The ERISA fiduciary standard is based on the quality of the decision making process. In their September 2006 guide titled Meeting Your Fiduciary Responsibilities the Department of Labor (“DOL”) stated that “The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. […] Prudence focuses on the process for making fiduciary decisions.” In their February 2013 publication Target Date Retirement Funds – Tips for ERISA Fiduciaries the DOL admonishes fiduciaries to “establish a process for comparing and selecting TDF’s”, “establish a process for the periodic review of selected TDFs” and “document the process”. Process, process, process.
Good decision processes are not only an ERISA fiduciary requirement, they also improve efficiency and support business growth. However, because we make decisions every day we often don’t stop to examine in detail exactly how we are making those decisions or how we could achieve more successful results by consciously changing the way in which we decide.
At Bdellium, we define a good decision-making process as “an auditable, repeatable, complete sequence of steps that leads to a specific solution for achieving a defined objective.” Let’s take a moment to consider each of these elements:
- Auditable: The relationship between inputs (assumptions, data, logical algorithms, subjective preferences) and results must be clear so that the process can be validated and mistakes corrected.
- Repeatable: Given the same set of inputs, the process should always produce the same result. This ensures that decisions are consistent and success can be replicated.
- Complete: The process must describe a navigable path from the starting point clear through to the final solution, with no gaps and no dead-ends.
- Sequence of Steps: Each step must follow logically from the previous step and lead logically to the next step.
- Specific Solution: A process is not complete if it stops at a short-list. It must deliver a final recommended solution.
- Defined Objective: We must know clearly what defines “success”. If we can’t define the goal we cannot know if we have achieved it.
Every fiduciary and advisor needs to ask themselves whether the decision process they are currently using meets these essential standards. Furthermore, it is not enough to vaguely believe that a process meets these standards – a fiduciary must understand each component of the process and how the pieces fit together.
We recently put together the following checklist to help fiduciaries evaluate the process they use to select and monitor their plan’s Qualified Default Investment Alternative (QDIA) and their understanding of the process:
- Does the process comprehensively evaluate relevant performance, risk and operational criteria?
- Does the process explicitly take account of how important or unimportant each of the evaluation criteria is to your plan?
- Does the process take plan demographics and participant behavior into account?
- Does your process enable you to simultaneously evaluate all candidates (both off-the-shelf and custom) across all criteria?
- Does your process enable you to balance each candidate’s different levels of performance across multiple evaluation criteria?
- Does your process individually rank all candidates?
- Given the same set of data, would your process always produce exactly the same result, independently of who conducts the evaluation?
- Do you understand how every input is calculated and what it means?
- Do you understand any major limitations or risks in using particular measurements or methods?
- Do you understand how the process uses its inputs to arrive at the final results?
While this list was developed with a plan’s QDIA in mind, you will notice that it can be applied equally to any of the important decisions that a plan fiduciary must make, including the selection and monitoring of the plan’s other service providers and even the process of plan design.
We do not claim that this list is perfect or exhaustive but any fiduciary who cannot answer “Yes” to every question would be well served by investing some time and effort to improve the design and/or their understanding of their decision-making processes.