Difference Between a Trustee and Custodian in a Pension Plan

These two roles are both important for your retirement.

Nov 14, 2015 at 11:27PM

Pension plans have become less common over the years, but they still play a vital role in the retirement prospects for millions of workers across the nation. Although most people think of their employers as playing the most important role in their pension plans by actually contributing the money that goes toward their retirement benefits, there are other things that have to be done correctly in order to ensure the plan assets are adequately managed throughout your lifetime. Specifically, both trustees and custodians have vital tasks they must do to protect pension plan money. Let's take a look at how these jobs are different and what they each involve.

What the trustee must do
Pension law requires pension plans to hold their assets in a trust fund for the benefit of their workers. There must be a written plan that spells out how benefits are paid and how the pension is operated, and the pension must keep records of how money comes into and goes out of the plan. Pensions must also keep documentation that gives participants the information they need in order to understand the plan and what they need to do, and pensions have to make regular reports to the government as well to update them on their status.

The trustee of the plan has the primary fiduciary responsibility for ensuring that plan assets are managed for the best interests of the plan participants and their named beneficiaries. In particular, trustees must follow the plan's rules in administering the plan, and they must follow the standard of care that a reasonable fiduciary would follow in fulfilling their responsibilities. Trustees are specifically barred from engaging in prohibited transactions with pension assets, and they're not allowed to receive compensation from other parties dealing with the pension plan or take actions that create a conflict of interest.

Breach of these fiduciary duties can leave the trustee liable for any damages that result, requiring the trustee to reimburse the pension plan. Even if the trustee hires outside help to take on some of the responsibilities of the position, the trustee still bears some responsibility for overseeing and monitoring those who are fulfilling those responsibilities.

Pension plan custodians
By contrast, a custodian has much more limited responsibility over a pension plan than a trustee. Typically hired by the trustee, a custodian holds the actual investment assets and handles buying and selling of investments over time. Often, the custodian will provide recordkeeping services to document investment, contribution, and withdrawal activity over time, and the custodian often handles actual payment of distributions to participants or their beneficiaries. Although the agreement between the custodian and the pension plan sets out duties and responsibilities, the trustee generally has control over what the custodian does and is ultimately responsible for the custodian's actions.

There's nothing that prevents trustees from also acting as custodians, as long as conflicts of interest are avoided. Many financial institutions offer both trustee and custodial services to employers specifically with the idea of taking on both roles.

Most pension plan participants rarely see the work of trustees and custodians behind the scenes. However, they're a critical piece of how pension plans work and how your hard-earned retirement benefits get protected.

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