What are your Responsibilities as Trustee of your Plan?
The Employee Retirement Income Security Act of 1974 (ERISA) is intended to protect the interest of employees who participate in employer sponsored retirement plans. As such, ERISA requires that each plan name at least one fiduciary that serves as plan administrator and at least one trustee. A plan trustee must act solely in the interest of the plan participants and beneficiaries, for the exclusive purpose of providing benefits while defraying reasonable plan expenses.
A plan trustee must also:
- Act prudently, using the care and skill that an expert would under similar circumstances;
- Diversify plan investments to minimize large losses, unless it is clearly prudent to not do so; and
- Act according to the plan document, as long as it is consistent with ERISA.
Assets of an ERISA plan are generally required to be held in trust and managed by the trustee(s) who is either named in the trust document or appointed by the plan's named fiduciary. Generally, the trustee(s) has exclusive authority and discretion to manage and control the assets of the plan. However, the plan may provide that the trustee(s) is subject to the direction of a named fiduciary who is not a trustee, or this authority may be delegated to an investment manager.
The trustee may be an employee of the company sponsoring the plan (e.g., an owner of the company or other delegated employee) which is known as a self-trustee, or the sponsor of the plan may choose to outsource the role of trustee to a third party, known as a corporate trustee.
Types of Trustees
If the plan sponsor chooses to self trustee the plan, the individual designated as the trustee has the fiduciary responsibility to ensure that the plan's assets are managed and controlled in a manner that satisfies the above noted provisions of ERISA. A self trustee who also serves in other plan related roles (e.g., plan administrator, participant or owner) must be careful of conflicts of interest that may arise because of these multiple roles and must always act in the best interest of the plan participants and beneficiaries.
A corporate trustee is considered a fiduciary to the plan and adds a layer of protection to the plan sponsor by distributing fiduciary responsibility more broadly. This helps to reduce the potential for conflicts of interest and ERISA litigation. The role of trustee is performed by an institution specializing in these services, which reduces the potential of inadvertent rule violations and saves the plan sponsor on time-consuming administrative functions. However, the amount of fiduciary responsibility/liability assumed by the corporate trustee will depend on whether the trustee is a directed trustee or a discretionary trustee.
Types of Corporate Trustee
A directed trustee includes trustees known as "Non-discretionary" or "Passive" trustees who accept little responsibility for their actions. Essentially, the plan sponsor or other fiduciaries direct the trustee to perform actions. The trustee will work as advised with little or no regard to implications pertaining to the plan document or ERISA. Passive trustees may consider implications from a legal perspective. Many directed trustees require a hold harmless agreement that protects the directed trustee against liability. Consequently, directed trustees assume very few fiduciary responsibilities and very little liability. The investment manager role is not included in most directed trustee services.
A discretionary trustee or "Active" Trustee provides the plan sponsor the greatest fiduciary protection. The discretionary trustee considers the legal and compliance implications of directives that they receive as well as the impact for failing to act when no direction is given. For example, as discretionary trustee, if American Trust regularly receives a 401(k) contribution file twice a month from a specific plan sponsor and the contribution file discontinues or is not received in a timely manner, we will contact the plan sponsor to rectify and provide guidance on the situation.
A discretionary trustee advises the plan sponsor with regards to the Internal Revenue Code, IRS Regulations, ERISA, Labor Department regulations, and general trust laws. As discretionary trustee, American Trust also acts as the investment manager and is responsible for the selection monitoring and removal of its core investments.
In summary, things to consider when deciding what type of trustee you are looking for:
- Time consumption of the administration role
- Lower audit fees for those plans required to perform an audit
- An extra degree of protection to the participants regarding fees and possibly investments
- The expertise required to keep the plan's tax qualification intact
- Reduction of fiduciary liability for the plan sponsor
- Litigation risk is drastically minimized
What American Trust Can Offer
With fiduciary responsibility, there is also potential liability. Fiduciaries who do not follow the basic standards of conduct may be held personally liable to restore any losses to the plan or to restore any profits made through improper use of the plan's assets resulting from their actions.
Discretionary Trustee Services
Providing the greatest protection possible, American Trust offers full discretionary trustee services. Unlike many other providers, we are capable of offering this service and take the responsibility of safeguarding you and your employees to the greatest extent.
Contribution Monitoring--Contributions are monitored closely by our expert retirement specialists. We ensure that contributions are submitted within the Department of Labor guidelines.
Comprehensive Compliance Testing--Provide regulatory compliance testing as required to ensure your plan remains qualified.
Submission Ready Form 5500 Preparation--Compile all plan information and complete required annual reporting.
Document Design Consultations & Amendments--Review current plan document and consult on any plan design recommendations and provide ongoing consultation as changes occur in the dynamic of your business.
Corrective Program Guidance--Provide assistance in the process if corrections are needed.
Investment Oversight--Responsible for the selection, monitoring and removal of core investments.
Monitoring of Regulatory Changes--Provide ongoing legislative amendments and will advise you on any operational changes as needed.