The Department of Labour (DOL) was asked to give an opinion on indemnification provisions in service provider (SP) contracts. The Employee Retirement Income Security Act of 1974 (ERISA) requires that a plan not engage in a transaction with an SP for the furnishing of services unless the SP’s contract and compensation are reasonable and necessary for the operation and administration of the plan. The DOL advised that, to meet these standards, plan fiduciaries have to solicit bids to objectively assess the SPs’:
Quality of services.
Reasonableness of fees.
The DOL further advised that indemnification provisions applying to fraud or willful conduct are void. However, provisions applying to negligence and unintentional malpractice may be considered. Accordingly, the DOL opined that an ERISA fiduciary must assess:
Source: DOL Advisory Opinion 2002-08A (Aug. 20, 2002), http://www.dol.gov/pwba/Regs/Aos/ao2002-08a.html
The ability to obtain comparable services at comparable costs from SPs without indemnification provisions, or from SPs including such provisions but with greater protection for the plan.
The potential risk of loss and cost to the plan.
Howard Pianko, Epstein Becker & Green P.C.