How ERISA Protects Retirement Plan Assets During Times of Uncertainty

Retirement plan assets are typically held in custody at banks or other financial institutions. The good news is that the security of retirement plan assets is protected by the Employee Retirement Income Security Act of 1974, as amended (ERISA). While ERISA does not protect retirement plan balances from investment losses that may result from recent tumultuous markets, it provides security by requiring retirement plan assets be held in trust by one or more trustees.

What You Should Know

The trust is a legal entity that is separate from the employer, the trustee and custodian. If any one of these entities goes bankrupt, there would be no legal effect on the trust. A new trustee and/or custodian would be appointed.
The trust must be in writing and the trustee, which has responsibility for administering the trust for the benefit of the plan participants and beneficiaries, will generally be named either in the trust document or in the plan document. A trustee may be given discretion over the investment of the plan's assets, or the investments may be directed by the plan sponsor, an investment manager, or in the case of a participant-directed plan like a 401(k) or 403(b) plan, by the participants themselves.
The trustee can be an individual or institution such as a bank or trust company. In the case of an individual trustee, the actual possession of plan assets will almost certainly be placed with an institutional custodian. The custodian is charged with holding and safeguarding plan assets.
Neither a trustee nor a custodian has beneficial ownership of the plan assets. The same is true for the plan sponsor, broker, investment manager or advisor. Plan assets are treated as if owned by the plan participants.
Assets are protected from the creditors of an employer, custodian, or trustee in the event of bankruptcy or insolvency.

What You Can Do

Be prepared to respond to participant inquiries. You may wish to review plan documentation such as the plan’s trust document and the plan document. Be prepared to provide a copy of the Summary Plan Description upon request.
Consider addressing concerns proactively by providing plan participants communication that explains how ERISA protects the security of retirement plan assets.

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