ERISA Directed Trustee Services

Frequently, qualified retirement plan sponsors question whether having a corporate trustee makes sense from a cost/benefit perspective. Most corporate trustees act as “directed trustees”, so other fiduciaries bear responsibility for the investment decisions. In a casual review, it may appear that the trustee’s primary responsibility is merely to act as a glorified cashier, receiving and disbursing funds according to the plan administrative committee’s direction. In most qualified plans, assets are custodied through a mutual fund company, insurance company or stock broker, further limiting the trustee’s role. Consequently, many plan sponsors believe that it makes sense to self-trustee the plan, and save the trustee fee.

Only the plan sponsor can determine whether the “value added” by a corporate trustee justifies the trustee’s fee. However, in considering the “value added” by the corporate trustee, the plan sponsor should consider both the tangible and intangible benefits furnished by an external trustee. Further, the plan sponsor should also consider the mitigation of potential fiduciary liability afforded by having an independent third party act as trustee. The key benefits of a corporate trustee are summarized below:

Tangible Benefits

  • time consuming administrative functions, including preparing consolidated asset and income statements, processing receipts and disbursements, and preparing and filing tax forms, are delegated to an institution specializing in providing these services;
  • plans with over one hundred participants subject to the plan audit requirement may pay a lower audit fee for an institutionally trusteed plan, because the plan may be eligible to file a “limited scope” audit report, and because the institution generally prepares standardized auditor’s reports designed to simplify the audit process;

Intangible Benefits

  • since assets are controlled by a corporate trustee, plan participants receive an extra degree of protection that plan assets will be used solely to pay benefits to participants and beneficiaries, and reasonable plan expenses.
  • the trustee role is delegated to an institution specializing in providing trust services, minimizing the possibility that a trust responsibility could be overlooked, thereby exposing the plan sponsor to penalties, or even jeopardizing the plan’s tax-qualified status;

Mitigated Fiduciary Liability

  • fiduciary responsibility is distributed more broadly, reducing the possibilities for potential conflicts of interest;
  • the possibility that the Labor Department or a plan participant might file a lawsuit under ERISA for violations of fiduciary responsibility is significantly reduced; and
  • in the event of any ERISA litigation, a corporate trustee is likely to share defendant responsibilities with the plan sponsor and other plan fiduciaries. Since a corporate trustee will have significant resources for mounting a legal defense, having a corporate trustee increases the likelihood that the plan sponsor will be successful in defending against potential ERISA lawsuits.

Engaging a corporate trustee may entail significant costs, and consequently, represents an important decision for any company. However, in considering whether a corporate trustee is required for a plan, the plan sponsor should weigh both the tangible and intangible benefits against the costs of engaging the trustee.