Trusts for 457(b) Plans

[Guest Steven N]

The exclusive benefit requirement can be met using a custodial account or an annuity contract instead of a trust. Treas. Reg. §1.45-8(a)(3). Whenever a plan uses a custodial account or an annuity contract instead of a trust, the account or contract must expressly state the exclusive benefit language. Treas. Reg. §1.457-8(a)(3)(i).

A plan can "mix or match" different kinds of exclusive benefit arrangements-trust, custodial account, and annuity contract - as long as every plan asset is held under at least one exclusive benefit arrangement. Treas. Reg. 1.457-8(a)(3)(i).

Where all the plan assets are held under a custodial account or an annuity contract, the establishment of an outside trust is not necessary. However, for plans that provide for loans, or other assets held outside the exclusive funding arrangement (i.e., self-directed brokerage account), would the plan sponsor need to have someone or some entity appointed as trustee to fulfill the trust requirement?

We have a concern as a vendor selling 457b annuity contracts and custodial accounts. It creates additional steps and expense for us to set up an outside trust agreement/document with a bank for a 457b governmental plan that wants to offer loans. If this is not necessary, then the situation will be streamlined for all parties. The 457 Answer Book does not directly address this question, although Question 2:45 and 2:50 seem to imply that an annuity contract or custodial account can contain trust language and exclusive benefit language which our document does.

Bottom line, is this sufficient to not have to provide trust documents outside a plan document?

[jpod]

If there is a loan, why can't the asset - the receivable, as evidenced by the promissory note and/or other documents - be held by the custodian of the custodial account or by the insurance company that issued the annuity?

[Peter Gulia]

Whether a custodian or a trustee, some fiduciary must hold each right (such as, a participant loan, or a “brokerage” account) that is the governmental 457(b) plan’s asset. And the “custodial account” or trust must meet the conditions of IRC sections 401(f) and 457(g).

If a bank or trust company so serves, whether it does so as a custodian or as a directed trustee might not meaningfully affect its duties under most States’ laws concerning holding an asset and not disposing of the asset other than as properly instructed. (Of course, this isn’t advice to anyone.)

Steven N, the practical question is whether the bank, trust company, or IRS-approved non-bank custodian is willing to hold the particular kind of asset that the other plan fiduciaries want a custodian or trustee to hold.