The Julie A. Su vs. Axim Solutions Group et al case demonstrates the importance of an employer’s fiduciary duty of developing and maintaining a prudent process in selecting service providers in delivering health and welfare and retirement benefit plans to covered employees. In the case where the employer is subject to the Service Contract Act, additional duties are owed to meet fringe benefits, timely funding, and recordkeeping requirements. It is important to understand that employers can never relinquish their fiduciary responsibilities to the employe benefit plans they establish. Plan sponsors can always engage professionals to take on functional duties to fulfill their day-to-day functions or even share fiduciary responsibilities as co-fiduciaries to the benefit plans. However, plan sponsors always retain the duty for prudent selection and monitoring of the hired professionals and appointed co-fiduciaries.
Many unsuspecting employers, especially in the government contractor sector, engage a single service provider, such as Axim Fringe Solutions Group and its affiliates or subsidiaries, as a third party to manage their entire fringe benefit administration and processing. These types of “bundled” service providers, directly or via their affiliates or subsidiaries, typically offer the following services or fulfill the following functions:
- Fringe accounting and recordkeeping services,
- Plan design and selection for health & welfare plan,
- Acting as the commissioned broker for all group insurance products,
- In the case of a self-funded health and welfare plan, acting as the claims adjudicator, processor and recordkeeper,
- Acting as the retirement plan (commissioned) broker or (fee based) consultant. Sometimes, the entity offers a Pooled Employer Plan where the entity is the (fee based) Pooled Plan Provider (PPP),
- COBRA, HSA, and/or Section 125 Cafeteria Plan administrator for additional per head fee, and/or
- Acting as the directed trustee to the health and welfare plan to meet SCA requirements.
For employers, especially those who are strapped for resources or new to the SCA mandates, giving all fringe dollars to a single provider who can take on all these duties is very attractive. Compensation to a bundled service provider is often not fully understood or vetted. There is also often a lack of full transparency of direct and indirect compensation with revenue sharing. As this case shows, there is a lack of checks and balance in this arrangement and James Campbell was able to take whatever discretionary actions that he wished. Trust is a double-edged sword.
Secondly, even if the service provider is not a bad actor, he/she may not be a competent provider of every service offered and for which he is engaged by the plan sponsor. Every business owner wants to increase revenue and profit margin. However, for ERISA plans, the plan sponsor and all fiduciaries must serve “solely in the interest of participants and use the assets for the exclusive purpose of the plan”. It is the plan sponsor employer’s responsibility to balance efficiency with fiduciary duty. The simplest and most convenient bundled service provider approach may not be the prudent approach as service providers tend to always overreach and expand their services without necessarily doing so with the highest competence and through a fiduciary lens.
This case has also shined a light on what types of fees are permissible to be absorbed by the fringe dollars and what types of fees are deemed employer expenses and cannot be paid by the fringe assets. There is actually nothing new in this discussion. It is well understood under ERISA that there are two types of expenses. The first is often referred to as expenses for meeting “settlor” functions. These are activities which relate to the establishment, termination, and design of plans and are not fiduciary activities. However, activities related to plan management are fiduciary decisions, and “reasonable” costs in providing the services could be paid for by the fringe assets (e.g. in retirement plans, recordkeeping fees, advisory fees, mutual fund expenses, audit fees, etc. are often paid by plan assets). This entire topic has created much confusion as a result of this case, and an employer should seek ERISA and benefits legal counsel to clearly assist in understanding and implementing payment approaches.
Finally, the DOL vs Axim is a case of showing how unchecked and unmonitored discretionary power given to anyone or any one organization significantly increases the opportunity for corruption. Inserting independent service providers to serve in different roles for a health & welfare and a retirement plan under an SCA fringe accounting environment with an independent trustee significantly reduces the likelihood of an Axim experience.
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