I RECENTLY served as an expert witness on prudent process. My testimony focused on what a “prudent process” is and what fiduciaries do to satisfy that requirement. To prepare for that testimony, I outlined the steps required for a prudent process—based on my experience and observations.

1. Determine the purpose of the plan. Fiduciaries must make decisions that are consistent with the objectives of the plan. For retirement plans, the purpose is to provide retirement benefits. Therefore, the first, and most important test for any decision is, will this promote meaningful retirement benefits for the participants? How do you understand the purpose of your plan? Read the documents, the SPD, and other important plan materials. This step also requires that fiduciaries have a basic understanding of their responsibilities under ERISA. After all, the law requires that fiduciaries override the terms of the plan documents when those terms conflict with ERISA’s provisions.

2. Develop a plan and document it. Best practices (and, in some cases, legal compliance) dictate the development of a strategy for achieving the objectives of the plan. For example, investment fiduciaries are required to make investment policy decisions, such as the investment categories to be used by the plan and the criteria for selecting and monitoring the investment categories to be used by the plan and the criteria for selecting and monitoring the investment options (e.g., the mutual funds). There is no explicit requirement in ERISA that those decisions be reduced to writing—that is, no explicit requirement that an investment policy statement (IPS) be drafted. From a best-practice perspective, a thoughtful IPS will help fiduciaries better manage their investment responsibilities and achieve the investment goals of their plan.

3. Determine responsibilities and allocate them. Under ERISA, fiduciaries are not required to be experts in the administration and investment of retirement plans. Fiduciaries need to understand the full range of their responsibilities and decide where they want help. Then, they need to choose competent helpers. That allocation of responsibility must be done prudently, and the advice must be considered thoughtfully; it is a breach of fiduciary duty to just rubber-stamp the advice. While fiduciaries must prudently select and monitor their advisers, that task is not as difficult as it may appear. In fact, it is easier than selecting and monitoring the investments. Focus on the licensing, education, and reputation of the adviser. Get references and check them out.

4. Investigate and report. Once the advisers are selected and the duties assigned, the responsible party must investigate the issue under consideration. The results of the investigation should be reduced to writing—and the report should be in sufficient detail to describe the scope of the investigation, the information gathered, and the analysis of the information.

5. Evaluate and meet. As a practical matter, where multiple fiduciaries are involved, like committee members, it is essential that each one review and understand the report, and that they meet to discuss its contents and recommendations and to share their individual thoughts. If the written report is not clear or raises questions (e.g., about the adequacy of an investment), the fiduciaries, or their adviser, should investigate—that is, ask questions and get answers. While much of the initial monitoring is quantitative (based on data and performance), the investigation is usually more qualitative (e.g.: Why is the fund underperforming? Have there been changes at the investment manager?).

6. Discuss and decide. The concept of a committee acting as a fiduciary is that, while each has a vote, the work product reflects the analysis and opinions of the committee members in the aggregate. The benefit of critical and involved discussion is that the issues are thoroughly explored, and the strengths and weaknesses of the alternative conclusions are fully understood and considered. The decision must be the committee’s and reflect the collective efforts of the members.

7. Implement. It is clear from DOL guidance that the last step is to implement the decision made through the prudent process. As with the process, the decision must be implemented in a diligent and prudent manner.

8. Monitor. A fiduciary’s work is never done. Any decision that has an ongoing effect on a plan must be monitored periodically. The law does not specify the frequency of the monitoring, other than that it be done at appropriate intervals. As a practical mater, most plans monitor at least once a year.

ERISA is not so much about whether fiduciary decisions are right or wrong, but more about whether the “right” information was evaluated in the “right” way—a prudent process.
Source: PLANSPONSOR