What ERISA Fiduciary Concerns Exist in Private Exchanges?

By Christopher V. Goff, J.D., M.A. (Employers Health)

As a result of the Patient Protection and Affordable Care Act and rising medical costs, the health insurance marketplace is undergoing major changes and reforms. For proactive employers seeking to control rising health care costs, private health insurance exchanges may present a way for employers to curb further health care cost increases, reduce their administrative burden and increase benefit choices offered to employees. In spite of numerous potential advantages arising from participation in a private exchange, employers should pause to consider how potential fiduciary liability, arising under the Employee Retirement Income Security Act of 1974 (“ERISA”), may be implicated by their participation in a private exchange. 

Enacted to create minimum standards of protection for pension plans and welfare plans, ERISA standards seek to ensure that plan interests are protected and establish a fiduciary relationship between the plan and its participants. As a result of the use of a functional approach to determine fiduciary status, any individual or entity having discretion under the plan may be deemed a fiduciary. Thus, a decision to delegate certain duties constitutes discretion and preserves fiduciary status, even in spite of contractual agreements to the contrary. Despite the existence of various private exchange structures and services, the selection and retention of a private exchange, communication of a private exchange offering to plan participants, and plan management of funds deemed under the plan sponsor’s control represent key areas in which the plan sponsor remains an ERISA fiduciary. Just as similar duties are retained by plan sponsors under historical employer-sponsored benefit strategies, these areas of responsibility persist under a private exchange strategy. 

A plan fiduciary must act with prudence, loyalty and in the best interest of plan participants. In the face the complex and evolving private exchange market, the duty of prudence may necessitate the consultation of an expert. Plan sponsors who have historically relied on independent third parties to help them evaluate and select a plan administrator may now find themselves in a compromised position. Why? Many of the organizations that have traditionally operated in a “trusted advisor” role are now operating private exchanges. Therefore, plan sponsors are heading down a slippery slope with respect to their fiduciary roles if they turn to a third-party advisor with dual personalities: 1.) a purportedly independent, objective advisor; and 2.) a private exchange.

Plan sponsors must consider fiduciary implications when evaluating a private exchange strategy. The old adage, “if it sounds too good to be true, then it probably is,” has application to the wishful thinking of the human resources professional who anticipates “offloading” ERISA fiduciary status to a private exchange. Moreover, the selection of an advisor to assist a plan sponsor in navigating the private exchange landscape must be carefully considered given the nature of private exchange providers and their dual personalities.