Custodian

What a custodian is

A 401(k) plan’s assets do not sit with the employer or the recordkeeper. ERISA generally requires them to be held in trust by one or more trustees. A custodian is the financial institution that has physical or electronic possession of the assets: it receives contributions, holds the mutual fund shares and cash, settles trades and pays out distributions.

Trustee and custodian are related but different. The trustee has legal title to the assets and a fiduciary role. Many plans use a directed trustee, which follows proper instructions from the plan’s fiduciaries and has no investment discretion. A custodian holds the assets on behalf of the trustee or the plan. One institution often does both.

Why it matters to employers

Separation is the point. Because plan assets are in a trust, they are not available to the employer’s creditors, and they are not on the recordkeeper’s balance sheet. If your company or a service provider fails, the assets remain the plan’s.

When you compare providers, ask who the custodian and trustee are, whether they are separate from the recordkeeper, and how money moves from payroll into the trust.

Example

On payday an employer sends $40,000 of deferrals and match. The money goes to the plan’s trust account at the custodian. The recordkeeper tells the custodian which fund shares to buy, and updates each employee’s account.

Common mistakes

• Assuming your recordkeeper holds the money. Usually it directs the custodian.

• Not knowing who the plan’s trustee is. It may be a person at your company, which adds fiduciary duties and bonding needs.

• Sending contributions to the wrong account after a provider change.

• Believing custody protects against investment losses. It protects ownership of the assets, not their value.