02/07/2023
The Role of the ESOP Trustee. What an ESOP Trustee Does.
As a qualified retirement plan, employee stock ownership plans (ESOPs) are required by law to have an ESOP trustee. Selecting an ESOP trustee is a critically important part of establishing and maintaining an ESOP and should be undertaken with care.
WHAT IS AN ESOP TRUSTEE?
An ESOP trustee is an objective third-party who has fiduciary responsibilities for the ESOP. As fiduciary, the trustee has legal ownership of the company stock and must always make decisions and act in ways that are in the best interests of the plan participants and beneficiaries. The ultimate role of the trustee is to protect participants while improving the ESOP.
There are two different types of ESOP trustees. Specifically, ESOP transaction trustees and ongoing trustees.
Transaction trustees are appointed when an ESOP is being formed, is sold, or is terminated. Their role is to manage the transaction on behalf of the ESOP company’s employees, ensuring share prices are fair market value and the deal is structured appropriately for participants.
Ongoing trustees manage the routine, annual work of the ESOP such as monitoring performance, valuing stock and overseeing stock allocations to participants, and reviewing financial statements. A transaction trustee can become an ongoing trustee.
THE ROLE OF AN ESOP TRUSTEE
ESOP trustees are tasked with performing due diligence to ensure all legal rules and requirements surrounding the formation and management of the ESOP are followed. This includes reporting and filing records with the Department of Labor (DOL) and the Internal Revenue Service (IRS). The ESOP trustee is liable for over- or under-valued share price claims. If claims are filed against the ESOP, the trustee is responsible for handling them in coordination with the company.
By ensuring compliance with all of the relevant rules and regulations governing ESOPs, the trustee acts as a safeguard against lawsuits and is an advocate for plan participants.
Three specific tasks assigned to the trustee are:
ENSURE AN INDEPENDENT ESOP APPRAISAL
ESOPs must undergo an independent appraisal to determine share pricing every year. The trustee is responsible for hiring an independent appraiser to arrive at a fair market value share price on the last day of the plan year. The primary goal of this annual activity is to ensure shares are priced at current fair market value so that plan participants receive fair value in their accounts.
SET AN ANNUAL ESOP STOCK PRICE
The trustee reviews the results of the independent appraisal for accuracy and to ascertain the effect of the value on the plan performance. Based on the results of the appraisal, the ESOP trustee will set the annual ESOP share or stock price. This price is used to allocate new shares to participants and to prepare current participant statements.
MANAGE ESOP ASSETS
Upon formation of the ESOP, an ESOP trust is created. This trust is managed by the ESOP trustee who is the legal shareholder of the shares in the plan. Throughout the year, the trustee meets with company management to monitor operations and financial performance. They will ensure all DOL and Employee Retirement Income Security Act (ERISA) requirements are being met and that plan participants know the value of their shares and account balances. Importantly, the trustee oversees the annual distribution of shares as well as the buyback of shares from participants who retire from the company.
WHO CAN BE AN ESOP TRUSTEE?
ESOP trustee selection is conducted by the board of directors after a thorough vetting process. ESOP trustees can be company employees or even the selling owner or be completely independent of the company. Some companies fear losing control of the company by placing so much responsibility in the hands of an independent trustee and opt to give the responsibility to a trusted insider. Others understand the risks and liability of being in charge of the ESOP or are unable to manage the ESOP in-house and prefer to have a completely independent party oversee it.
Internal trustees may experience conflicts of interest as an ESOP trustee because they are usually also part of the upper management team, may have incentive plans that are tied to share prices, and may even serve on the company’s board of directors. For these reasons, it is recommended that trustees be independent of the company even though it is not a legal requirement.
Regardless of whether they are independent or not, the duties of the trustee remain the same: to always act solely in the best interests of plan participants. All trustees also must sign process agreements which set guidelines, responsibilities, and procedures that the ESOP trustee must follow.
SHOULD AN ESOP TRUSTEE BE ON THE BOARD OF DIRECTORS?
Trustees monitor the company’s board of directors and attend board meetings in order to fulfill their duties, but this does not mean they should be part of the board. In fact, it is better if they do not sit on the board in order to maintain their independence. Remaining independent of the board reduces the potential for the many different conflicts of interest that could arise between managing the company and managing the ESOP. The typical role of the ESOP trustee is to act in a consultative and oversight capacity, ensuring the board is always acting in the employees’ best interests. Most ESOP plan documents allow the board to recommend the removal and replacement of an ESOP trustee and also give trustees the same ability to remove and replace board members.
AEGIS FIDUCIARY’S ESOP TRUSTEE SERVICES
The ESOP trustee is a vital part of any successful ESOP. Managing ESOP transactions and maintaining an ESOP takes a team of experienced professionals like those at Aegis Fiduciary. Our trustee services include ESOP Transaction Trustee and Ongoing ESOP Trustee. We also offer ESOP consultations to help businesses learn more about the process and requirements governing ESOPs.
Contact us to receive more information about ESOPs and to learn how we can help you navigate the process.
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Get in touch with us to see how we can help your company transition to an ESOP or provide ongoing trustee services.
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