People often get confused between a trustee and a custodian when discussing their pension plans. Before getting into the details, it is important to understand that both of them play a crucial role in your retirement. They both need to perform several tasks to ensure your retirement fund is properly managed and protected.
The Role of a Custodian in a Pension Plan
A custodian for retirement funds holds the investment assets and manages the buying and selling of such investments over a period of time. The custodians can also offer recordkeeping support at times to keep track of investments, contributions, and withdrawal activities over time. They often handle the payment of distributions to the beneficiaries.
The agreement between the custodian and the pension plan decides the duties and responsibilities of a custodian. However, the trustee usually has control over the actions of the custodian. Trustees can also act as custodians as long as there are no conflicts of interest. In fact, several financial institutions can offer employers both trustee and custodial services.
The Role of a Trustee in a Pension Plan
Pension law mandates that every retirement plan shall hold its assets in a trust fund for the beneficiaries. The whole thing needs to be systematic. There must be a written plan that dictates how benefits are paid and how the pension is managed. Also, the pension must have a record of all the transactions involving the plan.
The primary fiduciary responsibility of the trustee of a plan is to ensure that the plan assets are managed while keeping the best interest of the beneficiaries at heart. While administering the pension plan, trustees need to follow the rules of the plan while fulfilling the fiduciary duties as per the standard of care.
Trustees are restricted from engaging in prohibited transactions with pension assets. They are also prohibited from receiving compensation from other parties that are dealing with the pension plan or engaging in actions that give rise to a conflict of interest.
Moreover, trustees are held liable for any damages that happen due to the breach of fiduciary duties. They even need to reimburse the pension plan. While trustees may hire third-party support to share some of the responsibilities associated with the position, they still remain responsible for overseeing and monitoring those who take on those responsibilities.
Trustee vs. Custodian - What Is Better for Your Pension Plan?
Most people participating in a pension plan do not see the trustees’ and custodians’ work as their operations take place behind the scenes. Having said that, they both play a crucial role in determining how the pension plans work and how the retirement funds (and assets) get protected.
A trustee is a fiduciary who is in charge of overseeing the day-to-day management of assets and property placed in a trust. A custodian, on the other hand, is a financial institution that is responsible for holding customers’ securities for safekeeping while minimizing the risk of their loss or theft.
A trustee is a person or a firm that can be appointed for a variety of purposes, including in the case of bankruptcy, for a trust fund, for a charity, or for certain types of retirement plans. A custodian, however, is entrusted with the custody of retirement funds (or assets). As mentioned previously, a trustee can appoint a custodian.
Lastly, trustees generally have discretionary power over assets, allowing them to make decisions regarding how they can be managed. Custodians, on the other hand, operate under a certain set of guidelines.
Conclusion
Even though a lot of people get confused between a trustee and a custodian, their roles are quite different from one another when it comes to managing a pension plan. Also, the choice between a custodian and a trustee depends on the type of retirement account the client has. It will be wiser to seek professional guidance before making the final decision.
