A discretionary trustee is the party that decides what happens with your plan's assets, rather than waiting for instructions from the sponsor or the committee.
Your plan already has a trustee. The name appears in your trust agreement, your plan document, or a signed appointment.
The trustee's authority covers the plan's assets. Running the plan day to day belongs to the plan administrator, the 3(16) role, which is a separate appointment.
One firm can hold both roles. ERISA says so directly.
Appointing a discretionary trustee reduces what your committee is responsible for. It does not remove the obligation to choose that trustee carefully and review the arrangement.
ERISA requires a plan's assets to be held in trust, with a trustee holding them. A few narrow exceptions exist in Section 403, mostly for plans funded entirely through insurance contracts.
So your plan has a trustee. The useful question is which kind, and whether that person understands what they are taking on.
A discretionary trustee is the one making the decisions about the plan's assets. Nobody gives the discretionary trustee instructions, and the discretionary trustee answers for the decisions.
If that doesn't describe your plan, you may be the trustee yourself, or your plan may use a directed trustee. The worksheet below helps you work out which, with room to record the answers and a note on where to find each one.
Featured Worksheet
Discretionary Trustee Evaluation Worksheet
A diagnostic worksheet for identifying which kind of trustee your plan has today and who holds each responsibility.
Once someone accepts the trustee role, they hold full authority over the plan's assets. ERISA doesn't set out a checklist of tasks that comes with it. The duties follow from the authority, and the main ones are these:
Holding the plan's assets in the name of the trust
Selecting the investments, monitoring them, and replacing them when they no longer meet the plan's standards
Confirming that contributions reach the trust
Pursuing other amounts owed to the trust, where the trust agreement assigns that
Paying benefits and the plan's reasonable expenses out of the trust, and never letting plan assets come back to the employer
Keeping the trust's books and valuing the assets each year
Keeping the plan's assets within the reach of the U.S. courts
Investing consistently with the plan's funding policy
Staying clear of prohibited transactions and self-dealing
Every one of those decisions is held to the same standard. A trustee is a fiduciary, so ERISA requires the trustee to act only in the interest of the participants, to bring the care and skill of someone experienced in this work, to diversify the investments unless there is a clear reason not to, and to follow the plan documents where they agree with ERISA. If you are the one named, this is what the job looks like in practice.
What the Trustee Role Doesn't Cover
The trustee's authority stops at the assets. Running the plan is a different job that belongs to the plan administrator, the role ERISA defines in Section 3(16). Approving benefit claims, determining whether a domestic relations order qualifies, and the rest of the day-to-day administration all sit there.
Your plan document names the administrator. If it doesn't name anyone, the plan sponsor holds the role by default, which is how a company ends up doing this work without deciding to.
One firm can hold both roles. ERISA lets a plan put one party in more than one fiduciary capacity, and it uses trustee and administrator as its own example. So when you compare providers, ask which roles each one is actually taking, because the title alone won't tell you.
Which Kind of Trustee Does Your Plan Have?
The difference is who makes the calls about the plan's money: which investments the plan holds, and what moves in and out of the trust.
A discretionary trustee makes those calls. A directed trustee doesn't. It acts on instructions instead, and those instructions come from whoever your plan document puts in charge of running the plan, which may be the company itself or a retirement plan committee. ERISA calls that party the named fiduciary. A directed trustee arrangement only exists where your plan document sets it up, so if you have one, someone chose it.
Both are fiduciaries. A directed trustee is responsible for less, because they're carrying out instructions rather than forming their own judgment. That doesn't mean it follows anything it receives. A directed trustee is bound only by an instruction that matches the plan's terms and doesn't conflict with ERISA, so giving a directed trustee an improper instruction protects nobody.
The practical consequence: with a directed trustee, whoever gives the instructions still answers for those decisions, and your plan document names that party. For the full comparison, and how to tell from your own documents which arrangement you have, how a directed trustee differs covers it.
Who Can Be the Trustee of a 401(k) Plan?
An individual, a committee, or an institution such as a bank or a state-chartered trust company.
To find out who yours is, check three places: the trust agreement, the plan document, and any signed appointment. Whoever is named there is your trustee. If it's a person rather than an institution, that person is carrying the duties discussed in this post.
