Plan Sponsor as Trustee?

[Guest krijowri]

Does anyone know if there are any problems with the corporation who sponsors a 401(k) plan also serving as trustee of the underlying trust? I cannot find anything that either expressly allows or disallows employers from serving as trustees, although intuitively it seems that it should not be allowed.

[namealreadyinuse]

I don't think that corporations can act as trustees unless they are banks, trust cos, or otherwise qualified. It is very common to have principals of a corporation (Board members, owners, etc.) individually serve as Trustees.

[QDROphile]

You do not want the plan sponsor to be fiduciary. You probably do not want the Board of Directors to be a fiduciary. I agree with the post about the inability of busines corporations to be a trustee.

[Peter Gulia]

Whether it’s wise to name the employer as its employee-benefit plan’s trustee is a separate question. But it’s not at all clear that a plan’s creator can’t establish a trust that names such a corporation as the trustee.

Even if a State statute prohibits a non-natural person other than a bank or trust company from acting as a fiduciary, a common exception is for such an organization to serve as the trustee regarding a plan to provide benefits to the organization’s employees. Some States do this expressly in the banking statutes, others in the general-business-organizations statute, and yet others by courts’ interpretations. While I haven’t done a 50-States survey, I’ve rendered advice on enough States’ law concerning this point to believe that there’s usually a way to make it work.

Like many practitioners, I usually suggest that it’s “safer” to choose a trust company (even if it’s one that has some business relationship concerning an investment or service provider).

If an employer decides to “self-trustee” a plan, naming as trustee the corporation, rather than a particular natural person, sometimes can help keep documenting which natural persons make the trustee’s decisions internal to the corporation’s resolutions and minutes, rather than a matter that might involve documents exchanged with the plan’s other service providers.

A natural person who is or might become involved in making the trustee’s decisions could get his or her lawyer’s advice about how ERISA defines a fiduciary and how courts have interpreted, and might further interpret, that definition. Such a person also could get advice about how to protect himself or herself using a combination of ongoing advice (much of which can be paid for from plan assets), liability insurance, and the employer’s additional defense and indemnity.

[Guest krijowri]

These were the conclusions I was leaning towards. I can't find anything that directly addresses this issue, and that's what always makes me nervous! Aside from the state law issue (which is an angle I hadn't considered, so thanks!), has anyone seen any cases, rulings, regulations, etc. which address this?

[PLAN MAN]

If the trustee is a fiduciary of the plan and the plan sponsor is named as trustee, are all the officers of the company considered plan fiduciaries? How do you determine who has fiduciary responsibility/liability for plan assets? Naming a trust company with deep pockets seems like the better way to go.

[QDROphile]

A commercial trustee is not necessary and is often not the best alternative (expensive, unless the responsibilities will be limtied to custody), but Plan Man is exactly right about the confusion over fiduciary responsibility and liability if the sponsor entity is named as a fiduciary. Good practice is more important than deep pockets. You pay dearly for deep pockets.

[Guest krijowri]

A plan sponsor is always a fiduciary, so I guess I don't get your point PlanMan...??? The individual officers are no more "exposed" under the corporation-as-trustee scenario than they are under the normal corporation-as-plan-sponsor situation.

[QDROphile]

You are incorrect krijowri. Conforming to the ignorance of the masses may provide some comfort, but it does not provide the best results.

[Guest krijowri]

Wow, that was kind of rude, QDROphile. But I think you missed my point. PlanMan expressed concern that by naming the employer as "trustee," it would somehow expose all of the officers or directors to fiduciary liability, i.e., since they act on behalf of the corporation, they would be on the hook for fiduciary liability, rather than just the entitiy. Therefore, my point was that an employer who is a plan sponsor is already a fiduciary with respect to its duties as plan sponsor. Yet, you never hear this: "Oh, Company X breached it's fiduciary duties as plan sponsor, so now the CEO is liable for that breach." Sure it might be the CEO's fault, but that type of fiduciary responsibility never "trickles down" to the officers or directors (Company X would be on the hook) - so why should a "trickle down" effect suddenly exist with respect to other fiduciary capacities, such as the plan sponsor acting as trustee. It wouldn't unless those officers/directors personally take on a more active fiduciary role. That was my only point, and it was in no way intended to be an argument either in favor of nor against the employer acting as trustee of its own plan. But please explain this to me: in what way am I "conforming to the ignorance of the masses"? I'm don't understand how that makes sense in this context...?

