Since 1974, business owners who have stepped up and established retirement or health insurance plans to provide benefits for their employees have been regulated by the Employee Retirement Income Security Act of 1974 (ERISA).
Those who take on fiduciary responsibilities to administer and manage ERISA benefit plans must do so carefully, under the statutory framework and the regulations and guidance issued by the U.S. Department of Labor (DOL). One important responsibility is to identify the plan's needs for services and to select competent professionals to assist the plan fiduciaries in carrying out their duties under ERISA. Enlisting the appropriate criteria to find and retain the right third-party administrator (TPA) can go a long way in ensuring the smooth and cost-effective operation of the plan.
Failing to engage in a prudent process to select the appropriate TPA for an ERISA plan can result in dire consequences: plaintiffs, including the DOL, have not been shy about suing insurers and TPAs alleging violations under ERISA and seeking maximum damages.
For that reason, and to operate in a manner consistent with ERISA requirements, time devoted to the proper selection of a TPA for an ERISA benefit plan is time well spent. Engaging in a robust selection process is time intensive and takes away from addressing the day-to-day demands of administering the plan and responding to participant needs. In light of the current litigious environment, exercising such care in the selection of the plan's TPA not only satisfies fiduciary duties under ERISA, but could also minimize litigation risk and, if litigation is filed, present a solid defense.
Over the years, the DOL has pointed out that the selection process depends on the particular facts and circumstances of each plan, but should take into consideration the TPA's qualifications, the quality of services offered, and the reasonableness of its fees in light of the services provided. Some factors to consider, including guidance from the DOL, include:
TPA qualifications: Plans will have different needs depending on their type, design, number of participants and asset size. Ask the TPA about its services, experience, fees and expenses, customer references and any other information relating to the quality of its services. Contact the TPA's references to ask about the level of their satisfaction with the TPA; e.g., the TPA's error rate, how effectively the TPA addresses complaints and correct errors, and the TPA's responsiveness to questions and concerns. Evaluating the TPA's quality of services is a significant factor and failing to take it into account could, in the Department's eyes, constitute a breach of fiduciary duty.
Data security: Recent data breaches highlight the need for computer security and safeguards. Review the TPA's technology and confidentiality standards and frequency with which it checks and updates security protocols.
Conflicts of interest: The DOL has expressed particular concern about conflicts of interest, self-dealing or improper influence in the selection of service providers. The selection process should include a review of the affiliations or relationships between the plan sponsor, the plan's service providers and the plan fiduciaries.
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Bid process: Consider presenting each prospective TPA the same information about the plan and ask for proposals or formal bids. Ask the prospective TPA to be specific about which services are covered for the estimated fees and which are not. Plan fiduciaries also may consider service providers who offer TPA services as part of a "bundled" service arrangement; e.g., TPA services offered as part of a menu of other services such as custodial trustee, recordkeeping, investment management, education, or advice services.
Comparison shop: Compare the prospective TPA's information, including the fees and expenses to be charged by different TPAs for similar services. Note that ERISA does not require that plan fiduciaries choose the lowest cost provider. The decision regarding which TPA to select should be based on an assessment of all the relevant factors, including both the quality and cost of the services.
Fees and costs: While the lowest bidder need not be selected, the person selecting the TPA must determine that the TPA's compensation is reasonable in light of the services provided to the plan. According to the Labor Department, understanding the terms of the TPA agreement, particularly the fees and expenses to be charged is an important factor in the selection process. As well, understanding whether the TPA receives compensation from any other sources for services to be rendered in connection to the plan has become an issue in litigation and should be considered during fee negotiations and as part of the selection process.
Fidelity bond: If the TPA will handle plan assets, determine whether it has a fidelity bond to protect the plan against loss resulting from fraudulent or dishonest acts. ERISA requires that every person who handles plan assets must be bonded.
Document and memorialize: Once the selection is made, a written agreement detailing the TPA's services, fees and costs should be executed. Document the TPA candidate review, preserve any information or documents that were received or considered as part of the selection process, and memorialize in writing the decision and reasoning behind the decision-making process.
Monitoring: The DOL suggests obtaining a commitment from the TPA to regularly provide information about the services it provides. The plan should also periodically review the TPA's performance to ensure it is providing the services in a manner and at a cost consistent with the agreement. Comments or complaints from plan participants should be reviewed. Periodically, the plan should ask the TPA whether there have been any changes in the information it provided before hiring (e.g., does the TPA continue to maintain any required state or Federal licenses).
Tess Gee is a member of the Washington, D.C.-based law firm Miller & Chevalier Chartered, and she practices in the area of employee benefits with a specific focus on the Employee Retirement Income Security Act of 1974.
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