ERISA makes it very clear what pieces need to be in place for plan sponsors to relieve themselves of at least a tiny bit of fiduciary liability. Really, it's not that hard. And the benefits can be quite enticing.

In the 1990s, a state-led initiative began to upgrade the “Prudent Man Rule” to a “Prudent Investor Law.” At the time, lay-trustees were concerned they'd be on the fiduciary hook for the trusts they served. These weren't professional trustees (i.e., the kind you find in bank trust departments or, in some states, law firms). These were everyday people, friends and families who were only trying to help. They didn't want to be saddled with a liability they couldn't define.

Hence, while it started one by one in state legislatures, the Prudent Investor concept became universal. All these nonprofessional trustees had to do in order to mitigate the liability associated with managing trust investments was to hire a professional to manage those investments.

ERISA adopted a similar provision with its “Prudent Expert” definition. Like those innocent trustees of the Prudent Investor era, plan sponsors could alleviate fiduciary liability association with plan investments by hiring an investment professional.

Actually, it's a little more than that. They must give that professional discretionary authority regarding plan investments. It is only when investment discretion shifts to the service provider that the associated liability also shifts. Otherwise, the liability stays with the plan sponsor.

Again, it's not a difficult rule, but it's a nuance too often overlooked. It's as though some plan sponsors aren't reading the ingredient label on the package they're buying.

And if things go wrong, something a lot more than a 100% cotton shirt will shrink.

READ MORE:

A 3-word fiduciary rule — Carosa

The 'Fiduciary Rule' versus the 'Rule of Fiduciary' — Carosa

Do you have the 'knows' to be a fiduciary? — Carosa