Thursday, November 16, 2006

Fiduciary Decisions

Investment fiduciaries under ERISA will be judged based on their decision making processes. It is their conduct not the outcome of their decisions that matter most. Decision making is central to human activity yet there are many impediments to a good fiduciary decision making process. Human behavior in the face of uncertainty, group decision dynamics, time and resorce constraints and information asymmetry can can hinder good decisions.

The first decision fiduciaries must make tackle is...are they appropriately skilled and positioned from a time and resources perspective to make investment decisions? ERISA requires them to be or to seek counsel from those who are. Not critically addressing this most fundamental decision may stand out as a primary reason why plans and participants are underperforming, why poor investment products proliferate and why conflicts of interest still pervade the retirement investing industry. Oversimplifying investment decisions or avoiding them altogether generates fiduciary liability.

Robert Rubin
made some thoughtful comments on decision making that are relevant to fiduciaries:

"recognizing that all decisions are about probabilities rather than certainties should lead us to uncover and engage with the full array of complexities around making the best decisions"

"each alternative possible outcome is not a simple, single effect, but the net effect of tradeoffs between competing considerations"

"often, decision-makers faced with a situation where all choices are bad, react by not deciding. That, however, is a decision in itself, and often the wrong decision"

"reality is complex, and recognizing complexity and engaging with complexity was the path to best decision-making"


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