Prudence and Procedure in the Context of Protecting Against ERISA Class Actions

Retirement plan fiduciaries’ decisions are based on a process, and prudence should be baked into and visibly evident in the process.

Anyone who has played both baseball and softball will tell you there is no functional difference between the two. Of course, there is in regard to the speed of the game and the intensity of the skill sets applied, but there is no functional difference for the fielder playing defense or the batter hitting at the plate. This becomes highly evident when one has firsthand experience playing both, as opposed to neither, games at a competitive level. It’s the man on the field who is the expert, not the spectator in the stands. It is clear that Theodore Roosevelt knew this, as reflected in his “Citizen in a Republic” speech at the Sorbonne in Paris, April 1910:


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“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”  


Wealth management and other investment advice, or having a legal duty to monitor or otherwise evaluate it, requires some critical skill sets that must be understood and correctly applied. At the core is the standard of prudence one may find in the Employee Retirement Income Security Act of 1974 (ERISA). As the U.S. Constitution may be seen as a guideline for how to bind human nature in government, so, too, is ERISA for those who manage private U.S. retirement assets.


Functionally, prudence is applied per ERISA Section 404 when fiduciaries discharge their duties. It is almost universally accepted that ERISA’s standards are derived from the law of trusts—for example, see Tibble v. Edison International.


There has been activity outside of ERISA, in the context of the rules governing the management of trust assets generally. The Uniform Prudent Investment Act (UPIA) effectively updates and clarifies traditional trust law and, arguably, in some sense, can be viewed through the ERISA prism, which focuses on process and also on the overall portfolio.


Thus, there is a deference under fiduciary conduct where the fiduciary is an expert or sufficiently expertized as to the matters at hand, has become familiar with and taken into account all relevant considerations, and is proceeding without a conflict of interest. In addition, the fiduciary is given the flexibility to act in this way regarding the portfolio as a whole; the fiduciary’s conduct as to each individual investment is not considered in a vacuum.


As for the UPIA, its commentary similarly discusses an objective standard:


“The concept of prudence in the judicial opinions and legislation is essentially relational or comparative. It resembles in this respect the ‘reasonable person’ rule of tort law. A prudent trustee behaves as other trustees similarly situated would behave. The standard is, therefore, objective rather than subjective. Sections 2 through 9 of [UPIA] identify the main factors that bear on prudent investment behavior.”


Section 2(a) of the UPIA is at the heart of its prudence-centric approach:


“A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill and caution.”


In addition, although the words “modern portfolio theory” (MPT) are not specifically mentioned in the UPIA itself, it certainly permits and mandates its approach. Thus, from a results-oriented perspective, the UPIA, like ERISA, would permit the fiduciary significant flexibility.


Any doubts that the UPIA and MPT aren’t entwined is put to rest in the UPIA’s prefatory note:


“[UPIA] undertakes to update trust investment law in recognition of the alterations that have occurred in investment practice. These changes have occurred under the influence of a large and broadly accepted body of empirical and theoretical knowledge about the behavior of capital markets, often described as ‘modern portfolio theory.’”


Furthermore, Section 2(b) of the UPIA states:


“A trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.”


Clearly, the UPIA is diving into the mechanics of managing assets specifically in a trust when one has a fiduciary duty. But are these considerations limited to the trust context? There seems to be increasing inquiry regarding whether a client seeking advice from a broker might expect recommendations that are based on reasonable care, skill and caution, and as a part of an overall strategy having appropriate risk and return objectives. Indeed, in the aftermath of the judicial demise of the Department of Labor’s amended fiduciary rule, the Securities and Exchange Commission is presently exploring the implementation of a best interest standard that would apply beyond the traditional trust/fiduciary context.


Are there lessons here for plan sponsors and fiduciaries who might like to protect themselves against the possibility of ERISA class action? There may well be relevant considerations at the heart of what is prudent behavior. Management decisions are based on a process, and prudence should be baked into and visibly evident in the process. 


ERISA also adds concepts that aren’t necessarily apparent under predecessor common law. Notably, ERISA demands that a fiduciary use the care and diligence that a person “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.” Some ERISA practitioners have, as a result, referred to the ERISA prudence standard as a “prudent expert” standard. Indeed, if a knowledgeable and unconflicted fiduciary does an appropriately careful and thorough job, just what really is the basis for a legislature, regulator or court to second-guess that fiduciary?


Therefore, a focus on process rather than retrospective concerns about performance may be critical, as the key to whether the fiduciary duties are being fulfilled lies in methodology not outcome. No effort is made here to say or imply that results are unimportant. The ultimate goal, of course, is performance. But high expense ratios, poor performance relative to benchmarks, lack of diversification, and investment overlap are outcomes that, arguably, are apt to result from poorly applied methodology and less apt to occur if proper procedures are in place. 


In other words, prudence and loyalty, without conflicts of interest, are cornerstones to ERISA. Maybe procedural prudence is the most critical component of fulfilling fiduciary duties under ERISA, and therefore of deflecting possible claims in ERISA class actions.

Neal Shikes is a Chartered Retirement Planning Counselor, CRPC, the “Trusted Fiduciary” (, and principal associate for Thornapple Associates (, a provider of Expert Witness Services. Andrew L. Oringer is co-chair of the ERISA and executive compensation group at Dechert LLP and leads the firm’s national fiduciary practice.

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 Strategic Insight or its affiliates.