The Role and Responsibilities of the Individual Trustee

Being the fiduciary to your company 401(k) plan is a vitally important function. Your employees and their beneficiaries depend on you to make the best decisions possible. This responsibility also carries with it the associated risks and liability.

Reach Skilled Volunteering
Reach Skilled Volunteering (Photo credit: Wikipedia)

Fiduciary responsibility covers a well-defined set of assets. These assets must be managed for the ultimate benefit of someone else. As a fiduciary, you may be responsible for any one of many types of assets. You, as a corporate director or officer, may be the trustee of an employee benefit plan. You, as a Board member or officer, may be a trustee for a college endowment or the endowment of any other not-for-profit institution. You may be the trustee for the estate or foundation of a family member or close friend. In all these situations, the buck stops with you. And it’s not even your buck.Ironically, you may have this same fiduciary responsibility to manage your own possessions. These assets may include your residence and your career as well as your taxable and tax deferred investment portfolios. Even if you own the assets today and will own them in the future, you must act as a trustee. Why? Because the beneficiary of your personal assets is not the you of today, but the you of tomorrow. With this in mind, the you of today must manage your possessions for the sole benefit of the you of tomorrow. This requires great discipline. The good news is you can’t sue yourself for a breach of fiduciary duty. Still, this doesn’t mean your liability vanishes, it just shows us in a different way. For example, rather than taking your younger self to court for mishandling your own retirement funds, you’re merely punished by not living the retirement lifestyle you had dreamt of – or by living in your kid’s basement, which may or may not be the same thing.

Plan sponsors are, by default, fiduciaries to the plan participants and their beneficiaries. Many plan sponsors believe that their service providers have taken care of everything. Case law is full of examples that this assumptions is false.

Please comment or call to discuss how this affects you and your organization.

Posted via email from Curated 401k Plan Content

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Discretionary Trustees vs. Directed Trustees

Trustees Catherine Ripley and Ken Gibson
Image by dave.cournoyer via Flickr

Plan sponsors need to understand that their service provider does not, ordinarily, assume any fiducisry liability. Many service providers use a marketing gimmick to sell plans by making empty promises. If you read the fine print a ‘fiduciary warranty’ offers virtually no protection.

Perceptions and Reality
A directed trustee is the most common kind of trustee associated with plan assets. The functions assigned to the trustee in most standardized plan documents and trust agreements such as prototype plans are those of a directed trustee. In many cases, a directed trustee is a trust company that provides an asset custody service as part of a mutual fund family that offers bundled record-keeping services such as the case with Fidelity Management Trust Company and the Fidelity investment arm in DeFelice, and Merrill Lynch Trust Company and the Merrill Lynch investment arm in WorldCom.The perception that trust companies and other such entities ordinarily provide legal protection to plan sponsors for the selection, monitoring, and replacement of plan assets is wrong. While the custodial and trustee services offered by trust companies and other such entities are valuable, even a directed trustee under ERISA, such as a trust company, cannot offer plan sponsors legal cover simply because their agreements with these sponsors make sure that the sponsors–not the directed trustee–remain ultimately liable for plan assets, in accordance with the law of ERISA.

As I’ve noted in previous columns, mother always said to read the fine print. So once again, I’ll remind advisors to remind their fiduciary clients to read their agreements with trust companies and other such entities because it is usually these documents that will govern the ultimate legal liability of their clients, not oral sales representations or written sales brochures.

Plan sponsors need to understand the difference between marketing gimmicks and actual transfer of risk.

Please comment or call to discuss how this affects you and your company retirement plan.

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