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Employee Benefits Legal Blog Employee Benefits Related to Labor & Employment Matters

Fiduciaries and Experts: Relying on Advice

Posted in Court Cases, Plan Administration, Retirement Plans, Welfare Plans

Frequently benefit plan fiduciaries have to rely on experts for advice relating to plan administration.  Legal counsel, actuaries, investment advisors, appraisers and the like are essential components of the administration of benefit plans, but they are not fiduciaries.  And fiduciaries are subject to the "Prudent Man Rule" when satisfying their fiduciary obligations.

The good news is that generally courts don’t look at the results of a decision so much as the process.  Fiduciaries who use experts for advice and counsel properly can sometimes be insulated from breach of fiduciary duty claims because they made diligent efforts to reach a conclusion, even if it was ultimately a bad decision.  For example, numerous court cases have found that making a bad investment is not a breach of fiduciary duty if the fiduciaries satisfied their fiduciary obligation to properly investigate the investment before they made the decision.  The process is reviewed, not the outcome.  So investment losses are not necessarily a breach if the investment decision was made properly.  As one judge noted "the test of prudence- the Prudent Man Rule -is one of conduct and not a test of the result performance of the investment.  The focus of the inquiry is how the fiduciary acted in his selection of the investment and not whether the investment succeeded or failed."

To rely on experts, fiduciaries are charged with the obligation to provide accurate and complete information, and to properly review and become familiar with recommendations and advice.  It is not enough to rubber stamp the recommendation of a fund advisor.  Fiduciaries have to understand why the advice was given and evaluate whether it was based on accurate information (and sometimes accurate assumptions).  Similarly, choosing experts is a component of the evaluation process and a decision to use a particular expert should be based on a thorough review of the need for the expert and their credentials.

Fiduciaries need not become experts themselves, and can rely on expert advice when making decisions.  Reliance on experts is an essential component of administering a plan, but it starts with choosing good experts and giving them complete and accurate information.  Year-end reviews are always a good time for fiduciaries to look at their processes for making decisions.  Consider reviewing how your plan uses experts, and who those experts are, to make sure you can verify the processes for their selection and using their advice.  Put checks and balances in place to make sure they get accurate information.  And above all, ask questions.  Fiduciaries may not have to be experts, but they always have to be prudent.