Justifying the Cost of Voluntary Benefits

Every pay period, millions of American workers see deductions on their paystubs for voluntary benefits such as accident and critical illness insurance. Now, they are suing over how much they pay.

Four recent class action lawsuits allege that large employers—United Airlines, LabCorp, Community Health System, and Allied Universal, along with their brokers—violated the Employee Retirement Income Security Act (ERISA) by choosing plans that charged employees excessive and unreasonable premiums for voluntary health benefits while brokers profited.

ERISA, which Congress enacted in 1974, sets requirements for employer-sponsored benefit plans, including retirement and health. Under ERISA, anyone who exercises discretionary control or authority over a benefit plan becomes a “fiduciary” with a strict legal duty to act in the plan participants’ best interests.

The complaints allege that fiduciary duties attached to the employers because they selected insurance carriers, included the voluntary benefits in their own enrollment materials, and administered the plans. The plaintiffs claim that employers violated their fiduciary duties by failing to compare plans in the voluntary benefit marketplace and failing to ensure brokers received reasonable compensation.

Each group of plaintiffs allege that brokers function as fiduciaries because they exercise discretionary control over plan decisions. The plaintiffs also allege that brokers engaged in self-dealing by steering employers toward high-cost plans and withholding information about lower-cost alternatives in order to maximize their own commissions.

A key question in the proceedings is whether ERISA applies at all. The Department of Labor (DOL) provides an exemption for employers offering voluntary benefit plans that meet the following conditions: the employer does not make contributions to the plan, employee participation is completely voluntary, the employer does not endorse the plan, and the employer does not receive compensation for the plan, other than what is reasonable for administrative services rendered in connection with the plan. Exempted plans do not have to comply with the Act’s fiduciary requirements.

Whether the plaintiffs’ plans are exempted will depend on the facts of each case.

As these complaints progress, Congress appears to move in the opposite direction. On March 17, the U.S. House Education and Workforce Committee advanced the ERISA Litigation Reform Act, introduced by U.S. Representative Randy Fine (R-Fla.). If passed, the bill would make ERISA lawsuits much harder to bring.

Former DOL officials have voiced their opposition to the bill, saying it will “significantly weaken the enforcement framework Congress designed to protect Americans’ health and retirement benefits.” They contend the bill would make it more difficult to uncover wrongdoing, hold fiduciaries accountable, and rectify losses.

In this week’s Saturday Seminar, scholars consider whether employee benefit plans are adequately protected.

• Over one third of employers may be violating ERISA, conclude Barak Richman of George Washington University School of Law and several coauthors in an article in the Cambridge Journal of Law, Medicine & Ethics. The Richman team finds widespread failure of employers to uphold their fiduciary duties by not comparing price and quality when selecting plans. After selecting a plan, employers also have an ongoing duty to monitor the plan’s customer service, coverage adequacy, and costs, Richman and his coauthors note. By not acting prudently, employers expose themselves to liability and cause employees to pay more, contend the Richman team.
• Although ERISA has robust protections for retirement plans, its protection of the nearly 165 million American workers who receive health insurance from their employer is inadequate, argue Amy B. Monahan of the University of Minnesota School of Law and Barak D. Richman of George Washington University Law School in an article. They contend that, in the absence of federal regulatory standards, employers do not evaluate their health plans with sufficient rigor. As Monahan and Richman claim, insurers lack an incentive to compete for customers, leading to high prices and subpar services. Amid an increase in health insurance-related employee litigation, they urge courts and the DOL to reconsider the demands that ERISA places on employers that provide health insurance.
• In an article in Akron Law Review, practitioner Brendan Mohan investigates how states could regulate pharmacy benefit managers (PBMs). Mohan provides an overview of PBM functions, including negotiating prices with drug manufacturers, controlling drug sales’ volume, and determining patient premiums and out-of-pocket expenses. Mohan notes that the federal government and states have begun to scrutinize these practices. Despite this increased scrutiny, Mohan explains that PBMs have long relied on ERISA to preempt state laws attempting to regulate their practices. Mohan predicts, however, that recent U.S. Supreme Court decisions will allow states to pass laws regulating PBMs, but contends that Congress must enact broader federal legislation to curb harmful practices.
• Despite benefits making up nearly a quarter of employee compensation on average, recent state pay transparency laws fail to mandate detailed disclosure of employee benefits, argues Samantha J. Prince of Penn State Dickinson Law in an article in Marquette Law Review. Prince explains that, absent a mandatory disclosure rule, businesses can generally elect to disclose as much or as little as they want about their benefits to prospective employees. She emphasizes that accurate and detailed disclosure allows workers to make informed employment decisions. Other stakeholders, such consumers and investors seeking to align their purchases and investments with employee-friendly companies, may also benefit from increased transparency, Prince contends. She advocates enhancing disclosure through state statutes, DOL rulemaking, ERISA amendments, or SEC requirements.
• Determining how much workers lose when retirement plan managers charge excessive fees or make poor investment choices is fundamentally a math problem, argue Vahick Yedgarian and Ram Paudel of International American University in a forthcoming paper. Drawing on court decisions, settlements, and expert reports from 2020 to 2024, Yedgarian and Paudel examine how courts ask what workers’ retirement accounts would have been worth had the mismanagement never happened. Yedgarian and Paudel identify performance benchmarking, statistical modeling, and loss calculations as the main tools courts use to quantify those losses. Yedgarian and Paudel conclude that policymakers working to protect workers’ retirement savings should recognize that financial experts, not just lawyers, often determine how much workers recover.
• Excessive fees charged by retirement plan managers are draining Americans’ retirement savings, warns Lauren Valastro of Texas Tech University School of Law in a forthcoming article in the Houston Law Review. Valastro argues that fees of 1 percent to 2 percent can erode between one-third and one-half of a worker’s retirement savings. The contracts governing retirement plan managers under ERISA harm workers, who have no say in how those contracts are written but bear the financial consequences, Valastro contends. Valastro proposes restructuring these arrangements by borrowing practices from other industries, such as tying manager pay to investment performance and capping fees, to protect the $13 trillion Americans hold in employer-sponsored retirement plans.