A ruling in an
excessive fee case against a health benefit plan sponsor reminds sponsors that
the Employee Retirement Income Security Act (ERISA) requires proper monitoring
and selection of service providers and their fees for health plans as well as
retirement plans.
United States
Secretary of Labor R. Alexander Acosta brought a 10-count amended complaint
against 11 defendants, but the only ones left after years of proceedings were
Chimes D.C., Inc. Health & Welfare Plan and its alleged fiduciaries and service
providers, including Chimes District of Columbia, Inc. The Secretary contends
that the defendants charged the plan excessive fees for services and engaged in
prohibited transactions by receiving commissions, kickbacks and inappropriate
reimbursements.
U.S. District
Judge Richard D. Bennett of the U.S. District Court for the District of
Maryland concluded that:
- The Chimes defendants took
reasonable measures to oversee and monitor the plan and its service
providers, and they made reasoned decisions that were consistent with that
of a prudent person acting in a like capacity in similar circumstances;
- Chimes D.C.’s agreements with
service providers FCE and BCG were for the provision of necessary services
to the plan, for which they were paid reasonable compensation;
- The Chimes defendants did not
engage in prohibited transactions when the Chimes Foundation, which is not
a party to the litigation, received charitable contributions from FCE, BCG
and their principals;
- The plan’s fees in the aggregate
were reasonable, so there is no evidence of loss to the plan;
- Regardless whether FCE committed a
fiduciary breach by its collection of commissions and fees, Chimes D.C.
was not aware that such monies were not paid into the plan and did not
knowingly participate in any misconduct; and
- There was no evidence of denied
benefit claims that were not afforded a proper review.
Bennett issued
judgment in favor of the Chimes defendants under Rule 58 of the Federal Rules
of Civil Procedure.
Background in the opinion says Chimes D.C. elected to pay the fringe
benefit amounts into a trust pursuant to a health and welfare benefit plan,
rather than provide cash payouts, because of the severe disabilities many of
its employees faced, which would have made it difficult, if not impossible, for
them to purchase benefits in the marketplace by themselves. Chimes D.C.
executives felt that the company could not administer the plan by itself and
chose the Boon Group as the third-party administrator (TPA).
The number of
employees continued to grow as Chimes D.C. took on new contracts, in some cases
assuming contracts that were under collective bargaining agreements, which
required Chimes D.C. to work collaboratively with the unions. As the size and
complexity of the plan increased, Chimes D.C. executives decided to look for a
new TPA, specifically one with Service Contract Act experience that would be
capable of providing a self-funded plan with coordinated stop-loss insurance to
reduce the exposure to catastrophic medical expenses. Chimes D.C. was concerned
that Boon was moving towards implementing a defined contribution plan, under
which a monthly per-employee premiums would be paid to the insurance provider,
precluding an employer from saving any money left over from the premium amount
following payment of claims and benefits.
A separate plan
was created in May 1995, and BCG became the plan’s broker and plan
representative, and FCE was selected as TPA for the plan. Chimes D.C. was the
plan sponsor, plan administrator and named fiduciary as defined by ERISA.
Because Chimes D.C. had delegated its fiduciary duties to FCE to administer the
plan and to an individual defendant to act as trustee, Chimes D.C.’s obligation
was to monitor the others, Bennett noted.
Bennett’s
analysis of Chimes D.C.’s actions are similar to the analyses conducted in
ERISA 401(k) and 403(b) litigation.
According to
the opinion, in light of the unique circumstances of its disabled workforce,
Chimes D.C. did not issue any requests for proposals (RFPs) to other TPAs
before selecting FCE to replace Boon. However, Bennett found the plan sponsor
engaged in an adequate investigative process, including contacting other
organizations in similar circumstances and being informed that FCE was a
reputable, credible, and effective health and welfare plan manager and
administrator for benefits under the Service Contract Act.
Chimes D.C.
relied on its broker to monitor the TPA marketplace. The broker kept tabs on
the marketplace, received and reviewed proposals and marketing packages from
start-up companies, assisted other service providers searching the marketplace,
provided regular reports and pricing information, and presented comparison
information during plan review meetings. Searches for alternate TPAs resulted
in a decision that a change was not in the best interest of the plan and its
participants.
Although,
Chimes D.C. did not send out formal, written RFPs for the purchase of TPA
services, Bennett found that all witnesses credibly testified that their
informal search activities were the functional equivalent given the few choices
available, and they believed that sending out a formal RFP did not make
practical sense. Bennett noted that even Acosta’s expert, Andrew Naugle,
acknowledged that had Chimes D.C. issued a formal RFP, it “could have selected
FCE again.”
“Chimes D.C.
chose to take a ‘best value’ approach to their searches—not just looking for
the cheapest price, although mindful of cost, but looking for a good fit that
meets the needs and provides the best benefits,” Bennett wrote in his opinion.
“There is no requirement under the law to engage in a formal, written RFP
process. Certainly, ERISA does not require a fiduciary to ‘scour the market’ to
find and offer the cheapest possible deal for plan participants.”
As for the
charge of excessive fees, Bennett found that every year, the Chimes D.C. Board
and executives conducted an annual review of the plan with FCE and BCG, and
sometimes the plan’s trustee, to review the plan as a whole, including the
costs and fees paid by the plan to its service providers. “In addition to
relying upon the information reported by their service providers, the Chimes
executives also relied upon the plan’s trustee, reasonably believing that the
trustee had the duty to ensure that the fees charged to the plan were
consistent with the terms of the TPA Agreement,” Bennett wrote. He also found
that Chimes D.C. continually negotiated fees with both FCE and BCG, and
renegotiated lower fees for the plan from 2005 to at least 2016.
While Bennett
found both Acosta’s and Chimes D.C.’s experts credible and helpful in the
analysis of total plan fees, he pointed out that the Chimes Plan has unique
requirements that make comparisons a challenging exercise. “Naugle, however,
did not appear to fully appreciate the implications of the Service Contract Act
complexity or the 75% disabled participant population comprising the Chimes
Plan. Since few TPAs specialize in SCA contracts, it is reasonable to expect
that a plan may pay more than a median rate for that expertise,” Bennett wrote.
Based on the testimony and evidence on the record, and in light of the plan’s
unique characteristics, Bennett said he found that the fees paid by the Chimes
plan in the aggregate were not excessive in contrast to comparable plans, and
that the plan’s fees were reasonable.
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