A Prudent Process Protects Fiduciaries

Section 404(a)(1)(B) of ERISA requires a fiduciary to discharge its duties with respect to an ERISA plan “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aim.” The duty of prudence has many facets. However, 35 years of court cases and agency guidance dealing with countless issues in a wide variety of contexts have made at least one thing clear: prudence requires a sound process. This post will offer a few thoughts about how the maintenance of a robust plan administrative committee can help assure a sound process for decision making and, thereby, fulfill the duty of prudence.

As a practical matter, courts have interpreted the duty of prudence as creating a “prudent expert” standard, rather than a prudent man standard. In the words of one judge “a pure heart and an empty head are not enough” to demonstrate compliance with the duty of prudence. Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983). At a minimum, this means that plan fiduciaries must engage in a thorough and diligent investigation and analysis, and perhaps bring in expert advisers, before making a decision. Cases involving breaches of fiduciary duty with respect to the investment of plan assets return to this theme again and again. See Donovan v. Mazzola, 716 F.2d 1226, 1223 (9th Cir. 1983) (the test of prudence is “whether the individual trustees, at the time they engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment.”); Donovan v. Cunningham (the court’s inquiry must focus on the quality of the fiduciary’s investigation of an investment, not the merits or ultimate performance of the investment).

So if fiduciary processes create the framework within which the plan fiduciaries can fulfill their obligations, what sorts of “best practices” are likely to protect fiduciaries and help them do a better job? In our view, a sound fiduciary process will include at least the following:

  • Appointment of a plan administrative committee (with attention paid to the composition and membership of the committee).
  • Formal designation of the duties and responsibilities of the committee (sometimes in the form of a charter or similar document) and the establishment of operating rules.
  • The provision of appropriate protections for committee members, such as fiduciary liability insurance and indemnification by the employer.
  • Adherence to the foregoing rules through regular meetings and the thorough and accurate documentation of analyses and actions taken by the committee -- the taking of minutes is key to demonstrating compliance particularly when it comes to monitoring the performance of other fiduciaries.

A sound process, well documented, will serve the interests of fiduciaries and participants alike.