How Closing the Documentation Gap Can Create a Strong Defense Against Fiduciary Litigation

A recent surge in fiduciary lawsuits targeting health and welfare plans signals a fundamental change in enforcement. Courts are now applying the same rigorous process-and-procedure standards long used for retirement plans to the world of health benefits, revealing longstanding gaps in governance and documentation. The vulnerability for many employers isn't rooted in the plan decisions themselves, but in an inability to prove how or why those decisions were made.

Jennifer Spiegel Berman, Chief Legal Officer at Lumelight, specializes in ERISA, HIPAA, and ACA compliance. She explains that ERISA, which governs both retirement plans and health and welfare plans, has been around since 1974. Although ERISA's standards for health and retirement plans are fundamentally the same, the operational rigor applied to health benefits has, in many cases, failed to keep pace.

"The law has not changed here. These laws have been in place for a very long time. What we are seeing now is a spotlight on a spectrum of noncompliance, especially around process and procedure." Berman says the core problem is a fundamental shortcoming in the decision-making process where "virtually none of it is documented."

• One law, two realities: In the retirement plan world, it's standard practice for plan sponsors to meet quarterly, review performance, analyze fees, and take detailed notes. That happens very little in the health and welfare plan world, Berman says. "So whether you're paying the right amounts or not, you can't prove that you looked at it. You can't prove you did the diligence."

These procedural gaps manifest in litigation. Berman outlines how plaintiffs' attorneys follow the money through public filings to demonstrate fiduciary blindness, as seen in a recent wave of lawsuits targeting voluntary benefits. By filing Form 5500s, many plan sponsors were seen as having conceded their plans were under ERISA's jurisdiction, opening the door for discovery to reveal a lack of documentation and concrete examples of where that breakdown shows up.

• Show me the minutes: Berman says the documentation gap can be painfully simple. Though a defendant can use a calendar invite as proof that a meeting occurred, the defense falls apart when they're asked what was discussed. "Too often, the answer is, 'I have no minutes. I have no documentation to show what we reviewed.'"

• Governance gap: The absence of fiduciary committees is another problem. This, she says, is a more glaring issue than lack of documentation. "I'm fighting with people just to get these committees set up. If I could get more organizations to simply establish a committee and start the process, that would be a huge win."

Berman’s practical guidance for employers to build a defensible process centers on establishing a formal governance structure. Step one is to build a fiduciary committee, ideally of three to five people from HR, finance, and legal. "That committee must meet at least quarterly to start evaluating and understanding the benefits plan. They need to understand what the plan is, how it works, who the vendors are, and how they're compensated."

Under ERISA, employers are required to prudently select benefits administrators and ensure that plan service providers are receiving only reasonable compensation. However, Berman challenges the common assumption that prudence means finding the cheapest option. "You're looking for value. There is nothing that says you can't put a value on trust as part of your analysis. In fact, you should be. Trust, relationship, and quality are all pieces that go into determining reasonable compensation, not just the lowest compensation."

Her guidance extends beyond employers, serving as a roadmap for high-integrity advisors. She encourages employers to treat good brokers as crucial partners who can facilitate a compliant process, elevating them from vendors to be managed. In this new environment, Berman says, transparency becomes a key advantage.

• The transparency test: A fiduciary should be able to get clear answers on three key points. "They need to ask for a full disclosure of all compensation the broker receives relative to the account, not just what's on required compensation disclosures. They should get a full inventory of all services being provided. And they should ask the broker to identify their most respected competitors."

Berman advises that while employers can outsource expertise, they cannot outsource responsibility. In the eyes of the law, a prudent and well-documented process forms the core of a credible defense. "I can't emphasize this point enough," she stresses. "If it's not documented, it didn't happen. Period."