Definition
The term custodial agreement refers to an arrangement whereby a nominee holds the assets or property on behalf of the beneficial owner. Custodial agreements are typically associated with benefits programs offered by companies and government agencies.
Explanation
Custodial agreements are oftentimes entered into by employees when participating in an employer's retirement plan such as a 401(k) or 403(b). These arrangements provide employees with the benefit of having the funds in their account managed by investment professionals. Through regular payroll deductions, the custodian can collect and invest the employee's funds. The fees associated with these agreements are oftentimes lower than those charged individual investors.
Custodial agreements are typically lengthy documents, explaining the following topics in great detail:
Funding Accounts: including contributions, rollovers, conversions, and reinvestment of earnings.
Access to Funds: including transfers, distributions, and beneficiary designations.
Administration of Funds: including instructions, notices, communications, voting rights, taxes, as well as actions the custodian can take in the absence of specific instructions.
Legal Notices: including limitations on liability and indemnification, fees and expenses, delegation to agents, amendments to the agreement, effective dates, governing law, and termination of the agreement.