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ERISA Fiduciary: Beware % Payments

Don't jump to wishful thinking or sloppy conclusions. ERISA fiduciary can be summarized as the plan Trustee(s) and everyone who exercises any level of discretionary authority over the plan has the duty to have plan assets protected and used in a prudent manner. So, that is the criteria against which any deal or arrangement should be measured. If a TPA claims that it in no way has ERISA fiduciary duty, they should ask themselves if they truly advertise to their clients that the never use their brain, and call the client to decide each claim and eligbibility. I think not. TPAs exercise discretionary power all the time in operating the plan for the client. Because the definition of fiduciary duty is an open-ended criteria, it means that what are actually bad ideas in most scenarios in which they might be applied, don't have a specific prohibition in the text of the law or regulations. So, if you asked DOL only the very narrow question, "Are service payments based on percentages (such as % of savings) illegal?" The narrow technical answer would be "No." HOWEVER, what that really means is that percentage payments are not a problem as long as the overall criteria of prudence is met. So, in other words, you can do a percentage-of-payment arrangement as long as the plan assets are always the winner when all aspects of the deal are individually dissected. For example, here's a scenario some DOL staff used to describe their view: A plan (via TPA) had contracted with a UR firm to research any suspicious claims. The UR firm would get 30% of any savings. A claim for $100,000 was turned over to the UR firm. After about 10 minutes of phone calls, the UR firm determined that the $100,000 claim was a typo, and should have been only $100. Now, on the one hand, you might say "Hooray, the plan saved $70,000!!!" However, DOL's ERISA fiduciary interpretation was that $30,000 was an imprudent amount to pay for 10 minutes of work. So, this deal in this particular scenario was not deemed to be consistent with fiduciary duty. If it had taken the UR firm months and months of expensive work to earn their $30,000 fee, then maybe. So, the moral of the story is that percent deals are OK if they always come out with the plan as the winner (in DOL's perspective of determining "winner"). So, if a percentage deal said something like "X%, but never to exceed the prudent (market price) cost of the service" that would probably be OK, because the plan would never pay more than the prudent price. The trouble with this is that the profit margin of the percentage deals comes when the plan is not the winner (like the example of getting paid $30,000 for 10 minutes work). Over twenty years ago, when many TPAs were being formed, they were so confident that they could save clients money that it seemed logical to offer an admin fee structure based on a percentage of savings. However, like the "savings" example above, DOL judged not just the saving, but also whether what the TPA (or any other service provider) received was "reasonable" (prudent) for the work done. So, the percentage pay for TPA admin fees is rare. Perception of bias: Besides the possibility of being paid more than a prudent amount for the amount of work done (like the $30,000 for 10 minutes example), many percentage arrangements leave DOL with the uncomfortable feeling that the service provider will have selfish incentive to have outcomes that maximize the percentage. For example, if the admin fee is a percent of total claims….then there is the perceived motive to pay out as much plan assets as possible in order to maximize the basis of the TPA's percent. Conversely, if it is a percent of savings, there is the prima facie motive to either jiggle timing or give plan participants less than they deserve. So, even if you would never try to influence the outcome, it is a possibility, and thus is a built-in caution about using percentage arrangements. Jail-bait: ERISA fiduciary is much tougher than normally-accepted practices in the business and state-regulated insurance arena. So, while it is perfectly legal for a car manufacturer to charge one price to the dealer, and the dealer to charge as much as possible, that practice can send you to jail under ERISA, since some artificially higher price is probably not viewed as the "prudent" price. All sorts of service & discount entities have started working with employee benefit plans and TPAs. They are not familiar with the more strict standards of ERISA. So, we hear of deals in which a doctor charges $1,000. The discounter pays the doctor $600 as payment-in-full. The discounter then charges the plan $800, and the TPA gets a percentage or commission somewhere in the process. While that would be fine in selling a car, in ERISA, you better be able to convince a very suspicious DOL that this is not a case of the plan getting ripped off with a phony price while others make profits in the process (and was the work done to earn those profits "prudent" for the amount of payment?) It carries a potential double-whammy of dismay from DOL if the plan participant's co-pay is based on a phony amount. So, the morals of this long story are: (1). What makes percentage-based deals attractive (occasional big payments for less work) is the very thing that makes DOL feel that the plan is not participating in a "prudent" arrangement, and is thus a breach of fiduciary duty. (2). Discounts and intricate deals have become a minefield for ERISA fiduciary breaches. Anything but the most transparent discounts and deals are going to set off alarms with DOL and increase the intensity of investigations. Who gets blamed? TPAs will usually draw most of DOL's ire & blame. Why? Most deals are arranged via the TPA, and most involve duties in which the TPA exercises some discretionary authority impacting plan assets or which beneficiaries are impacted. DOL knows the level of professionalism & knowledge in the the TPA business, so they tend to say to the TPA, "You should have known better (and prevented your client from doing something stupid)". So, vendors can talk big and give lots of assurances, but it is your neck, and maybe the neck of your client on the chopping block. How to tell when there are warning signs? You are probably the best judge. Here's the self-test. Imagine that some investigative-reporting TV show like "60 Minutes" is coming to do a show about the deal and what you did and how much you and others made. It will view everything in the most skeptical way. If you are fair with yourself (not rationalizing), and if you feel a bit embarrassed about how that TV show would portray you….then that is your expert inside warning signal that you've probably got an ERISA fiduciary concern. The SPBA members'-only website has several further discussions & descriptions of ERISA fiduciary, including some that could be printed out and given to brokers, vendors or others who can't understand why you aren't jumping at the opportunity to "make some money on percentage payments". Legal citations within ERISA Want to spice up your next cocktail conversation…or wow the recipient of your next stern letter? Here are the legal citations for some of the most common items that come up for TPAs. All of the following are under Title 29, U.S. Code, ERISA, Title One Section 401 - Coverage (what arrangements & people are covered by ERISA) Section 402 - Establishment of plan (including who are the named official fiduciaries + requisite features of a plan). Section 405 & 405(c) cover co-fiduciary liability & delegation such as TPA covering for client) Section 403 - Establishment of a Trust (why most modern plans need to have a trust). Section 514(b) - preemption of state insurance law, not including Hawaii. Other types of state law and Federal laws are not preempted.