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How to Prudently Hire and Retain a Discretionary Corporate Trustee


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Most plan sponsors seek to have a retirement plan that provides adequate benefits to their employees, is easy to
administer, is compliant with ERISA fiduciary standards and protects the plan sponsor from legal and financial risk and liability. Working in conjunction with a knowledgeable retirement plan advisor, a discretionary corporate trustee is
uniquely suited to allow the plan sponsor to meet these goals.

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How to Prudently Hire and Retain a Discretionary Corporate Trustee

  1. 1. Unified Trust Company, N.A. How to Prudently Hire and Retain a Discretionary Corporate Trustee: Guidelines for Advisors and Plan Sponsors Hiring a Discretionary Corporate Trustee to Improve Outcomes and Manage Risk Most plan sponsors seek to have a retirement plan that provides adequate benefits to their employees, is easy to administer, is compliant with ERISA fiduciary standards and protects the plan sponsor from legal and financial risk and liability. Working in conjunction with a knowledgeable retirement plan advisor, a discretionary corporate trustee is uniquely suited to allow the plan sponsor to meet these goals. Charles Schwab in conjunction with Koski Research, 401(k) Participant Survey, October 2011 1 National Association of Plan Advisers, NAPA Net, December 21, 2012 2 Plan Sponsor, “Vanguard Is Offering Retirement Plan Participants Interactive Graphics to Help Them Make Key Decisions”, July 10, 2013 3 4 ERISA Section 403 (a) We now have more than 20 years experience that clearly shows that 401(k) education has made very little difference in improved outcomes. In fact, a 2011 study showed that 56% of plan participants were not aware of or did not review plan related education materials.1 This despite more than $1 billion the industry spends each year on employee 401(k) education.2 A recent Vanguard study showed that only one in four participants bothered to open an email that contained a personalized forecast and an offer for advice.3 Overall less than 2% of plan participants signed up for advice according to Vanguard. What we have learned is that in order to improve outcomes, discretionary activities with resulting control over numerous plan activities are required. Unified Trust Company, N.A. has served for many years as a discretionary corporate trustee of ERISA plans. Unlike ordinary providers of investment products such as directed trustees, Unified Trust is a “named fiduciary” in the plan document. The role of a discretionary corporate trustee generally encompasses exclusive responsibility for the assets of the plan, including the selection and monitoring of investments, proper allocation of assets, avoidance of prohibited transactions, and proper plan administration. The discretionary corporate trustee must be prudently hired, and as ERISA states, “shall have exclusive authority and discretion to manage and control the assets of the plan.” 4
  2. 2. A named fiduciary is the single most important fiduciary in administering the plan.5 The Department of Labor (DOL) has stated that the act of appointing such fiduciaries is in itself a fiduciary function.6 Generally, an employer’s board of directors, business owner, or decision-makers will designate the named fiduciary, either pursuant to procedures set forth in the plan documents or by approving a plan document that already designates the named fiduciary. In such circumstances, this decision maker is a fiduciary to the plan with respect to the appointment process. Because designating the named fiduciary is a fiduciary function, the board of directors or other person or entity appointing the named fiduciary should exercise prudence in the selection process. A knowledgeable retirement plan advisor can be of immense help to the plan sponsor in selecting the named fiduciary. There are two types of corporate trustees—those that are discretionary and those that are directed (also called passive or custodial). The discretionary corporate trustee’s responsibilities are far more extensive that the responsibilities of an ordinary directed trustee. A directed trustee has no discretionary authority with respect to the investments of assets, selection of providers, distribution of assets, or plan administration. For example, a directed trustee is only responsible for custody and safekeeping of the plan’s assets; implementing directions from the plan sponsor’s retirement committee and basic trust accounting. As a practical matter, the directed trustee functions mostly in the role of a passive custodian. Although it is confusing to many plan sponsors, they or their retirement committee are always in charge and have the responsibility for management of a directed trustee, even if the directed trustee is a large financial institution. Congress passed ERISA in 1974 to