Employee benefit plan management: trustee vs. custodian

March 03, 2023

Discover how plan sponsors ensure employee benefit plans are satisfactory and meet regulations and learn how institutional trustees can provide valuable assistance.

The difference between trustees and custodians can cause confusion, but this article will help clarify those roles. The biggest distinction is a custodian provides safekeeping of a plan’s assets, but it doesn’t own them and thus cannot buy, sell, transfer or move assets unless explicitly instructed to do so by the trustee(s).

People mistakenly use the terms trustee and custodian interchangeably, says Andrew Staab, vice president and senior counsel, U.S. Bank Law Division, Trust Legal Services. “While a trustee performs custody services, a custodian does not perform trustee services.”

In a single employer plan, the employer is the plan sponsor that establishes a separate trust to hold plan assets. The trust is a separate and distinct entity from the employer. In establishing the trust, the employer hires a trustee, and the trustee – if it’s a financial institution – typically performs the custodial services for the trust.

Surprisingly, some single employer plan sponsors appoint an individual at the employer to serve as trustee of the plan. This is risky because it puts a tremendous fiduciary burden on the person. With such risky arrangements, it behooves the plan sponsor to consider hiring an institutional trustee to replace the person. “This is the perfect opportunity to reduce risk and bring on expertise by hiring an institutional trustee,” says Karl Wilson, senior vice president, Institutional Trust and Custody at U.S. Bank.

In a multiemployer plan, also known as a Taft-Hartley plan, there’s a board of trustees for the trust. The board of trustees is comprised of persons, and the board of trustees would typically hire a custodian to be the safekeeper of the trust’s assets.

“Being hired to hold people’s money as a custodian carries huge responsibility, but when you assume the role of trustee, you’re even more exposed to risk. Being detail-oriented is crucial.”

“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 weren’t 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 doesn’t 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 
  • Reporting 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’s 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.

Related content

How do interest rates work?

At your service: outsourcing loan agency work

Depositary bank and collateral agent

30-day adulting challenge: Financial wellness tasks to complete in a month

Investment strategies by age

High-yield bond issuance: how to avoid 5 common pain points

High-yield bond issuance: 5 traits lawyers should look for in a service provider

Preparing for your custodian conversion

Asset classes explained: Cash, bonds, real estate and equities

How digital platforms streamline client onboarding for investment funds

Understanding yield vs. return

What type of investor are you?

Year-end financial checklist

European outlook: Trustee experience more important than ever

Putting home ownership within reach for a diverse workforce

How liquid asset secured financing helps with cash flow

Administrator accountability: 5 questions to evaluate outsourcing risks

The ongoing evolution of custody: Tips for renewing your custody contract

3 innovative approaches to ESG investing in Europe

Case study: U.S. asset manager expands to Europe

Key considerations for launching an ILP

A first look at the new fund of funds rule

Interval funds find growing popularity

Alternative assets: Advice for advisors

The benefit of a multi-jurisdictional European trustee

The role of a custodian

Custody or safekeeping: What’s the right solution for government investments?

Easing complex transactions: Project finance case studies

Easier onboarding: What to look for in an administrator

ESG-focused investing: A closer look at the disclosure regulation

Maximizing your infrastructure finance project with a full suite trustee and agent

3 tips to maintain flexibility in supply chain management

Top 3 considerations when selecting an IPA partner

5 questions you should ask your custodian about outsourcing

Insource or outsource? 10 considerations

10 ways a global custodian can support your growth

The reciprocal benefits of a custodial partnership: A case study

The benefits of a full-service warehouse custodian

The unsung heroes of exchange-traded funds

4 questions you should ask about your custodian

Bank vs. brokerage custody

Refining your search for an insurance custodian

Service provider due diligence and selection best practices

What is CSDR, and how will you be affected?

Webinar: CRE technology trends

Avoiding the pitfalls of warehouse lending

Complying with changes in fund regulations

Business risk management for owners of small companies

Evaluating interest rate risk creating risk management strategy

Webinar: CSM corporation re-thinks AP

Webinar: AP automation for commercial real estate

Addressing financial uncertainty in international business

5 winning strategies for managing liquidity in volatile times

The future of financial leadership: More strategy, fewer spreadsheets

Employee benefit plan management: trustee vs. custodian

Protecting cash balances with sweep vehicles

Choosing your M&A escrow partner

OCIO: An expanding trend in the investment industry

Delivering powerful results with SWIFT messaging and services

Look to your custodian in times of change

How institutional investors can meet demand for ESG investing

Managing complex transactions: what your corporate trustee should be doing

High-cost housing and down payment options in relocation

Why retail merchandise returns will be a differentiator in 2022

4 benefits of independent loan agents

Middle-market direct lending: Obstacles and opportunities

How RIAs can embrace technology to enhance personal touch

An asset manager’s secret to saving time and money

Crypto + Relo: Mobility industry impacts

For today's relocating home buyers, time and money are everything

Webinar: CRE Digital Transformation – Balancing Digitization with cybersecurity risk

Empowering team members

10 tips on how to run a successful family business

Business tips and advice for Black entrepreneurs

How to test new business ideas

How to get started creating your business plan

The role of ethics in the hiring process

8 ways to increase employee engagement

How to reward employees and teams who perform well

How to hire employees: Employee referral vs. external hiring

Give a prepaid rewards card for employee recognition

5 steps for creating an employee recognition program

Checklist: Increase lead generation with website optimization

Omnichannel retail: 4 best practices for navigating the new normal

Is your restaurant Google-friendly?

3 simple brand awareness tips for your business

How a small business owner is making the workplace work for women

The growing importance of a strong corporate culture

Business credit card 101

Meet your business credit card support team

How to apply for a business credit card

How jumbo loans can help home buyers and your builder business

Break free from cash flow management constraints

5 tips for managing your business cash flow

Improve online presence your business

How Shampoo’ed is transforming hair and inspiring entrepreneurs

The San Francisco bridal shop that’s been making memories for 30 years

How Al’s Breakfast is bringing people together

In a digital world, Liberty Puzzles embraces true connection

Celebrity Cake Studio’s two decades of growth and success

How a travel clothing retailer is staying true to its brand values

How to build a content team

Use this one simple email marketing tip to increase your reach

How (and why) to get your business supplier diversity certification

Do I need a financial advisor?

Retirement income planning: 4 steps to take

Year end tax planning tips

A guide to tax diversification in investing

Bull vs. bear market: What do they mean for you?

Start a Roth IRA for kids

Investing myths: Separating fact from fiction in investing

What Is a 401(k)?

ETF vs. mutual fund: What’s the difference?

What are alternative investments?

4 times to consider rebalancing your portfolio

Effects of inflation on investments

How much money do I need to start investing?

7 diversification strategies for your investment portfolio

Why compound annual growth matters

How to start investing: A beginner’s guide

5 questions to help you determine your investment risk tolerance

Tips to overcome three common savings hurdles

Allowance basics for parents and kids

5 tips to use your credit card wisely and steer clear of debt

Travel for less: Smart (not cheap) ways to spend less on your next trip

Real world advice: How parents are teaching their kids about money

How to stop living paycheck to paycheck post-pay increase

Practical money tips we've learned from our dads

6 ways to spring clean your finances and save money year-round

How to cut mindless spending: real tips from real people

How to increase your savings

How grandparents can contribute to college funds instead of buying gifts

How to open and invest in a 529 plan

5 tips to use your credit card wisely and steer clear of debt

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

Can you take advantage of the dead equity in your home?

4 questions to ask before you buy an investment property

How to spot a credit repair scam

5 unique ways to take your credit card benefits further

Disclosures

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.