As predicted, the class action lawsuit against Johnson and Johnson (J&J) alleging the drug manufacturing giant breached its fiduciary duties was not an anomaly. Wells Fargo has just entered the fiduciary breach mix. Just last week, Wells Fargo (another large company) was sued for mismanaging its employees’ drug benefits. The allegations nearly mirror those within the J&J suit(opens a new window) filed earlier this year.

Executive summary

Wells Fargo is now the second of many expected and anticipated class action suits against employers for breach of fiduciary duties with respect to their health plans. As previously stated, plaintiff law firms have been investigating several large employers as to whether they are acting in the best interest of their plan participants, exercising care and prudence with respect to the selection of service providers and administration of their plans, and ensuring that plan costs are reasonable.

There’s no time better than the present for plan sponsors to ensure they are minimizing risk, following their fiduciary obligations, and stepping up their oversight.

Action steps include considering the formation of a health and welfare benefits committee to monitor ERISA benefits, including the selection of service providers, reviewing contract terms, ensuring appropriate value for the price, and monitoring service providers and aggregate costs.

Being able to demonstrate a process is in place will generally be an effective shield for many plaintiff lawsuits. That is, prudence equals process.

Lockton Comment: Our recommendations about appropriate fiduciary steps have not changed. For more information, see our Alert(opens a new window) and considerations of the J&J case. Taking prudent action and ensuring proper fiduciary governance remains of utmost importance.

Background on Wells Fargo lawsuit

Like the J&J lawsuit, the plaintiffs in the Wells Fargo lawsuit are alleging mismanagement of the employees’ drug benefits, not taking proper measures to ensure its plan costs were reasonable and failing to exercise prudence in the selecting of and monitoring of its pharmacy benefit manager (PBM). The claims are nearly identical, so we will not reiterate the facts here. However, the plaintiffs’ suit against Wells Fargo also includes claims of incredibly high administrative fees and alleges that Wells Fargo did not ensure the compensation it paid to its PBM was reasonable, which resulted in a prohibited transaction.

Notably, and significantly, an ERISA trust exists in Wells Fargo, just as it does with J&J. ERISA’s fiduciary obligations are at play when plan assets are involved. Plan assets are comprised of participant contributions and other monies that are set aside (and protected) specifically to pay for plan benefits, such as plan monies that are held in a trust. Many employer ERISA plans are paid directly out of the employer’s general assets, which are generally not deemed plan assets. So, with most employer plans, the amount of plan assets is smaller by comparison as typically the only plan assets involved are from participant contributions. However, when trusts are involved, all contributions (employee and employer) as well as investment income are deemed plan assets. This is a much bigger pot. In Wells Fargo, for the 2022 reporting year alone, that pot was alleged to receive over $2.5 billion dollars in additional plan assets.

Unknowns with Wells Fargo Suit

Plaintiffs claim large discrepancies with Wells Fargo prescription costs using similar examples to J&J. They claim by not using a NADAC (National Average Drug Acquisition Cost) benchmark that the plan overpaid. However, what is unclear is whether Plaintiffs considered the administrative fee and the dispensing fee when comparing NADAC with the Wells Fargo prescription plan. Typically, NADAC does not include those fees so they would need to be added in to ensure the comparison is apples to apples.

Moreover, the NADAC is established based on pharmacies voluntarily completing a survey of their acquisition cost. Although only a very small percentage of pharmacies participate (less than 6%), the Centers for Medicare & Medicaid Services (CMS) uses NADAC in Medicaid reimbursement. While these numbers can be helpful, they are not the entire cost and comparison just against ingredient cost can be misleading.

Status of J&J lawsuit

The J&J suit is ongoing. The plaintiffs in that case filed an amended complaint and currently pending is a motion to dismiss. But there has been no ruling as to whether the PBM contract amounted to a breach.

Why should fiduciaries care?

Employer plan sponsors whose health and welfare plans are subject to ERISA are in fact ERISA plan fiduciaries. As such, they have specific duties.

Lockton comment: See the section of our Alert(opens a new window) titled “About fiduciary duties” for an explanation of those duties.

Carrying out those fiduciary duties requires that plan fiduciaries understand their roles, know how the plan operates, and are aware of other key aspects of plan administration.

Fiduciaries can be named in the plan document or identified by the services they provide to a plan. A person can be a functional fiduciary if they exercise discretionary authority or control over the plan or its assets. There can be multiple fiduciaries, and each could have co-fiduciary liability for missteps.

Lockton comment: For further information on potential liability, see the section of our Alert(opens a new window) that is titled, “As a fiduciary, what is the risk exposure?”

What should fiduciaries consider?

Employers need to engage in a prudent process when selecting and monitoring their service provider. They need to take an active role and step up their oversight.

Lockton comment: As previously mentioned, the allegations within J&J and Wells Fargo are nearly identical. This new suit does not set forth substantially different fact patterns or considerations. Therefore, the action plan for what employers should do remains the same. These action steps can be found in our Alert(opens a new window) under “What should fiduciaries do now?”

With respect to PBMs specifically, additional considerations include understanding all the sources of pharmaceutical manufacturer revenue the PBM receives and whether those different sources are passed on to the plan. Fiduciaries should also look at the total plan cost, including rebates, dispensing fees, and administration fees during its evaluation.

Lockton comment: Lockton has created a self-help kit called the Fiduciary Governance Toolkit to help its clients ensure they are well-versed on and are meeting their fiduciary duties. Moreover, Lockton’s pharmacy team can provide guidance and insight on the different areas to consider in the evaluation and selection of the client’s PBM.