Guest Jimmy B Posted April 2, 2002 Share Posted April 2, 2002 I have a client who is deathly afraid of being named as a trustee of his company's 401(k) plan. Can the company be named as trustee? Are there any laws preventing it? He is willing to sign as an officer of the company, just not as trustee. Link to comment Share on other sites More sharing options...
Mike Preston Posted April 3, 2002 Share Posted April 3, 2002 I don't believe it is possible for for the company to be named as a Trustee. As I understand the issue, only those who can assume the role under trust law can step to the plate on this one. Individuals can, as can entities which are appropriately licensed. Unless the company in your case is capable of acting as a trustee for others, I don't think it can do so for the plan. I also think this a matter of state law, so a local law firm should be able to confirm or deny my theory. If the individual is concerned about this, the trustee that is appointed should be a corprate trustee. Should be lots available in the local phone book. Link to comment Share on other sites More sharing options...
mbozek Posted April 3, 2002 Share Posted April 3, 2002 then the client can adopt a SIMPLE IRA plan mjb Link to comment Share on other sites More sharing options...
IRC401 Posted April 3, 2002 Share Posted April 3, 2002 I agree that it is a matter of state law. I believe that PA law allows a corporation to be trustee of its own benefit plans. I do not know if there is any other state that so allows. Link to comment Share on other sites More sharing options...
pjkoehler Posted April 3, 2002 Share Posted April 3, 2002 If your thought is to insulate an individual from the fiduciary liability of acting as the plan's "trustee," I don't think this strategy has much to offer, even if it is permitted by state trust law, unless the person you seek to shelter is not a member of the board of directors. Under a corporation's rules of internal governance (subject to state corporation law), a corporation can only act by appropriate resolution of its governing body, typically its board of directors. If the trust document designates the corporate plan sponsor as the "trustee," the directors would, in effect, act ex officio collectively as a board of trustees and each director would be exposed to fiduciary liability. It may be agued that since the trust document was adopted by a board resolution in the first place, it provides adequate notice of the directors' acceptance of their appointment ex officio, i.e. so long as they are directors. A director who prefers to avoid exposure to fiduciary liability would be well advised to resign. Even a director who recuses himself from board decisions that are arguably fiduciary in nature would not be completely insulated, since failures to act by parties who have the "authority" to exercise such discretion may well provide the grounds for imposition of fiduciary liability by a court, not to mention the recusing director's exposure to co-fiduciary liability for the acts or failures to act of his fellow directors. You should also bear in mind that the board may have delegated discretonary authority to one or more corporate officers to manage the administration of the plan and control plan investments. That delegation, irrespective of the appointment of the corporate plan sponsor as the "trustee," would not shelter that officer from exposure to fiduciary liability. Phil Koehler Link to comment Share on other sites More sharing options...
fidu Posted April 3, 2002 Share Posted April 3, 2002 wouldnt this corporation-as-trustee issue be preempted by erisa and therefore not be governed under state law? Link to comment Share on other sites More sharing options...
mbozek Posted April 3, 2002 Share Posted April 3, 2002 What risk is this client afraid of: If it is investment risk hire advisor to select the proper mix of funds and let employees direct investments under 404©. Review the funds once a year and get rid of funds in the bottom 20% of their class for three years (dogs) or keep dogs and offer additonal funds. Hire a record keeper/TPA to perform tests and provide for immediate elegibility of all employees to avoid excluding any one for Sal reduction and if there is an er contribution make for mandatory ee participation after 1 yr of service. Dont allow hardship distributions, permit only one loan and limit all distributions to a lump sum only. If the client is still worred adopt a sep or simple plan or buy worry beads. mjb Link to comment Share on other sites More sharing options...
pjkoehler Posted April 3, 2002 Share Posted April 3, 2002 Corporations are creatures of state law. In prescribing rules of general application for the internal governance of a corporation, a state's law does not "relate to" an employee benefit plan and, therefore, doesn't come within the scope of ERISA preemption. There may be some states that have adopted trust law that exclusively regulate the persons/entities who may act in a trustee capacity with respect to employee benefit plans. (Modernly, most state legislatures are savy enough to avoid this preemption trap in drafting their statutes to fall within a preemption exemption.) Even though such a law, if any, arguably would "relate to" the plan, it would probably be exempt from preemption under the special "savings clause" in the Act. As a practical, as well as a legal, matter, the corporation can only act by operation of its board of directors or by persons to whom authority has been delegated by the board. Persons who are members of the board will invariably have, and eventually excercise, the discretionary authority or control over the plan that's described in ERISA's definition of a "fiduciary," even if the board's involvement is limited to engaging other fiduciaries, e.g. investment managers, third party plan administrators, or unrelated, i.e. corporate trustees. While these parties, and not the board, would have fiduciary responsibility with respect to the acts or failure to act that they undertake in the performance of their properly delegated fiduciary duties, the board would retain direct fiduciary responsibility for the manner in which it selected these fiduciaries and monitors their performance. It could also be exposed to co-fiduciary liability for the misdeeds of the other fiduciaries. Phil Koehler Link to comment Share on other sites More sharing options...
