Understanding Fiduciary Duties

Hello and welcome to Beyond the Benefits with Savoy Associates. My name is Chris VanderWaal and I am joined here today with Colleen Patterson. Colleen, how are you doing? I'm doing great. Thanks, Chris, for inviting me today. This is going to be a pretty interesting topic, I think. Yeah, so we're here to talk about ERISA and fiduciary duties, particularly in light of the Blockbuster Johnson & Johnson lawsuit that has recently been filed here in Middlesex, New Jersey. So at a high level, ERISA has a bunch of requirements for plan sponsors. ERISA doesn't require that plan sponsors offer a plan, but when they do, there's a number of things they have to do. And one of the key components is, it's called a fiduciary duty. And a fiduciary duty is a standard of care under the law that applies, it goes way back, but it does apply under ERISA and it does apply to plan sponsors and other folks. And it requires, high level, that they really exercise a lot of care in their choices and the decisions they make. And that applies beyond ERISA, that comes from a trust law where you're in charge of taking care of assets for other people or property for other people, things like that. So, Colleen, what the biggest takeaway be, before we get into diving into the topic, what's the biggest takeaway that we hope that our listeners, primarily insurance brokers, take away from us having a podcast about fiduciary duties? I think probably, I mean, there's a lot to just the term fiduciary and understanding what that means, but I think it's really recognizing that regardless of whether you're a small employer, mid-market, large, and you're a broker dealing with all of these different market sizes, that everybody really has to pay attention to the responsibility of what a fiduciary actually has to carry out. There's certainly the responsibility at the employer level, but there's a huge responsibility as individuals to ensure that they are administering their plan correctly, and certainly to the letter of the wall. So, I think this is something that everybody has to pay attention to. What do you think? I agree entirely. Plan sponsors of all sizes have the same obligation. They must act in the best interest of the plan. And so with that, let's talk a little bit about Johnson & Johnson. Johnson & Johnson, not a small employer, not a small plan, tens of thousands of employees in the United States in their plan, tens of millions of dollars in employee contributions every year. This is not a startup company, not anymore. Johnson & Johnson is as big as it gets. And the blockbuster lawsuit that was filed recently is by a Johnson & Johnson employee who's working on establishing a class. So, this is a class action lawsuit that's been filed. And the employee filed that she is a health policy person for Johnson & Johnson. So, she knows what she's looking for. And what this complaint goes through are a number of instances where the plan that Johnson & Johnson offers their employees, for which they take tens of millions of dollars of employee contributions every year, for which employee raises get diverted to help pay for increased healthcare. She alleges that Johnson & Johnson was not a good steward of this plan. And the specific allegations get to overcharging for certain instances. So, two in particular, one was an HIV antiviral drug that if you were enrolled in the plan and you bought it through the Johnson & Johnson plan, would cost a little over $1,600 for 90 pills. But those pills were $2 a piece if you were just paying a cash charge. So, you would pay $180 out of the plan or $1,600 in the plan. Another instance was a multiple sclerosis medication. This one's been all over the news because the numbers are so outrageous. It was over $10,000 to buy a 90-day supply through the plan, but a little under $80 to buy it out of pocket with no insurance. And so, the allegations in the lawsuit get to the questions of where is this money going? If it's $200 to buy a drug at a pharmacy, but almost $2,000 to buy it through a plan, where's that money going? Who is it benefiting? Why is this a good use of the plan assets? There's a number of allegations throughout the complaint. The complaint is over 60 pages and includes detailed descriptions of some of the practices that have been getting some negative light in our industry and some of the things that really do deserve to have a light shined on them. Insurance consultants, and these are big national names. These are people that you would recognize their firms, allegedly getting paid $1, $2, $6.50 per prescription filled on a PBM plan, going to the benefits consultant. There is a question here as to whether the plan sponsor has fulfilled their duty. And so, with that, Colleen, do you want to talk a little bit about what fiduciary duties are and how they apply to an ERISA plan? Sure. So, this is probably one of the most important things that plan sponsors have to be cognizant of. And it doesn't matter whether or not you are fully insured, you are self-insured, but really what we're talking about here is that it's really the discretion that a person is using when they're administering and they're managing the plan. So, of course, we're talking about plan assets, but it's really decisions around the plan. And you were just talking about, Chris, that one of the main issues with this Johnson & Johnson lawsuit is, of course, whether or not the fiduciary responsibilities were being held were actually being carried out correctly because there's a huge issue about price discrepancy here. So, some of the other things that fiduciaries have to really be mindful of is that they're really carrying out all responsibilities of the plan. So, obviously, to the plan itself, but then they also have to make sure that they're making decisions on behalf of all of the participants of the plan in a way that is following the rules under fiduciary responsibilities. So, they have to be very diligent. They have to make sure that they are monitoring things closely. They have to ensure that there is a duty of prudence here and making sure that that's not violated. And that comes also when they're deciding about vendors that they're working with. So, you were talking about PBMs and some of these larger PBMs and agencies that folks would recognize those names, they have a responsibility to ensure that they're really being truly neutral and they're evaluating all aspects of that relationship in the best interest of the plans, not just for them as an individual or them as a consumer or a utilizer of the plan. So, there's a lot to this that they have to really pay attention to. Now, I'm thinking I'm a few