Named Fiduciary vs Directed TTEE

[Guest Ephesian431]

I am working with a company that is told that their current provider (bank 1) is a named fiduciary. They are looking at another provider who is a directed trustee (bank2). Bank 1 says that they provide a much greater service than Bank2. The plan sponsor picks fund choices. Is the plan sponsor relieved of fiduciary responsibility with Bank 1 being a named fiduciary? I do not see much difference in the services of bank 1 and bank 2 since the ER is still making the investment choices. Am I wrong?

Add. Info.: plan type 401k

Participant directed

Currently use bank 1 funds and a

few outside funds

Fund performance is a issue

[Guest]

THe er would still have fiduciary responsibility for correctly choosing and monitoring bank 1's performance. If the er is sophisticated enough to handle it (have meetings etc.) I don't see why you shouldn't switch to bank 2 or another service provider, especially if performance is an issue.

[Wessex]

A directed trustee can be a Named Fiduciary and a discretionary trustee can not be a Named Fiduciary. Whether or not one is a Named Fiduciary does not determine one's fidicuary liability; that is determined by one's fiduciary capacity.

[Guest Ephesian431]

Thank you DSilver & Wessex. Your knowledge is greatly appreciated.

Wessex,

If I understand correctly, if the duties are the same, then it matters not if one is a directed TTEE & Named Fiduciary VS directed TTEE only.

[Jon Chambers]

To get a sense of the relative responsibilities of the various trustees, I'd recommend reading their model trust agreements, paying close attention to the indemnification and hold harmless agreements. In terms of limiting liability, the following lists arrangements from most retained liability, to least retained liability:

Fully passive, non-discretionary directed trustee (we'll do whatever we're told to do, no questions asked, no matter what)

Non-discretionary directed trustee (we'll do whatever we're told to do, unless we know it's against the law)

Active directed trustee (we'll generally do what we're told, but we'll investigate the reasonableness of the direction)

Active discretionary trustee (we'll do what we think is right)

As an example of the distinction between passive and active trustees, if a sponsor stops sending in salary deferrals, the passive trustee won't do anything. The active trustee would investigate why contributions weren't received as scheduled. I've seen active directed trustees resign over this issue. There is a difference, although it's subtle (until you need it).

------------------

Jon C. Chambers

Principal

Schultz Collins Lawson Chambers, Inc.

(415) 291-3004

[Guest Pete Swisher]

Named Fiduciary sounds misleading in this case: absence of control over fund menu removes the most meaningful protection a Trustee can deliver. If the sponsor chooses the fund menu then by definition they are a directed trustee unless they have accepted other (non-investment) fiduciary functions with discretion. That seems unlikely. In other words, your "named fiduciary" sounds an awful lot like a directed trustee anyway.

[MoJo]

Unless, of course, the fund menu selected by the employer includes collective trusts managed by the "directed trustee." Then, the directed trustee, while not selecting the fund line up, does in fact have fiduciary control over the underlying assets of the collective trust, which are in fact considered assets of the plan's trust, and make them, by definition, a true fiduciary under ERISA.

Bottom line: Titles and agreements are irrelevant. Function determines what liability attaches under ERISA. Discretion in management of the plan, *any* handling of assets (except in the most ministerial of ways), and the regular dispensation of investment advice for a fee are what makes one a fiduciary.

[Guest Jim Jesikiewicz]

If the case of a Passive Trustee (never touches the money, gives No advice, did not choose the funds...) should they be named on a Schedule P for the 5500? If not, who should?

[Jon Chambers]

Yes, the passive trustee should be listed on the Schedule P, and should sign it.

[Guest Jim Jesikiewicz]

Jon,

What liability does the passive trustee assume or role they play?

I am looking for a definition. From all the different things I read, no one is sure of the responsibilty of a passive trustee. It is sold as a invisible barrier between the employer/employee, but when push comes to shove, I think the employer is the fiduciary.

Would you have anyone else on a Schedule P if NO trustees are listed on the document, other than the passive bank?

