The Prudent Process - A Beautiful Thing

Many dissatisfied with the private employer defined contribution system are destined to be permanently frustrated. That's because addressing their concerns requires changing the system fundamentally. One concern expressed by critics is that plan assets are not managed lockstep across the system using someone's idea of best practice. For example, many believe that there is a best practices approach to target date fund design that the government should mandate for every employer-sponsored defined contribution program. They are unhappy at the wide variety of approaches. They are unhappy with the process that permits such variation. They are especially unhappy with approaches that are not theirs.

We have what we have because plan fiduciaries are required to use a prudent process approach in their decision-making. The brilliance of this fiduciary standard is that it relies on “care, skill, prudence, and diligence under the circumstances then prevailing,” not specific requirements and guidelines set at any point in time. It recognizes that the requirements and guidelines for prudent decision making are constantly changing and that flexibility to adapt to changing conditions is necessary. It recognizes that investment philosophies, products and practices change and evolve over time. This approach has continued to be prescribed for those investing money on behalf of others for hundreds of years because it works. Those at the Department of Labor understand this and rightfully push back against those who would have them define best investment practices, products or product designs.

Without the prudent process the government would have mandated how DC plan assets are to be invested decades ago, and there would be no target date funds to discuss. The prudent process is a beautiful thing. We are fortunate that participant accumulations are managed by decision-makers using it.

David