A fiduciary fund is a fund held by a fiduciary (such as a trustee, executor, guardian, or agent) that is overseen and managed on behalf of another entity, typically for the purpose of investment and growth of the assets within the fund.
In the world of government accounting, the term “fiduciary funds” is often used to refer to resources that a government holds and manages on behalf of an outside party. The government has a duty to ensure that these resources are used or expended as specified by the entity that provided the resources.
Fiduciary funds typically include four kinds of funds:
- Pension (and other employee benefit) trust funds: These are used to report resources that are required to be held in trust for the members and beneficiaries of defined benefit pension plans, defined contribution plans, other postemployment benefit plans, or other employee benefit plans.
- Investment trust funds: These are used to report the external portion of investment pools reported by the sponsoring government.
- Private-purpose trust funds: These are used to report all other trust arrangements under which principal and income benefit individuals, private organizations, or other governments.
- Agency (or custodial) funds: These are used to report resources held by the government in a purely custodial capacity (assets equal liabilities) and do not involve measurement of results of operations.
As with other fiduciary activities, the manager of a fiduciary fund has a legal and ethical obligation to manage the fund in the best interest of the beneficiary or beneficiaries.
Example of a Fiduciary Fund
Let’s consider an example of a pension trust fund, a type of fiduciary fund.
Suppose a city government establishes a pension fund for its employees. Each paycheck, a certain percentage is deducted from the employees’ salaries and contributed to the pension fund. Additionally, the city contributes funds as the employer. The pension fund is managed by a board of trustees, which may be part of the city government or an independent body.
The trustees have a fiduciary duty to manage the fund in the best interests of the city’s employees, who are the beneficiaries of the fund. This includes making sound investment decisions to grow the fund’s assets and ensuring that pension benefits are paid out correctly to retired employees.
The money in the fund does not belong to the city government. Rather, it belongs to the employees, who will receive it as pension benefits when they retire. The city government, or specifically the board of trustees, is merely holding and managing the money on behalf of the employees.
The board of trustees must keep accurate records of all transactions involving the pension fund and regularly report on the fund’s status and activities. This can be seen as a form of fiduciary accounting. It provides transparency and accountability, helping to ensure that the fund is managed properly and that the employees‘ interests are protected.
This is an example of a fiduciary fund in action. In this case, the city government or the board of trustees is acting as the fiduciary, managing the fund’s assets on behalf of the beneficiaries (the city’s employees).