Plan sponsors today have unprecedented options available to them when making investment selection decisions for their plans. Among those options is a wide array of actively managed investment strategies. These strategies provide participants a diversity of choice and the opportunity to benefit from excess returns above a benchmark, which can have a significant impact on portfolio value over longer time horizons due to the power of compounding. At the same time, plan sponsors face increasingly complex fiduciary requirements, as well as pressure to provide an optimal plan experience for participants at a reasonable cost. Making investment selection decisions under these conditions can prove challenging. This white paper aims to help fiduciaries navigate the waters of plan investment selection and monitoring processes by:
- Decoding the legal standards that apply to fiduciaries who are responsible for choosing investment options for their plans.
- Identifying some guiding principles drawn from legal authorities that may assist fiduciaries assessing investment strategies such as active and passive as part of a plan lineup.
- Emphasizing the importance of process as the most important factor in fiduciary decision-making.
Decoding ERISA’s Fiduciary Standards
ERISA holds plan fiduciaries to certain standards of care that the courts regard as the highest standards known to law, namely:
- Fiduciaries owe a duty of loyalty1 to plan participants and beneficiaries. This means that the fiduciaries must act solely in the interests of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and paying only reasonable plan expenses. This standard is often is referred to as the "exclusive benefit rule."
- Fiduciaries owe a duty of care2 to plan participants and beneficiaries. This means that when the fiduciaries act for the plan, they must act “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 a like character and with like aims.” This standard is known as the "prudent person rule."
- Fiduciaries also must act consistent with the documents3 that govern the plan and must diversify4 the plan’s investments so as to minimize the risk of investment losses.
- Understanding the documents that govern the plan, which may set forth investment objectives or mandates for the plan. Remember, following the plan documents is a key fiduciary obligation.
- Meeting regularly to discuss and review the plan’s investment options. Again, the focus here is on process. It is important to have a decision-making process that is thorough, consistently applied, and documented.
- Considering key attributes of the investment options (such as performance, expenses, and volatility) when considering available options and monitoring those investments chosen for the plan.
1 ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A).
2 ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B).
3 ERISA § 404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D).
4 ERISA § 404(a)(1)(C), 29 U.S.C. § 1104(a)(1)(C)
This paper is sponsored by T. Rowe Price Associates, Inc. Contents of this paper are for informational purposes only and not for the purpose of providing legal advice. The analysis and conclusions are solely those of the author.