ERISA doesn't stop an individual from being the discretionary trustee. An owner in that seat has money on both sides of the same decisions. If the owner participates in the plan, the investment lineup affects their own balance. The company also pays for the plan, so cost affects the business. ERISA requires those calls to be made for the employees, which is the hard part ofan owner serving as their own trustee.
3(21), 3(38), or Discretionary Trustee: Who Makes the Call?
These three differ in how much of the work leaves your desk, and who answers for the decisions once it does.
Comparing a 3(21) advisor, a 3(38) investment manager, and a discretionary trustee
3(21) Advisor
3(38) Investment Manager
Discretionary Trustee
Picks the investment menu
Recommends, you approve
Selects and replaces on its own
Selects and replaces on its own
Signs off on a fund change
You
The 3(38)
The trustee
Holds the plan's assets
No
No
Yes
Confirms contributions arrive
No
No
Yes
Keeps the trust's books
No
No
Yes
Who can serve
Any person or firm. No license or registration is required, because the status comes from advising the plan for a fee rather than from a credential
Only a registered investment adviser, a bank, or an insurance company
Any person or entity, including an individual, a committee, a bank, or a trust company
Where the authority comes from
Your service agreement
An appointment made the way your plan document provides for
The trustee role itself, once accepted
Puts fiduciary status in writing
Depends on the agreement
Required
In the trust agreement
You still select them and review them
Yes
Yes
Yes
A 3(21) advises. You receive analysis, fund options, and monitoring reports. You make the decision, which means you still answer for it. A 3(21) shares the work rather than the responsibility.
A 3(38) handles the investments. It selects funds, monitors them, and replaces them without your approval, and it has to put its fiduciary status in writing. The appointment has to be made the way your plan document provides for it.
A discretionary trustee handles the investments and holds the assets. Its authority comes from the trustee role rather than from being hired for a specific task, so it also carries the asset-side work a 3(38) never touches.
One firm can serve as both your discretionary trustee and your 3(38) under a single engagement. What matters is that the documents state which capacities the firm accepted and which assets each one covers.
In all three arrangements, selecting the provider and reviewing them stays with you.
Why Would a Plan Sponsor Appoint a Discretionary Trustee?
Six reasons come up when sponsors weigh this.
Your own assets are exposed. ERISA reaches the individual, not just the company. A fiduciary who breaches a duty has to restore the plan's losses personally, return anything gained from using plan assets, and can be removed by a court.
The role arrived without being chosen. If you signed the trust agreement as one step in setting up the plan, you became a fiduciary at that moment. Under ERISA that status follows from the authority you hold, not from a title or an explanation anyone gave you.
Investments aren't your field. ERISA measures you against a prudent person acting in a like capacity and familiar with these matters. Without that background and without a documented process, you're exposed even in years when nothing goes wrong.
You're on both sides of the decision. An owner serving as trustee is deciding about a plan they also participate in. An outside trustee resolves that. It doesn't resolve every conflict, because any provider has an economic interest in the engagement and may be affiliated with another party your plan pays. Ask who they're affiliated with and how they're compensated.
Succession.
A plan can't operate without a trustee, because ERISA requires the assets to be held in trust by one. If the individual serving as trustee leaves the company, retires, or dies, someone has to take the role. Your trust agreement should say how a trustee resigns, who appoints the replacement, and what authority applies in between. Check whether yours does.
A record you can produce. If the Department of Labor or an auditor asks, a written record of who decided what and why is what demonstrates a sound process. Ask any provider what reporting you receive and how often.
Do You Need a Discretionary Trustee?
Many plans operate without one. But one point deserves to be stated directly.
Appointing a discretionary trustee doesn't end your fiduciary responsibility. The investment decisions move, which is a real change. Choosing that trustee is itself a fiduciary decision, though, and the same prudence standard applies to leaving that arrangement in place as applies to entering it. Reviewing it isn't optional, and it isn't finished at signing.
Nothing you can sign makes a plan sponsor a non-fiduciary. Under ERISA, fiduciary status follows from the authority a party actually holds over the plan, which is not something a contract can rewrite. If a provider describes an arrangement that ends your status, read the contract closely.
What you get is a narrower responsibility. Instead of answering for every investment decision in the plan, you answer for one decision made carefully and reviewed on a schedule. That's a meaningful reduction, and it isn't elimination.
