Unanimous Supreme Court Holds Retirement Plan Fiduciaries Must Monitor and Remove All Imprudent Investment Options

Last week, on January 24, the United States Supreme Court issued its much-anticipated decision in Hughes v. Northwestern University (“Hughes”), unanimously holding that retirement plan fiduciaries have a duty to continuously monitor retirement plan investment options and to remove all imprudent ones.  In its opinion, the Supreme Court made it clear that if there are imprudent investment options in a retirement plan (such as a 401(k) plan), plan fiduciaries cannot ignore them just because there are other prudent investment options.

Northwestern University offers two defined contribution retirement plans for its eligible employees.  Like many other similar plans, the plans’ fiduciaries select the investment options from which participating employees can choose to invest their retirement plan savings.  The plaintiffs in Hughes allege that the Northwestern University plan fiduciaries breached their duty of prudence under the Employee Retirement Income Security Act of 1974 (“ERISA”) by: (1) failing to monitor and control the fees paid by the plans for recordkeeping, resulting in unreasonably high costs to plan participants; (2) offering a number of mutual funds and annuities in the form of “retail” share classes that carried higher fees than those charged by identical “institutional” share classes; and (3) offering too many investment options (over 400) and thereby causing participants to be confused and make poor investment decisions.

The lower court (U.S. Court of Appeals for the Seventh Circuit) had dismissed the plaintiffs’ allegations because the court determined that the Northwestern University fiduciaries had provided an adequate array of choices, including the types of low-cost funds the plaintiffs wanted.  In the lower court’s view, the fact that participants could have chosen lower-cost funds destroyed any claim that the defendants had breached their fiduciary duty by leaving imprudent options in the plans.  In effect, the lower court determined that it did not matter that there were “bad” investment options in the plans’ investment menu – because there were also “good” ones that participants could have chosen during the relevant time.

In its decision, the Supreme Court unanimously rejected this participant-choice rationale – and made it crystal clear that ERISA requires plan fiduciaries to continuously monitor all plan investments and to remove any imprudent ones.

While the Supreme Court’s decision in Hughes is important, the Court did not address the arguably more-important issue that many in the employee benefits community had been hoping the Court would address:  What does a plaintiff in an ERISA excessive fee case have to plead in their complaint to survive a motion to dismiss?  In the past week, since the Hughes decision was issued, commentators are all over the place guessing about what the Court’s decision means for this important question.  Some commentators think the Hughes decision will make it more difficult for plaintiffs to bring these types of lawsuits.  Other commentators think the opposite.  Unfortunately, the opportunity has passed, for now, for the Court to resolve this question and lower courts will continue to struggle with it.

Free Over-the-Counter COVID Tests (if you can find them)

The Families First Coronavirus Response Act (FFCRA) was enacted on March 18, 2020, and generally requires group health plans to provide benefits for certain items and services related to COVID-19 testing when those items or services are furnished on or after March 18, 2020 and during the applicable emergency period.  Plans must provide this coverage without imposing any cost-sharing requirements (including deductibles, copayments, and coinsurance), prior authorization, or medical management requirements.

Less than 10 days later, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) amended the FFCRA to include a broader range of diagnostic items and services that plans must cover without any cost-sharing requirements, prior authorizations, or other medical management requirements.

Then, in June 2020, the Departments of Labor, Health and Human Services, and the Treasury (collectively, the Departments) issued guidance stating that plans are required to cover COVID-19 tests intended for at-home testing, when the testing is ordered by an attending health care provider who has determined that the test is medically appropriate.  The Departments noted, at that time, that the Food and Drug Administration (FDA) had not yet authorized any COVID-19 diagnostic tests to be completely used and processed at home.  Since that time, however, the FDA has authorized additional diagnostic tests for COVID-19, including tests that can be self-administered and self-read at home.  These COVID-19 tests are now available over-the-counter (if you can find them) through pharmacies, retail stores, and online retailers (OTC Tests).

Last week, on January 10, 2022, the Departments issued updated guidance stating that the requirement for health plans to cover free OTC Tests is no longer limited to situations in which the individual has an order from a health care provider.  This updated guidance provides the following details:

