Can corporate plan sponsor be the named trustee?

[Guest PSteinhart]

I have a client who has been advised to name the company itself as the qualified plan trustee. I'm looking for the pros and cons for doing this. Do you know where I can find any articles that address this issue? Your comments are appreciated.

[Guest TCW]

Yikes! I haven't considered this issue in a long time, but as I remember naming the company as Trustee is pretty dangerous. As I recall, you potential open all the company books and operations to ERISA/DOL scrutiny if their is any claimed breach of fiduciary duty, i.e. self-dealing by the company as fiduciary/Trustee. Lots of ways this can innocently happen... In addition, I suspect personal liability for company breaches may ultimately find it's way back to the owners under a co-fiduciary theory.

Anyone considering this idea should make sure they have a competent legal advisor.

[Guest Mickey Maier]

The question of who can act as a trustee is governed by state trust law. Most states restrict the ability to be a trustee to individuals and bank trust companies which are regulated by the state or the comptroller of the currency. Some states allow lawyers and law firms to also act as trustees. I am not aware of any state that would allow a business corporation to act as trustee.

[Peter Gulia]

While many States’ laws prohibit a corporation that’s not a bank or trust company from engaging in a business of serving as a trustee or other fiduciary, a State’s law might permit a corporation to serve as the trustee of a trust for an employee-benefit plan for the corporation’s employees. To pick just one example, Pennsylvania’s Banking Code expressly permits a non-bank corporation to act as trustee of a trust “for the benefit of [the corporation’s] own employe[e]s[.]” 7 Pa. Stat. § 106(a)(iii).

With many retirement-plan trusts (especially those under which a participant directs investments within a menu that the employer selected), a trustee has no discretion other than to consider whether a directing person’s direction is genuine and “proper” – which many ERISA practitioners interpret as not precluded by the plan’s documents or ERISA. And usually the employer is, or some of its employees are, the named plan fiduciary that must decide claims and must decide the directions (other than those permitted to a participant, beneficiary, or alternate payee). In those circumstances, the value of an “outside” trustee is the trustee’s duty to refuse to obey an instruction that’s obviously wrong.

If the identity of the trustee is specified by the plan’s documents, that selection was a “settlor” decision. But if a person has or exercises discretionary authority to appoint a trustee, the selection is a fiduciary decision. A fiduciary must make a trustee selection using at least the prudence, care, diligence, and skill that a prudent expert would use in making the selection in similar circumstances.

PSteinhart, you asked about “the pros and cons” of naming the employer as a retirement plan’s trustee. An advantage is that the employer ordinarily should not get compensation beyond reimbursement of direct expenses. See 29 C.F.R. § 2550.408c-2(b)(2). A disadvantage is that an employer, acting as directed trustee, is less likely than a trust company to refuse or question a fiduciary’s wrong direction – especially if the people who make the trustee’s decision are subordinates or co-workers of, or the same people as, those who make the plan administrator’s or named fiduciary’s decisions.

[Peter Gulia]

Yesterday, I looked at this question for a Delaware corporation, and found that Delaware law is favorable to allowing a general corporation that is not a bank or trust company to serve (without compensation, of course) as the trustee of a qualified retirement plan for the benefit of the corporation's employees.

[Carol V. Calhoun]

I just ran across this topic, and wondered whether the previous replies have been superseded by Department of Labor Field Assistance Bulletin No. 2008-01, http://www.dol.gov/ebsa/regs/fab2008-1.html. That Bulletin treats it as a fiduciary breach if no one has the authority to collect delinquent contributions. While the situation described in the Bulletin is one in which no trustee has the obligation to collect delinquent contributions, I wonder if it would also apply to a situation in which the only party authorized to collect delinquent contributions from the employer was the employer itself?

[Peter Gulia]

If an employer (or an executive of the employer) serves as a retirement plan's trustee, the typical plan and trust documents don't even try to exclude a duty (and power) to pursue collection from the employer. (Trying to allocate away a collection duty is among the favored provisions of a trust agreement designed for a directed trust company.) Rather, the employer trustee has the authority, but too often neglects to use that authority.

This is another good illustration about why Congress should require that every ERISA-governed retirement plan have at least one fiduciary that is independent of the employer.

[Bill Presson]

Always nice to find old threads on "new" topics. Just had a question from a potential client about this issue. I don't like the idea of a company being the trustee, but need to be able to tell him whether or not they can be.

So, it appears that it is based on state law (assuming Peter is correct above and I have no reason to believe otherwise). I did have one client in Kentucky get approval from the Dept of Financial Institutions to do this, but they were working closely with their legal counsel, so I didn't think much about it. Plus it was 20+ years ago when I knew more than I know now!

Any suggestions on how to determine whether a state will allow this? Or is it going to mean hiring an attorney in the state to help?

Thanks.

[MoJo]

Always nice to find old threads on "new" topics. Just had a question from a potential client about this issue. I don't like the idea of a company being the trustee, but need to be able to tell him whether or not they can be.

While I'm not a big fan of having "more" fiduciaries in the mix (see my other posts!), this is one case where I think having a trustee that is not the plan sponsor is a good idea. For starters, just the issue of timely segregation of slary deferals can get more complicated where the employer as plan fiduciary needs to remove the assets from "corporate coffers" as soon as practicable, and the easiest way to do that is to deposit them in the trust (with the trustee - which if it is the employer theoretically means they could "wave a magic wand" over the pool of assets and say "these are now in the control of "us" as trustee" (I am, being facitious, of course). But the issuesaginify as a result of potential conflicts. Custodians help, but they aren't "trustee" (at least in their mind).

Insitutional trustees are cheap. Even individual trustees (which a lot of our plans use) "seem" to provide a "break" between employer and trust.

While it all is an artifice to some extent (smoke and mirrors), the right kind of smole and mirrors (coupled with prudent fiduciary practice) makes sense to me.

We actually looked into this for my employer (TPA, etc.) and decided against it for two reasons. One, there is liability; and two (more important) we want to be able to consult with our clients about "best proactices" and couldn't construct a case as to why self-trusteeing the plan was a "best practice."