ERISA Prudence, Methodology and the Aggregate of Outcomes

Neal Shikes, with MJN Fiduciary LLC, discusses why being prudent in retirement plan decisionmaking means considering all factors in aggregate, not just a single factor.

It’s obviously a matter of prudence to try to protect a retirement plan participant from economic loss, because there is a strong possibility that it will impair them from reaching their desired lifestyle in retirement. Protecting participants means creating an investment menu that prevents any participant from shooting himself in the foot.

Plan sponsors can create a prudent menu by not including investments that are too opportunistic and volatile to a participant population with varying degrees of subject matter expertise.

Prudence, though, is a matter of behavior which causes an outcome—like the investment options in a retirement plan—and it’s best judged by methodology or deriving methodology by quantifying the outcomes in aggregate. In fact, any attempt to reach a conclusion based on one or few outcomes may lead to a myopic viewpoint and a distorted opinion.

The Employee Retirement Income Security Act (ERISA) seems to augment this idea by not offering guidelines on any specific outcome but, instead, focusing on prudence, loyalty and conflicts of interest caused by methodologies.

Thus, it is rather perplexing, perhaps self-serving, why many in the financial services industry—and, oftentimes, their proxies—request outcome interpretations, clarifications and guidance from the Department of Labor (DOL) when there is a universe of “wiggle room” with regard to the subjectiveness of one’s methodology. It is already a liberal regulation. No one is advocating any specific road map to any destination.

Nevertheless, for those who have a fiduciary responsibility to their clients in the investment universe, statistical likelihoods of outcomes are important. The incorporated data are variables in the methodology that they have developed that will be deployed in the best economic interests of their clients. So, for those retirement plan investment committee members who consistently choose investments that are contrarian to statistical likelihoods, their methodologies must show why they think their choices will consistently be better for plan participants. Again, this is quite perplexing and requires a high level of sophistication, subject matter expertise and only increases the likelihood of liability.

Many sports fans get caught up in a single moment that seemed to determine the outcome of the game. But this is a good example of the importance of focusing on the whole picture instead of just one event. 

Was it the home run that caused the team to win the game? Was it because the batter was able to get a pitch count more favorable to them? Was it because the opposition chose a left-handed pitcher? Or was it because the previous batter who had a two-out single allowed the next batter to get up and eventually hit the home run that won the game? It’s as if each event cascaded from the previous one, and the home run was never the causation. It was just as important as why the batter did not swing at the first two pitches, why there was a left-handed pitcher on the mound, and how the previous batter was able to get a two-out hit. 

Even if all these events did not culminate into a game-winning home run, the decisions in this “event-string” may have all been prudent. The example shows that determining the viability of the game plan via the aggregate of all the players’ behaviors and decisions, and not just focusing any single player’s behavior or decision, is the key to test plausibility. Sizing up or adjudicating prudence works the same way.  


Neal Shikes, Chartered Retirement Planning Counselor (CRPC), and managing partner at MJN Fiduciary LLC (The Trusted Fiduciary), has 30 years’ experience in financial services, wealth management, portfolio construction and fintech. He is also a consultant/expert to the financial services industry and the legal profession on matters concerning the Financial Industry Regulatory Authority (FINRA)/suitability and ERISA/fiduciary duty. He is a guest writer for financial publications, articles and blogs and has been referenced by think tanks and financial associations. 

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.