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The Role and Responsibilities of the Individual Trustee

August 07
00:05 2012

Congratulations. You’ve just had a great honor bestowed upon you. You have been selected to serve as a trustee. You may not be called a trustee. Your title might be that of a director or officer. You may ‘merely’ be a member of an appointed or elected Board. Indeed, you may have no title or formal position at all. Whatever the case, you have one thing that very few people have. You have a fiduciary responsibility.

And that should scare you.

If it doesn’t, read on. For fiduciary responsibilities translate into only one thing: fiduciary liabilities.

In general, liabilities are not a good thing. That’s why many people buy “liability” insurance. It covers events you can be blamed for but, while technically your responsibility, prove to be very difficult to anticipant prevent. For instance, if someone slips on the icy sidewalk coming from your porch, it’s your fault for not removing the ice (or warning the person not to go that way). Still, for a modest annual premium, your friendly neighborhood insurance company would gladly step in and pay for whatever damages result from the errant fall.

It’s not so easy to mitigate fiduciary liability. It’s sort of a sticky kind of nuisance. That’s why most people don’t want to go near it. Those brave souls that do must meet a much higher standard than that of a mild-mannered reporters working for a major internet weekly (or whatever mild-mannered job most of us work at). On the bright side, at least this liability is narrowly focused.

Fiduciary responsibility covers a well-defined set of assets. These assets must be managed for the ultimate benefit of someone else. As a fiduciary, you may be responsible for any one of many types of assets. You, as a corporate director or officer, may be the trustee of an employee benefit plan. You, as a Board member or officer, may be a trustee for a college endowment or the endowment of any other not-for-profit institution. You may be the trustee for the estate or foundation of a family member or close friend. In all these situations, the buck stops with you. And it’s not even your buck.

Ironically, you may have this same fiduciary responsibility to manage your own possessions. These assets may include your residence and your career as well as your taxable and tax deferred investment portfolios. Even if you own the assets today and will own them in the future, you must act as a trustee. Why? Because the beneficiary of your personal assets is not the you of today, but the you of tomorrow. With this in mind, the you of today must manage your possessions for the sole benefit of the you of tomorrow. This requires great discipline. The good news is you can’t sue yourself for a breach of fiduciary duty. Still, this doesn’t mean your liability vanishes, it just shows up in a different way. For example, rather than taking your younger self to court for mishandling your own retirement funds, you’re merely punished by not living the retirement lifestyle you had dreamt of – or by living in your kid’s basement, which may or may not be the same thing.

As an individual trustee, you have a great variety of responsibilities. Do you know where these responsibilities first came from? Though they derive from nearly 800 years of law, trust law actually begins with the Magna Carta. Back in those medieval times, King John was as bad at managing his own money as he was at managing the estates of his barons. This upset his barons very much, as they generally did not want to see the king rape their estates (and other assets) should they die an untimely death, say, gallivanting on some Crusade. The knights were so angry, they threatened King John with a civil war, lest he agree to a set of principles. Today we call these principles the Magna Carta.

Signed in 1215 AD, the Magna Carta, among many points a desperate King John agreed to, includes a section devoted to describing the duties of the trustee (from the British Library Board’s modern translation):

[5] Moreover, so long as he has the wardship of the land, the guardian shall keep in repair the houses, parks, preserves, ponds, mills and other things pertaining to the land out of the revenues from it; and he shall restore to the heir when he comes of age his land fully stocked with ploughs and the means of husbandry according to what the season of husbandry requires and the revenues of the land can reasonably bear.

This portion of the Magna Carta attempted to address the problem of guardians (trustees) plundering the estates of under-age heirs. Such irresponsible trustees, who reported directly to the King, often left the estate worthless by the time the heir came of age. The resulting article represents the trustee’s version of the medical profession’s Hippocratic Oath: “First do no harm.”

Eight centuries of democratic evolution and case law have yielded a standard set of duties for the trustee or fiduciary. The Practical Operations and Management of a Bank (McGraw-Hill, 1968), defines the principle functions and general duties of a trust officer as:

  1. Carry out the terms of the trust indenture exactly as stated.
  2. Analyze and periodically review the trust.
  3. Keep the principal safely invested.
  4. Maintain uninvested principal and undistributed income at a minimum consistent with the provisions of the trust indenture.
  5. Promptly collect all income and maturing principal on all investments.
  6. Control, pay out and distribute funds only as authorized by the trust instrument.
  7. Study and be acquainted with the needs of the beneficiaries at all times.
  8. Promptly remit payment in acceptable form for coupons and bonds presented for payment or redemption.
  9. Expeditiously prepare and mail checks representing dividends declared.
  10. Competently manage or supervise the management of any real estate holdings, farms, etc.. as required in the discharge of the trust relationship.
  11. Operate in a competent manner any business or liquidate same if directed by the will.
  12. Advise and consult with donors and beneficiaries of a trust on their business or personal problems.
  13. Promptly prepare and handle income tax matters.
  14. Make prompt reports and accountings to donors or beneficiaries of a trust as required.

As you can see, this represents an extensive list (and it doesn’t even include the proscribed activities). You cannot expect a single handbook such as this to cover all the above material. Moreover, since I first began writing on fiduciary matters in 1999, the professional fiduciary world has become split among three lines: the traditional bank trustee, the SEC-registered fiduciary and the ERISA fiduciary. Mind you, there remain shades of grey in each of these three areas. For example, the traditional bank trustee, promulgated under state and federal trust law, has come to include individual trustees and, in some states, attorneys. The SEC-registered fiduciary has become the center of controversy as more and more dual registrants (i.e., those registered as both brokers and investment advisers) are torn between the competing ethics of the suitability standard and the fiduciary standard. Finally, the ERISA fiduciary comes in so many flavors, each with its own specialty, that it’s difficult for the financial professional to sort out, let alone the 401k plan sponsor.

Nor are there any good, universally accepted easy-to-read resources on the duties of the trustee. The problem lies in those eight centuries we referred to previously. More precisely, in the United States it involves the last two centuries of case law, where the nature and extent of trustee duties have been best delineated. Add to that an increasingly complex layer of often-contradictory regulatory edicts, and you begin to see the problem.

So, congratulations on your being selected to serve as a trustee. Your life hasn’t yet gone to the dogs, but at least you now know why you should be scared.

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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