Thank you for your time.... Jim

[Jon Chambers]

The Schedule P is the "Annual Return of Fiduciary of Employee Benefit Trust". It starts the statute of limitations running for the 5500 filing. It doesn't imply any real fiduciary liability for the trustee--the trustee's role is a function of the trust agreement and the trustee's engagement agreement with the plan sponsor. A passive trustee is generally not responsible for investments, but is still responsible for the safekeeping of assets. Depending on the agreements, even passive trustees may have some additional responsibilities. For example, if salary deferral contributions cease coming to the trust, and the trustee knows that the plan has not been terminated, they may have some responsibility to investigate why they are no longer receiving contributions.

I think that the rules are pretty clear, unfortunately, terms are used interchangably, and different trustees accept different amounts of liability, so it is very difficult to say which trustees accept more or less liability based on terminology such as "passive" or "active". Clearly, the employer will be a fiduciary to the plan no matter what the trustee's role is. In my opinion, there is a hierarchy of liability shifting. When the trustee is active and fully discretionary, they take on the most liability. Where they are passive and non-discretionary (i.e., they do whatever the employer tells them to, without investigating, and nothing that the employer doesn't tell them to), they take on the least liability. There are an infinite number of variations in between. You may be interested in my article, Benefits of an Institutional Trustee, at our firm's website at http://www.schultzcollins.com/Advisors/schultzcollins/

Click on "Qualified Plans" to find the article.

Finally, there is no reason that I am aware of for anyone other than a trustee to sign the Schedule P, even when the trustee is completely passive.

Hope this helps,

[Guest Pete Swisher]

Jim,

I have also looked for hard definitions but think only fuzzy definitions exist. (the best source I've found is Jon's article, available on his firm's website I think) The only definitions that matter are the terms of the particular trust agreement. "Passive" is defined in my firm as custodian only; pure directed trustee with lots of "we don't do this" and "we're not a fiduciary with respect to that" in the agreement. An active trustee can only be considered active with respect to functions it clearly accepts in the trust agreement. In our firm, for example, we can be an "active, directed" trustee by accepting no discretion but actively monitoring investments quarterly against the investment policy statement (i.e., performing the due diligence). That may make us a co-fiduciary but it relieves the employer of no liability--it only helps prove that the employer is doing its job. The final step on the ladder is full fiduciary--an "active, discretionary" trustee, where we accept discretion for plan assets in writing and all the liability that goes with it. Bottom line: a "passive" or "active" trustee is whatever the trust agreement says it is.

[KJohnson]

Jon,

Just wondering, it would seem under the Act that if you take the role as a trustee and sign the scheduel P, then it appears that you would have to take the duties assigned to you under ERISA as a trustee. Under 403(a)(1)--that means that you would still have the olbigation to determine that your instructions from the named fiduciary are 1) proper, 2) in accordance with the terms of the Plan and are not contrary to ERISA. Thus, I am not sure your descritipion of a fully passive trustee would actually meet ERISA's definition of a trustee. And ,generally a plan must have a trustee.

In your fully passive situation is there another person or entity that acknowledges that he or she is a trustee? Do you just call yourself a custodian?

[mbozek]

KJ: To put this in the proper perspective is Charles Schwab, INc a fiduciary because it is the custodan of a qualified plan and signs a Schedule P? Second can you explain to me how can a trustee determines what is a proper instruction in the wired world of EFTs and and e trading? Third : what does all of this talk about being a fiduciary mean in the context of mandatory arbitration ?

[Jon Chambers]

KJ--

To address your question, there are many corporate trustees that accept designation as trustee, and require indemnifications from the corporation sponsoring the plan that cover them if they don't meet the ERISA requirements that you cite. They are the "trustee", in the sense that they are named as trustee, they sign the Schedule P, the plan can get a limited scope audit, etc., but they do not take on most of the responsibilities and liabilities that are normally associated with the trustee. In the plans I work with, no other individual or organization acts as co-trustee when an institution serves as passive trustee.

