URGENT -please clarify PRUDENT man VS prudent expert RULEs for ERISA f

[fidu]

Can anyone clarify the difference btw prudent man and prudent expert rule as they apply to ERISA fiduciaries.

Are there ERISA or other code provisions or adsvisory opinions that deal w/ this at all?

thanks for all responses!

happy and healthy holidays to all

[Appleby]

Does this help?

http://www.google.com/search?q=cache:CuB8g...+investor&hl=en

[fidu]

Thanks, but that last response does not clarify the distinction btween prudent man and prudent EXPERT.

regardless, it seems to be a state law doctrine and ERISA is still governed under the prudent MAN rule - CORRECT????

[MoJo]

I don't think the "prudent expert" standard is one of state law fiducuiary responsibility - indeed I think that is a distinction between the "prudent person" (must be politically correct now!) standard and the "prudent expert standard." ERISA Section 404(a)(1)(B) provides that a fiduciary must act solely in the interests of the participants and beneficiairies "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." It is the "acting in like capacity and familiar with such matters" language which is in addition to the state law concept of a "prudent man" which makes the standard a "prudent expert" one. A fiduciary must not simply act with respect to an ERISA covered plan as any old prudent man would - you must approach it as a prudent "expert" would. That is, when dealing with investments, you will be judged not as a prudent man would be, but rather as a prudent professional investment manager would. A prudent man may perform one level of due diliugence before making an investment, a prudent expert would presumably do much more.

The prudent man standard is but a starting point for ERISA fiduciaries. The standard applicable to them is considerably more stringent.

[GBurns]

Well said. This is the best explanation I have seen.

[Kirk Maldonado]

As a corollary to what MoJo said, the larger the amount that is to be invested, the higher the degree of scrutiny that should be applied.

In other words, if you only have $1,000 to invest, you should not waste money hiring a professional advisor (at least if the advisor is paid out of the plan's money). On the other hand, if you have $100,000,000 to invest, you'd better make certain you have retained proper advisors.

[MoJo]

Kirk - given the extremes you use, I think it would be safe to say a "prudent expert" would engage assistence in the latter case, but not the former. However, I hesitate to utilize such examples - as the decision on whether or not to use a professional advisor is clearly a question for the prudent expert to answer. That is, if we were talking about $100,000, what would your answer be? I would suggest that in some cases, a professional should be engaged, in others, maybe not. It is the ability to make that determination, through the use of a prudent expert's sound reasoning, that in fact is what a prudent expert is.

[Fred Payne]

The Prudent Man Rule of ERISA has long been a much higher standard of conduct than for the fiduciary managing the assets of the poor widow. My recollection of my studies of this issue was that the "Prudent Expert" rules were an attempt to codify conduct of the non-ERISA fiduciary at the same level of expertise as that of the ERISA fiduciary. In other words, for all practical purposes there was no difference in the standard of conduct that would apply to the ERISA vs non-ERISA fiduciary.

[Jon Chambers]

In reply to Fred's posts, the state law rules are hard to quantify, since they vary from state to state. For many years, many states had "legal lists" of approved investments that wouldn't be challenged, even if they were used in an inappropriate manner. Recently, many (but not all) states have adopted the Uniform Prudent Investor Act (UPIA), which generally applies standards from the Third Restatement of Trusts, that track closely to the ERISA standards. Despite the adoption of the UPIA standards, I think it's fair to say that most people believe that ERISA prudence standards are higher than state law standards, because of the judicial interpretation that "prudent man (person)" means prudent expert.

[fidu]

Many thanks to all for the concise and extrememly knowledgable answers

one follow up for Jon or anyone else who may know - has NY state adopted the UPIA? and if so, where is it codified?

HAPPY & HEALTHY HOLIDAYS AND NEW YEARS TO ALL

[Jon Chambers]

Here's what I was able to find (on a website maintained by Klosterman Capital Corporation). It doesn't appear that New York has adopted UPIA yet, although they are in the minority in that regard.

"The Uniform Prudent Investor Act is a new law, concerning the investment of trust funds by fiduciaries. The Commissioners on Uniform State Laws adopted it in statutory form and recommended that all states enact it in 1994. It has since been adopted by 36 states, including Alaska, Arizona, Arkansas, California, Colorado, Connecticut, District of Columbia, Hawaii, Idaho, Indiana, Iowa, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, and Wyoming. "

Hope this helps,

[Guest kowen]

The most basic distinction between the "Prudent Man" and "Prudent Expert" rules, as I understand them, are as follows:

The prudent man standard comes from the common law of trusts and requires a fiduciary to manage the trust assets as an ordinary person would handle their own assets. The prudent man rule was also applied on an investment by investment basis. ERISA raised the standard to the prudent expert rule where the fiduciary is required to invest plan assets as a prudent expert familiar with the investment of pension assets would. Individual investments are also evaluated on the basis of they how the contribute to the overall portfolio. The Handbook of Employee Benefits has a great section on the difference between the two.