[Bird]

I'm with krijowri on this one. QDROphile, maybe I'm dense but I missed your point completely. I get this: "Good practice is more important than deep pockets. You pay dearly for deep pockets." and agree completely, but the next post mystifies me.

[QDROphile]

A plan sponsor is always a fiduciary.

Wrong. And when you go to the trouble of italicizing incorrect statments, I have no trouble being direct in rejoinder. Since your premise is wrong, everything that flows from it is flawed. To make matters worse you were perpetuating a commonly held misconception ("ignorance of the masses").

One reason you don't hear that a CEO is liable for plan sponsor breach of fiduciary duties is because a plan sponsor is not a fiduciary unless it is ignorant enough to be designated as a fiduciary or act as a fiduciary. That is my point and Plan Man's point. You get unintended complications when you make the wrong move of designating the plan sponsor as a fiduciary. Your comment in the context of "never" is just plain wrong again (and once again you emphasize a misstatement). The DOL or a good plaintiff will try to find warm body and when the sponsor is a fiduciary. The members of the board and the officers are in the gunsights because a corporation does not act except through those persons and those persons are responsibile for corporate acts. Even if the attemp is not successful, the indivuidals are put through a wringer.

Go read the materials in the ENRON litigation. The DOL was after individual corporate officers because ENRON was a named fiduciary for certain matters and undertook fiduciary functions in others. I don't agree with some of the ENRON charges because I think the DOL goes overboard; the DOL sees fiduciaries everywhere and always starts from the proposition the plan sponsor is a fiduciary. The DOL loses on that point regularly.

[Bird]

...a plan sponsor is not a fiduciary unless it is ignorant enough to be designated as a fiduciary or act as a fiduciary.

I don't mind admitting that my volume submitter plans say the employer is the named fiduciary.

Maybe I'm just part of the ignorant mass, but would you mind telling us what alternative(s) you suggest?

[QDROphile]

Identify individuals by title in the plan document, if that fits. The title is an identifier only, it is not injection of the corporate office into plan adminstration. That concept that is tough for some to understand, and it may not fit over time and change of personnel, even if it starts right.

A more generic and flexible alternative is to have the plan document specify that the CEO or some other identified individual appoints the plan administrator, which may be a committee. The CEO will be a fiduciary in that limited capacity, but at least everyone will know exactly who the fiduciaries are and the fiduciaries will know what their responsibilities are so they can carry them out properly.

And then when the Department of Labor or a plaintilff's lawyer goes after the Board for leverage, you slam the door in their faces. I can tell you from experience that it is a very satisfying result.

[Bird]

Thanks for the reply.

If I understand, you are protecting the board by naming a title (e.g. CEO, or President) or appointing the CEO to name an administrator.

Maybe it's my small plan bias, or maybe that has nothing to do with it, but that doesn't do much for me.

[four01kman]

Right, the Plan Sponsor is not a fiduciary unless specifically named in the documents. Those individuals who are responsible for certain actions are fiduciaries, and accountable as such for their actions.

My sense of the law is most corporations in their state charters do not include the duties of a Trustee as part of what they do. Accordingly, corporations generally are not trustees of the plans they sponsor. Rather, employees of the employer are so designated by the Board of Directors, or the CEO.

Because there are certain duties required and expected of Plan Trustees, it may make more sense for a "corporate" (bank) trustee to be designated, especially when the plan assets reach a certain size.

[QDROphile]

I agree that it is not so important if ownership, employer management, and plan administration are concentrated in the same person or same limited number of people, but should be considered when those roles are divided among different persons. The worst position for ERISA liability, besides outright criminal behavior, is being a fiduciary but not recognizing that one is a fiduciary.

[Guest Robin.Wolf]

For what it's worth, the Corbel Adoption Agreement Guide says "A corporate trustee is usually a bank, insurance company or similar financial institution. It generally cannot be the employer because state laws have restrictions on which types of business entities can serve as trustees.

I have seen one case of a plan sponsor being named as trustee after being advised by their legal counsel that this was permitted by their state laws. This Plan received a favorable determination letter from the IRS.

[Steelerfan]

So, it's safe to say that ERISA does not prevent an employer from being a trustee, but state law might.