minutes into listening to this. I am an insurance broker advisor and I am wondering who is a fiduciary? And so, that question under ERISA, fiduciary is not a word we use every day in our normal language, but it does appear throughout the legal world quite a bit. A fiduciary is anybody who exercises discretion over a plan. Now, a named plan sponsor is always going to be a fiduciary, but you could have other functional people or entities that become fiduciaries. So, Colleen, what are some of the types of decisions that would make somebody a fiduciary, even if they're not named in a plan document as a fiduciary? So, probably one of the most important things that would make somebody a fiduciary is whether or not they are involved in the payment of claims somehow. So, I think one of the things we talk about all the time is follow the bonds. So, what would make somebody a fiduciary is if they're having some level of discretion in how those claims are being processed, but more importantly, how the funds to be able to satisfy those claims payments are actually being made. So, the other thing too is whether or not they're exercising some kind of discretion where they're making decisions about the plan. That's something that could make somebody a fiduciary under the definition. And all of those things are going to be identified in the plan document, meaning who it is that would be the fiduciary the plan is going to be listed in the plan document. Now, I know we talk a lot about that as well. Exactly right. So, making decisions, exercising discretion, it's a functional test. And you talked about being named in the plan document. If you're named as a fiduciary, you have this duty. If you're not named, you could actually still end up being a functional fiduciary, and that's going to come into play when you've got somebody who's doing more than what's called ministerial actions. So, if you've got a third-party administrator that is only processing, let's say an HRA administrator, only processing claims based on what the major medical insurance carrier pays, and just saying, we're going to pay 100% of your deductible. Your EOB came in, it says you have $1,000 deductible, here's $1,000. That's a ministerial action. They don't have any discretion. The plan set forth by the sponsor says we pay the deductible. They get third-party substantiation. It shows that it was approved. They just pay that payment out. But the claim that happened before that is definitely going to be subject to some discretion because that major medical carrier had to determine if the claim was medically necessary. And that is a discretionary decision. Was it appropriate? Was it the right course of action for that patient? Was it covered under the plan? Those are all discretionary actions. So, your claims administrator, depending on whether they're doing a ministerial duty or exercising discretion, could or could not be a fiduciary. It all depends. Brokers, generally, on the health and welfare side, are not fiduciaries because even though they make plan recommendations, it's usually the employer or the plan sponsor, the benefits committee, some individual that is on the employer plan sponsor side that is really making the decision as to whether to go with a PPO or an EPO, not the broker. On the flip side, if we jump over to the retirement side of the house, any individual who routinely gives investment advice for a fee is a fiduciary. And so, fiduciary, we keep saying this word, it's an obligation to act in the best interest of whomever you have the duty to, in this case, the plan. Colleen, does being a fiduciary mean that you can't remove benefits from a plan or increase contributions or even discontinue certain benefits? No, being a fiduciary would be that you have the ability to make the decisions to do those things and you're also making a decision to work with the third party that is going to execute those decisions that you as fiduciary are making about the plan. Now, there's a whole concept if you are a fiduciary, you've gotten there through a functional test or maybe being named. Once you get to that threshold, you're expected to operate as what's called a prudent expert. The standard is not a prudent person, which is the norm throughout tort law. Instead of just being a prudent person out there, which is a person who would make a wise decision, under ERISA, you are expected to operate as somebody who is familiar with the material. So, you are expected to know a good choice from a bad choice. So, you should, under ERISA, arguably, know that paying $10,000 for a drug that you can buy for $200 cash is a bad choice. And so, ignorance is not going to be an excuse because you are expected to go and learn or know the material for which you are obligated to act. When you are a fiduciary, you are prohibited from engaging in what's called a prohibited transaction. There are what's called parties of interest. And where this gets into play, it happens a lot more or it's at risk more, I should say, hopefully, is it happening, where this could be a bigger risk is where you have planned assets. So, the Johnson & Johnson plan, according to the allegations of the complaint, takes tens of millions of dollars of employee contributions every year. But if you think about a pension plan, it takes real money. Every single pension plan has real dollars in it. And whenever there's real dollars, there's an opportunity for real fraud. Maybe it's good intentions. Maybe it's something like a loan. Maybe the business wants to take a loan from the 401k. That would be a prohibited transaction, even if they pay market interest rates. And even if they pay it back and there's no fraud and no harm, still a prohibited transaction. We're not going to see that as much on our side in the employer benefits space on the health and welfare side. But it's notable to think about where these lawsuits might shake out and how an insurance advisor getting paid $6 for every prescription filled could violate some of these principles. So, Colleen, our listeners are generally benefits advisors listening to this. What should they know? How could they take this to the street and help their clients today or help win some prospects? So, there's a couple of things I think that's important to note. And we talk about this a little bit in our conversation today, but then certainly in all of the other conversations that we're having. When you think about just where our industry is as a whole and all of our broker partners are dealing with this on a daily basis, when you think about transparency rules since the CAA was passed, then all of us are dealing with this every single day. We're talking about