Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
You are correct that there is a general requirement for qualified retirement plans to utilize a trust, and 403(b) plans are considered to be qualified for this purpose. However under Section 401(f) of the Code and Section 404(b) of ERISA, there is an exception to the trust requirement for plans that only utilize (a) custodial accounts held by a bank or other entity satisfactory to the IRS– these accounts are more commonly known as mutual fund accounts, and/or (b) annuity contracts issued by qualifying insurance companies.
Coincidentally, Sections 403(b)(1) and 403(b)(7) of the Code limit 403(b) investments generally to annuity contracts and custodial accounts holding mutual funds, with the exception of church plans that establish retirement income accounts under 403(b)(9). Thus, the vast majority of 403(b) plans invest in assets that do not require a trust under the Code and ERISA, so a trust is generally NOT required for either ERISA or non-ERISA 403(b) plans. This is not to state that a trust is prohibited for 403(b) plans, but in practice trusts are utilized fairly rarely.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.