provide safeguards and standards for the operation and management of retirement plans in the nation’s private sector. ERISA §403(a) clearly specified who would have the exclusive power and authority to manage plan assets. This power and authority was placed primarily on a discretionary plan trustee who would be hired by the plan sponsor. Despite ERISA’s clear preference that there be a discretionary trustee with the exclusive oversight over plan assets, most | investment providers refuse to accept appointment as a discretionary trustee. These investment providers simply do not want to take on the fiduciary obligations of a discretionary trustee. Over time the industry largely moved to a directed trustee structure because it allowed service providers to keep conflicts of interest and have resultant higher profit margins. In the Renfro v. Unisys Corp ERISA litigation, the minimal role of the directed trustee, in this case Fidelity Investments Trust Company, was very clear.7 According to the court: “Fidelity’s limited role as a directed trustee, delineated in the trust agreement, does not encompass the activities alleged as a breach of fiduciary duty—the selection and maintenance of the investment options included in the plan. As we have explained, a directed trustee is essentially ‘immune from judicial inquiry’ because it lacks discretion, taking instructions from the plan that it is required to follow.” It is hard to be any clearer than the words “immune from judicial inquiry.” The directed trustee is simply not responsible, and therefore any problems belong to the plan sponsor and their retirement committee if they have one. A true ERISA §403(a) discretionary corporate trustee provides the highest level of fiduciary protection to the plan sponsor. This is because the duties accepted by the discretionary corporate trustee are more encompassing than any other fiduciary such as the so-called 3(38), 3(21) or 3(16) delegated advisors or managers. This is true even if the delegated fiduciary is serving in a discretionary role.8 Serota, S and Brodie, F, ERISA Fiduciary Law, Second Edition, pp 191193, © 2006 BNA Books 5 6 Renfro v. Unisys Corp., 671 F. 3d 314 - Court of Appeals, 3rd Circuit 2011 Grantz, J. and Sanford M., Deconstructing the Discretionary Fiduciary Models: ERISA Section 3(38) Investment Managers vs. Discretionary Trustees, Journal of Pension Benefits, pp 30-37, Winter 2011 8 9 DOL Field Assistance Bulletin 2007-1 See Martin v Tower settled 1991, Whitfield v. Cohen, 682 F.Supp. 188, 193 (S.D.N.Y. 1988); Arizona State Carpenters Pension Trust Fund, D. Ariz., No. CIV 89-0693 PHX RGS, settlement 1/2/94; Chao v. Legino, D. Ore., No. 02-440, settlement 4/4/02. 10 11 2 29 CFR 2509.75-8, D-4 7 DOL Advisory Letter 97-15
  3. 3. Allocated versus Delegated Fiduciary Duties It is important to understand the difference between allocated and delegated fiduciary duties. • whether the consultant has fiduciary liability or other insurance that would protect the plan and its fiduciaries; • ERISA bonding amount; • ERISA fiduciary liability insurance amount; • securities law registration (or similar licensing); • references from other plans for whom the consultant has provided investment services; • Acknowledgement in writing by the investment consultant that it is an ERISA fiduciary; A discretionary corporate trustee performs allocated duties, while a 3(38) or 3(21) manager performs duties delegated to them by a named fiduciary, such as the plan sponsor or even an allocated discretionary corporate trustee. • “Allocation” is the term for division of responsibilities amongst named fiduciaries (generally done in the plan document); while • “Delegation” occurs when a named fiduciary delegates some of their plan responsibilities to another fiduciary (who is not a named fiduciary in the plan document); • Both allocation and delegation should be done in writing and in accordance with ERISA, DOL regulations, and the plan document. Hiring a Discretionary or managers. In addition, because the discretionary corporate trustee has greater responsibility, any ERISA fiduciary violations would far more likely fall on its shoulders when compared to other more limited fiduciary service providers. In almost all court cases limited service providers such as mutual fund complexes and insurance companies have disavowed any fiduciary status. Thus, the discretionary corporate trustee provides much greater protection to the plan sponsor. In contrast the due diligence a plan sponsor must undertake in hiring and retaining a non-trustee investment manager, such as a 3(38) investment manager, can be overwhelming.9,10 In Martin v Tower, the court listed the following review items the plan sponsor Corporate Trustee is Easier should consider before hiring a non- than Selecting Other More trustee investment manager: Limited Plan Fiduciaries Because the plan sponsor is normally the ERISA fiduciary that selects and monitors the discretionary corporate trustee this