Friday, January 6, 2012

Discretionary v. Directed Trustees: Fiduciary Focus

In case you haven't seen it, yesterday in Morningstar's Fiduciary Focus column, Here -->, author Scott Simon tackled a topic that we, and our firm, Unified Trust, have been tackling for years. The topic is Discretionary Trustees vs. Directed Trustees. I got rather excited, thinking to myself selfishly that finally, someone else is going to discuss the merits of appointing a discretionary corporate trustee and the advantages of that over the more common, less valueable step-sister, the Directed Corporate Trustee.

Note, that while the article is, in my opinion, well written, factual and fairly thorough, I was disappointed, nonetheless, to read that he was referring to Discretionary Trustees in the broader sense. He makes the valid point that all trustees appointed by the Plan Sponsor are Discretionary Trustees unless specifically appointed as a Directed Trustee. That includes individuals, such as business owners or boards or officers appointed in this role. The only place he even mentions that you can appoint a Discretionary CORPORATE Trustee is as an aside where he states how uncommon this appointment is. He doesn't go into the merits of Prudent Fiduciary Appointment, or even compare contrast the differences between the two types of Corporate Trustees. You can incidentally find that on this blog.

Here -->
Here -->

Disappointment aside, he does make a few very good points.

1.) All trustees are Discretionary unless specifically identified as Directed in the Plan Document at which point the responsibilities of trustee fall back to the Named Fiduciary, typically the Plan Sponsor. The good example of US Airways and their relationship to Fidelity Trust Company is provided.

2.) Directed Trustees provide a very limited array of services, typically asset custody, following direction and ensuring transaction accuracy. They are a highly limited fiduciary, and most (that I've seen) disavow fiduciary status in the contracts.

3.) No one can ensure blanket relief from fiduciary liability. There are only degrees of limited relief. Unfortunately, he doesn't point out that the highest degree is to prudently appoint a Discretionary Corporate Trustee.

So, long story short (too late, I know), Scott Simon wrote a decent article making the point that the devil is in the details, and that Plan Sponsors should be wary of unscrupulous sales pitches about fiduciary relief.

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