United States: Plan Fees: Hi-Lex Puts Welfare Plan Vendors On Notice

Last Updated: June 6 2014

Thomas Greene is a Partner in our Boston office.


  • A welfare plan administrative services only (ASO) vendor breached fiduciary duty under ERISA when it failed to properly disclose fees.
  • Lack of trust did not prohibit contributions from being characterized as plan assets in the vendor's hands.

Over the last several years, plan fiduciaries have been made painfully aware of the importance of the duty to monitor and disclose fees charged to 401(k) plans and participant accounts under the Employee Retirement Income Security Act of 1974, as amended (ERISA). Hi-Lex Controls, et. al. v. Blue Cross Blue Shield of Michigan, Nos. 13-1773/1859, 2014 serves as a reminder that plan fees are not just an issue for retirement plans, but also welfare plans.

ASO Fee Agreements Under Scrutiny

Hi-Lex Controls, Inc. is an automotive parts supplier with approximately 1,300 employees that maintains a self-insured health plan for which Blue Cross and Blue Shield of Michigan (BCBSM) acted as a third-party administrator under an "administrative services only" (ASO) agreement. Similar to most ASO arrangements, BCBSM processed claims for Hi-Lex's health plan (the "plan") and granted plan participants access to its provider networks. In return, BCBSM received a monthly administrative fee based on the number of employees enrolled in the plan. ASO arrangements typically provide two very important benefits, among others, to employers and plan participants:

  1. access to an established network of providers
  2. cost savings based on the economy of scale provided by the ASO's negotiating power with the provider networks

In 1993, BCBSM began a program called "Retention Reallocation" under which it marked-up hospital claims and passed the additional mark-up onto its ASO clients. The mark-up was in addition to – not in lieu of – the administrative fee. Additional fees at issue in Hi-Lex included:

  • a provider network access fee
  • reserve contingency risk fee
  • "other than group" subsidy fee
  • a retiree surcharge fee

Court Finds Administrative Compensation Fees Not Acceptable

Hi-Lex asserted it was unaware of the fees until 2011 when BCBSM disclosed the fees to Hi-Lex in a letter in which BCBSM referred to the fees as "administrative compensation." Hi-Lex brought suit in 2011 and the District Court found that BCBSM:

  • was a fiduciary under ERISA
  • had engaged in self-dealing prohibited transactions under Section 406(b) of ERISA
  • breached its general fiduciary duty

The District Court also found that Hi-Lex's claims were not time-barred because of its concealment of its fee practices. The court awarded Hi-Lex more than $6 million in damages and pre-judgment interest. BCBSM appealed the court's findings.

On appeal, a three-judge panel for the Sixth Circuit found the following:

  • BCBSM was in fact a fiduciary due to its ability to exercise discretion over the amount of fees charged to its ASO customers, including waiving fees in certain cases.
  • Hi-Lex's contributions to a BCBSM managed account were "plan assets" in BCBSM's hands because BCBSM held the funds, had discretion to pay claims, had sole check writing authority over the plan's account, provided related data to Hi-Lex for disclosure on the plan's annual Form 5500 and, as a result, there was a reasonable expectation of a "beneficial ownership interest" in the funds.
  • The applicable statute of limitations was six years from the date of discovery of the fee practices because of BCBSM's concealment and since BCBSM never properly disclosed the fees in question until 2007 at the earliest, had previously offered misleading statements such as the administrative fee was all-inclusive and that a "hypothetically reasonable diligent plaintiff" would not have discovered the facts until 2007.
  • BCBSM engaged in self-dealing and prohibited transactions under Section 406(b) of ERISA for which there is no "reasonable compensation" exemption under Section 408(b) of ERISA.
  • BCBSM breached its general fiduciary duty when it failed to act "solely in the interest of [plan] participants and beneficiaries."

The key to the Hi-Lex decision is the finding that the funds in the BCBSM managed account were ERISA plan assets since indentifying plan assets is a threshold question for fiduciary status and prohibited transactions under ERISA. The court's finding that the managed account funds were plan assets may not be adopted by other courts. Nonetheless, Hi-Lex makes it clear to welfare plan vendors that they need to be transparent about their fee practices and provide adequate disclosure of the fees. Concurrently, plan sponsors and administrators have a separate duty to monitor the fees being charged to the plans for which both the sponsors and administrators have oversight responsibility. Hi-Lex also makes it evident that while not subject to the same detailed regime that defined contribution plans are under, described in Section 408(b)(2) of ERISA, failure to properly disclose welfare plan fees can result in significant liabilities, particularly with large self-insured plans. 

Action Items for Vendors and Plan Fiduciaries

In order to establish and maintain a best practices approach to plan management, the following are action items for vendors and plan fiduciaries:

  • Vendors should develop a set of best practices focused specifically on transparency in order to remove any ambiguity over the amount and nature of the fees passed onto the plans for which they provide services.
  • Vendor best practices should include disclosure to both plan administrators and plan participants on a regular basis depending on the type and regularity of a fee (e.g., at least annually, quarterly, when a change occurs, etc.).
  • Plan fiduciaries (e.g., plan sponsors and administrators) need to review welfare plans fees as well, particularly with respect to self-insured plans where premiums are not set year-to-year by a regulated insurance market.
  • Plan fiduciaries should be proactive in monitoring fees and request adequate disclosure from vendors. A failure to make reasonable inquiries, investigate and take remedial action, if necessary, may result in a breach of fiduciary duty by the plan fiduciary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions