In part one of our two-part series on the roles and responsibilities of an ESOP Plan Trustee, we will discuss the overall responsibilities of the Plan Trustee including engaging an independent ESOP appraiser.
An ESOP Plan Trustee is required by Title 29 of U.S. Code Section 1104(a) to comply with fiduciary duties and prudent man standard of care.
An ESOP Plan Trustee must do the following:
- Act solely in the interest of the plan’s participants and beneficiaries while defraying reasonable plan expenses.
- Act with the care, skill, prudence, and diligence under the circumstances that a prudent man acting in a similar capacity would.
- Diversify the investments of the ESOP plan.
- Act in accordance with the ESOP plan documents.
An ESOP Plan Trustee also needs to engage an independent ESOP appraiser. IRS Section 401(a)(28)(c) requires an independent appraiser to complete a valuation. The Trustee is responsible for determining the value of the company’s stock on an annual basis. The ESOP Trustee should complete the following steps before determining the value of the company stock:
- Read the valuation report and make an effort to understand it.
- Verify the company information in the report is accurate and that the assumptions made by the appraiser make sense.
- Review the report with the appraiser and verify that the methods used by the appraiser seem appropriate.
- Understand how the ESOP repurchase obligation is factored into the valuation.
The selection of an independent ESOP appraiser is an important decision and the selection process should be documented by the Trustee. The independent ESOP appraiser must be independent of the company in fact and appearance and have relevant and significant ESOP experience. The ESOP Trustee should perform due diligence and revisit this decision on a regular basis.
Click here for part two of our series on the roles and responsibilities associated with an ESOP Plan Trustee.