often the same as the employer), members of a benefits committee, and any third party with discretionary authority over plan decisions.
The fiduciary designation is not limited to retirement plans. Health and welfare plan sponsors are also ERISA fiduciaries — and the same standards of conduct apply. The difference is that health plan fiduciary litigation has historically been less common than retirement plan litigation. That is changing rapidly.
ERISA fiduciaries are personally liable for breaches of their duties. This means the individual — not just the company — can be held responsible for losses to the plan. Personal assets, not just corporate assets, are at risk. This is not a theoretical risk: DOL enforcement actions and private lawsuits against health plan fiduciaries are increasing.
The Four Core Fiduciary Duties
ERISA Section 404 establishes the standard of conduct for fiduciaries. The four core duties are:
- Duty of Loyalty: Act solely in the interest of plan participants and beneficiaries — not in the interest of the employer, the plan sponsor, or any third party. Decisions must be made for the exclusive purpose of providing benefits and defraying reasonable plan expenses.
- Duty of Prudence: Act with the care, skill, prudence, and diligence that a prudent person familiar with such matters would use in similar circumstances. This is an objective standard — it requires process, not just good outcomes.
- Duty to Diversify (investment plans): Diversify plan investments to minimize the risk of large losses. This duty applies primarily to retirement plans but has some application to health plan reserve management.
- Duty to Follow Plan Documents: Administer the plan in accordance with the plan document and SPD, unless doing so would violate ERISA. Discretionary decisions must be consistent with plan terms.
Fiduciary Duty and Health Plan Cost Management
The most significant emerging area of health plan fiduciary liability is the failure to prudently manage plan costs. A series of lawsuits and DOL guidance has established that health plan fiduciaries have an affirmative duty to monitor plan expenses, evaluate vendor performance, and take action when costs are unreasonable.
The Johnson & Johnson lawsuit, filed in 2023, is the most prominent example. Employees alleged that J&J's health plan fiduciaries failed to prudently manage pharmacy costs — paying dramatically inflated prices for common drugs when lower-cost alternatives were available. The case mirrors the wave of 401(k) excessive fee litigation that began in the mid-2000s and resulted in billions in settlements.
The J&J lawsuit is not an isolated case. Similar lawsuits have been filed against other large employers. The legal theory is straightforward: if a prudent fiduciary would have known that the plan was paying unreasonable prices for drugs or services, and failed to act, that is a breach of the duty of prudence. Ignorance is not a defense — the duty of prudence requires active monitoring.
- Benchmark plan costs annually against market data — pharmacy, TPA fees, stop-loss premiums, and network pricing.
- Document vendor selection and fee review processes — the process matters as much as the outcome.
- Conduct periodic RFPs for major plan vendors — at least every 3 to 5 years.
- Review PBM contracts for spread pricing, rebate retention, and audit rights.
- Engage independent advisors who are not conflicted by commissions or vendor relationships.
Prohibited Transactions
ERISA Section 406 prohibits certain transactions between the plan and "parties in interest" — including the employer, plan service providers, and their affiliates. These prohibited transactions are per se violations of ERISA, regardless of whether the plan was harmed.
- Sale, exchange, or lease of property between the plan and a party in interest.
- Lending of money or extension of credit between the plan and a party in interest.
- Furnishing of goods, services, or facilities between the plan and a party in interest.
- Transfer of plan assets to a party in interest.
- Acquisition of employer securities or real property in excess of ERISA limits.
Many routine plan transactions qualify for statutory or administrative exemptions from the prohibited transaction rules. Engaging a TPA, PBM, or stop-loss carrier — all parties in interest — is permitted under the "reasonable contract or arrangement" exemption, provided the compensation is reasonable and the services are necessary.
Fiduciary Governance Best Practices
The best defense against fiduciary liability is a documented, process-driven governance structure. Courts evaluate fiduciary conduct based on process — did the fiduciary follow a prudent process, even if the outcome was not optimal?
- Benefits committee: Establish a named benefits committee with documented membership, authority, and meeting cadence. The committee should include HR, finance, and legal representation.
- Meeting minutes: Document all fiduciary decisions — vendor selection, fee reviews, plan design changes, and benefit determinations — in written meeting minutes.
- Vendor due diligence: Document the process for selecting and monitoring plan vendors, including RFPs, fee benchmarking, and performance reviews.
- Conflict of interest policy: Require committee members to disclose conflicts of interest and recuse themselves from decisions where a conflict exists.
- Fiduciary liability insurance: Maintain fiduciary liability insurance to protect individual fiduciaries from personal liability. This is separate from directors and officers (D&O) insurance.
- ERISA counsel: Engage ERISA counsel for significant plan decisions — plan design changes, vendor transitions, and benefit denials.
Your Action Steps
- 1Identify all individuals who exercise discretionary authority over your health plan — they are fiduciaries and should be named in the plan document.
- 2Establish or formalize a benefits committee with documented membership, authority, and a regular meeting schedule.
- 3Implement a vendor review process: benchmark TPA fees, PBM costs, and stop-loss premiums against market data at least every 3 years.
- 4Review your PBM contract for spread pricing and rebate retention — document the review and any corrective action taken.
- 5Confirm your organization carries fiduciary liability insurance that covers health plan fiduciaries.
- 6Engage ERISA counsel to review your fiduciary governance structure and identify any gaps before the next plan year.
Knowledge Check
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Assess your fiduciary process and documentation.