As the safekeeper of plan assets, custodians are among the service providers that multiemployer benefit plan trustees have a fiduciary duty to monitor.
Yet plan custodians are not discussed as often as other service providers—especially those referred to as the A-Team: the attorney, auditor, administrator and actuary—writes Andrew E. Staab in his article “The Plan Custodian: Keeper of the Money,” which appears in the April issue of Benefits Magazine.
The article by Staab, who is vice president and senior corporate counsel for U.S. Bank, provides an overview of the role of plan custodians.
What are the basic duties of a plan custodian?
Section 403(a) of the Employee Retirement Income Security Act (ERISA) requires an ERISA plan administrator, such as a multiemployer benefit plan board of trustees, to hold the plan’s assets in trust. The board hires a custodian, usually a bank, to hold the plan’s financial assets such as securities investments and cash.
What should trustees know about custodians?
- Assets must be kept separate. The custodian should acknowledge in writing that plan assets will be kept separate and apart from the custodian’s general assets. Staab stresses that this is the most important ingredient to custodial safekeeping because by keeping the assets separate, the custodian is protecting plan assets from the custodian’s creditors if the custodian were to become insolvent. The custodian bank also may not use the assets for other banking business functions.
- Custodians should not be fiduciaries. Contrary to popular perception, a custodian is not a fiduciary under ERISA Section 3(21) because a custodian does not assert discretionary control or authority over plan assets, Staab explains. Everything the custodian does with respect to plan assets is a result of receiving a direction from an authorized entity (board of trustees, investment professionals, etc.). Even though a custodian maintains possession of a plan’s assets, its custody of those assets does not rise to the level of fiduciary control or discretion over them.
- Custodians should have strong communication with the plan and other service providers. The custodian works with the fund auditor and plan administrative officer or third-party administrator to provide information for the annual Form 5500. The custodian also communicates with investment managers and advisors about asset transfers and trade settlements.
- Custodians handle contractual settlement of plan investments. Plan investment professionals direct the plan custodian to purchase investments on behalf of the plan. The custodian uses its own resources (cash or securities) to purchase the plan investment. Because the custodian takes a financial risk that the plan will have enough funds to purchase the investment, a board of trustees should not be surprised if a prospective custodian demands in the custody service agreement to be protected when advancing its funds on behalf of the plan during contractual settlement. In addition, Staab cautions that trustees should be wary of a custodian that cannot explain how it operates contractual settlement.
- Custodians provide other services. Custodians can help benefit plans with work to reclaim withheld foreign taxes on plan investments if needed. Other functions may include securities lending, responding to tender offers, proxies (if not done by an investment professional), class action litigation and foreign exchange transactions. Some custodians also offer benefit payment services for qualified retirement plans.
Partner with your plan custodian
Staab notes that trustees should hold custodians to high standards of information security and confidentiality, particularly with the increasing risk of cybersecurity breaches. The Department of Labor recently issued new cybersecurity guidance for plan sponsors, plan fiduciaries, recordkeepers and plan participants, which includes tips for hiring a service provider.
“A custodian is an important partner for members of the board of trustees to fulfill their fiduciary duties, even though it is not usually the first provider that comes to mind when listing a plan’s service providers,” Staab concludes. “A board of trustees should invite its custodian to the board meeting at least once a year to report on its activities and to answer questions. The custodian will welcome that invitation.
Kathy Bergstrom, CEBS
Senior Editor, Publications at the International Foundation of Employee Benefit Plans
The latest from Word on Benefits: