Why Make Your Company the 401(k) Plan Trustee? What Are the Pros/Cons?

Not all companies are prepared to take on the duties of a trusteeship

Whether or not a company should be the plan trustee for its 401(k) may depend on the plan provider and the provisions of the plan document. For questions relating to a specific issue, an employer should consult with an Employee Retirement Income Security Act of 1974 (ERISA) attorney. An ERISA attorney specializes in qualified retirement plans (such as an employer-sponsored pension plan, 401(k), or 403(b)) and will be able to make an appropriate recommendation. When making a determination, the attorney may consider past cases involving retirement plans, such as the notorious scandal involving Enron.

According to the U.S. Department of Labor (DOL), "ERISA protects your plan's assets by requiring those persons or entities who exercise discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so are subject to fiduciary responsibilities." 

Key Takeaways

  • Business owners who offer employer-sponsored retirement plans need to decide who to assign as trustee.
  • A trustee has a fiduciary responsibility to make investment decisions in the best interest of the plan participants.
  • A company can be the trustee. However, the responsible staff would need to have the necessary training in order to competently complete the trustee duties and carry out the company's fiduciary responsibility.
  • Alternatively, a company can outsource the trustee duties. A discretionary trustee, external to the company, would provide the company with the greatest shield against liability.

What Does a Trustee Do?

A trustee is the person or entity entrusted to make investment decisions in the best interests of plan participants. A trustee is assigned by another fiduciary, such as the employer who sponsors the qualified retirement plan, and should be named in the plan documents. Additional restrictions apply for a trustee. A trustee cannot handle their own plan assets, for example, or engage in transactions that pose a conflict of interest.

Who Should Be the Trustee?

If you are asking this question as the business owner, you must weigh the pros and cons before deciding on a trustee for your employer-sponsored plan. If instead the question is posed from an employee's perspective, the choice of trustee wouldn't usually impact that person's retirement plan transactions.

The business as the trustee

If you are the owner of a business that is the trustee of a qualified plan, then all the functions and powers of the trustee are the responsibility of the company. Fiduciary responsibility is a serious business. In the case of mismanagement, a fiduciary cannot plead ignorance, as ignorance is no excuse for negligence.

As such, your firm will need to assess the qualifications of its staff to determine if they are qualified to handle the duties of a trusteeship. If they are not qualified, the company may have to ensure the staff members entrusted with this responsibility receive adequate and ongoing training. Alternatively, it may be in the firm's best interest to hire employees who are already qualified.

A trustee must ensure that all plan documents are followed, to the extent that they follow ERISA guidance.

An external party as the trustee

If an external party is a trustee, the employer would need to determine if the external party is a directed or discretionary trustee.

Directed trustees—A directed trustee is permitted by the company to make decisions about plan assets. However, a directed trustee would not give investment advice or make any discretionary investment decisions without specific directions. Those decisions would need to be directed by an authorized person listed in the plan documents, and the directed trustee would process the investment instructions based on those directions.

A directed trustee's liability for investment decisions is generally limited to determining that the employer's instructions are in good order. The directions should be appropriate as determined by both the plan documents and ERISA regulations.

Discretionary trustees—A discretionary trustee is allowed to perform the full functions of a trustee without receiving direction from the employer. The discretionary trustee would have fiduciary responsibility for plan investments, in addition to assuming the duties of a directed trustee. Using a discretionary trustee adds a layer of liability protection for the company because the fiduciary responsibility is outsourced.

The Bottom Line

An employer who does not have the staff necessary to carry out the responsibilities of a 401(k) plan trustee may find it beneficial to use an external party as the plan trustee. An employer who has adequate staff may want to conduct an analysis to determine if it is more cost-effective to farm out the trustee responsibilities.

An employer who chooses to make an external party the trustee should make periodic checks to ensure the external party's staff is adequately trained to handle any and all trustee duties assigned to them.

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  1. U.S. Department of Labor. "Employee Retirement Income Security Act (ERISA)."

  2. U.S. Department of Labor. "Fiduciary Responsibilities."

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