Arguing about whether plan sponsors are fiduciaries is really fruitless and impractical. While they may not always be fiduciaries with regard to every plan action or nonaction, they will rarely if ever be found to have no fiduciary responsibility at all. Somewhere in upwards of 85 to 90% (maybe even all of them) of the plans I saw trusteed by Fidelity had trust agreements that made Fidelity a "directed trustee" for plan purposes. This means that ultimate fiduciary responsibility for invetment choices will remain with the sponsor. Fiduciary responsibility of Fidelity would be limited to matters within its control. The agreements never gave Fidelity discretionary authority over plan investments. Most trustees don't want such responsibility--unless they are prepared to be ERISA "Investment Managers" and willingly assume such authority. In that case the plan sponsor would not have fiduciary responsibility for investment choices, but would (here's the kicker) retain fiduciary responsibility for selection of the IM. Thus it is virtually impossible for a plan sponsor to get out of all potential fiduciary liability since they must, by virtue of being plan sponsor, hire other vendors to do work and take on other fiduciary matters.

The moral of the story is that employee benefits market realities make it so that the plan sponsor will retain some or a significant amount of defacto fiduciary responsibility nearly all the time. The drafters of ERISA knew about the potential conflicts and that's why plan sponsors are referred to as wearing two hats--one for plan decisions and one for corporate decisions.

[Don Levit]

Steelerfan:

Excellent point.

The trustee responsibility is a matter of degree, not whether a plan sponsor has any explicit trustee duties.

In matter of ambiguity, one can generally look to form over substance.

Don Levit

[QDROphile]

Steelerfan, I think you are jumping to an unnecessary conclusion.

When an institution, or any other fiduciary, has limited fiduciary functions because of the express scope of the appointment, such as appointment as a directed trustee, that does not mean the rest of the fiduciary responsibilities falls on the sponsor. It means the rest of the fiduciary responsibility remains with some fiduciary. This discussion has been about who that fiduciary should be and how to assign the fiduciary functions to the intended person rather than lose control over who is a fiduciary and leave it up to chance, the Department of Labor, or a plantiff to determine to whom fiduciary responsibiliry attaches.

So if you have the Fidelity trust institution as the trustee, you are at the beginning of the question about who is the fidicuary, not at the answer that the plan sponsosr is the fiduciary.

The market may dictate that it is too expensive to have an institutional discretionary fiduciary, but that does not mean that plan sponsors are, or should be fiduciaries. And I assure you that in situations other than the "one person has all responsibility for everything about the business" it can make a big difference who the fiduciary is an how well that is established.

[Steelerfan]

I don't disagree as far as your statement goes, and I don't leave it up to chance, but practically speaking a portion of residual fiduciary duty must always remain with the sponsor because it will not be possible to delegate it all away.

The point I'm trying to stress is that attemps by a sponsor to "give up" or "avoid" or "pass off" fiduciary responsibility, how ever you want to say it, is going to be limited by practical concerns and ERISA's functional definition of fiduciary. I can almost guarantee you that Fidelity (or other trustee) would not do business with an employer that refused to sign off as a named fiduciary unless there were many many many dollars involved. Even then who do you think the employer is going to get to take that status and who would be acceptible to both parties? Is there a provider out there who signs up to be ERISA named fiduciary when the employer doesn't want to be? Maybe, but sounds unworkable. The sponsor's employees won't want to be named in the plan, that I guarantee. And delegating all the authority you suggest would be a nightmare patchwork of ridiculously drafted documents and uncertain scopes of services and liability. And an employer won't normally want to give up all the control that goes with being a named fiduciary or other duties that are fiduciary in nature but that the employer will want to retain because they are in fact the plan sponsor and the employer of the employee/participants.

But the major point here is that the employer will be the plan sponsor (with a capital P and S) in every case because no one else can be--remember under ERISA this is an employee benefit plan. The employer will either be responsible for hiring the service providers or naming or hiring the persons who will hire the service providers who would under your theory absorb fiduciary responsibility. How can the sponsor absolve itself from potential liability for the fiduciary decision to hire vendors or to name employees to hire vendors who might have authority to hire other vendors?

Since this is your odd view, maybe you can demonstrate how a plan sponsor gets off the hook completely. Since I think it is impossible, I can't wait to hear!