KJohnson Posted April 3, 2002 Share Posted April 3, 2002 PJK, I believe that there is a line of cases stemming from a case called Confer v. Custom Engineering out of the Third Circuit in 1991 or 1992 that states that if a corporation is the named fiduciary, there is not automatic personal fiduciary liability of the Board of Directors if they are acting "qua" corporation and not as individuals when they make their fiduciary decision. My recollection is that DOL had fits on this and I remember them succesfully litigationg your position in a case called Pacific Lumber in the Ninth a few years later. I haven't updated this research in a while, but I think that the Confer line of cases is still "good law" in some Circuits. Link to comment Share on other sites More sharing options...
pjkoehler Posted April 4, 2002 Share Posted April 4, 2002 KJohnson: The issue in Confer was whether corporate officers of the corporate plan sponsor, which was a named fiduciary under the plan, had fiduciary responsibility in the performance of their discretionary acts even though the company had not expressly allocated such responsibility to them. That's not quite the same issue as whether the corporate directors would have had such exposure. The Ninth Circuit clearly rejected that sort of test in favor of a purely functional test with repect to persons who exercise discretionary control over the plan. Under that test, it's virtually impossible for a corporate director who meets, confers, deliberates and votes to cause the corporation to exercise its discretionary authority as plan "trustee" over the management of plan assets to avoid being a "fiduciary." Kayes v. Pacific Lumber Co., 51 F.3d 14493d 1449 (9th Cir. 1995). In fact, Kayes, was cited in a subsequent Third Cicuit decision for that proposition. End of the Road ex rel. Fruehauf Trailer Corp. v. Terex Corp. , 250 BR 168 (2000). The Third Circuit appears to have limited Confer to its facts. Phil Koehler Link to comment Share on other sites More sharing options...
KJohnson Posted April 4, 2002 Share Posted April 4, 2002 I'll have to go back and reread it, but my recollection is that Freuhauff actually followed Confer (and wasn't it a Delaware District Court decision), I think there was another district court case out of N.C. (my home state) called Atwood in the mid 1990s that went the same way as Confer. And I believe that there was also a case out of Alabama called Professional Helicopter Pilots v. Denison that also went the same way. I guess I am just not convinced that this is a completely resolved issue although I am sure that DOL would wholeheartedly agree with you. Of course, I haven't gone back and reread these cases and it is almost 9:00 p.m. eastern time-- so I guess I won't. Link to comment Share on other sites More sharing options...
pjkoehler Posted April 4, 2002 Share Posted April 4, 2002 Fruehauf Trailer is a decision by the Bankruptcy Court of the District Court of Delaware, which is in the Third Circuit and, therefore, prior decisions by the Third Circuit Court of Appeals are controlling authority. While the bankruptcy court in Fruehauf cited Confer, it also cited the Ninth Circuit decision in Kayser, which effectively ripped the Confer decision to shreds on the issue of whether corporate officers may be fiduciaries if they do fiduciary kinds of things, regardless of whether the corporate "named fiduciary" had expressly delegated discretionary authority to them. In fact, the bankruptcy court could have resolved the issue before it solely on the basis of Confer, it's controllling authority, but amazingly it concluded that an officer or director may be a fiduciary if he exercises discretion over the management, assets, or administration of the plan, i.e. it follows Kayser. Until and unless the Third Circuit overturns Confer, or the Supreme Court weighs in, plaintiffs in the Third Circuit who bring ERISA suits for breach of fiduciary duty will have to take it into account. Plaintiffs in the Ninth Circuit can ignore Confer. In other circuits, they take their chances on cases of first impression. It's certainly not free from doubt how any of the other Circuits might come down, but they'd be hard pressed to dismiss the logic of Kayser, which specifically considered all the arguments in Confer as well DOL Reg. Sec. 2509.75-8; Q&A D-3 and D-4. I haven't read the case in North Carolina you mentioned, but it's interesting that are plaintiffs willing to bear the costs of litigating an issue Confer tried to but to rest. Phil Koehler Link to comment Share on other sites More sharing options...
KJohnson Posted April 4, 2002 Share Posted April 4, 2002 Here is a recent D.C. District Court case where the Court acknowledged the different treatment in the Circuits. It then adopts an "I'll know it when I see it" standard. http://www.dcd.uscourts.gov/01-236.pdf Link to comment Share on other sites More sharing options...
IRC401 Posted April 8, 2002 Share Posted April 8, 2002 So, if you have a company in which the owners, the directors, and the senior officers are all the same people (or are members of the same family), and if they don't want to pay a bank or trust company to act as trustee, does it hurt to name the corporation as trustee? (assuming that it is legal to do so under state law) Link to comment Share on other sites More sharing options...
KJohnson Posted October 2, 2002 Share Posted October 2, 2002 The Confer decision has come up in the ENRON case. The DOL's brief is a good read regarding the government's current view of "functional" fiduciaries, corporate fiduciaries and the like. It will be interesting to see what the 5th Circuit does with this issue. The brief can be found here: http://www.dol.gov/sol/media/briefs/enronb...ief-8-30-02.htm Link to comment Share on other sites More sharing options...
Guest consultant Posted October 15, 2002 Share Posted October 15, 2002 Hire a Discretionary Institutional Trustee who accepts the role as the named fiduciary, an investment manager (per ERISA) not a stock broker or insurance agent, follow 404©, educate and document everything, establish proper fiduciary monitoring...... and remember that federal courts are back logged with cases. Even if you could figure out how to appoint the company as a trustee, they can not assume fiduciary liability and if state law allows it, federal law will override it. Go back and look at case law, suits are brought against individuals most of the time with the companies drug in because they have deeper pockets. and take a look at these: Whitfield v. Cohen (682 F. Supp. 188, 9 E.B.C. 1739, S.D. NY 1988); Martin v. Tower and Arizona State Carpenters Pension Trust v. Miller (CIV 89-0693 PHX RGS, D. AZ 1994) Link to comment Share on other sites More sharing options...
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