USA – DISTRICT OF COLUMBIA Trends and Developments Contributed by: Sanford Heisler Sharp McKnight, Sanford Heisler Sharp McKnight
Beyond a Checklist: Understanding a Prudent Fiduciary Process Under the Department of Labor (DOL)’s Six Proposed “Safe Harbour” Factors The Employee Retirement Income Security Act of 1974 (ERISA) governs employer-sponsored 401 (k) plans and the fiduciaries tasked with administering and overseeing those plans. In the 50 years since ERISA’s enactment, the landscape has shifted from one primarily characterised by defined benefit pen - sion plans to one dominated by defined contribution 401 (k) plans. 401 (k) plan fiduciaries are charged with overseeing and monitoring the investment options and service providers made available to plan participants. Often referred to as the “highest duties known to law”, ERI - SA holds plan fiduciaries to the utmost standards of prudence and loyalty. On prudence, ERISA Section 404 (a)(1)(B) states that fiduciaries must discharge duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a pru - dent man acting in a like capacity and familiar with such matters would use in the conduct of an enter - prise of a like character and with like aims”. ERISA does not, however, articulate what, precisely, plan fiduciaries must do to satisfy this “prudent expert” standard. However, for over 30 years the DOL has maintained that fiduciaries should evaluate whether the investment would be expected to provide a plan with a lower rate of return than available alternative investments with commensurate degrees of risk or riskier than alternative available investments with commensurate rates of return. If so, the investment will not be prudent. See Department of Labor Interpre - tive Bulletin 94-1 (23 June 1994). The DOL’s recently proposed “safe harbour” regula - tion addressing ERISA’s fiduciary duties in selecting investment alternatives represents a significant devel - opment in defined contribution plan governance. The proposal seeks to establish a process-based safe har - bour for fiduciaries selecting investments for partic - ipant-directed plans, including investments contain - ing alternative assets such as private equity, private credit, real estate, infrastructure, commodities and potentially cryptocurrency.
Unlike mutual funds, these types of alternative invest - ments are not subject to the same registration require - ment or the regulatory regime of the federal securities laws. Because of that, these investments historically have been available only to sophisticated investors who can properly assess and understand the risks and have sufficient assets to bear the risk of financial loss. The DOL’s proposal could dramatically alter this long- time dynamic, marking the first time these alternative investments could be offered entirely to a market of investors. Instead of limiting sophisticated and risky investments only to sophisticated investors able to bear the risk, plan fiduciaries could make these alter - native investments available to every participant in the 401 (k) plan. The amount of money at stake is stag - gering, and, if passed, plan fiduciaries should expect an onslaught of pressure from those who stand to benefit financially. At first glance, the proposal appears to offer fiduciar - ies a more navigable roadmap for satisfying ERISA’s prudence obligations. The DOL identifies six non- exclusive factors that fiduciaries must evaluate in order to obtain a presumption of prudence under ERI - SA Section 404 (a)(1)(B). However, fiduciaries should resist the temptation to view the proposal as a simpli - fied compliance exercise or litigation shield that can be achieved through a superficial checklist approach. In practice, the proposed framework sets the floor for fiduciary process. Each factor requires nuanced judgement, detailed market analysis and ongoing monitoring that many committees may underestimate. It effectively acknowledges what ERISA litigators and courts have emphasised for decades: prudence is not simply checking boxes off a list – rather, it is the prod - uct of a rigorous, well-informed and diligent fiduciary process. The DOL’s proposal does not lower fiduciary risk. Instead, it formalises expectations for a robust gov - ernance framework around investment selection and monitoring.
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