Navigating Fiduciary Risks: Responsibilities of Offering an Employee Benefits Plan

Feb 21, 2024

When it comes to offering employee benefits plans, there’s a lot more at stake than meets the eye. Behind the scenes, there are legal and financial responsibilities that every employer must uphold. 

Navigating fiduciary risks related to offering employee benefits plans is one thing employers should never overlook. Below, we’ll delve into the intricacies of fiduciary duties, shedding light on the potential implications for both employers and employees.

Understanding Fiduciary Roles and Responsibilities

Let’s start with the basics. What exactly are fiduciary roles and responsibilities in the context of employee benefits plans? 

Fiduciaries are entrusted with managing these plans in the best interest of the participants. This means making decisions about plan assets, investments and administration with utmost care and prudence. 

If you’re a fiduciary for your company, you must be up-to-speed not only on your fiduciary responsibility but the importance of compliance and the implications of any violations.

As a health plan fiduciary, your responsibility is to administer the company’s health plan per the plan document and for the benefit of plan participants — your employees. To put things plainly, you must be precise, consistent and prepared.

Fiduciary Risks and Potential Liabilities

Now, let’s talk about the risks. 

Fiduciary breaches can lead to significant liabilities for employers and individuals alike. The fallout can be costly, whether it’s mismanagement of plan assets, conflicts of interest, or failure to monitor service providers.

A key example of the importance of fiduciaries understanding liabilities takes us to a recent lawsuit against Johnson & Johnson (J&J) under the Employee Retirement Income Security Act of 1974 (ERISA). This case is a significant legal development that employer plans and their fiduciaries should closely monitor. 

The lawsuit accuses J&J of failing to negotiate lower prices for prescription drugs for its employee health plans, leading to millions of dollars in overpayments for generic drugs. Specifically, the lawsuit alleges that J&J’s self-funded health plans paid inflated prices to pharmacy benefit managers for many generic drugs, raising out-of-pocket costs for workers. 

For example, the lawsuit cites that the health plans paid $1,629 for a 90-pill prescription of an HIV antiviral drug that costs pharmacies about $180, and $10,239 for a multiple sclerosis medication, compared to the typical out-of-pocket cost of no more than $77​​​​.

This case has brought to light broader implications for employer plans and their fiduciaries.

Potential Precedent Setting: This lawsuit could set a precedent for future litigation, particularly in how employers manage their health plans. It highlights the importance of fiduciary duties under ERISA, including the prudent management of employee benefits and the need for employers to ensure they are not overpaying for services such as prescription drugs.

Increased Scrutiny: The lawsuit may lead to increased scrutiny of self-funded health plans, especially regarding their relationships with pharmacy benefit managers and the negotiation processes for drug pricing. This could prompt other companies to reevaluate their health plan management practices to avoid similar legal challenges.

Financial Risks: If J&J is found to have breached its fiduciary duties under ERISA, it could face significant financial penalties. This outcome could alert other employers to the potential financial risks associated with non-compliance with ERISA regulations, emphasizing the need for diligent oversight of health plan management.

Reputational Impact: Aside from potential financial penalties, J&J faces reputational risks, which could have indirect consequences for other employers. Companies might take proactive steps to ensure compliance with ERISA to avoid negative publicity and the associated impacts on employee trust and morale.

Ripple Effects on Health Plan Design and Management: This lawsuit may encourage employers to more closely examine and possibly redesign their health plans. They might adopt more transparent and competitive processes for drug pricing negotiations to ensure compliance with ERISA and protect against overpayment claims.

This lawsuit serves as a critical reminder of the fiduciary responsibilities employers hold under ERISA and the importance of prudent, cost-effective management of employee benefits plans.

Best Practices for Mitigating Fiduciary Risks

So, how can organizations minimize fiduciary risks? 

It starts with robust practices and procedures. Documenting decisions, ensuring compliance with ERISA regulations, and fostering transparency are crucial steps. Moreover, investing in fiduciary training and oversight can empower individuals responsible for managing employee benefits plans. 

By adopting best practices, organizations can better safeguard the interests of plan participants and mitigate potential liabilities.

Compliance and Legal Considerations

Of course, navigating fiduciary responsibilities requires a solid understanding of the legal landscape. 

When it comes to a Department of Labor Audit, these are the key items fiduciaries must prepare for:

  • 401k and employee benefits regulation
  • Family and Medical Leave Act (FMLA) compliance
  • Employee Retirement Income Security Act (ERISA) compliance
  • Employee timekeeping
  • Wage and hour compliance
  • Child labor law compliance
  • Wage deduction processes
  • Accurate payroll and recordkeeping 

Staying informed about regulatory changes and seeking expert guidance are essential for maintaining compliance. 

In conclusion, offering employee benefits plans entails more than just providing perks to employees—it involves assuming fiduciary responsibilities with far-reaching implications. 

To best steer clear of fiduciary pitfalls, understand your role and the responsibilities that come with it, and always stay up-to-date on emerging changes.

If you’re interested in connecting with the Totem team, click here.

Keep Exploring