Regulators are soon expected to unveil a new fiduciary standard that will dramatically change how financial professionals do business.
Broker-dealers and those who work with Individual Retirement Accounts would be held to the same fiduciary standards as their 401(k) plan brethren, which would overturn 40 years of business practices that allowed these individuals to recommend investments in which they receive a commission.
Amid all of the teeth-gnashing, here's a look at eight questions that are central to the debate:
1. Is a fiduciary liable for losses to a plan for failing to investigate and evaluate a proposed investment?
Not necessarily. A fiduciary's failure to investigate and evaluate an investment decision alone is not sufficient to make him liable for losses to a plan. Instead, efforts to hold the fiduciary liable for a loss attributable to an inadequate investment decision must demonstrate a causal link between the failure to investigate and evaluate and the harm suffered by the plan.
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The cases that hold a trustee liable for losses for failing to investigate and evaluate the merits of an investment have based the trustee's liability on findings of fact that clearly established the unsoundness of the investment decision at the time it was made. If a court determines that a trustee failed to investigate a particular investment adequately, it will examine whether, considering the facts that an adequate and thorough investigation would have revealed, the investment was objectively imprudent.
"[T]he determination of an objectively prudent investment is made on the basis of what the trustee knew or should have known; and the latter necessarily involves consideration of what facts would have come to his attention if he had fully complied with his duty to investigate and evaluate." It is the imprudent investment, rather than the failure to investigate and evaluate, that is the basis of liability.
2. Is the prudent person rule subject to the business judgment rules?
No. It is not a business judgment rule that applies to the question of prudence in the management of an ERISA plan, but rather a prudent person standard.
3. Is a fiduciary an insurer of plan investments?
No. "[T]he prudence rule does not make the fiduciary an insurer of the plan's assets or of the success of its investments. ERISA does not require that a pension fund take no risk with its investments. Virtually every investment entails some degree of risk, and even the most carefully evaluated investments can fail while unpromising investments may succeed.
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"The application of ERISA's prudence standard does not depend upon the ultimate outcome of an investment, but upon the prudence of the fiduciaries under the circumstances prevailing when they make their decision and in light of the alternatives available to them." The fiduciary duty of care requires prudence, not prescience.
