Trustee

Trustees have significant responsibilities when it comes to your retirement savings. A trustee is an individual or entity responsible for holding the 401(k) plan's assets in a trust. Their primary duty is to safeguard these assets solely for the benefit of the plan participants and their beneficiaries. 

While some trustees may also be responsible for investment decisions, this role is often delegated to a qualified investment manager. The trustee ensures the plan's assets are managed in accordance with the plan documents and ERISA regulations. They're essentially the guardian of your 401(k) plan's assets.

What are a trustee’s responsibilities in a retirement plan?

Imagine the trustee as a secure vault for your 401(k) plan's funds. Their main job is to securely hold all the plan's investments in a trust. They don't typically choose the specific investments for you. That's usually your role as a participant or the role of a separate investment manager. 

The trustee is responsible for ensuring that your contributions and any employer contributions are correctly deposited and accounted for, and that the plan's assets are used exclusively for the benefit of you and other participants. 

Why are trustees important for 401(k)s?

A key function of the trustee is to ensure that all actions related to the plan's assets comply with the plan document and ERISA. This includes processing contributions and distributions as directed by the Plan Administrator. 

While the trustee plays a vital role in the plan's compliance, the Plan Sponsor and the designated Plan Administrator retain ultimate responsibility for the overall administration and compliance of the plan. This includes duties like determining eligibility, approving loans, and conducting annual compliance testing, unless these duties are formally delegated to another party in writing.

Who can serve as a 401(k) plan trustee?

An individual within the company, such as an owner or a high-ranking officer, can serve as the trustee. This is particularly common in smaller businesses. Most plans prefer the trustee to be a U.S. citizen. While a non-U.S. citizen can legally act as a trustee, having a foreign trustee can lead to significant tax complications and may result in the trust being classified as a "foreign trust" by the IRS. This classification can lead to different, more complex reporting requirements and potential negative tax consequences. To avoid these issues, if a non-citizen is a trustee, it's advisable to have a U.S.-based co-trustee to maintain the trust's domestic status.

Alternatively, a plan can hire a professional financial institution or a dedicated trust company to act as a directed trustee. These entities specialize in asset management and navigating complex financial regulations.

Regardless of who is chosen, a trustee is considered a plan fiduciary. This means they must be prepared to fulfill all legal and fiduciary obligations associated with the role. This position carries substantial legal weight and requires a high standard of care.