Since the early 2000s, retirement plans have battled lawsuits claiming plans pay excessive fees to covered service providers, such as plan administration and investment fees. These fees can significantly drain the value of participants’ accounts—a 1% increase in fees can reduce an account balance at retirement by 28%, according to the US Department of Labor.
Now, thanks to new fee disclosure requirements, employer-sponsored health plans may face a wave of excessive fee litigation. Fortunately, lessons learned from retirement plans can help health plans manage their legal risks.
The Story of Retirement Plans + Excessive Fees
In 2011, the US Department of Labor issued a regulation under 408(b)(2), which required covered service providers to retirement plans—service providers receiving more than $1,000 in compensation—to make certain fee disclosures to retirement plan fiduciaries.
The disclosure of hidden fees and payment arrangements fueled numerous excessive fee lawsuits. Given the success of many of these suits, most individuals who work with retirement plans today strive to ensure the fees are reasonable—a fiduciary duty.
CAA 2021 Brings Major Change
Now, 2023 is for employer-sponsored health plans, what 2011 was for retirement plans, thanks to the Consolidated Appropriations Act (CAA).
There’s a CAA every year—the 2022 CAA brought us SECURE ACT 2.0—but we’re focused on CAA 2021. It amended 408(b)(2) to impose fee disclosure requirements on employer-sponsored health plans. These are the same disclosure requirements that retirement plans have worked with for more than a decade.
Fiduciary Duty Applies
We often write about the Employee Retirement Income Security Act (ERISA) and its applicability to retirement plans, particularly concerning the fiduciary duties that retirement plan sponsors have. For example, sponsors should act in the best interest of plan participants, act prudently, and pay only reasonable fees. Since ERISA also covers employer-sponsored health plans, they have the same fiduciary responsibilities.
Both retirement- and health-plan fiduciaries should take their duties seriously; they can be personally liable for any breaches—there is no corporate veil of anonymity to hide behind. Further, you do not need to be explicitly named as a fiduciary to be considered one—simply acting with discretion in some way over the administration or assets of the plan can assign fiduciary status to an individual.
What This All Means
To get a better sense of what this all means, consider how 408(b)(2) applied to retirement plans back in 2011 and think along the same lines here for health plans today:
- Covered service providers must generate the required fee disclosures.
- However, the plan fiduciaries are required to ensure they actually receive the disclosures.
- If the covered service provider does not provide the required disclosure, the fiduciary of the health plan is obligated to report the provider to the Department of Labor.
- If the fiduciary of the health plan does not report the provider, the fiduciary is committing a fiduciary breach. They are also engaging in a prohibited transaction if they continue to work with the covered service provider.
Many health plan fiduciaries may not know they need to get these disclosures. If they receive the disclosures, the fiduciaries may not realize it is their duty to ensure these fees are reasonable. In the retirement plan world, fee disclosures can be complex, but their equivalents in health plans are even more challenging.
Litigation already in Motion
Attorney Jerry Schlichter brought one of the most significant 401(k) fee-related cases, Tibble vs. Edison International. This case created a roadmap for the substantial number of excessive 401(k) fee cases that followed. Schlichter has now turned his attention to pursuing excessive fee litigation against employer-sponsored health plans. Tibble happened in the early 2000s, and things are much different today regarding the ease with which potential plaintiffs can be identified and targeted via ads on social media platforms.
What can you do?
Why is a retirement plan consultant writing about employer-sponsored health plans? Because health plans might find a potential path to risk mitigation by looking back at how things started and evolved in the retirement plan world—and how the industry adopted various best practices to manage fiduciary risk.
Since the risk of excessive fees is similar, health plans could apply the same risk mitigation strategies used in the retirement plan world. For example:
- Identify plan fiduciaries
- Have a committee.
- Establish processes for reviewing and monitoring
- Document actions taken/not taken
- Delegate fiduciary responsibilities, such as Aldrich Wealth as your retirement plan’s 3(38) discretionary manager
Unfortunately, health plans may face a greater risk of legal action than retirement plans. Not only is it easy to identify potential plaintiffs through means like LinkedIn, but rising healthcare costs drain participants’ wallets. This is the opposite of retirement plans, which often give participants more money than they put in from their pay.
Therefore, companies should consider the lessons learned from the retirement plan world and apply similar risk mitigation strategies to their health plan. Of course, should you have any questions or need assistance, please reach out to the advisors at Aldrich Wealth.
Meet the Author
Lead Retirement Plan Consultant
Neil Plein, CPFA™, AIF®
Aldrich Wealth LP
Neil is a Certified Plan Fiduciary Advisor (CPFATM) and Accredited Investment Fiduciary (AIF®) who acts as the quarterback of a retirement plan. He guides employers through the overall plan management with the knowledge to do a deep dive into any aspect of plan operation. Neil connects the dots between internal staff and external service providers…
- Corporate retirement plans
- Recordkeeper selection
- Strategic planning and consultation
- One-to-one consulting participant meetings
- Certified Plan Fiduciary Advisor (CPFATM)
- Accredited Investment Fiduciary (AIF®)