Discretionary Trustee – 5 Things You Need to Know
What is a discretionary trustee?
Under the Employee Retirement Income Security Act of 1974 (ERISA), the discretionary trustee has "exclusive authority and discretion to manage and control the assets of the plan."
Why do you need a discretionary trustee? If you are offering an employer sponsored retirement plan, you are a fiduciary to the plan. That is a big responsibility and one that you may not have the expertise to handle alone. Let me explain.
A fiduciary is an individual or organization with a legal duty to act in the best interest of the investor and their beneficiaries and to do so with a prudent expert standard of care. The challenge is that there are different types of fiduciaries and they accept differing levels of responsibility. This is where it gets confusing!
Now it’s important to note that when it comes to fulfilling your fiduciary responsibilities, this isn’t a ‘we’ll give it a best effort and see what happens,’ kind of deal. This is more of a ‘you can be personally liable in a court of law,’ kind of deal.
That isn’t meant to drive fear, but rather bring awareness to the importance of understanding and fulfilling your fiduciary responsibilities in delivering your employer sponsored retirement plan.
The reality is that not every fiduciary misstep will find you being sworn under oath in the judicial system. However, even the most minor of breaches could bring fines and require considerable time and resources to resolve the issue at hand.
While there are many fiduciary roles, it's important to grasp the difference between a discretionary trustee and a directed trustee. If you can understand this distinction, you should be able to help turn fiduciary confusion into fiduciary clarity. So, let’s break it down:
1. Most, not all, of a sponsor’s fiduciary responsibilities regarding the assets of a plan can be transferred to a discretionary trustee.
A plan sponsor will always be a fiduciary to the plan. There is no way to fully absolve yourself from that role. You can, however, carve out fiduciary responsibilities to experts who are willing to accept fiduciary status. The key here is that those fiduciary roles and responsibilities are documented in writing.
For example: Our firm, which operates as a discretionary trustee, signs as the named plan trustee in the plan documents, fully acknowledging our fiduciary responsibilities to the plan and its participants.
When working with us, as a discretionary trustee service provider, the sponsor still maintains fiduciary responsibility, but it is significantly limited to being prudent in hiring and monitoring us. To better assist our sponsors in fulfilling that fiduciary responsibility, we provide quarterly Fiduciary Monitoring Reports.
2. Who is the decision maker? This is a key difference between a discretionary trustee and a directed trustee.
The distinction to understand here is, who is the decision maker?
The individual, team or organization that has the final say regarding the selection, retention and replacement of plan investments assumes the fiduciary responsibility and liability.
If you hire a discretionary trustee, they would be the decision maker. If not, the sponsor would act as a directed trustee, meaning they can take direction from experts, but ultimately, they would still be responsible and liable for decisions regarding the assets of the plan.
3. Allocation and delegation are different.
A former colleague and friend described the difference between allocation and delegation in the following way:
In his household, he is responsible for the lawn and exterior upkeep of their property. Let’s say instead of doing the work himself, he decides to hire a landscaper (i.e. lawn expert). Unfortunately, they do a terrible job and his wife is unhappy.
Who is ultimately responsible?
You could argue that the landscaper was the expert and should be responsible, but at the end of the day, it was my colleague’s job to make sure the lawn looked nice whether he outsourced that work or not. In this instance, he delegated his responsibility to the landscaper.
Now, let’s say in the written bylaws of their neighborhood association, the landscaping of the exterior property was the association’s responsibility, that duty would be then allocated, and the association would be held responsible.
How does that relate to a discretionary trustee? When a plan sponsor hires a discretionary trustee, they are allocating, not delegating, the fiduciary responsibilities regarding the assets of the plan to the discretionary trustee. The discretionary trustee is responsible and liable for those duties.
4. There are 21 Global Fiduciary Best Practices with 85 subcategories to manage.
In the qualified retirement plan space, a fiduciary duty is a legal requirement to always act in the best interest of the investor and their beneficiaries and to do so with a prudent expert standard of care. Well, how does one go about that? With a lot of intentionality and a prudent, documented process!
As a discretionary trustee service provider, our firm adheres to Global Fiduciary Best Practices developed by Fi360, an organization widely recognized for being a leader in fiduciary training and resources. With 21 best practice categories and 85 different subcategories, this is no easy task.
This resource reviews the best practices and how we adhere to them: https://advisors.unifiedtrust.com/dl_docs/DT-30.pdf
5. A discretionary trustee can help participants improve their retirement outcome
Most often when you think of a fiduciary, you probably think of that role more at a plan level, to help a sponsor navigate his or her fiduciary responsibilities and liabilities. Sure, the core principle of being a fiduciary is to act in the best interest of others (the participants), but the term fiduciary sounds more foundational than functional. When you work with a discretionary trustee, it’s both.
Most retirement plan participants are failing. Studies show that approximately only 25% are on track to have an adequate benefit at retirement. Why?
Frankly, we expect participants to do too much. Despite great intentions with good educational tools, most participants are still not going to know how to set a goal, save more, monitor his or her progress and make the necessary adjustments over time.
This is where a discretionary trustee can help. Discretionary trustees can take ‘discretion’ over the assets of the plan and essentially ‘do it for them.’ By taking an active role in managing the assets in a participant account, participants are far more likely to achieve retirement success.
Want to see the results for yourself? Check out this Snapshot of Success which reviews a recent before and after study of our UnifiedPlan® Managed Account population
When trying to gain an understanding of your fiduciary responsibilities and whether a discretionary trustee may be a better fit, ask yourself the following questions:
- Do I have anything in writing from our service provider that clearly and explicitly states they are assuming a fiduciary role and details the extent of that role?
- How much time do I have to manage all the fiduciary responsibilities and do I have the expertise to do this in a fully compliant manner?
- Are my participants on track to achieve a successful retirement or do they need more help?
Our firm, Unified Trust, is a national bank trust company and discretionary trustee. Our goal is to make it easier; easier for sponsors to fulfill their fiduciary responsibilities and easier for participants to achieve a successful retirement outcome.
Unified Trust, was the first trust company globally to be certified for fiduciary best practices by the Centre for Fiduciary Excellence (CEFEX). Building financial futures in the interest of others is what we do. We’d like to do it for you too. Contact us today!
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