RxDC reporting. And there's a responsibility that we all have to ensure that our groups are carrying out their requirements under that particular rule. But then there's also us as brokers and consultants out there where we have a obligation to be able to disclose our compensation that's out there. So, I think one of the best takeaways for our broker partners as we're thinking about all of this, this is all kind of tying together. So, you want to ensure that you're doing what I would say are the low-hanging compliance items that you can easily check the box on. So, that's going to be things like ensuring that you're disclosing the proper information you're supposed to, which will be those disclosure of compensation statements. Ensure that you're talking to your groups about the importance of having ERISA plan documents in place. If you've read anything about this J&J lawsuit, you'll see there's actually mentioned in there about plan documents. And we were mentioning again the fiduciary responsibilities and the fiduciary is named within the plan document. And then the other thing that I would say that would help brokers as far as not only retaining their current business by ensuring these very minor compliance items are taken care of, but it's a great prospecting tool to have a conversation with a new prospect to say, hey, when was the last time you actually had your plan documents reviewed? And do you understand or you are familiar with these terms and particularly what a fiduciary is and what that means for you, Mr. and Mrs. Client, for your particular group and how your decisions that you're making about the plan actually make sure fiduciary to your participants within the plan. So, I think the takeaway is document, which would be your disclosure of commissions that you're responsible to do, document ensuring that your clients have their plan documents in place to be able to give to their employees. Yes, absolutely. And if you touched on the compensation disclosures, that's an interesting angle specifically for brokers that are delivering value that they're proud of, for people who are getting paid a fair amount for the value they provide to their customers. This price transparency and compensation transparency is a great thing because when you're proud of what you do, you know you're delivering enough value to justify what you get paid. So, there's no shame in disclosing what you get paid. The disclosure of compensation is not just a recommended practice. It's actually required of plan sponsors. The fiduciaries on the plan must obtain compensation disclosures from all service providers that are going to earn more than $1,000 in the year or expect to earn more than $1,000 in the year from the plan. And if they don't obtain that disclosure, it is the fiduciary of the plan who is in breach. They are by default not acting as a prudent expert and they have breached their fiduciary duty to the plan. So, if you're prospecting and you want to talk to an employer, you can tell them that they can be held personally liable, like in the Johnson & Johnson case, for breaching their fiduciary duty if they didn't get a compensation disclosure from their broker. Because at that point, the fees are by default not reasonable. It doesn't matter if the fees are low. If they're not disclosed, they are unreasonable. And so, the fiduciary has breached their obligations to the plan, exposing them and the plan to great liability. So, when you're proud of the services you provide to your customers and you can show what you get compensated and how they get a good deal out of it, you've got nothing to hide. You show them your compensation or you ask them why their broker has a great opportunity to expose good value versus bad value. The other thing too, Chris, that I think is really helpful when they're communicating with their clients is this is the way that all of the dots get connected. There's so many conversations we have with employers and sponsors that really don't understand, one, why do they have to pay attention to some of these things that are happening in the news? Because the first question is, well, that's J&J, and they're huge, and that's not my company. But I think what is helpful for a broker is to see and explain to current clients and prospects how these dots get connected, meaning, yes, J&J is on a huge national level because of their size, and this is a big thing in the news, but here's what that means to you. As I'm talking to you, a small, mid, somewhat large size employer about the importance of RTC and all of these transparency rules and these tools that are coming out and all of this information and pricing that's happening around drugs and PBMs, the reason this is so important is because this impacts you, specifically you, Mr. and Mrs. Small Group, because whatever the outcome is of this is going to have an impact, likely, across the board. In addition to that, the things that are happening in the news around pharmacy benefit manager legislation, that, again, is something that's going to have an impact on this case, ultimately, as far as where it goes after the decisions are made and that whatever those decisions are, this is going to likely set a precedent going forward. I think this is probably the first of its kind, but it helps employers and brokers more easily connect to what's happening in the news and what I have to do on my small or mid-market employer level with this disclosure requirement you're talking about and the RXTC requirement that's going on. It helps me understand that it doesn't matter how large or how small I am as an employer. I have a responsibility to pay attention and to carry out my responsibilities to the letter of the law. Well said. On that note, there are a lot of dots to connect and far more than we can cover in a brief podcast. As always, please reach out to us if you have any questions, if you want to talk about how to discuss these topics with your clients or prospects, if you want to go ahead and get things cleaned up, make sure that houses are in order, or you want to just figure out how to better broadcast your value out to the market, reach out to us at Savoy. We are here to help. So that's been another episode of Beyond the Benefits with Savoy. Thank you, Colleen. Thanks, Chris. This is a great topic. I know we get into this quite a bit, but I really appreciate also all the content that you've been putting out about this on LinkedIn. There's been some great insight that you've put out. I know you said the lawsuit is 60 pages, so I appreciate all the time you're spending on explaining this to all of our stakeholders. It's been very helpful. Thank you, Colleen.