task is a fiduciary function. But the task is much more straightforward than hiring other plan fiduciaries such as 3(38), 3(21) or 3(16) delegated advisors • education; • experience in advising plans; • professional designations; • capitalization and financial condition; • A description of the investment process used by the consultant, such as the providers of the databases and software used to formulate the advice; • whether and how often written reports are provided to the fiduciaries; • whether the processes and advice are based on generally accepted investment theories, including modern portfolio theory, and prevailing investment industry practices; • fee benchmarking; • whether the consultant’s advice is potentially conflicted; • does the consultant’s compensation (or other payments) vary depending on the advice given; • does any affiliated entity or person receive payments that varies based on the advice given; • if the payments are variable, are those payments offset against consulting fees and equalized under the DOL “Frost Model”11 ; • the number of ERISA plans advised by the consultant and the amount of assets in ERISA plans for which the consultant provides investment services; and • procedures for avoiding ERISA prohibited transactions. 3|
  4. 4. In addition, on a quarterly and annual basis the plan sponsor must verify that the manager has complied with all procedures and policies. The plan sponsor should receive written certification from the investment manager that there have been no ERISA violations or prohibited transactions. Further, the plan sponsor must ensure all assets have been properly valued, conduct investment performance versus benchmarks analysis; broken down by asset class and sector and verify each manager’s fee computation. In contrast to a delegated investment manager the discretionary corporate trustee is a named fiduciary in the plan document and by ERISA definition is a full-fledged fiduciary. The discretionary corporate trustee’s duties and responsibilities cannot be diminished or lessened by the terms of a contract, because under ERISA it has exclusive discretionary control and decision making authority. The discretionary corporate plan trustee experienced in ERISA will always have in place procedures and processes to detect and make sure that no ERISA violations take place. Further, the discretionary corporate trustee is always subject to the Frost Model of revenue neutrality, thus, conflicts of interest and alternative sources of payment would not be an issue. The experienced discretionary corporate trustee is better qualified and inclined to conform to the ERISA duty of loyalty to the plan participants and the “prudent expert” duty. In terms of its initial hiring the discretionary corporate trustee will provide a comprehensive package of information that covers essential due diligence items needed for the prudent hiring of the discretionary corporate trustee. This makes it very easy for the plan sponsor to fulfill their fiduciary duty to prudently hire. Each year the discretionary corporate trustee can provide appropriate reports, summarized data and information to allow the plan sponsor to prudently determine whether to continue the discretionary corporate trustee for ongoing services. This makes it much easier for plan sponsors to completely fulfill their fiduciary duty in a time efficient manner. This can make a material reduction in the plan sponsor’s “soft costs” of internal personnel devoting large amounts of company time and resources to prudently overseeing the plan. When hiring and retaining a discretionary corporate trustee the plan sponsor and its board of directors need only gather the following: • a comprehensive package of information that covers essential discretionary trustee due diligence; • written certification from the trustee that they will follow the Frost Model of revenue neutrality; and • written certification from the trustee that it has procedures and practices in place to avoid ERISA violations and prohibited transactions Summary In summary, a discretionary corporate trustee experienced in ERISA provides a much more comprehensive fiduciary service to plan sponsors. Not only does it accept fiduciary status and responsibility, it provides the highest level of fiduciary oversight required of a named fiduciary. In conjunction with a discretionary corporate trustee a knowledgeable retirement plan advisor is able to bring much greater value to the plan sponsor. In turn, a plan sponsor-advisor-discretionary corporate trustee relationship will provide improved outcomes for the plan, its participants and their beneficiaries. It is easier for the plan sponsor to hire and monitor a discretionary corporate trustee than other fiduciary service providers because the discretionary corporate trustee, as a ‘named fiduciary’ retains much greater responsibility, and can thus attest to a much broader array of specific fiduciary best practices. Your goals are our goals. 4|