Ongoing Duties of an ESOP Trustee

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Wed, Oct 24, 2012
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The ESOP Trustee is an integral part of the ESOP Corporate Governance process.  An ESOP Trustee serves as the legal shareholder of the shares held by the ESOP trust and has many responsibilities.  Here are some of the more important ones:

Voting ESOP Shares to Select the Board of Directors

As the legal shareholder, the ESOP is responsible for voting the ESOP shares in most cases, including selecting the Board of Directors.  The plan document specifies the voting rules for each individual plan.  The ESOP Trustee is legally required to pass-thru voting to the employees for certain major corporate issues (e.g. liquidation, sale of all or substantially all the assets, recapitalization, merger).

Managing Assets of the ESOP Trust

The ESOP assets, which primarily consist of the stock of the company, are required to be held in a trust and managed by the ESOP Trustee. The ESOP Trustee is the individual with authority and discretion over the plan assets.  This includes developing an investment policy of both cash and stock investments.

Establishing the Annual ESOP Stock Price

One of the most important fiduciary responsibilities of an ESOP Trustee is to establish the annual ESOP stock price.  This starts by making sure the ESOP Appraiser is Independent, both in fact and appearance, and that they have relevant and significant ESOP experience.

An ESOP fiduciary should be sure to complete at a minimum the following steps in determining the value of the company stock:

  1. Read the valuation report and make an effort to understand it.  Does the report provide a clear basis for its conclusion.

  2. Verify the company information in the report is accurate and that the assumptions made by the appraiser are reasonable.

  3. Review the report with the appraiser and verify that the valuation methods employed by the appraiser are appropriate.

Following Plan Documents

A fiduciary is required by ERISA to act in accordance with the plan documents.  This means that the ESOP Trustee must fully understand the plan and trust documents.

Satisfying ERISA Fiduciary Responsibilities

The ESOP Trustee is an ERISA fiduciary that has primary duties defined in ERISA.  

An ERISA fiduciary must act solely in the interest of the plan's participants and beneficiaries while defraying reasonable plan expenses.

An ERISA fiduciary must act with the care, skill, prudence, and diligence under the circumstances that a prudent man acting in a similar capacity.

An ERISA fiduciary must diversify the investments of the plan unless it is clearly prudent not to, knowing that by definition an ESOP is "designed to invest primarily in qualifying employer securities" and that Courts Almost Always Give Presumption of Prudence For Company Stock in ESOPs

An ERISA fiduciary must act in accordance with the plan documents.

Documenting the Process

The process of making a fiduciary decision is just as important as the result of the process.  The decision-making process should be clearly defined and executed as planned.

It is important  to take and keep thorough notes.  Maintaining minutes and internal memos are recommended practices.  Many ESOP Trustees will keep a marked up copy of the appraisal report on file to document their review process.


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Topics: Employee Stock Ownership Plan (ESOP)

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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