The Growing Responsibilities of ESOP Trustees · The Growing Responsibilities of ESOP Trustees Ben...

The Growing Responsibilities of ESOP Trustees

Ben F. WellsDinsmore & Shohl, LLP

1900 Chemed Center

255 East Fifth St.

Cincinnati, OH 45202

513.977.8108

[email protected]

© 2007 Dinsmore & Shohl LLP

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Which Laws GovernRetirement Plans?

�Employee Retirement Income Security Act (ERISA)

� Internal Revenue Code


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Which Government Agencies Enforce the Laws?

�U.S. Department of Labor – Employee Benefits Security Administration (EBSA – formerly Pension and Welfare Benefits Administration)

� Internal Revenue Service – TE/GE Division


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Who is a fiduciary?

�ERISA Section 3(21) – Any person who:

– Has discretionary authority or control over management of the plan or plan assets;

– Provides investment advice for a fee; or

– Has discretionary control or responsibility over plan assets.


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Who is a fiduciary?

�Formal title is irrelevant

�Depends on actual control/responsibility

�“If it walks like a duck and talks like a duck” analogy


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�Trustees

�Administrative Committee members

�Employees who have decision making authority over plan

�Potentially:

– Board of Directors

– Company officers


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What activities make one a

fiduciary?

�Decisions about plan administration

�Acquiring or disposing of plan assets

�Selecting or monitoring plan investments

� Interpreting plan terms

�Appointing other fiduciaries


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What are typical ESOP fiduciary

activities?

�Buying or selling shares

�Hiring a valuation firm

�Determining share value

�Voting shares


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What does it mean to be a fiduciary?

�A fiduciary must comply with the fiduciary provisions of ERISA:

– Prudent person rule

– Exclusive purpose rule

– Plan Document Rule

– Prohibited transaction rules (similar, but

not identical, provisions in the Code)


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What is a “prudent person”?

�ERISA Prudence requirements

– Prudent person rule

� Fiduciary must 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”

� “[ERISA’s] test of prudence…is one of conduct and not a test of the result of performance of the investment. The focus of the inquiry is how the fiduciary acted in his selectionof the investment and not whether his investments succeeded or failed.” Donovan v. Cunningham, 716 F. 2d 1455, 1457 (5th Cir. 1983).


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What is the “exclusive purpose rule”?

�Exclusive purpose rule

– Fiduciary must discharge his duties for the

exclusive purpose of providing benefits to

participants and their beneficiaries

– A fiduciary must act “with an eye single to

the interests of the participants and

beneficiaries.”


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What is the “plan document rule”?

� Plan document rule

– A fiduciary must follow the plan documents to the extent that they are consistent with ERISA

– The overall rule of prudence prevails in that if it is

imprudent to follow the plan documents, then the fiduciaries need not follow the plan document.


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How can a fiduciary comply with all of these rules?

�The keys are prudent management, ongoing monitoring and documentation.

�Process is crucial


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What is a “settlor” function?

– Generally relates to formation rather than

administration or management of a Plan.

– Generally settlor functions are not subject

to ERISA’s fiduciary rules.

– Example: Establishment or termination of

a Plan is a settlor function.

– Appointment of trustee, even by the settlor,

is a fiduciary function.


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functions?

� “ministerial” acts

– Calculating service

– Preparing employee communications

– Preparing governmental reports

– Processing payments

� Actions of advisors

– Valuation report

– Audit

– Preparation of participant statements


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ERISA Prohibited Transactions

� ERISA (and the Code) provide that certain transactions between a Plan and certain related parties (ERISA – “party in interest”; Code – “disqualified person”) are specifically prohibited unless an exemption has been granted

� Party in interest – generally any Plan fiduciary, service provider, sponsoring employer, certain shareholders, relatives of the above, and certain related entities.


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ERISA Prohibited Transactions

� Sale, Exchange or lease between Plan and PII

� Lending money or extension of credit between Plan and PII

� Furnishing goods, services and facilities between Plan and PII

� Direct or indirect transfer to or use by or for the benefit of a PII of any Plan assets

� Acquisition on behalf of a Plan of employer securities or employer real property

� Self dealing


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ERISA’s Prohibited Transaction Exemptions

�Granted by DOL

�Types:

– Statutory

– Class Exemptions

– Individual Exemptions


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ERISA’s Prohibited Transaction Exemptions

�ERISA Section 408 Statutory Exemptions

– Loans to ESOPs

– ESOP share purchases

– Receipt of benefits from Plan


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ERISA’s Prohibited Transaction Exceptions

�Key Section: 408(e) – Exempts acquisition or sale of employer stock by an ESOP (and some profit sharing plans) if:

– Transaction is for “adequate consideration”, and

– No commission is charged on the sale.


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What is Adequate Consideration?

� Section 3(18) of ERISA contains the definition

� The “fair market value” of the shares

– As determined in good faith by the trustee or other fiduciary

– Pursuant to the terms of the plan

– In accordance with DOL regulations


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Key Concepts

�Procedural prudence

– Key is the process not the results

– Independent counsel

– Independent financial advisor

– Independent trustee


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Conflicts of Interest

� ERISA does not prohibit conflicts of interest, BUT–--

� Even the appearance of a conflict may lead to costly litigation

� Consider independent trustee

� Hire professionals to advise fiduciaries

� Remember that PROCESS is the key to any fiduciary action taken with regard to an employee benefit plan

� Document, Document, Document

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