The ESOP trustee fills the vital role of acting as the legal shareholder of the shares held in the ESOP trust. The trustee has fiduciary responsibility for the ESOP and, as such, bears many responsibilities during the initial ESOP transaction and afterward. These responsibilities make identifying, vetting, and selecting an ESOP trustee a key step in establishing an ESOP.
Below, we share the primary ESOP trustee responsibilities.
Retain an Impartial ESOP Appraiser
In their fiduciary role, ESOP trustees are responsible for the annual valuation of the ESOP shares or stock price. This requires the trustee to retain the services of an independent appraiser who will arrive at a value. The trustee must thoroughly vet the appraiser to ensure their independence and ability to do the work based on past ESOP experience. This is all a routine part of the trustee’s due diligence responsibilities.
Determine the ESOP Stock Price Annually
Establishing the annual ESOP stock price is one of the most visible roles of the trustee. This dollar amount determines how much each share is worth. That price affects how much employees who seek a distribution will receive year as well as how many shares the company can afford to buy back.
Determining this price requires a careful analysis of the business’ financial statements, close consultation with accountants, and working with the independent appraiser. All while ensuring the process adheres to ERISA, DOL, and IRS restrictions and requirements. The trustee doesn’t just hire an accountant and appraiser; they are active participants in the valuation process, verifying data, methods, and processes and ultimately bearing responsibility for the valuation amount arrived at.
Voting the ESOP Shares to Choose the Board of Directors
Voting for ESOP board members is governed by state law as well as the ESOP plan document and ESOP’s articles of incorporation and bylaws. However, as the legal shareholder, the trustee has responsibility for voting those shares. This includes voting for the board of directors. There are other situations in which the ESOP trustee must pass voting through to employees. Specifically in cases of liquidation, mergers, major asset sales, or recapitalization.
Manage ESOP Trust Assets
Company stock is held in the ESOP trust, for distribution in accordance with the plan document. Any stock or assets that sit in the trust are managed by the ESOP trustee. Managing these assets requires developing an investment policy that meets plan needs in terms of cash on hand and stock investments. Trustees must be careful to diversify the trust’s investments while still balancing the need to invest in qualifying employer securities to meet their fiduciary duty and protect the plan from lawsuits that allege imprudent activity.
Ensure Plan Documents are Followed
The ESOP plan document is the foundation of any ESOP. This document governs who can participate, when vesting occurs, how distributions work, when valuation will occur, and much more. The plan document is what the IRS, DOL, and ERISA will review when a company requests to form an ESOP. Neglecting to follow the approved plan document is a major risk for lawsuits and can result in the ESOP being cancelled.
Document Decision-Making Procedures in Detail
Maintaining accurate and thorough records is a must for the ESOP trustee. To best protect themselves and their ESOP client, fiduciaries should document the decision-making processes and results. If there is ever a question about why certain decisions were made, the trustee should have documentation to back it up. Best practices recommend keeping not only records of the final decision, but copies of all appraisal reports, memos, messages, and minutes to provide a clear record of the decision-making process.
Fulfill ERISA Fiduciary Obligations
Just as important as following the plan document is fulfilling ERISA obligations ethically and prudently. The Employee Retirement Income Security Act of 1974 (ERISA) sets minimum standards to protect plan participants. It is the duty of ESOP trustees to ensure these standards are met. Specifically, the fiduciary must:
- act solely in the interest of plan participants and beneficiaries while defraying reasonable plan expenses.
- act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
- diversify the investments of the plan, unless it is clearly prudent not to.
- act in accordance with the plan documents.
ESOP Trustee Services at Aegis Fiduciary
ESOP trustees are intimately involved in the governance of an ESOP company. They are tasked with maintaining impartiality, ensuring fairness, valuing the company, ensuring legal compliance, and managing the health of the ESOP finances all while looking out for the plan participants best interests. Given these responsibilities, we cannot overstate the need to choose a qualified ESOP trustee to act as fiduciary.
The trustee must be familiar with ESOP transactions and ongoing management. They must demonstrate good judgment, be able to work with independent appraisers, and be well-versed in the federal rules and regulations governing ESOPs. Aegis Fiduciary meets all of those criteria and more. We take ESOP trustee fiduciary responsibility very seriously. Our strict and thorough internal processes exceed the Department of Labor guidelines and our ESOP services are provided by a team with over 90 years of combined ESOP experience and who have completed over 400 ESOP transactions involving a wide range of industries.
Aegis Fiduciary offers ESOP Transaction Trustee or for Ongoing Trustee services. Contact us to learn more about our ESOP Trustee services.
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DISCLAIMER: The Articles displayed on this website do not constitute legal advice, nor do they substitute for the advice of qualified professionals. While the Articles displayed on this website are designed to provide information regarding the subject matter covered, we cannot guarantee the accuracy of any statements contained therein. If any legal advice or expert assistance is required, the services of qualified professionals should be sought.
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