The directive from the Department of Labor couldn’t be any more explicit. The expectations they have of you, as a plan sponsor or fiduciary to a retirement plan, is that you have a “prudent process” and that the process is “well documented.” Simple enough! However, this is one of the most significant weaknesses we see in how most fiduciaries manage their retirement plans. There is little or no identifiable process, minimal documentation if any, or even worse, a document laying out a process that is not followed.

For all the concern around potential fiduciary liability, you would think having a documented process would be in place for all plans. So why is this not the case? The first reason is that plan sponsors are unaware of the importance of doing so. They don’t realize that this is the first line of defense should a problem arise. The second is that they are not sure what to document or how.

A prudent process when acting on behalf of a plan is one where you exercise the care, skill, prudence, and diligence that a prudent person familiar with such matters would exercise in similar circumstances.

With regard to investments, you must give appropriate consideration to the facts and circumstances that you know or should know are relevant to the investment course of action. The Department of Labor and courts measure prudence by analyzing the process used to select an investment or course of action. The standard of conduct is one of a “prudent expert.” The good news is you are not held to a standard of always choosing the very best investment. This is an impossible standard to meet.

In plain language, you need to make sure that decisions regarding the plan are being made by someone familiar with such matters, in a thoughtful way, and following an identifiable process with the motivation and thought process for decisions documented.

If you do not have the expertise to meet the prudent expert standard, then you need to hire one. Carefully identifying your prudent process, following it and documenting the rationale for your decisions will be the first and best line of defense should an issue arise later with your plan.