The common denominator for almost all fiduciary governance is the concept of a “prudent” fiduciary. Further, the conduct required of a prudent fiduciary is, universally, that of a prudent process.
Procedural prudence may seem, at first blush, like an amorphic concept ... attractive sounding, but difficult to apply. Or, procedural prudence may sound like a grand idea in the realm of academics, but of little application in the real world.
However, neither of those conclusions is correct. Instead, prudent process is, at a fundamental level, both specific and implementable. But it does require a commitment to engaging in a process to make decisions.
As a matter of context, when I use the term “fiduciary,” I am referring to fiduciaries of all ilks, regardless of whether regulated by state or federal law. That includes trustees of individual trusts, committee members for retirement plans, executors of probate estates and, generally, any person who makes decisions for the benefit of third parties.
What, then, must fiduciaries do in making decisions?
There are at least four steps to engaging in a prudent process. Those are:
1. The duty to make necessary decisions. The failure to make a necessary decision is a fiduciary breach ... the only question is whether there are damages. In some cases, the issue is obvious. For example, trust funds must be invested in a manner consistent with the objectives of the trust. In other cases, though, the need to make a decision may be less obvious.
2. The duty to follow the terms of the governing documents. That is true regardless of whether the governing document is a trust agreement, a will, a retirement plan, or another instrument. The fiduciary is obligated, with a few exceptions, to be faithful to the settlor’s intent, as expressed through the governing document. Fiduciaries must read and understand those materials and, if needed, hire attorneys or others to explain the provisions.
3. The duty to investigate. A prudent process requires that the fiduciary investigate any issues about which the fiduciary will make a decision. A fiduciary needs to gather the information that is material to making an informed and reasoned decision. The fiduciary then needs to review and understand that information. As a final step, a fiduciary needs to reach a decision that is informed by the investigation and that is reasoned—in a sense that it has a rational connection to the information evaluated.
4. The duty to hire experts, when needed. Fiduciaries are not required to be experts on all of the issues that come up in the administration and management of a fund. However, where a fiduciary lacks the expertise, the fiduciary must hire experts to assist in the investigation and/or decision making. Those experts could include investment advisers, appraisers, accountants, attorneys and others. As a part of that process, the fiduciaries need to prudently select the advisers, especially in terms of qualifications, fees and potential conflicts of interests. Where the relationship is ongoing, a fiduciary needs to periodically monitor the performance of the expert. Finally, the fiduciary cannot rubber stamp the expert’s advice, but instead must analyze it, obtain clarification if needed, and reach an informed and reasoned decision.
Each of these steps is implementable. Fiduciaries must consider the important issues in the administration of their duties; they must review and understand the terms of the governing document; they must make informed decisions; and they must hire advisers when needed. All of those activities are performed by attentive fiduciaries on a regular basis.
However, where a person does not view the fiduciary duties as a separate job from his or her other activities, he is treading on thin legal ice. For example, if a person believes that they are acting as a fiduciary as a favor, or as an agent of the settlor (rather than an independent actor), the potential for problems is great.
In addition to engaging in a prudent process to make decisions, fiduciaries must communicate appropriately with their beneficiaries (or participants, as they are called in the benefits community). While most breaches may occur in the implementation of the governing documents or in the investment of fund assets, a sad reality is that a significant amount of fiduciary litigation has its genesis in the failure to adequately and/or accurately communicate with the beneficiaries.
Education is the first step in helping fiduciaries understand the importance and consequences of their position. Advisers to fiduciaries need to inform them, at the very least, of the need for a prudent process and of the basic steps for implementing that process.
Equipped with that information, some may decide not to serve. In those cases, that decision is probably better for both the nominated fiduciary and for the beneficiaries. On the other hand, others who are willing to be attentive will do a better job ... for themselves, for the fund, and for the beneficiaries.