Four Pitfalls to Avoid When Negotiating Service Provider Agreements

This is the third and final installment in a series of three blogs leading up to our Compliancedashboard® webinar on December 5^th, 2018: Contracts 101: Creating Simple, Compliant Service Provider Agreements. In the first blog of this series, we looked at essential contract provisions for service provider agreements; the second blog reminded us to include specific ERISA-plan information in wrap documents.

In today’s blog, let’s identify four contract provisions that may “trap” the unfamiliar…and how to avoid them. Oftentimes, the best offense is a good defense; avoid these traps by consulting a qualified ERISA professional, negotiating terms (finding common ground with the service provider), and crafting a clear, concise, and explicit agreement to meet all parties’ needs.

1. Scope of Services to be Provided

The Trap:

Failure to clearly understand the exact nature of each of the services the provider has agreed to provide—and those they have not agreed to provide.

How to Avoid:

Language should first be consistent with plan provisions and address the scope of services to be provided.  Second, services should be explicitly stated in writing, accurately explained in detail, and thoroughly understood by both parties to the agreement—before signature.

2. Compensation & Fee Disclosures

The Trap:

Compensation paid to the provider(s) exceeds a “reasonable” amount.[1]

How to Avoid:

First, don’t just glance at the fee schedule; examine it closely.  Second, run it past an experienced ERISA professional.  Third, comparison shop—paying the service provider will cost the plan, the plan sponsor and the participants—so ensure provider fees are reasonable.

3. Limitation of Liability & Indemnification Applicable to Both Parties

The Trap:

Lopsided language more favorable to the service provider than the plan.

How to Avoid:

First, consult an attorney with ERISA experience who is comfortable drafting contracts.  Second, go to school—learn the basics about Limits of Liability and Indemnification.  In a nutshell, limiting liability means limiting (or capping) the amount of damage a party is responsible for if there’s a mistake.  To indemnify someone means to “hold them harmless” and compensate or secure someone from harm or loss.

Oftentimes, in a service provider’s standard contract template, both legal concepts are heavily written to favor the service provider.  However, a plan sponsor can negotiate these provisions with the provider.  For example, ERISA prevents a fiduciary from obtaining a release of liability from breaching their fiduciary duty.[2]  This means a provision written to secure such release is void.

4. Termination Provisions

The Trap:

Failure to plan for a split: What happens when one or both parties wishes to terminate the agreement?  What do you do if the plan itself is terminated?

How to Avoid:

First, specify (in detail) in the agreement the procedures to be taken by both parties if one or both parties wishes to terminate the agreement. This may include details about a transition plan to a new provider.  Second, all termination provisions under ERISA purview must reflect specific termination language.[3] Third, if the plan itself is to be terminated, make sure to identify who will assume duties related to the termination.

*This blog post is not intended to constitute legal advice. Please consult your counsel regarding plan-specific needs.

[1] Generally, ERISA prohibits a “party in interest” from providing services to a plan unless the transaction is exempted.  One exemption to the prohibited transaction rules permit payment to a service provider if the plan pays no more than “reasonable” compensation to the provider.

[2] ERISA Section 410(a) states (in relevant part) “any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void against public policy.”

[3] ERISA Section 408(b)(2).