Most employers have a hard enough time ensuring that their qualified retirement plans are properly documented, with amendments to comply with various tax acts.

Employers often want to minimize their responsibilities and obligations for their plans. So, when vendors offer to act as directed trustees with little or no fees, plan sponsors often gratefully accept. However, employers must carefully review all documents when outsourcing trustee services.

Historically, banks, insurance companies and mutual funds charged fees to act as trustees with the full range of fiduciary responsibilities.

Over time, service providers began serving as "directed" trustees to minimize their obligations and responsibilities, and offering such services with low or no costs. The alternatives available to employers include having senior executives act as individual trustees for qualified retirement plans or having a financial institution assume this responsibility.

The primary advantage of having an external trustee is that individual officers need not be named as trustees in a Summary Plan Description distributed to participants with direct liability for fiduciary decisions.

Limited responsibilities

Most trustees provide comparable services and serve well in the role of directed trustees. Nevertheless, before signing a directed trustee agreement, employers must understand that the trustees are assuming only limited responsibilities and that significant responsibilities remain with employers to monitor and instruct a directed trustee.

In some instances, employers may be better served having corporate officers, with adequate fiduciary insurance, serving as trustees and allowing financial institutions to simply act as custodians.

The most significant issues that employers need to consider when evaluating directed trustee services are the responsibilities the Department of Labor believes trustees must assume.

In Field Assistance Bulletin No. 2008-01, DOL addressed the responsibilities of named fiduciaries and trustees for collection of delinquent employer and employee contributions. This FAB was issued as a result of pension plan investigations that revealed that many trust agreements purported to relieve financial institutions serving as plan trustees of any responsibilities to monitor and collect delinquent contributions.

These investigations also revealed circumstances where no other trust agreement, plan document or other instrument assigned such responsibilities to another trustee or imposed the obligations on a named fiduciary with the authority to direct a trustee.

Collecting contributions

The FAB concluded that the responsibility for collecting contributions is a trustee responsibility and that although responsibilities may be delegated to other parties, it is ultimately the responsibility of the named fiduciary with authority to hire and monitor trustees to ensure that all trust responsibilities are properly delegated and assigned.

Accordingly, a directed trustee agreement relieving a trustee of the responsibility to collect contributions violates the FAB and ERISA, and can lead to DOL enforcement efforts.

Although the ability to require contributions to be paid to a plan is one of the most important issues to consider in directed trustee agreements, other typical provisions also require consideration.

Standard provisions to look for

Standard provisions in directed trustee agreements that employers should evaluate with recommendations are:

* The employer is responsible for determining benefits - instructing the trustee, the disbursement of benefits, investment management, soliciting stock voting instructions from participants, directing the trustee and voting proxies, and performing the administrative functions specified in the plan. Many of these responsibilities may be outsourced, for additional fees.

* The employer acts as a custodian with regard to promissory notes, mortgages, and loans and related documents, and it is the responsibility of the employer to hold such documents in safekeeping. A directed trustee wishes to limit involvement with a plan. However, most third-party recordkeepers should be willing to hold promissory notes, particularly in today's paperless environment.

* The employer shall indemnify and hold harmless the trustee from and against any and all claims, losses, damages, expenses (including reasonable attorney fees) and liability to which the trustee may be subject by reason of any acts done or omitted to be done, except where the same is finally "adjudicated" to be due to the gross negligence or willful misconduct of the trustee.

Employers should not agree to a gross misconduct standard and should avoid accepting indemnifications contingent upon a judicial determination.

* The trustee shall receive, hold, manage, invest and reinvest trust funds in accordance with directions from the employer. The trustee shall take no actions except pursuant to directions from the employer and has no duty to determine any facts or propriety of any actions taken or omitted in good faith pursuant to the instructions of the employer. A directed trustee only acts when "directed" to do so and is not responsible for following any directions.

* The trustee has no duty or authority to ascertain whether contributions should be made to the plan or to bring any action to enforce any obligation to make a contribution. Such a provision may not be permitted unless this responsibility is delegated to a named fiduciary.

Reasonable requests

Most directed trustees do not wish to negotiate or change the terms of their standard trust agreements. However, although reluctant to make changes, most directed trustees will accept reasonable requests for changes, particularly when they are advised that their standard language is in violation of ERISA.

Thus, employers who review trust agreements and request changes will obtain some concessions, even though uniformity is desired by all service providers. Obtaining a trust agreement that is legally enforceable, prudent and protects the interests of the employer and participant is the ultimate goal, not simplicity for the directed trustee.

Contributing Editor Frank Palmieri, CPA, JD, LL.M (Taxation) is a partner with the law firm of Palmieri & Eisenberg, with offices in Princeton, N.J., and Alexandria, Va. He is a national speaker and writer on employee benefits issues and is a fellow in the American College of Employee Benefits Counsel.

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