[Guest mjb]

Being a plan sponsor is not tantamount to being a plan fiduciary under ERISA. Othewise there would be no need to define who is a fiduciary under ERISA 3(21). As I understand it a plan sponsor who selects the fiduciary is not liable for the decisions made by the fiduciary but only for insuring that the fiduciary was selected prudently. See dol 404© regs-1(f) example 8 on selection of investment advisor fiduciary for plan participants by plan. If the duties of a fiduciary under ERISA 3(21) are performed by independent fiducaries who exercise discretion of plan activities how is the plan sponsor a fiduciary? Directed trustees take instructions from the fiducaries and do not have descretion to act as fiduciary. If what you are saying is true then every case for breach of fiduciary responsibility would name the employer as a defendent as well as the fiducaries for the plan which I dont see happening.

[Guest krijowri]

Steelerfan - I completely, totally, 100% agree. That's EXACTLY what I was trying to articulate before I was lambasted by qdrophile.

QDROphile - I agree that a prudent plan sponsor will delegate away much of its fiduciary responsibility, but they DO have to actively delegate it away.

And mjb - no one ever said that the plan sponsor is ALWAYS a fiduciary and therefore always liable for the acts of others. But at a default level, the plan sponsor remains the original fiduciary until (and only to the extent that) they give that authority away. And I agree, mjb, the plan sponsor who selects another fiduciary is usually NOT liable for the decisions made by that fiduciary. But it is also true that if the plan sponsor makes a bad appointment of, say, the plan administrator, then the plan sponsor could potentially breach its fiduciary duties with respect to that appointment.

[Don Levit]

krijowri:

I agree with everything you said.

In addition, the plan sponsor needs to monitor the fiduciaries he appoints to ensure they are performing as intended.

Don Levit

[Guest krijowri]

Don - I'm glad you and Steelerfan seem to have the same view of this as I do - I was starting to question my fundamental beliefs! hahah!

[QDROphile]

How much money would you be willing to bet that FIdelity will not act a a trustee unless the employer "signs off as a fiduciary"? I am not sure what you mean by "signs off as a fiduciary" but I interpret it to mean that the employer is the fiduciary that engages or directs Fidelity. I have several files with Fidelity as trustee and the fiduciary that directs Fidelity is not the employer. I explained how to do that in a prior post. The plan document names the CEO as the person with authority to appoint a committee to serve as plan administrator. The plan document says that the administrator is the fiduciary with responsibililt for managing plan assets. The plan administrator engages Fidelity for custodial services, consistent with Fidelity's policies about refusing discretion over plan assets. If the plan sponsor appoints the trustee in its capacity as settlor of the trust, one can assert that the plan sponsor (acting by the person identified in the plan document) is not acting in a fiduciary capacity. Even if it is a fiduciary, as noted in earlier messages that slice of fiduciary responsibility is limited and the risk of breach of duty is small because it is easy to meet the appropriate standard by engaging a responsible instititution. Managing the plan asset, including direction of the trustee, is a much bigger job. Engagement of an investment manger is also bigger job than appointing a directed trustee.

[Guest krijowri]

You are completely missing the mark, QDROphile. NO ONE is disagreeing that a plan sponsor can delegate much of its fiduciary responsibility to someone else. The plan administrator, the trustee, the investment advisor -- these can all be separate people or entities from the plan sponsor. The point is simply that if the plan sponsor does not designate other fiduciaries, it's on the hook. AND, the plan sponsor is always responsible for prudently selecting and monitoring any fiduciaries or service providers it appoints. But how 'bout this? We'll just agree to disagree. I don't think we will ever see eye to eye on this one, so let's stop debating it, please.

[Steelerfan]

I have no desire to get the last word in, I just wanted to comment on QDROPhile's creative fiduciary planning.

I don't see it as necessarily causing any major ERISA issues that wouldn't come up in the "normal" situation where the employer or a commitee of the employer would be the plan administrator. But I also don't think that it changes anything of substance, and I'm sure that Fidelity's legal department is satisfied that the employer would still be on the hook as a "named fiduciary" because the CEO acts as an agent of the employer. Are you suggesting that this "finnegeling" gets the employer off the hook for investment direction? If so, I wouldn't expect that argument to hold up in court.

But I also can't imagine too many CEOs comfortable with having their title in a qualified plan document.