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ERISA Says Shop Around for Services to be Prudent

TPAs are sometimes accused of being ungrateful or fickle customers when placing stop-loss, UR, PPOs, and other services for the client ERISA plan. There are especially pressures & expectations when the TPA has some ownership relationship to the service provider or long friendly business relations. Instead of being fickle or ungrateful, TPAs are obeying the law.

Virtually all TPAs have "knowing participant" fiduciary duty to be sure that each business transaction of the client plan is the most "prudent". Proving prudence (and the method DOL uses for enforcement investigations) is usually via shopping around. "Prudent" doesn't always have to be the low-ball bid, but DOL will want good reasons why the more expensive was a better deal. Not shopping around or showing other provable efforts to assure that each transaction was "prudent" is prima facie evidence of a breach of fiduciary duty. If it looks like an inside deal with a related firm, in which the TPA (or any other person with fiduciary responsibility) might directly or indirectly profit, it can become a criminal offense (jail time...not just a civil case).

Let's examine the legal basis for the requirement to "shop around":

Section 405 of Title I of ERISA describes the liability for breach of co-fiduciaries. (In later law, "co-fiduciary" has been dubbed "knowing participant fiduciaries".) Lots of entities try to weasel out being considered a knowing participant fiduciary. However, DOL very strongly feels TPAs are co-fiduciaries because of the range of decision-making you have over the plan. So, the point is that you, the TPA, have fiduciary duty (not to be confused with the official Fiduciary, who is the sponsor/trustees of the plan).

Section 406 is titled "Prohibited Transactions". Sec. 406(a)(1)(C) prohibits "furnishing of goods, services, or facilities between the plan and a party in interest;" If the TPA has a relationship to a vendor (stop-loss insurer, PPO, etc. etc.) , this would prohibit you from doing business with that vendor.

Section 408 has some exemptions to prohibited transactions. Section 408(b)(2) allows "Contracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan , if no more than reasonable compensation is paid therefore."

Thus, the key question in most ERISA fiduciary situations is not whether something is "allowed"...but how else can you document that you were prudent and really looked for the most reasonable compensation & deal if you can't show that you shopped around?!? Loyalty & ownership carry no weight. (In fact, they can be viewed as prima facie evidence of favoritism.) You need to show that you really looked for the best deal. (TPAs can point out that ERISA fiduciary and shopping around" also applies to a plan's search/selection/retention of TPA services, so TPAs are not requiring something to which they are not also subjected.)

DOL occasionally issues some specific Prohibited Transaction Exemptions (PTEs). For example, PTE 84-24 (an updated version of 77-9) allows TPAs to accept commissions for placing stop-loss (with the assumption that fiduciary prudence was followed). There is no standardized form for making the required PTE 84-24 disclosure to the client, but one of the factors expected to be disclosed is if the TPA has any relationship to the stop-loss source. If there is a relationship disclosed, DOL expects the plan trustees to look especially carefully to assure themselves that it is a prudent transaction. If not, DOL can prosecute the client trustee and/or the TPA and/or, occasionally, the vendor (if it was felt that the vendor had a hand in the deception or lack of prudent decision making).

Shopping around to be prudent is just one of the reasons ERISA is the ultimate consumer protection law. "Self-dealing" and tie-in arrangements are allowed and common in normal insurance and business. that's why so many of the new people and entities coming into the benefits arena assume they can do the same under ERISA. (Note: ERISA fiduciary does not apply to non-ERISA plans such as those sponsored by governmental or religious groups.)

There is no master list of "do's" and "don'ts" of ERISA fiduciary. If you ask DOL, the answer is that each case is judged by its own unique facts & circumstances (and they have the benefit of 20/20 hindsight). How can you tell what's right & prudent? Trust your conscience & gut feeling. A handy self-test is to imagine that an investigative reporter just got access to all your files and is trying to make an expose about each of the transactions. If there is anything that would embarrass you if it were portrayed in the worst possible interpretation, then correct those factors now. Thanks to SPBA member Ed Finley for suggesting a review of this topic.