On February 5, 2024, a class action lawsuit was filed against Johnson & Johnson, alleging that the company and their pension & benefits committee breached their fiduciary duty under the Employee Retirement Income Security Act (ERISA) by mismanaging the plan’s prescription drug benefits (Lewandowski v. Johnson & Johnson, et. Al., D.N.J., No. 1:24-cv-00671 (Feb. 5, 2024)). More specifically, the complaint alleges that the plan’s fiduciaries did not act prudently in the selection of the plan’s pharmacy benefit manager (PBM), that they agreed to unreasonable prices (allegedly price markups of 498%), and subsequently failed to properly oversee the PBM (among additional claims). Specifically, in one example provided, the case alleges that a certain drug offered under the plan cost plan participants 250 times more than the price available to someone at a pharmacy if they were to pay out of pocket. As a result, the complaint states that the plan has cost employees millions of dollars due to the fiduciary breach and they are seeking a jury trial on the matter.
ERISA Fiduciary Responsibility
ERISA was signed into law in 1974 and was the culmination of public concern over prior mismanagement of employee benefit programs. The focus of the law is on setting minimum standards for the management of benefit plans (including fiduciary responsibilities) and on protecting employee rights. As background, a fiduciary is a person or entity that has discretionary authority to control and manage the operation and administration of a benefits plan that is governed by ERISA. Specifically, ERISA requires that fiduciaries act “with the care, skill, prudence, and diligence under the circumstance…that a prudent man acting in a like capacity and familiar with such matters would use…” 29 USC 1104(a)(1)(B).
While not an exhaustive list, some examples of fiduciary responsibilities include:
- Acting solely in the interest of plan participants and their beneficiaries
- Following plan documents
- Carrying out duties prudently (duty of care)
- Paying only reasonable and necessary plan expenses
- Documenting plan and benefits decisions and the basis for those decisions
- Carefully selecting and monitoring service providers
Fiduciary Liability
There may be consequences of failing to carry out fiduciary responsibilities, such as personal liability to make the plan whole and restore any losses and being removed and barred from being a fiduciary. Further, there is also such thing as co-fiduciary liability, where a fiduciary will be liable for another fiduciary’s violation if there is participation, concealing, permitting, or knowledge of the action without any steps taken to remedy the violation. Finally, it is important to note that fiduciaries can also be held responsible if one of their chosen service providers fails to perform.
While the case is still pending and we do not yet know the outcome, this is a fitting time for employers to take stock of their own plans and to ensure they have solid processes in place to mitigate risk. This is especially so, given many new regulations (such as the Consolidated Appropriations Act, 2021) seeking to gain additional transparency around benefit plans, including surprise billing and drug pricing.
Ways Employers Can Mitigate Risk
There are many ways employers can guard against unnecessary plan risk; here are some actionable employer takeaways:
- Review and understand fiduciary responsibilities, including conducting regular fiduciary training
- Regularly review and assess the plan’s third-party administrators and contracts (this includes a duty to monitor those providers and ensure the plan is paying only reasonable fees and expenses)
- Review and update plan documents, as needed; employers should be operating the plan in line with the procedures outlined in their plan documents
- Take care to negotiate rates and look at benchmarking and market data to make diligent comparisons of carriers and service providers
- Consider a benefits committee to closely monitor benefits activity and service providers
- Consider fiduciary liability insurance, which can protect against breach of fiduciary duty claims (this insurance can protect both retirement and health & welfare plans)
Additional Resources
Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2024 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved
