“When you’re hired to hold people’s money as a custodian, you are not a fiduciary, but there’s still a huge responsibility,” Staab says. “But when you assume the role of trustee, you’re just that much more exposed from a risk perspective, because the trustee is a fiduciary."
The value of an institutional trustee
Given the difference in roles — the knowledge required, the level of responsibility, the fiduciary aspect and the risk assumed by taking on and overseeing the assets — trustee fees tend to run higher than custodian fees.
Oversight is critical in ensuring that an employer-sponsored employee benefit plan lives up to its promises.
Consider the plight of an employer plan sponsor that hired a third-party investment manager to manage the assets in its pension plan. The investment manager made a practice of sidestepping the trustee and pushed the company to make a number of investments without involving the trustee.
As owner of the plan assets held in trust, the trustee alerted the company that the investment manager was asking it to violate federal law that requires it to maintain all plan assets in trust. In turn, the company intervened, insisting the investment manager allow the trustee to register investments in its capacity as trustee.
In another case, a large multinational company discovered that the investment manager for its employee benefit plan hadn’t correctly titled the plan assets in the name of the trust. This led to the consequence that all of the investments were in the name of the investment manager and not the trustee. Either the investment manager became a trustee without the plan sponsor’s consent, or the plan assets were not held in trust. Neither scenario was acceptable to the plan sponsor. Again, the plan sponsor followed the trustee’s recommendation to properly register the assets in the trustee’s name.
When mistakes with employer-sponsored benefit plans happen, the repercussions can be significant, and if a plan trustee falters in executing its fiduciary duties, the issues can escalate quickly.
“A primary role of a trustee is to ensure that money doesn’t go back to the plan sponsor in any way to benefit the company,” says Wilson. “The money needs to go into a trust and that money needs to go out through the trust to one place: the plan participant or beneficiary who receives the benefits. Any other arrangement compromises the status and structure of the trust with the IRS.”
Why employers add a layer of protection
A trust is a separate legal entity that allows a plan sponsor (as grantor, trustor, or settlor) to store assets that fund employee benefit plans such as a pension, deferred compensation or healthcare benefit plans. Pursuant to the service agreement with the plan sponsor, the trustee assumes ownership of the trust assets and abides by the laws related to the plan, most notably the Employee Retirement Income Security Act of 1974 (ERISA).
Most critically for plan participants — generally, current employees or retirees — ERISA sets out standards for the trustee’s fiduciary duties. According to the U.S. Department of Labor, the main enforcer of the ERISA rules, “The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying reasonable plan expenses.”
In the single employer benefit plan context, the trustee is often a financial institution that does not perform plan administration matters such as benefit claim determinations, eligibility determinations, and plan interpretation. Accordingly, the single employer plan sponsor must fill that role with a plan administrator, which is usually the plan sponsor. The plan administrator can also be a committee or a ranking officer from the employer. In the multiemployer plan context, the plan administrator is the board of trustees.
Overwhelmed by the knowledge and resources required to handle such duties in a proper manner, many individual employers turn to third parties to share the fiduciary duties of a plan administrator, although Wilson cautions against putting the plan on cruise control.
“Some employers think that they can completely delegate it away, but they carry the main fiduciary responsibility for the plan,” Wilson says. “The ones that understand this develop in-house experience to help fulfill those responsibilities. In an effort to reduce and sometimes to cut costs, many corporations try to shift that responsibility elsewhere.”
After all, the repercussions for fiduciary missteps can be considerable.
“There’s a whole body of law dedicated to breaches of fiduciary duties,” says Staab. “If you commit a breach, you could become personally responsible and liable for whatever the breach is."
Institutional trustee responsibilities
Although most benefit plan sponsors have the best intentions in starting the plan, many quickly realize they know little about benefit plan administration. Those organizations with dedicated staff most effectively administer the plan for participants in accordance with statutory and regulatory requirements.
Even the best run organizations frequently turn to a number of professional service providers for assistance, including an institutional trustee, investment manager(s), actuary and attorney, among others.
An institutional trustee is a core professional service provider, covering responsibilities such as:
- Owning and safeguarding the assets
- Reporting valuations of assets — traditional and alternative
- Fulfilling tax, regulatory and other reporting requirements
- Developing online resources for sponsors and participants
- Processing recurring and lump sum payments to participants at the direction of the plan administrator
- All the while, the trustee reports all transaction activity — made by the investment manager and plan administrator.
“Additionally, one of the things that we try to do is keep our eyes open,” Staab says. “If something looks like it is breaching a fiduciary duty, we’ll point it out to the customer to review."
What to look for in an institutional trustee
Given the importance of the trustee role, key attributes in a potential partner include:
- Experience in trustee services, navigating the legal and regulatory waters and interacting with the plan administrator and participants
- Operational excellence at handling fees, reporting and trust accounting
- Exceptional in-house expertise on employee benefit plans, including familiarity with ERISA and Internal Revenue Service regulations
- Considerable stability and financial strength as a trustee
“Education is also huge, particularly in the single-employer plan world,” Staab says. “When a company decides it’s going to develop an employee benefit plan, it’s not necessarily thinking of the related fiduciary duties, but it’s a huge responsibility and it’s incumbent on the sponsor to understand what that means.”
A partner with considerable experience in serving as an institutional trustee to employee benefit plans can effectively balance legal and regulatory requirements with the needs of plan sponsors and participants.
“Ultimately, with respect to clients, we’re always applying a lens that says: OK, given the fact that we serve as an institutional trustee, how do we need to respond to ensure we fulfill our fiduciary duties to the participants and beneficiaries?” Wilson says. “Having an institutional trustee as an independent service provider can make a real difference.”
You deserve an experienced and valuable partner for your employee benefit plan and other comprehensive trust and custody solutions. Visit usbank.com/custody to learn how we can help.
