The Importance of Reviewing Litigation Involving Your Vendors

When it comes to managing an ERISA health or retirement plan, your vendors are integral to the process. Whether they provide investment advice, handle claims processing, or manage benefits administration, these vendors are crucial to the smooth operation of your plan. However, not all vendors are created equal, and understanding their history—particularly any litigation they’ve been involved in—is essential to safeguarding your organization.

Uncovering Potential Red Flags

One of the most significant reasons to review litigation involving your vendors is to uncover potential red flags. A history of lawsuits can indicate serious issues such as fraud, negligence, or breach of contract. Even if a vendor has not been found liable, the nature and frequency of legal disputes can provide insight into their business practices [1]. For example, a vendor facing multiple lawsuits for failing to meet contractual obligations might be a risky partner, as they may not deliver the quality of service your plan requires. This type of information is crucial in helping you avoid vendors that could pose a threat to your organization.

Assessing Financial Stability

Litigation can also be a sign of financial instability. Legal battles are expensive, and a vendor tied up in multiple lawsuits may face significant financial strain [2]. This could lead to disruptions in service, or worse, the vendor going out of business, leaving your organization in a difficult position. Understanding the financial health of your vendors is essential to ensuring they can fulfill their obligations to your plan. Reviewing their litigation history provides a window into any financial difficulties they might be experiencing, helping you make informed decisions about whether to engage or continue working with them.

Evaluating Ethical Standards and Business Practices

The legal history of a vendor can reveal much about their ethical standards and business practices. Vendors with a history of litigation may have engaged in practices that, while not necessarily illegal, are unethical or questionable [3]. For instance, lawsuits alleging deceptive practices or unfair treatment of clients can suggest a lack of integrity. As a fiduciary, you are required to act in the best interest of your plan participants, and partnering with vendors who do not share this commitment to ethical standards can jeopardize that responsibility. By reviewing litigation history, you can ensure that your vendors align with the ethical standards your organization upholds.

Mitigating Risks to Your Organization

Engaging with a vendor embroiled in litigation can expose your organization to unnecessary risks. If a vendor is currently involved in legal disputes, there’s always a chance that these issues could spill over into your operations [4]. For instance, a vendor facing litigation related to data breaches could put your plan’s sensitive information at risk. Additionally, ongoing legal battles might distract the vendor from providing the level of service your organization needs. By reviewing litigation history, you can better understand the risks involved and take steps to mitigate them, whether through additional contractual protections or by choosing a different vendor.

Supporting Informed Decision-Making

Ultimately, reviewing litigation involving your vendors supports informed decision-making, a cornerstone of your fiduciary duties. It ensures that you are not blindly entering into or continuing partnerships with vendors who might compromise the integrity or effectiveness of your plan [5]. By carefully considering a vendor’s litigation history, you demonstrate prudence and due diligence, protecting both your organization and your plan participants from potential harm.

In conclusion, taking the time to review litigation involving your vendors isn’t just a legal formality—it’s a vital step in protecting your organization from unnecessary risks and ensuring that your vendors meet the high standards required for managing an ERISA plan. Armed with this knowledge, you can confidently choose vendors that will support your organization’s goals and uphold the trust placed in you by your plan participants.

For support in managing your fiduciary responsibilities, visit Fiduciary In A Box.  

© 2024 Fiduciary In A Box, Inc. All rights reserved

References

[1] Gibson, D. (2024, June 18). Annual ERISA litigation review and outlook – 2024. Retrieved from https://www.gibsondunn.com/annual-erisa-litigation-review-and-outlook-2024/ 

[2] Gibson, D. (2023, March 21). Annual ERISA litigation outlook and 2022 review. Retrieved from https://www.gibsondunn.com/annual-erisa-litigation-outlook-and-2022-review/ 

[3] NCEO. (2023). ESOP and 401(k) plan employer stock litigation review 1990-2023. Retrieved from https://www.nceo.org/ESOP-401k-Employer-Stock-Litigation/pub.php/id/355 

[4] Fisher Phillips. (2024, April 11). New ERISA class actions zero in on group health plan fiduciary obligations. Retrieved from https://www.fisherphillips.com/en/news-insights/new-erisa-class-actions-health-plan-fiduciary-obligations.html 

[5] Department of Labor. (2022). 2022 ERISA litigation and significant issues in litigation. Retrieved from https://www.dol.gov/agencies/sol/divisions/plan-benefits-security/2022-ERISA