What to Ask Before You Appoint One
Discretionary trustee arrangements vary. Before signing, ask:
What is the firm putting in writing as discretionary trustee, and what is it declining to accept?
Is it serving as trustee only, or as trustee and 3(38)?
Is it also taking the 3(16) plan administrator role, and does your plan document name it for that?
Does it hold the plan's assets, or is there a separate custodian?
Who signs what?
What does it cost, and does the plan pay or does the company?
Is the firm affiliated with anyone else your plan pays, and how does that affect the total?
What reporting do you receive, and how often, so you can show the arrangement was reviewed?
A proposal describes what a firm intends to do. The plan document, the trust agreement, and the service agreement describe what it has agreed to do, and only the second set governs if the two ever diverge. Those are also the documents an auditor asks for.
The checklist below sets those questions out in full, with room to record each provider's answer and the document you took it from.
Where That Leaves You
Every plan has a trustee, and someone is already carrying these duties. The question this post can't answer for you is who, and for exactly what, because that's in your own documents.
Two things follow from that. If an individual at your company is the trustee, they're holding the responsibilities described here whether or not the role was ever explained to them. And if you're weighing an outside trustee, the title tells you very little on its own. What tells you something is a written answer to which capacities the firm is accepting and which it isn't.
Two things help with that. The Discretionary Trustee Evaluation Worksheet works through your own documents to establish what you have today and who holds each duty. If you have moved past that and are evaluating a specific provider, the Discretionary Trustee Due Diligence Checklisttakes the questions above and turns them into a record you can complete for each firm and compare side by side.
If reading your documents alongside someone would be more useful, we'll read them with you and tell you which responsibilities have actually moved and which haven't
A pre-hire evaluation framework covering fiduciary authority, scope of services, experience, compliance, and fees, with space to record each provider's answers side by side.
No. Both make investment decisions, but ERISA defines an investment manager as a fiduciary other than the trustee. The discretionary trustee's authority comes from holding the plan's assets, which is why the asset-side work sits there and not with a 3(38). One firm can serve in both capacities under one engagement.
Yes. ERISA lets a plan put one party in more than one fiduciary capacity, and it uses trustee and administrator as its example. Whether a particular firm accepts both depends on its agreement and on whether your plan document names it as administrator.
No. They are two different positions, though one party can hold both.
The named fiduciary runs the plan. ERISA requires your plan document to identify at least one, and it is usually the company or a retirement plan committee. The trustee holds the plan's assets and, if discretionary, decides what happens with them.
The two connect in two places. A named fiduciary can be the one who appoints the trustee. And in a directed trustee arrangement, the named fiduciary gives the instructions, which is why ERISA requires that party to be someone other than the trustee.
It's a rule that applies when participants pick their own investments. If the plan meets the 404(c) conditions, the plan's fiduciaries are not responsible for how a participant's own choices turn out. A participant who puts everything in one fund and loses money made that call themselves.
Qualifying depends on the plan offering a broad enough range of options and giving participants the information they need to choose. That's why it sits with the sponsor, the trustee, and the recordkeeper together rather than with any one of them.
No. ERISA requires a trustee, not a discretionary one. Your plan can provide that the trustee acts on instructions instead, which makes it a directed trustee.
It's the document that establishes the trust holding your plan's assets and sets out what the trustee can and must do. Sometimes it's a separate file. Sometimes the trust language sits inside the plan document as one of its articles. If you can't find a separate agreement, look in the plan document.
The trust agreement, the plan document, or a signed appointment. If the name isn't in any of those, that's worth resolving, because a plan holding assets in trust needs someone holding them.
Yes. ERISA doesn't prohibit it, and in plenty of smaller plans that's exactly the arrangement. It gets harder to defend once the plan covers employees, for four reasons.
The owner is deciding about a plan they're also saving in, so their own balance moves with the investment lineup. The company pays for the plan, so cost pressure pulls against decisions that have to be made for the participants. Prudence under ERISA is measured against someone who does this work professionally, which is a standard an owner without an investment background will struggle to document. And the liability is personal, so a breach reaches the owner's own assets rather than the company's.
None of that makes it improper. It does mean an owner-trustee should be able to show a real process behind the decisions, not just good outcomes.
