LAST REVIEWED Nov 06 2020 9 MIN READ
By The Human Interest Team
Duties of the Plan Trustee Under the Basic Plan Trust Agreement
Trustees Are Required.
All tax qualified plans are required to have a plan trustee. The trustee may be one or more individuals appointed by the plan sponsor and who agree to assume the trustee role, or a professional trust company or bank. Company employees must serve as trustees without compensation. Professional trustees will charge a fee for their services.
Parties Designated to Act for the Plan.
The federal law that governs 401(k) and other pension plans, called ERISA, sets out the duties of trustees as well as ways in which trustees may limit their responsibilities. Under our plan documents, each plan sponsor must appoint an “Investment Fiduciary” as well as a trustee. The Investment Fiduciary is responsible for selecting investments or appointing a professional investment manager, such as Human Interest Advisors, to select the menu of available investments. These two roles of trustee and Investment Fiduciary may, but are not required to be, filled by the same person. A financial officer or a plan committee is sometimes appointed as the Investment Fiduciary. The Adoption Agreement also provides for the appointment of a Special Trustee (who need not be the same as the trustee or the Investment Fiduciary) to determine and collect contributions.
ERISA’s fiduciary responsibilities are broad but may be limited by plan provisions and delegation of responsibilities to other parties. ERISA also permits the trustee to be indemnified by the plan sponsor if the trustee makes honest mistakes fulfilling its responsibilities.
Although the performance of certain functions listed below may be delegated, under ERISA law, the trustee is responsible for the following: holding and investing plan assets in accordance with ERISA’s fiduciary standards (Human Interest, if hired as a 3(38) Fiduciary, would take on the responsibility for investing)
accepting, determining, and collecting contributions, (contributions are accepted and collected by the custodian and HI assists with collections; HI may determine contributions)
providing an accounting of plan assets and valuing plan assets at least once a year, (performed by custodian)
keeping records of plan transactions, including those necessary to complete required ERISA asset reporting. (performed by custodian)
avoiding certain related party and self-dealing transactions (called “prohibited transactions”) which occur in investment and hiring scenarios,
to the extent that a trustee is following a direction from another authorized party, declining to implement that direction if it is contrary to law or the terms of the plan, and
If the plan document permits loans to participants, usually for holding the promissory notes and security agreements signed by participants when they borrow from the plan and enforcing the security provisions if participants default on their loan repayments.
It is important to understand the difference between being responsible for and performing the above tasks/duties. Although the custodian, Matrix Trust Company, and Human Interest perform these activities, the Trustee could still have liability to the extent the duties above are not fulfilled properly.
Limitations on Trustee Duties.
Again, it is important to understand that trustees are not required to personally perform all of these activities. They may hire outside providers to perform certain responsibilities. In particular, the Basic Plan document provides that the Investment Fiduciary may appoint an investment manager as defined in ERISA to assume responsibility for day to day investments. If Human Interest is hired as a 3(38) manager, the investment responsibility is delegated to Human Interest.
In contrast, if the trustee with the consent of the Investment Fiduciary or the Investment Fiduciary directly hires Human Interest Advisers as nondiscretionary investment adviser (meaning for only 3(21) services), Human Interest Advisers may be a co-fiduciary but that does not relieve the trustee and/or the Investment Fiduciary of investment responsibility.
In addition to the delegation of investment responsibility to Human Interest Advisers that occurs when we are 3(38) investment manager, our plan adoption package includes a custodial agreement with Matrix Trust under which Matrix assumes custody of the plan assets as agent for the trustee and assumes practical responsibility for implementing investment decisions of the Investment Fiduciary or Investment Manager, maintaining plan investment records and preparing the annual accounting and information needed to prepare the required ERISA reports, as well as signing any required tax authorizations. The Matrix agreement provides that: “The Trustee Acknowledges that the Custodian’s duties under the Agreement are ministerial and do not relieve the Trustee of any duties set forth in the documents comprising the Qualified Plan and any related Trust.” This means that the trustee can remain legally responsible for these functions if they are not properly performed by Matrix.
The plan has other provisions that limit the trustee’s responsibilities and potential liability. These are:
The plan and ERISA provide that the trustee is not responsible for investment decisions made by participants in selecting investments if these decisions have been properly passed on to participants. Accordingly, the trustee does not have any investment responsibility when Human Interest Advisers is appointed as investment manager and these provisions are used.
The Basic Plan provides that the trustee may require the plan sponsor to serve as custodian of the promissory notes and related documents held as part of a plan loan program. This passes on responsibility for plan loans.
The Adoption Agreement permits the plan sponsor to appoint a “Special Trustee” (who need not be the trustee) to enforce any provisions requiring that contributions be collected.
The trust agreement is part of the Basic Plan document and has been drafted to be consistent with the plan terms. This limits the trustee’s duty to determine whether directions are not consistent with the plan document.
Section 10.7 of the Trust Agreement contained in the Basic Plan provides that the plan sponsor may indemnify the trustee for losses and costs resulting from serving as trustee, to the extent not covered by insurance, except if there has been gross negligence, willful misconduct, lack of good faith or breach of fiduciary duty. (ERISA prohibits indemnifying a trustee for breach of fiduciary duty and in these situations.)
This is a user-friendly summary of very complicated legal rules. It is provided as a guide for plan sponsors and trustees. It is not intended to be nor is it a substitute for legal advice from an attorney.
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.