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Fiduciary Responsibilities for Employee Stock Ownership Plans

by Lynn Archer, Director-Consulting at the Principal Financial Group®

Lynn Archer Photo

Plan sponsors of any employee benefit plan are subject to the governing fiduciary duties and obligations under the Employee Retirement Income Security Act (ERISA). Let's review a few scenarios that illustrate how the rules manifest in the day-to-day operation of an employee stock ownership plan (ESOP). There are a number of guiding principles for fiduciaries to comply with ERISA. Here we will discuss three of the primary rules.

  1. Exclusive Benefit Rule: A fiduciary must act solely in the retirement benefit interest of plan participants.
  2. Scenario: The president of an ESOP company receives an offer from a third party to purchase the business.

    The role of a president is to assess many different variables that might make an acquisition offer attractive or unattractive such as the reputation of the acquiring entity, the effect on the company's customers, whether current employees would retain their jobs, etc. However, in his or her role as a fiduciary, the president may not take these factors into consideration and must focus on the exclusive benefit of plan participants. This means comparing the value to be received for the company's stock to the most recent valuation, and deciding whether the price being offered represents enough of a premium to participants that it would replace the lost opportunity of their continued participation in an ESOP-owned company.

  3. Prudent Person Rule: A fiduciary must act with care, skill and diligence of a person well-educated in matters of the Employee Retirement Income Security Act (ERISA) and retirement plans.
  4. Scenario: As required under ERISA, the fiduciary must determine the value of the company's stock on an annual basis.

    ERISA outlines the responsibility of the fiduciary as it relates to a company's annual valuation of their stock, however recent court cases have provided additional clarify on the responsibilities of the fiduciary, including:

    • Reading the valuation report, fairness opinion and all other written documentation requested or provided by its ESOP appraiser;
    • Understanding this financial information; and
    • Identifying, questioning and testing the underlying financial data and assumptions presented by the appraiser.

    For practical purposes, this requirement often comes down to ongoing fiduciary education. Complying with the Prudent Person Rule can also result in a fiduciary recommending that an outside, professional fiduciary play a role in plan governance—whether as a trustee, or as a fiduciary resource for the internal trustee. Fortunately, carrying out this duty does not require that every decision be correct in hindsight. Rather, the process by which a fiduciary evaluates options and makes the decision demonstrates prudence. This includes the selection and monitoring of fiduciaries.

  5. Duty to Follow Plan Terms: A fiduciary must follow the written terms of the ESOP document and other governing documents to the extent they are consistent with ERISA.
  6. Scenario: The Plan Administrator must decide who can participate in the plan and how plan accounts are to be distributed.

    This rule requires the fiduciary to read and understand the provisions of the ESOP, specifically those that require the fiduciary to take action; and second, to evaluate the direction given by the plan sponsor as to whether or not it violates ERISA. It is a matter of fiduciary obligation for the Plan Administrator to consult the plan and follow its terms.

Get additional education on the rules!

Do not let the many responsibilities of ESOP fiduciaries overwhelm you. We believe the Principal Financial Group ESOP consulting team has the background and knowledge to make these concepts more "user-friendly." Let our team help educate your organization about this important role in plan governance.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group (The Principal®), Des Moines, IA 50392.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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