Legal Information Institute, 29 U.S. Code § 1102, Establishment of plan
Legal Information Institute, 29 U.S. Code § 1103, Establishment of trust
Legal Information Institute, 29 U.S. Code § 1104, Fiduciary duties
Legal Information Institute, 29 U.S. Code § 1109, Liability for breach of fiduciary duty
Legal Information Institute, 29 U.S. Code § 1002, Definitions
Important Disclosures
First Hill Trust Company is a Washington State-chartered trust company. Investment advisory services are provided by BAC Capital Advisors, an SEC-registered investment adviser and a wholly owned subsidiary of First Hill Trust Company. Registration does not imply a certain level of skill or training. This article is educational. Neither First Hill Trust Company nor BAC Capital Advisors is acting as ERISA counsel or tax counsel to any plan or plan sponsor, and nothing here replaces advice from qualified counsel about your own plan.
Accuracy and currency of information. The statutory provisions and regulatory descriptions in this article were verified against the cited primary sources as of the date of publication. Regulations and guidance change. Readers should confirm current requirements with qualified counsel.
Educational purpose only. Provided by First Hill Trust Company for general informational and educational purposes only. It is not legal, tax, accounting, investment, or fiduciary advice, does not constitute a recommendation regarding any plan, investment, strategy, or course of action, and does not consider any recipient’s specific circumstances. Consult your own qualified advisors before acting.
No offer, agreement, or commitment. Nothing in this material constitutes an offer, solicitation, agreement, or commitment to provide any particular service or to assume any particular responsibility. Descriptions of what a trustee, administrator, adviser, committee, employer, or other party “may” or “can” do are illustrative of how such arrangements commonly work and do not describe the terms of any specific engagement. The actual services provided, the allocation of responsibilities, the scope of any delegation, and the duties of any party are governed solely by the applicable plan documents, trust agreement, advisory agreement, and written service agreements. In the event of any inconsistency, those documents control.
Services and regulatory status. First Hill Trust Company and its affiliates offer retirement plan services, recordkeeping and administrative services, trust and fiduciary services, investment advisory services, and group benefits services, in each case subject to applicable regulatory requirements and the terms of the relevant agreements. Not all services are offered to all clients, in all states, or in all circumstances. Investment advisory services are offered through an affiliated investment adviser; a copy of its Form ADV Part 2A is available upon request. Insurance and group benefits products are offered through appropriately licensed entities. The availability and scope of any service depend on eligibility and the applicable agreements.
Fiduciary status under ERISA. Fiduciary status under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), is determined based on the functions performed and the authority exercised, not on titles or labels. Whether any particular party is acting as a fiduciary, and the scope of any related duties or potential liability, depends on the facts and circumstances specific to the plan and the relationship. Engaging a trustee, adviser, or other service provider does not eliminate a plan sponsor’s or committee’s own fiduciary responsibilities, including the duties to prudently select and monitor any party to whom responsibilities are delegated.
Affiliated entities and conflicts of interest. First Hill Trust Company is affiliated with other entities, including an affiliated investment adviser and entities providing administrative, trust, or other services. These relationships may create conflicts of interest, including where an affiliate is engaged or compensated in connection with a plan. Such conflicts and compensation are described in the applicable service agreements and the affiliated adviser’s Form ADV Part 2A; fiduciaries should consider them when evaluating any engagement.
Statutory and regulatory references. References to ERISA, the Internal Revenue Code, and related statutory or regulatory provisions are general summaries only. They are not a substitute for review of the actual statutory text, regulations, or guidance from the Department of Labor, Internal Revenue Service, or other relevant authorities, and they do not address how those provisions may apply to any particular plan, sponsor, fiduciary, or individual. Laws, regulations, and guidance are subject to change and to interpretation by the relevant agencies and courts. Examples, categories, and situations described are simplified for illustration and may not reflect the requirements or circumstances of any particular plan or person.
No guarantee of results; investment risk. References to governance, fiduciary practices, risk reduction, or outcomes describe common industry approaches and potential benefits, not promises or guarantees of any result, of compliance, or of protection from liability, loss, or claims. All investing involves risk, including possible loss of principal; diversification does not ensure a profit or protect against loss. Past performance does not guarantee future results. For more information, contact First Hill Trust Company at (206) 625-1800.
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