
Prudent Expert Act
Section 404(a)(1)(B) of ERISA covers the Prudent Expert Act, stating: > ...a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and...with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. So what does this all mean? The best practice would be contracting a fiduciary advisor who assumes and acknowledges fiduciary responsibility and discretionary decisions for a 401k program. Such an advisor can find and eliminate hidden fees and conflicts of interest and lessen a 401k plan sponsor’s fiduciary liability by monitoring the plan, the service providers, and the investments. Prudent Expert Act language expands the responsibility of fiduciaries that was originally laid out in the prudent man or the prudent person rule. The term Prudent Expert Act refers to a regulatory measure that requires the fiduciary of a defined contribution retirement plan to manage the portfolio using the same level of care, diligence, prudence, and skill as someone familiar with such matters.

What Is the Prudent Expert Act?





Understanding the Prudent Expert Act
A fiduciary is someone who assumes legal responsibility for someone else's money. As such, they are legally required to manage that money in the best interests of its owner. Fiduciary best practices include identifying the client's time horizon, desired return, and risk tolerance, choosing asset classes consistent with these guidelines, periodically reviewing investment performance, and periodically reevaluating whether fiduciary standards are being met.
The Employee Retirement Income Security Act was enacted in 1974 as a way to protect the retirement savings of the American public. It put rules in place to make sure that fiduciaries don't misappropriate the assets deposited into qualified plans. The law, which is overseen by the Department of Labor (DOL), dictates that plans provide investors with information about the features of plans and about funding.
Section 404(a)(1)(B) of ERISA covers the Prudent Expert Act, stating:
...a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and...with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.
So what does this all mean? According to the rule, a fiduciary must not simply act with respect to an ERISA-covered plan as any prudent person would. They must approach it as a prudent expert. This means they are judged not as a prudent person, but as a prudent professional investment manager. A prudent person typically performs one level of due diligence before making an investment while a prudent expert is expected to do much more. The prudent person standard is a starting point for ERISA fiduciaries as the standard applicable to them is considerably more stringent.
While it is meant to help ensure professionals conduct themselves in the best interests of their clients rather than their own, the prudent expert act doesn't set a standard for retirement plans to generate returns or create income for investors.
Special Considerations
The expert rule, though, made slight changes to these expectations. The expert rule puts a higher standard on fiduciaries. Rather than simple prudence, the expert act requires these professionals to have some expertise when acting on behalf of their clients and their money.
Example a Prudent Expert
When 401(k) plans first became popular, some plan sponsors engaged the insurance agent who handled the company’s liability insurance or a broker already known to management. Others contracted a large big mutual fund company.
Choosing such generalists would typically fail to meet the fiduciary duty to prudently hire experts. Handling a 401k plan likely is too complex for someone without the necessary training, knowledge, and resources, and the companies would still have fiduciary liability.
The best practice would be contracting a fiduciary advisor who assumes and acknowledges fiduciary responsibility and discretionary decisions for a 401k program. Such an advisor can find and eliminate hidden fees and conflicts of interest and lessen a 401k plan sponsor’s fiduciary liability by monitoring the plan, the service providers, and the investments.
Under ERISA, hiring prudent experts is a fiduciary requirement when knowledge or services are needed by the plan. Professionals who don't execute their duties with prudence are said to breach their obligations and may be subject to disciplinary action by regulatory authorities.
Related terms:
401(k) Plan : How It Works & Limits
A 401(k) plan is a tax-advantaged retirement account offered by many employers. There are two basic types—traditional and Roth. read more
Department of Labor (DOL)
The U.S. Department of Labor is a cabinet-level agency responsible for enforcing federal labor standards. read more
Due Diligence & Uses for Stocks
Performing due diligence means thoroughly checking the financials of a potential financial decision. Here's how to do due diligence for individual stocks. read more
Employee Retirement Income Security Act (ERISA)
The Employee Retirement Income Security Act (ERISA) protects workers' retirement savings by ensuring fiduciaries do not misuse plan assets. read more
Fiduciary
A fiduciary is a person or organization that acts on behalf of a person or persons and is legally bound to act solely in their best interests. read more
Investment Manager
An investment manager is a person or organization that makes investments in security portfolios on behalf of clients. read more
Nondiscrimination Rule
A nondiscrimination rule states that all employees of a company are able to receive the same benefits, regardless of their position within the company. read more
Plan Sponsor
A plan sponsor is a designated party—usually a company or employer—that sets up a healthcare or retirement plan for the benefit of its employees. read more