One of the most common misunderstandings among retirement plan sponsors is the idea that fiduciary prudence can be measured solely by investment returns. Under ERISA, prudence is not about whether every one of your plan’s investment options outperforms each of the benchmarks every quarter. If it were, fiduciary oversight would basically require time travel, which, unfortunately, is still not covered by most service agreements. It actually encompasses much more. Fiduciary prudence is primarily about process.
That means fiduciaries are expected to make decisions with care, skill, diligence, and appropriate review. The real question is not, “Did our fund options have the best return?” It’s, “Did the fiduciaries follow a thoughtful and well-documented process in selecting and monitoring each fund?”
A prudent process often includes:
- reviewing investment performance regularly,
- comparing funds against appropriate benchmarks and peers,
- evaluating fees and share classes,
- considering whether options still fit the plan’s goals,
- documenting discussions and decisions, and
- following the plan’s investment policy statement, if one is in place.
This matters because even strong-performing investments can create fiduciary problems if no one is reviewing them properly. Conversely, a fund that underperforms for a period of time does not automatically mean the fiduciaries have failed. Investment results are just one piece of the puzzle. It’s the process that shapes the bigger picture.
This same concept applies to the fiduciary responsibilities beyond the plan’s investment options. Prudence is also reflected in how plan sponsors monitor the plan’s service providers, review plan fees, oversee plan operations, and handle plan administration.
In other words, fiduciary prudence is not measured solely by outcomes. It is a disciplined approach to managing the plan.
This is good news for plan sponsors, because it means fiduciary success is not about making the perfect call every time. It is about building a repeatable, informed process and using it consistently. When looking at fiduciary governance, “we had a reasonable process and documented it” is a much stronger position than “the numbers looked good, so we assumed everything was fine.”
A prudent process will not eliminate every challenge, but it can significantly improve how retirement plan decisions are made and defended.
