McKay Hochman Company, Inc.

The Employee Retirement Income Security Act (ERISA) requires certain standards of conduct of the fiduciary(ies) of a qualified retirement plan. One of those is known as the prudent person rule (formerly the prudent man rule). The prudent person rule is found in ERISA section 404(a) (which is presented below for reference).

The prudent person rule requires a fiduciary to 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 an enterprise of a like character and with like aims." Thus, the prudence standard applies not just to investments, but to all aspects of managing the plan and plan administration.

Fiduciaries can demonstrate that they have carried out their responsibilities prudently by fully documenting the processes used to carry out their fiduciary responsibilities. ERISA’s prudence standards center on the procedures that a fiduciary uses when determining a proper course of action and the documentation supporting these decisions. In addition to using prudence when making plan decisions, employers must also periodically evaluate these decisions to ensure they remain in the best interest of the plan.

Employers that lack expertise in certain areas will generally hire a service provider to handle other fiduciary functions, setting up an agreement that the person or entity will assume liability for those functions. When hiring a provider it is prudent to document the criteria considered for selecting that provider. In fact, the DOL has a fact sheet of tips when selecting service providers.

As fiduciary, the employer should have an Investment Policy Statement (IPS). An IPS is a written statement that provides the plan's investment goals and guidelines for investment decisions and responsibilities within a plan. An employer may have a hard time proving they are making prudent investment decisions if they do not have a written IPS in place. Further, the IPS should be reviewed each year and the policy and its underlying investments changed as necessary.

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;

(B) 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 a like character and with like aims;

(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III of this chapter.

(2) In the case of an eligible individual account plan (as defined in section 1107 (d)(3) of this title), the diversification requirement of paragraph (1)(C) and the prudence requirement (only to the extent that it requires diversification) of paragraph (1)(B) is not violated by acquisition or holding of qualifying employer real property or qualifying employer securities (as defined in section 1107 (d)(4) and (5) of this title).