Proving Fiduciary Prudence in a Challenging Landscape

Members of committees that oversee a retirement, pension, or healthcare plan qualified under the Employee Retirement Income Security Act ("ERISA") occupy a position of trust.? These trustees or fiduciaries must have a firm grasp of the principle of prudence.

The prudent person principle is a fundamental aspect of ERISA. It requires fiduciaries to act carefully and reasonably, considering the plan's circumstances and participants. That means that fiduciaries must make decisions based on thorough analysis, consider the plan's objectives, ensure its provisions and features match the participants' needs, and modify its design when regulatory changes dictate.

To demonstrate prudence, the people responsible for managing ERISA plans must follow a defined framework of steps or practices that embrace a broad range of issues, often referred to as a prudent process.? That includes the performance of outsourced administration vendors, investment providers, healthcare providers and brokers, controlling vendors' compensation, and validating the vendors' cybersecurity. (Note: ERISA does not attempt to describe specifically what it takes to satisfy the prudence principle.)

Prudence also requires consideration of investment diversification, asset liquidity, and the plan's overall risk and return objectives for retirement and pension plans. Committees must monitor investments regularly and make necessary adjustments to ensure they align with their objectives.

Demonstrating Prudence: A Key Challenge

Demonstrating prudence in ERISA's context can be challenging due to the law's complex nature and the varying interpretations of the prudent person standard. Fiduciaries must make sound decisions and provide evidence that their choices emerged from a thorough analysis and consideration of all relevant factors.

To overcome this challenge, fiduciaries should develop a practical framework for proving their prudence. ?This framework should include governance parameters, plan administration checkpoints, investment decision-making guidelines for retirement and pension plans, and controls that ensure the effective execution of the framework's steps. ?Properly designed and implemented, it can be a systematic approach to risk management, ensuring that the areas of most significant exposure to fiduciary risks, such as recordkeeping vendor compensation, cybersecurity, and healthcare plan fees, receive top priority.

Developing a Practical Framework for Proving Prudence

Developing a practical framework for proving prudence requires careful consideration of various factors. ?It's essential to remember that ERISA does not isolate the duty of prudence to retirement and pension plan investments.? Evidence of that exists in the overwhelming number of lawsuits filed against retirement plan fiduciaries over the last few years for their alleged failures in the other disciplines of governance, administration, and controls.

The Importance of Documentation in Demonstrating Prudence

A formal management framework should produce detailed records of the fiduciaries' actions and results. ?Documentation plays a crucial role in demonstrating prudence in ERISA compliance. ?Fiduciaries should maintain detailed records of their meetings, process audits, service provider selection, and retention decisions, vendors' fee examinations, and investment-related decisions, including the analysis conducted, the factors considered, and the rationale behind their choices.

In addition, fiduciaries should document any changes to the plan's governance, including the plan's design, investment strategy for retirement and pension plans, and data security and participant communication policies.

Seeking Professional Assistance: ERISA Consultants and Advisors

Given the complexities of the ERISA fiduciary role, employers may benefit from obtaining professional assistance from legal counsel, risk management experts skilled in ERISA, and investment advisors. ?These professionals have in-depth knowledge and expertise and can provide valuable guidance and support.? The 4D Framework? is an example of a fiduciary management protocol that embraces all ERISA plan types and has streamlined compliance for many ERISA plan committees.

Conclusion: Striving for Prudence in ERISA Compliance

Navigating the complexities of ERISA and proving prudence in a challenging landscape requires a thorough understanding of the prudence principle, a formal workflow, diligent decision-making, and careful documentation.

By implementing a framework for proving prudence, ERISA fiduciaries can enhance their ability to confidently fulfill their duties and protect the assets and data of their plan participants and beneficiaries.

4D Framework? is a trademark of Roland|Criss at rolandcriss.com