Procedural prudence vs. substantive prudence

Here is a significant passage from The Fiduciary Handbook for Understanding and Selecting Target Date Funds: Fiduciaries are obligated to monitor and evaluate the performance of their TDFs, but relative to what? Much debate and controversy surround the benchmarking of target date funds (TDFs). The challenge revolves around the fact that the asset allocation and, therefore, risk of TDFs changes through time. But, if fiduciaries will take a step back to look at the big picture, they will recognize only two choices: Procedural Prudence or Substantive Prudence. The fiduciary can use a benchmark that captures common practice, which is a Procedural Prudence benchmark. Procedural Prudence is satisfied when a fiduciary acts as others in a similar capacity act, following commonly accepted processes: follow the herd. The S&P and Morningstar Target Date Indexes are good benchmarks for Procedural Prudence because they are composites of all TDF mutual funds –they are consensus indexes. By contrast, a benchmark of Substantive Prudence reflects best practices, doing what is right for the beneficiaries, regardless of common practices. This may sound like a high and mighty benchmark, but it’s not. Its derivation ties directly to something quite simple: what are the appropriate objectives for a TDF. Procedural prudence benchmarks fail in the courts. Herd mentality is inadequate ( The Lemming analogy). The better choice is substantive prudence because it is in line with the core principles of ERISA which direct that all activity must be conducted in the best interests of participant sand beneficiaries. Mechanically, the only “safe” prudent process would be to attach individual benchmarks to each participant, taking into account all the relevant facts and circumstances of each individual’s financial and personal circumstances.  Of course, this is not practical in big plans. In making these choices, the following three questions might be helpful:1) Am I choosing this fund in the sole interest of my participants?2) Have I prudently sought the best available choice for my participants?3) Have I exercised due care by ensuring this choice will provide my participants with the greatest opportunity to achieve retirement income security?"http://www.targetdatesolutions.com/articles/Fiduciary-Handbook.pdf Even if plan sponsors don't have target date funds, the concept of substantive vs. procedural prudence and not simply following the herd also very much applies to assessing the reasonableness of participant fees. It is difficult to comprehend how a plan sponsor can insist that participant fees are reasonable in light of the services required when they are allowing asset-based fees to be deducted from participants' accounts.  If plan sponsors claim that participant fees are competitive compared to other percentage-based providers who also overcharge their participants, then they are likely correct.  However, that does not mean that their participants' fees are reasonable.