MJB--

A custodian is not a trustee. If Schwab signs the Schedule P as a custodian, we presume they are a custodian. If they sign it as trustee, we presume they are a trustee. To be absolutely sure, you need to see if they were appropriately appointed by the Board, and whether they accepted the appointment by action of an officer of the trust company. Schwab's trust company is careful to ensure that documentation is properly executed.

I doubt that Schwab or any other trustee, passive or active, can require arbitration in an ERISA case. They normally require significant indemnifications when they act as a directed trustee--see above. Other trustees require even more indemnifications than Schwab. Assessing the degree of responsibility accepted by a trustee is one of the services offered by a plan consultant that helps companies select bundled service providers.

[mbozek]

Jon- Federal judical policy is to encourage arbitration over litigation. The Federal Arbitration Act which enforces a contractual agreement to arbitrate disputes is not prempted by ERISA. The US Supreme Ct has upheld agreements for mandatory arbitration of employment discrimination claims to the exclusion of all other remedies.

[KJohnson]

Jon,

I guess that was my point. That you can seek all the indemnifications that you want and be as "passive" as you want, but if you are a trustee and a participant sues you because you acted on improper instructions, or instructions that were inconsistent with the plan, or instruction that were inconsistent with the Act then you may still be liable. You are then stuck with impleading the employer on the indemnification grounds. See e.g. First Tier Bank, N.A. v. Zeller 16 F.3d 907 (8th Cir.) cert. denied 513 U.S. 871 (19994), Maniace v. First Commerce Bank N.A., 40 F.3d 264 (8th Cir. 1994).

As to arbitration, how is a participant bound by an agreement to arbitrate. Also, the arbitration point could put you in an interesting position--participant can sue trustee but trustee cannot implead employer because of arbitration clause?

[Jon Chambers]

I agree with your first point. Your logic notwithstanding, many passive trustees use a trust agreement replete with indemnifications, and almost absolute repudiation of responsibility. The plan sponsor then faces the potential problem of reconciling the law and the terms of the agreement in the face of litigation. My general preference is to go with a trustee whose trust agreement accepts the non-delegable responsibilities that should typically reside with the trustee, such that there is no question as to what the plan sponsor should expect from the trustee.

With regard to arbitration, that point was raised by MBozek. I believe he was referring to the fact that Schwab's brokerage and custody agreement mandates arbitration in any dispute. I don't believe that Schwab's trust agreement contains such language. I also agree that the arbitration requirement could not be binding on a participant who didn't agree to it. MBozek may want to comment further on this issue, as I may have misconstrued his intent.

[Guest Pete Swisher]

My experience with arbitration agreements is that they are typically reserved for the brokerage side of the business, not the trust side. So a broker selling a commissioned product to a retirement plan client will require an indemnification agreement, but the trust agreement from the $500 "rent-a-trustee" that goes with that commissioned product will not have an arbitration clause. Does anyone know of any exceptions?

[mbozek]

Qualified plans in the securities industry typically have provisions for mandatory arbitration of claims by a participant. Also under a recent US supreme ct decision in Circuit City Stores v. Adams, an employer could require an employee to submit to mandatory arbitration as a condition of employment.

[Guest b2kates]

Jim,schedule P is signed by the Trustee of the Plan. Particularly the Trustee who holds title to the assets. If no other T exists, then yes it is the "passive" trustee.

[KJohnson]

DOL, in the ENRON case, is apparently taking on the issue of what "proper directions...made in accordance with the terms of the Plan and not contrary to ERISA" means. This is the American Bankers Association response]

http://benefitslink.com/articles/bankersbriefenron.pdf

[austin3515]

Jon -

In your article, it indicates that only Plans with a corporate trustee are eligible for the limited scope audits. Not true!

Per the DOL regulations, the only requirement is that the institution holding the assets be regulated blah blah blah.

Most of the major companies are aware of the rule, but once in a while, a trust company/bank that is eligible to give the certification won't do it because they're not the trustee. It's very frustrating (I'm a CPA by the way, and my firm does about 40 audits a year, several of which are limited scopes without a corporate trustee involved).

[austin3515]

I should say though, that I learned a great deal from reading the balance of the article!