The CPA Journal

CORPORATE TRUSTEESHIP: A FIDUCIARY ANALYSIS

By Sheree R. Tallerman, Geller & Wind, Ltd.

The Employee Retirement Income Security Act (“ERISA”) requires that plan assets, including 401(k) employee salary deferrals and employer contributions, be used only to pay benefits to participants and their beneficiaries and to defray reasonable plan operating expenses. Accordingly, qualified plans under ERISA must establish trusts to hold all plan assets. The plan sponsor either manages the plan assets or delegates this responsibility to trustees named in the trust instrument or appointed by the plan sponsor.

ERISA Fiduciaries

A named fiduciary is identified either in the plan instrument or in accord with a plan provision whereby the plan sponsor identifies the fiduciary. Either an individual or an entity may be a named fiduciary or may become a fiduciary based on the actual functions they perform. A named fiduciary commonly achieves fiduciary status by bearing the title, or performing the functions, of a trustee.

Functions giving rise to fiduciary status include exercising any discretionary authority or control over plan management or exercising any authority or control over the investment management or disposition of plan assets. Furthermore, an individual or entity may become a fiduciary by rendering investment advice for a fee.

Administrative managers of the plan sponsor are usually fiduciaries because of their involvement in the daily operation of the plan. Inevitably, they exercise substantial authority and control over final decisions on benefit claims, plan design, plan asset investment, and the selection and retention of plan service providers.

Although ERISA empowers trustees with complete control over plan assets held in trust, trust investment decisions may be delegated to the plan’s investment committee, the officers of the plan sponsor, or other designated investment managers. The plan trustee is not liable as a fiduciary for the investment decisions reached by others empowered to make them; rather, those individuals or entities that actually function as investment managers are. Nevertheless, if the agreement with the plan sponsor indicates that the plan trustee selects and manages investments, then the plan trustee will be held to the same liability standards as any other investment manager.

ERISA provides explicit exculpatory relief if plan trustees or the plan sponsor delegates the responsibility for investment decisions to a professional investment manager. No trustee will be held liable for acts or omissions of duly appointed professional investment managers. Nor are plan trustees responsible for the investment and management of plan assets under the control of professional investment managers. Trustees subject to the direction of the named fiduciary are called “directed trustees.” Directed trustees will not be held liable for following the instructions of the named fiduciaries or their delegates (i.e., investment managers).

Personal Liability

ERISA offers plan fiduciaries, including employer representatives and trustees, significant protection against personal liability for investment decisions if they exercise reasonable care in the selection of an investment manager, provide the manager with a written statement of the fund’s investment objectives, and periodically monitor the manager’s investment performance.

Plan fiduciaries are personally liable for losses caused by their breaches of any of the fiduciary responsibilities, obligations, or duties imposed by ERISA. Additionally, plan fiduciaries may be liable for breaches of fiduciary responsibility committed by other fiduciaries, including directed trustees.

In most qualified plans, a mutual fund company, insurance company, or stockbroker has actual custody of the plan assets. Consequently, many plan sponsors believe that it makes sense to become a self-trustee, to save the cost of a trustee fee and avoid cofiduciary liability. ERISA fiduciaries presumably would accept personal liability for their own acts or omissions, but not for the acts or omissions of cofiduciaries.

Cofiduciary Liability

A fiduciary is liable for a cofiduciary’s breach if

1) he knowingly participates in or undertakes to conceal an act or omission of the other fiduciary, knowing the act or omission to be a breach;
2) he has enabled the other fiduciary to commit a breach by his failure to comply with the fiduciary duties; or
3) he makes no reasonable efforts to remedy a breach by the other fiduciary of which he has knowledge.

More importantly, a fiduciary is also liable for the loss caused by another fiduciary’s breach if he enables the other fiduciary to commit the breach through his failure to exercise prudence or to otherwise comply with the basic fiduciary duties under ERISA. Such “non-active” trustees have been held liable for the acts of fiduciaries that have “actively” violated their fiduciary duties because they failed to discharge their duties with the required care and diligence.

Directed Trustee Responsibilities

Directed trustees, frequently corporate trustees, pay plan distributions, withhold federal and state taxes, file appropriate tax reports with IRS and state tax agencies, report tax information to plan participants receiving payments, and maintain appropriate records of the tax filings.

The primary reporting of plan distributions is on Form 1099-R, which is usually prepared by a corporate trustee or other paying agent. Form 1099-R filers are required to maintain certain information about designated distributions, and the IRS may assess penalties for failure to maintain the required information.

Furthermore, the payers of plan payments from which tax is withheld and deposited must file Form 945 by January 31 each year. All income tax withholding reported on Form 1099-R must be reported on Form 945. Paying agents must withhold income tax from plan payments and deposit the taxes with an authorized financial institution or a Federal Reserve bank or branch.

Corporate Directors’ Liability

Corporate directors not empowered to control plan assets or plan fiduciaries will generally not be subject to liability for the actions of plan fiduciaries. However, corporate directors may incur liability for the actions of plan fiduciaries as an extension of their fiduciary obligation to company employees who appoint and oversee the actions of plan trustees.

A fiduciary who knows that a breach has been committed by another plan fiduciary must take all reasonable and legal steps to remedy the breach or incur liability.

Simplified Plan Audit Procedures

Plans covering 100 or more participants must engage an accountant to examine and prepare a report on the financial statements and schedules required in the annual plan tax return (Form 5500). If a corporate trustee who is independently audited holds plan assets, the accountant may issue a “limited scope” audit opinion, partially relying on the report of the corporate trustees’ independent auditors in considering the trust’s internal controls and procedures.

Self-trusteeship

Only the plan sponsor may determine whether the value added by a corporate trustee justifies the trustee’s fee and co-fiduciary liability. Engaging a corporate trustee entails significant costs, which may not be justified when the trustee is directed by the employer and has disclaimed a significant amount of fiduciary liability.

Self-trusteed plans that retain an independent agent to process disbursements, withhold taxes, and prepare compliance reports and that meet at least annually to monitor the performance of those service providers, including the investment managers, are generally adequately managing the risks of plan sponsorship.

Fiduciaries must, subject to liability for failure, select and monitor service providers prudently in accordance with ERISA—even when participants exercise control over the assets in their accounts and responsibility is delegated to independent service providers. Unfortunately, many fiduciaries that retain a corporate trustee become casual observers and fail to monitor actual plan operation.

Editors:
Sheldon M. Geller, Esq.
Geller & Wind, Ltd.

Mitchell J. Smilowitz
GBS Retirement Services Inc.

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