Prudence in Action: Why Your 401(k) Process Matters
For retirement plan sponsors, fiduciary responsibility can feel abstract until an audit or lawsuit forces every decision into the spotlight. This is because regulators focus less on whether investments performed well and more on whether decisions were made through a careful, documented process. Under the Employee Retirement Income Security Act (ERISA), prudence is demonstrated through the steps taken, not the final result. That reality can raise an important question: if regulators ask for proof tomorrow, could you clearly show how your decisions were made?
Why Prudence Is About Process, Not Performance
ERISA requires fiduciaries to act with the care, skill, prudence, and diligence of a knowledgeable expert, and courts generally reinforce that this is a procedural standard. A plan is generally not considered imprudent solely because a fund underperforms or the market shifts. Instead, concerns arise when fiduciaries cannot show that choices were made thoughtfully, using available information, and with ongoing monitoring.
This emphasis on process means sponsors may be better positioned to demonstrate prudence when they keep clear records describing how decisions were made, who participated, and what information was considered at the time. A well‑organized process can support a plan’s ability to respond to regulatory inquiries, even when market conditions create challenges.
What Regulators Typically Request During an Audit
When a retirement plan is selected for a Department of Labor review, auditors often request materials that show how the plan is managed, which often include plan documents, service provider contracts, committee meeting minutes, investment reviews, fee evaluations, and any written policies related to oversight. These documents help regulators understand how decisions were made and whether fiduciaries applied consistent judgment. The absence of documentation may raise additional questions, regardless of the specific investment decisions involved.
In many cases, sponsors discover that their decisions were reasonable, yet they lack the written records to demonstrate why those decisions were made. This is where fiduciary risk can grow.
Common Gaps That Increase Fiduciary Risk
Fiduciary concerns rarely stem from intentional disregard. More often, they can emerge gradually as routines are replaced by informal practices. Examples include failing to keep meeting minutes, relying solely on provider recommendations without independent review, not revisiting fees or services regularly, and assuming someone else is handling compliance responsibilities. Over time, these gaps can make it difficult to prove prudence, even when decisions were reasonable.
Building an Audit‑Ready Fiduciary File
Being prepared for an audit does not require perfection, but it does require regular documentation and a clear governance framework. Committees can benefit from holding scheduled meetings, documenting discussions, maintaining written investment and governance policies, completing fiduciary training, and reviewing provider relationships on a regular schedule. These materials help to create a record that demonstrates care, attention, and informed judgment based on the information available at the time decisions were made.
Establishing a standardized approach also helps new committee members understand their responsibilities and can provide continuity when roles change. Ultimately, a strong file can demonstrate that decisions were made purposefully and with the interests of participants in mind.
Takeaway for Plan Sponsors
Fiduciary responsibility is not about predicting future performance, but about showing your work in a way that reflects diligence and consistency. Sponsors who focus on governance and documentation can place themselves in a more informed and organized position during audits and reviews, though outcomes depend on specific facts and circumstances.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Patricia L. Hutchinson
Director of Retirement Plan Services
AIF®, MBA