  1. Free OTC Tests must be provided on or after January 15, 2022 through the end of the public health emergency.
  2. Plans are still not required to provide coverage for COVID-19 tests (including OTC Tests) that are for employment purposes (e.g., testing required under an employer return-to-work policy), as opposed to tests for diagnosis or treatment of COVID-19. Please note, however, that the employer may nonetheless be required to pay for such testing under applicable state law.
  3. A plan cannot limit coverage to OTC Tests that are provided through preferred pharmacies. A plan may, however, arrange for direct coverage of OTC Tests through its pharmacy network and a direct-to-consumer shipping program, and then otherwise limit reimbursement outside of the plan’s arrangement to $12 per test.  This reference to a “direct” arrangement means the participant (which, for this article, includes beneficiaries and other enrollees) is not required to seek post-purchase reimbursement, i.e., the plan must pay the pharmacy or retailer directly with no up-front cost to the participant.  While many plans are looking to set up such an arrangement and direct employees to get their OTC Tests through a preferred network provider (after negotiating a discounted rate from the provider), there is some concern among employers that such an arrangement will result in increased volume and thus increased costs.
  4. If a plan sets up the direct arrangement described above and then only pays $12 for OTC Tests that are obtained outside of the direct arrangement, the $12 per test must be calculated based on the number of tests in a package.
  5. If a plan sets up the direct arrangement described above, plans cannot impose any prior authorization or other medical management requirements on participants, and must take reasonable steps to ensure that participants have adequate access to OTC Tests through an adequate number of retail locations (including both in-person and online).
  6. If a plan sets up the direct arrangement described above, plans must ensure that participants are aware of key information needed to access OTC Tests, such as dates of availability of the direct coverage program and participating retailers or other locations.
  7. Plans can limit the number of OTC Tests covered for each participant, beneficiary, or enrollee to 8 tests per 30-day period or per-calendar month. Please note for example, that if a family has six members covered by the plan, this means the plan must pay for 48 OTC Tests per month.  For employers with a significant workforce, the financial projections – even assuming some actuarial reductions for likely usage – are staggering.
  8. A plan can require an attestation, such as a signature on a brief attestation document, that the OTC Test (a) was purchased by the participant for personal use, not for employment purposes; (b) has not been (and will not be) reimbursed by another source; and (c) is not for resale.

New Health Plan Disclosure Requirements Should Bring More Transparency

Ten years ago, the United States Department of Labor (“DOL”) published a final regulation under the Employee Retirement Income Security Act of 1974 (“ERISA”), which required retirement plan service providers to disclose information about the service provider’s compensation and potential conflicts of interest. Under that regulation, covered service providers to retirement plans are required to disclose: (a) the services they provide to the retirement plan; (b) all “direct compensation” (i.e., directly from the plan) the service provider, its affiliate or a subcontractor reasonably expects to receive in connection with their services; (c) all “indirect” compensation (generally, compensation from some source other than the plan or the plan sponsor) the service provider, its affiliate, or a subcontractor reasonably expects to receive; (d) any related-parties compensation that will be paid among the service provider, an affiliate, or a subcontractor that is set on a commissions, soft-dollar, finder’s-fee, or other similar basis; and (e) certain other information.

Largely as a result of this regulation, retirement plan fiduciaries know (or should know) exactly who is getting paid, how much, and why for services provided to their retirement plans. There are (or should be) no secrets. This allows retirement plan fiduciaries to have a very clear understanding of any potential conflicts of interest.

Unfortunately, because of the absence of similar rules, this has not always been the case for health plan fiduciaries. On the health plan side, the rules have not required the same level of disclosure and thus health plan fiduciaries have not always had the same level of insight into every type and amount of compensation that their service providers may be receiving. For example, some brokers or consultants might have previously received undisclosed “book of business” or “5500” bonuses, based on the overall volume of business that they have placed with a certain provider – without any clear requirement to disclose such compensation to their employer clients.  Thus, many health plan fiduciaries have not able to assess all potential conflicts of interest.

Because of new rules that became effective December 27, 2021, the health plan side of the business is changing. The Consolidated Appropriations Act, 2021 (the CAA), amended ERISA effective December 27, 2021 to require certain service providers to group health plans to disclose specified information to a responsible plan fiduciary about the direct – and indirect – compensation that the service provider expects to receive in connection with services to the plan. The new disclosure requirements apply to persons who provide “brokerage services” or “consulting” to ERISA-covered group health plans who expect to receive $1,000 or more in direct or indirect compensation. The disclosures are intended to provide plan fiduciaries with sufficient information to assess the reasonableness of the compensation to be received (before it is received) and any potential conflicts of interest.

About 10 days ago, the DOL issued Field Assistance Bulletin 2021-03 (“New FAB”) to clarify some important aspects of the new CAA requirement:

  1. Look to Retirement Plan Rules. The disclosure requirements for health plans are not identical to the requirements for retirement plans, but the New FAB provides that health plan fiduciaries can look to the retirement plan regulation and its requirements when evaluating what kind of information to expect and request from their health plan brokers and consultants.  Thus, health plan fiduciaries should ask their service providers to disclose the same level of detailed information that is required of retirement plan service providers.
  2. Insured and Self-Funded. The new health plan disclosure requirements apply to fully-insured and self-funded group health plans.
  3. Applies to Limited Scope Dental and Vision. The new disclosure requirements apply to limited scope dental and vision plans – not just group health plans.
  4. Not Just Licensed “Brokers” or “Consultants.” The new disclosure requirements apply to providers of “brokerage services” and “consulting” services. The FAB makes it clear that just because a service provider does not call itself a “consultant” or charge a “consulting” fee does not determine whether they have to comply with the new disclosure requirements. The DOL expects reasonable and good faith efforts. Service providers who reasonably expect to receive indirect compensation from third parties in connection with advice, recommendations, or referrals for any of the listed services, should comply with the new disclosure requirements and not try to label themselves as something other than a broker or consultant merely to avoid the rules.
  5. December 27, 2021. The new requirements apply to contracts entered into, renewed, or extended on or after December 27, 2021.

These new disclosure requirements should bring more transparency to the health plan side of employee benefits and allow plan fiduciaries to know and understand all the ways, direct and indirect, that everyone is getting paid. This will allow fiduciaries to identify and assess conflicts of interest.