:: DOL Alleges Failure To Monitor TPA Fees Constitutes A Fiduciary Breach

Whether a breach of the duty of prudence has occurred depends on “whether the fiduciary engaged in a reasoned decision-making process, consistent with that of a prudent man acting in a like capacity.” Id. (internal quotations and citations omitted).

Although the Secretary alleges that FCE and Ward concealed certain activities from the Chimes Defendants, the Secretary is not foreclosed from also alleging that the Chimes Defendants failed to fulfill their broader duties to prudently and loyally monitor the Plan.

 Perez v. Chimes D.C., Inc., No. CV RDB-15-3315, 2016 WL 5815443, at *9 (D. Md. Oct. 5, 2016)

 A recent case illustrates the DOL’s focus on the duty to monitor fees and compensation arrangements as a fiduciary duty.  The case has resulted in several opinions.  Here are some highlights from an opinion denying certain defendants’ motion to dismiss.
Parent company may be a fiduciary
Parent companies of plan sponsors and administrators lack fiduciary status to the extent they do not actually exercise any control over plan assets or discretion over the plans of their subsidiaries, or exercise the power to appoint the actual fiduciaries.  But the Secretary alleged a “factual basis” for the parent company”s fiduciary status— namely, its control over plan assets and power to appoint plan fiduciaries.
Corporate officers and directors may become fiducaries
 Corporate officers and directors do not become fiduciaries solely by virtue of their corporate position, even if the corporation is a fiduciary, ‘unless it can be shown that they have individual discretionary roles as to plan administration.’  Here, however, the Secretary did not “simply restate ERISA’s statutory language”, but specifically alleged that the defendants:
  • Took part in negotiation of fees and engagement of third party administrator

  • Failed to conduct a full request for bid proposals from alternative providers, or request that an independent broker obtain and compare bid proposals from alternative providers” and

  • Neglected conflicts of interest in relying on recommendations

Concealment of activities is not a bar to liability of fiduciaries

Although the Secretary alleged that the TPA concealed certain activities from the employer’s representatives, the Court held that the Secretary was not foreclosed from also alleging that they failed to fulfill their broader duties to prudently and loyally monitor the Plan.

Co-fiduciaries may be liable for “consequential breach

Aside from knowing violations,  a fiduciary is also liable where “by his failure to comply with [his own ERISA fiduciary duties] in the administration of his specific responsibilities which give rise to his status as a fiduciary, he has enabled such other fiduciary to commit a breach.”  Thus, the Court allowed this allegation to stand.

Failure to monitor fees may constitute a breach

The Secretary alleged that the corporate officers did not take other steps to ensure that TPA’s fees were reasonable, such as consulting with an independent expert regarding its fees or comparing the fees to industry benchmarks.

Failure to remit comissions and rebates may constitute a breach

The parties had agreed that, with a few specific exceptions, that any commissions or rebates paid by the Plan service providers to the TPA  should be forwarded to the Plan.  The Secretary alleged that the TPA failed to forward all payments that it received from service providers to the Plan.

 Note:  The DOL has published a booklet which is useful for clients as a general overview entitled “Meeting Your Fiduciary Duties”.  Included is the following paragraph:

Monitoring a Service Provider

 

An employer should establish and follow a formal review process at reasonable intervals to decide if it wants to continue using the current service providers or look for replacements. When monitoring service providers, actions to ensure they are performing the agreed-upon services include:

 

– Evaluating any notices received from the service provider about possible changes to their compensation and the other information they provided when hired (or when the contract or arrangement was renewed);

– Reviewing the service providers’ performance;

– Reading any reports they provide;

– Checking actual fees charged;

– Asking about policies and practices (such as trading, investment turnover, and proxy voting); and

– Following up on participant complaints.

See also: Tibbie v.Edison Int’l, 135 S. Ct. 1823, 1829 (2015)