TRUSTS | Pension Plan Funding

The trust is the leading funding agency for qualified plans, in terms of both the number of employees covered and aggregate plan assets. A trust used for qualified plan funding is based on the same general principles of trust law as trusts used for other purposes, such as estate planning and administering the affairs of minors or incompetent persons. A trust is an arrangement involving three parties—the grantor of the trust, the trustee, and the beneficiaries. In qualified plan funding, the grantor is the employer and the beneficiaries are the employees. The trustee is a party holding funds contributed by the employer for the benefit of employees.

Legally speaking, a trustee is a fiduciary. A fiduciary is a person or organization that holds money on behalf of someone else (here the plan participants and beneficiaries) and that must administer that money solely in the interest of those other persons. The trustee's compensation is a fee for services rendered; the trustee is prohibited from personally profiting as a result of investing the trust funds.

The duties of a qualified plan trustee, like those of any other trustee, are set out in a formal trust agreement. Usually, the duties of a plan trustee are to accept employer contributions, invest those contributions, accumulate the earnings, and pay benefits to plan participants and beneficiaries out of the plan fund. The trustee performs these acts only at the direction of the plan administrator and not at the trustee's own discretion. However, in some cases, a trustee is given direct responsibility for choosing plan investments or choosing an investment adviser. The trustee must account periodically to the plan administrator or the employer for all investments, receipts, and disbursements. The trustee does not guarantee the payment of benefits or the adequacy of the trust fund to pay benefits. That remains the obligation of the employer.

A trustee may be an individual or group of individuals or a corporation such as a bank or trust company. Often employers name individual trustees, such as the company president or a major shareholder, to obtain an extra measure of control over plan assets. This is permissible under the law; however, when acting as trustee, such an individual is legally obligated to act solely in the interests of the plan participants and beneficiaries and not in the interests of the employer or shareholders.

Although a qualified plan trust is created and exists under the laws of the state in which it is established, the most significant provisions of trust law affecting qualified plan trusts have been codified in federal statutes that supersede state law whenever they apply.