The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to retirement plan trustees. The advisor asked:
“What defines a discretionary trustee vs. a directed trustee?”
Highlights of the Discussion
ERISA Section 403(a) provides that the assets of a qualified retirement plan must be held in trust by one or more trustees. The trustee will be either named in the plan document or appointed by a person who is a named fiduciary. The appointment of a plan’s trustee(s) is an important fiduciary decision that must be undertaken in a prudent manner by the plan sponsor or retirement plan committee with the proper authority.
Not all trustees, however, have the same authority or discretion to manage or control the assets of a plan. A trustee that has exclusive authority and discretion to manage and control the assets of the plan is a discretionary trustee. A discretionary trustee may be an employee of the company, but, more than likely, this role is outsourced to a third party.
However, a plan can expressly provide that the trustee is subject to the direction of a named fiduciary who is not a trustee. This is a directed trustee. The scope of a directed trustee’s duties is “significantly narrower than the duties generally ascribed to a discretionary trustee…” (Field Assistance Bulletin 2004-03). While a directed trustee is still a plan fiduciary, his or her fiduciary liability is limited, because he or she is required to act upon the direction of another plan fiduciary. The use of a directed trustee is a common plan model in the retirement industry. Many organizations serve as directed trustees.
Direction is proper only if the direction is “made in accordance with the terms of the plan” and is “not contrary" to ERISA. Accordingly, when a directed trustee knows or should know that a direction from a named fiduciary is not made in accordance with the terms of the plan or is contrary to ERISA, the directed trustee should not, consistent with its fiduciary responsibilities, follow the direction.
There are two basic flavors of qualified retirement plan trustee: discretionary and directed. Check the terms of the governing plan document for a particular plan to determine which applies.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2018, Retirement Learning Center, LLC. Used with permission.