IRA custodians in the US serve a mass market of individual retirement account holders. According to the Investment Company Institute (“ICI”), traditional individual retirement accounts (IRAs) are a key component of the US retirement system with $10.3 trillion in assets at year-end 2020.  

IRAs have become a significant component of US households’ retirement assets.  47.9 million or 37.3% of U.S. households owned one or more types of IRAs in mid-2020.  Households held $12.2 trillion in IRAs at year-end 2020, or 35% of the $34.8 trillion in total US retirement assets. 

It is not standard custom and practice for institutions to exercise any form of discretion with respect to beneficiary designations or to accept verbal changes to beneficiary designations from IRA account holders. 

Nonbank custodians are regulated by the Internal Revenue Service (“IRS”).  Any nonbank trustee or custodian must prove to the IRS that it can meet a set of regulatory requirements. One of those requirements is the ability to act within accepted rules of fiduciary conduct by demonstrating business continuity and having an established location, fiduciary experience, fiduciary procedures, and financial responsibility.  A nonbank trustee or custodian must also prove that it has procedures that support administration of its fiduciary powers through audits of its books and records. 

According to the IRS, a fiduciary is a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity.  Fiduciary status is based on the functions performed by the nonbank custodian.  Nonbank custodians are in a position of trust with respect to the participants and beneficiaries. A nonbank custodian’s responsibilities may include: 

• acting solely in the interest of the participants and their beneficiaries;
• acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
• carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters; and
• following the plan documents.

Investment advisers are regulated and subject to fiduciary obligations to their account holders either under the Investment Advisers Act of 1940 or state adviser laws or both.  These standards, meant to prevent advisers from overreaching or taking advantage of a client, require them to act in the account holder’s best interest. 

Investment advisers have a duty to provide their client with an account application and agreement setting forth the terms of the IRA relationship. Investment advisers have a duty to hold the account holder’s assets and keep them separate and apart from other assets of the Investment adviser. Investment advisers have a duty to maintain accurate records of the account and all transactions (including beneficiary designation forms, changes of address, wiring instructions, among other forms necessary to administer the account). Investment advisers have a duty to faithfully implement the account holder’s investment directions for self-directed accounts, and to administer the IRA account in good faith and in accordance with the Investment advisers policies and procedures.  The Restatement (Third) of Trusts provides that “A trustee who fails to keep proper records is liable for any loss or expense resulting from that failure.  A trustee’s failure to maintain necessary books and records may also cause a court…to resolve doubts against the trustee.” 

Given that 47.9 million or 37.3% of U.S. households owned one or more types of IRAs in mid-2020, custodial trustees must administer IRA accounts prudently consistent with their internal policies and procedures.  Failure to administer these accounts with required documentation and necessary record retention processes would likely result in further disputes between beneficiaries concerning entitlement to IRA accounts.