A caveat to the (usually sound) advice to pension fiduciaries to “document, document, document”

To the many perils of being a fiduciary for a corporate or public pension plan, maybe we need to add a growing threat of being buried under a dreary onslaught of policies, procedures and paperwork. It can wear down even the toughest.


“Document, document, document”

Fiduciaries have been put on the defensive by a number of recent court cases, mostly relating to corporate DC plans. As a result, more effort than ever is being put into ensuring not just that actions are prudent, but that they can be shown to be so. “Document, document, document” is the order of the day.

After all, if a fiduciary needs to demonstrate that they have done what is required of them, they will need documentation of their actions. When it comes to a legal defense, the existence of that paper trail can matter just as much as having taken the right steps.

But there’s a caveat to the “document, document, document” mantra.

But some documentation is not so helpful

It is good to have a formal record of steps that have been taken. Whether it’s the evaluation of providers, the benchmarking of fees, or any of the many other steps that fiduciaries take as part of their oversight of the investment program, you’ll want it on record. Because if a decision is subsequently challenged, the legal argument is more likely to hinge on the process that was followed than on the outcome.

But, while some documentation serves to explain decisions, and to demonstrate due process, not all documentation has that effect. Consider for example the statement that “we will review X at least once a year.” That can create a hostage to fortune. Far from strengthening a legal defense, such a statement can cause problems if, for some reason, the promised review does not occur. So there’s a difference between the documentation of actions and the documentation of aspirations.

This is why the Investment Policy Statement (IPS) can be a tricky document to get right. Properly structured, it is a powerful tool, and an aid to effective plan governance. But it doesn’t always sit well into the legal-defense mindset. Indeed, some plans, for this very reason, have chosen to focus on principles rather than specifics and/or to call out the policy statement as non-binding, and include a statement along the lines of “these may be our general intent, but the end goal here is to do what we need to do to achieve the best outcomes for plan participants, not to follow these procedures as an end in themselves.”

It seems to me a shame that these issues need to be given quite this much attention. Quite apart from the pain of dealing with it all, the legal considerations can even become a distraction from the fiduciary’s real task of looking out for participants’ best interests.

But, in litigious times such as these, fiduciaries are taking extra care to minimize their potential liability, and “document, document, document” is one way to do that. But only if it’s the right type of documentation.


USI-22533-12-18
Site preferences