When Industry Standard Becomes a Lawsuit: The Hidden Fiduciary Risk in “Everyone Else Is Doing It”
When “Normal” Becomes Risky
Most fiduciary mistakes don’t start with bad intentions. They start with comfortable assumptions.
In retirement plan governance, one of the most dangerous assumptions is this:
“If everyone else is doing it, it must be fine.”
In this episode of The Wise Fiduciary Podcast, host Marta Hurst explores how “industry standard” thinking can quietly cross into fiduciary liability under ERISA. What feels routine—benchmarking investments, accepting consultant recommendations, or justifying higher fees—can become legally indefensible when it replaces independent judgment.
The Fiduciary Red Line: From Consensus to Liability
This season focuses on a central question:
Where is the line between standard practice and fiduciary failure?
Under ERISA, the answer is clear:
Industry norms are not a defense. Prudence is the standard.
Fiduciaries are not evaluated based on what most plans do. They are evaluated on whether decisions are made with care, diligence, and independent judgment.
The red line is crossed when committees substitute:
- Consensus for analysis
- Popularity for prudence
- Process for critical thinking
The Most Dangerous Phrase in Retirement Plan Governance
One phrase appears repeatedly in committee meetings:
“This is industry standard.”
While it may sound reassuring, it has no legal weight under ERISA.
Courts do not evaluate whether a decision is common. They evaluate whether it is prudent for that specific plan at that specific time.
Example 1: Peer-Group Benchmarking and Investment Selection
One of the most widespread industry practices is benchmarking investments against peer-group averages.
Most reporting systems categorize funds and compare them to similar investments. If a fund performs better than 50% of its peers, it often receives a “pass.”
But here’s the issue:
Peer groups are descriptive, not protective.
They:
- Normalize mediocrity
- Mask excessive fees
- Ignore lower-cost alternatives
- Do not measure fiduciary prudence
A “better than 50%” ranking is not a fiduciary standard. It is a statistical comparison.
Key question fiduciaries should ask:
Would this investment still be selected if peer comparisons did not exist?
What Courts Have Said
Courts have consistently rejected the idea that “industry practice” equals prudence.
Key cases include:
- Tibble v. Edison International
Prudence is rooted in trust law, not industry norms. - Brotherston v. Putnam Investments
Peer-group defense rejected when lower-cost alternatives existed.
These cases reinforce a consistent principle:
Fiduciary duty is independent of industry behavior.
Example 2: “We Followed a Process”
Another common defense:
“We had meetings. We followed our process. We documented everything.”
While process matters, it is not enough on its own.
Courts have made clear that:
A process that avoids hard questions is not a prudent process.
Risk arises when committees:
- Use padded or shifting benchmarks
- Ignore cost differentials
- Fail to evaluate alternatives
- Focus on documentation instead of outcomes
A process that produces a flawed decision is still a flawed process.
Example 3: The Fee vs Performance Fallacy
A recurring belief in retirement plans is:
“Higher fees are fine if performance is good.”
This is one of the most common fiduciary shortcuts.
The issue is not whether performance is strong in a given period. The issue is whether the result justifies the cost relative to available alternatives.
Key fiduciary principle:
Performance must be evaluated net of fees and compared to reasonable alternatives—not isolated time periods.
Short-term success can mask long-term inefficiency.
Example 4: Delegation Does Not Remove Responsibility
Many committees assume fiduciary responsibility ends when they hire experts.
Examples include:
- Investment consultants
- 3(38) investment managers
- Plan advisors
But under ERISA:
Delegation does not eliminate fiduciary liability.
Even when services are outsourced, fiduciaries retain a duty to:
- Monitor providers
- Understand responsibilities being delegated
- Ensure ongoing prudence
Hiring an expert is not a shield. It is not a responsibility removal, but a shift..
The Core Fiduciary Failure: Substituting Judgment with Comfort
Across all examples, the underlying issue is consistent:
Fiduciaries stop asking “Is this prudent?” and start asking “Is this normal?”
That shift is where liability begins.
Key Takeaways for Plan Sponsors and Committees
Ask yourself:
- Are we relying on peer comparison instead of independent evaluation?
- Are we accepting performance without fee justification?
- Are we documenting process instead of evaluating outcomes?
- Would we defend this decision without referencing what others are doing?
If the answer depends on “industry standard,” the decision may not be defensible.
Conclusion: Prudence Over Popularity
The most important distinction in fiduciary governance is simple:
Industry standard may explain a decision. It does not justify it.
Courts evaluate prudence; not popularity, process theater, or consensus.
Fiduciaries who rely on comfort are exposed to risk. Fiduciaries who rely on disciplined judgment build defensible governance.
FREE RESOURCE: ERISA FIDUCIARY CHECKLIST
Want to evaluate your own plan?
Download the ERISA Fiduciary Checklist to assess how well your plan is meeting core fiduciary responsibilities under ERISA.
https://fiduciarywise.com/checklist
NEED HELP WITH YOUR PLAN?
If this episode raised questions about your fiduciary process, committee structure, or retirement plan governance, our team at Fiduciary Wise can help.
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ABOUT FIDUCIARY WISE
Fiduciary Wise serves as an ERISA 402(a) Named Fiduciary, helping retirement plan sponsors reduce fiduciary risk through governance oversight, monitoring, and fiduciary responsibility support.
DISCLAIMER
This content is provided for educational purposes only and does not constitute legal, tax, investment, or fiduciary advice. Retirement plan fiduciary responsibilities vary by plan structure and circumstances. Consult qualified professionals for specific guidance.