It’s often said that ERISA’s prudent man rule is the highest duty known to law. But is that enough?
Don’t get me wrong – any law that holds human beings to the standards of an expert in any field is a pretty high standard, and one that can be difficult to meet even with the ablest of expert assistance.
I started thinking about this recently when a friend was asking my advice on what he should do regarding the options in his new 401(k) plan. I did what I often do, outlining the pros and cons of various alternatives, helping him to make what I considered to be a well informed – or at least better informed – opinion.
I had stepped through all the options and considerations with his plan, a pretty standard combination of automatic enrollment provisions. But then, after asking questions throughout, when I got done, he didn’t ask what I thought he should do. Instead, he asked what I had done with my own retirement savings.
Plan fiduciaries have long been reluctant to superimpose their judgments on the participants whose benefit they are charged with overseeing, and with good cause. The financial decisions attendant to participating in a plan (including the decision to participate in the first place) are fraught with the potential for significant disruption, particularly in view of the panoply of personal circumstances that ought to be considered. And while there are doubtless situations in life for which we must do so – the imposition of our best judgments for loved ones not old enough, or no longer able, to do so – most of us have our hands full just keeping up with our own slate of critical determinations.
The process of stepping through my decisions with my friend wasn’t without its limitations. It wasn’t an apples-to-apples comparison, of course; my plan didn’t have the same options available to him, nor were our specific financial and familial situations identical.
While we have made significant strides in implementing “automatic” plan designs that help participants get off to a better start than they might have if left to their own devices, it still seems that most fiduciaries gravitate toward the “first, do no harm” standard generally associated with the medical profession’s Hippocratic Oath.
A higher standard might arguably be the so-called “Golden Rule,” which sets as its marker that you do to others how you would like them to do to you. How might that apply to retirement plan designs?
If you, as a participant, wouldn’t think of setting aside only 3% of pay, even as a starting point, why would you let others do so?
If you, as a participant, wouldn’t think of contributing to a level that doesn’t give you the full benefit of that company match, why would you let others do so?
If you, as a participant, would (and do) willingly accelerate your rate of contribution annually, why do you let others pass up that opportunity?
If you take advantage of a qualified default investment alternative to help ensure that your investments are diversified and rebalanced on an ongoing basis, and particularly if you use that as a default option for new hires, why wouldn’t you do the same for current hires?
If you think overinvestment in company stock is dangerous, why do you let participants do it?
If you think participants need help making retirement planning decisions, why don’t you accommodate it?
I realize the answers to some, and perhaps all, of these questions are complicated. “My boss wants us to” is surely the answer in some cases, while “Because I am worried I/we will get sued” comes up frequently. The answer I hear most from plan sponsors is, “I don’t know enough about their individual situations to make the right decision,” though one might also reasonably reply, “Because I’m not required, even as an ERISA fiduciary, to do so.”
But my conversation about a friend’s new 401(k) got me to thinking about the prudent man standard, and how it’s generally applied to plan design standards.
After all, can it really be in the best interests of plan participants, if it isn’t good enough for you?
The original prudent man rule dates back to the common law, specifically the 1830 Massachusetts case of Harvard College v. Amory. From that case came the notion that trustees were directed "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested." In the absence of specific directions in the trust agreement, the trustee was to invest as he would invest his own property, taking into account the needs of beneficiaries, the need to preserve the estate (or corpus of the trust), and the amount and regularity of income.
ERISA’s prudent man rule goes further, requiring that a fiduciary must perform its duties “with the care, skill, prudence and diligence under the circumstances then prevailing, that a prudent man acting in like capacity and familiar with such matters would use...”