What is a Functional Fiduciary and How Can it Affect Your Company?

Saturday, November 16, 2019

Organizations that are not listed as an official fiduciary can still find themselves considered a functional fiduciary, due to their role in an ERISA governed benefit plan. By definition, a functional fiduciary is any person or entity that exercises authority and management of a retirement or benefit plan, or that has a responsibility to administer the plan. Although not officially listed as a fiduciary, they are considered functionally so due to their role in the healthcare or retirement plan.


At times it is not clear what entities are and are not considered fiduciaries. In addition, there is also confusion as to what roles a party would have, depending on the industry, to be considered a functional fiduciary. In order to protect the interests of all parties it is a good idea to never assume that your organization is not (or could not in the future) considered a functional fiduciary. Clearly defining this can prevent problems and lapses in the future management of any healthcare plan.

Functional Fiduciary in the District Court of Northern California

A recent case in the California district court, Josef K. v. California Physicians’ Service, No. 18-cv-06385-YGR, has been litigating the issue of what constitutes a functional fiduciary, and what exactly their role is in the management of a plan or the approval/denial of a claim. The judge in this cause, Judge Yvonne Gonzales Rogers, recently ruled that an independent medical review company can be subject to a claim under the Employee Retirement Income Security Act (ERISA) for a breach of fiduciary duties.


glasses on clipboard next to a computer
ERISA healthcare plans are managed by plan administrators and designed to hold them to a high standard of fiduciary duty.

What is ERISA?

ERISA was designed to protect the interests of employee benefit plan members and beneficiaries, and it also establishes rules and standards of conduct for plan managers and other fiduciaries. This is an important protection for many families who are guaranteed that their plan funds are protected, and that the correct amount of money reaches the plan beneficiaries, even if a company goes bankrupt.


In 2013, ERISA encompassed 684,000 retirement plans and 2.4 million health care plans, which are managed by a wide variety of plan administrators. The companies that manage these plans are held to a high standard, and ensure that they act in the best interest of the plan participants. ERISA was designed to protect retirement and healthcare plans from mismanagement and abuse, and cover around 141 million workers and their beneficiaries. 

Claim denial

In the case in California, the problem arose from the denial of a mental health benefit that was not considered to be medically necessary. The dependent of the plaintiff submitted a claim for benefits under an ERISA managed healthcare plan for treatment. The administrator denied the claim, as well as its subsequent appeal. In this case, the plaintiffs then requested to have an independent medical review done of the claim and appeal denial. 


The service that undertook this review was Maximus Federal Services, Inc., which was tasked with reviewing all the information and making an independent observation. After its review, the company determined that the test conducted was not medically necessary, and upheld the denial of the claim by the plan administrator. The plaintiffs in this case believe the independent medical review company did not examine the case properly, that it failed to consider all the evidence, and did not do a thorough review at all.

stethoscope on notepad
Deciding whether to accept or deny a claim can be considered part of the role of a functional fiduciary.

Was there a breach of fiduciary duties?

The court’s opinion in this matter determined that Maximus Federal Services, Inc. was considered a fiduciary as defined by ERISA in this circumstance, and was therefore in breach of its fiduciary duties while conducting its independent medical review. According to the court’s opinion, there are three ways in which a party not named in a plan can take on the role of a functional fiduciary.


  • The party exercises discretionary authority or management of a plan or the allocation of its assets.
  • Gives investment or management advice for a fee with respect to any amount of money in relation to the plan.
  • A party has the authority and responsibility for the management of such a plan.


According to the court’s opinion, this is what made Maximus Federal Services, Inc. a functional fiduciary; there was no disagreement between the parties that the independent medical review company was not a named fiduciary.


The court further clarified that because Maximus Federal Services, Inc. was acting in a capacity to grant or deny claims, it was taking action against the basis for the complaint-- which is exactly what made it a functional fiduciary in this circumstance.

Medically necessary treatment

Maximus Federal Services, Inc. was asked to determine whether or not the medical treatment sought out by the plaintiff was medically necessary. By being asked to do this, Maximus exercised authority in determining whether or not the treatment was medically necessary, and not something done for convenience. When it reached the same result as the plan administrator, Maximus was also found to be exercising discretion into what it deemed was safe, effective, and appropriate for this particular situation. This was determined by the court to be what a functional fiduciary would be responsible for.


In addition to having authority over the determination of what was and what was not medically necessary, Maximus also had control of the allocation of the assets of the plan. If it found that the treatment was medically necessary, then the claim would be paid out. If it was found to not be medically necessary, then the denial would be upheld and no claim would be paid.


In this instance it appears that the independent medical review company was considered to be a functional fiduciary for its role in determining whether or not a treatment was medically necessary, and whether or not a claim should or should not be denied. It is helpful to know for plan administrators and others involved in plan management that going forward they should use all the information available when ruling on whether or not a claim should be paid or denied.


doctor writing notes on clip board
When an independent medical review company showed that it was responsible for managing allocation of a plan’s funds, it was taking on the role of a functional fiduciary.

What Does This Mean for Data Management?

Can other organizations with other roles be seen as functional fiduciaries as well? More and more companies have been gathering and tracking data to help their employees make better healthcare decisions, and to create better experiences with the employer-sponsored healthcare system over all. This data is used to help create better ways for doctors and hospitals to meet the needs of patients, and have started to change the way people interact with hospital professionals and the healthcare system. 


But can employers or other organizations who help them manage and track this data ever be considered functional fiduciaries as well? Employers who have access to the data of their employees have a responsibility to keep that information safe, and to use it to make better strategic decisions for the company going forward. It is not intended to be used to manipulate information or push certain agendas. 

Recommendations going forward

Employers should continue to manage their client’s data carefully, and ensure that they are using it to help the company make more informed and effective decisions. Withholding data or skewering it to meet an agenda is not proper management of data, and cannot lead to the best results. In order to help prevent misuse of data, perhaps it is a good idea to begin to talk about making changes both legally as well as with industry norms. Legally, there have been suggestions of creating a federal statute to enforce fiduciary duty among organizations that collect data. These statutes would then need to be enforced by the courts, as well as publicly upheld.


There is a way for data management to keep moving forward, and allow companies to make better decisions for their employees. However, protection from inefficient and ineffective use is needed as well, so that other organizations do not find themselves in a position that they did plan on.


As seen with the case in the district court of California, it is a good idea for plan administrators to examine all the available data and information before making a decision on a claim. The same holds true for data management, so it is crucial for there to be a process in place to properly monitor, store, and analyze what it is used for. 


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