While recognizing that the primary purpose of the prudent man rule of ERISA is to protect beneficiaries of employee benefit plans, policy makers must also consider the implications for companies seeking funds in the capital markets. The future growth of the economy depends upon technological advances and additional employment opportunities that only the continuing development of emerging companies can provide. There is evidence, however, that uncertainty over the meaning of ERISA’s prudent man rule has encouraged some pension fiduciaries to adopt conservative investment strategies that exclude these companies.
On the heels of the 1973-74 bear market, pension fiduciaries moved toward more fixed income investments and toward concentration of equity investments in the larger, well-established companies. Despite the subsequent upturn in the economy and the market averages, emerging companies still find it hard to raise new equity capital.
There are three speculations about the meaning of ERISA’s prudent man rule that could create artificial distortions in the market for such companies’ securities: (1) it prescribes an across-the-board “prudent expert” standard based on the prudence expected from a professional investment manager; (2) it generally adopts the common law rule prevailing in various states that specifically requires prudence of an individual investment to be assessed with reference solely to its own characteristics rather than to its relationship to the entire portfolio; and (3) the diversification requirement discourages investing a portfolio entirely in common stock.
None of these speculations seems justified. The legislative history of ERISA emphasizes achieving a flexible rule that would recognize the varying size, complexity and purpose of different kinds of employee benefit plans. Indeed, the language of ERISA was carefully drafted to prevent it from seriously interfering with the prevailing practices of pension managers. The guide to conduct under ERISA remains, as it is under trust law, the exercise of sound judgment and common sense.