The ESOP as the Majority Stockholder – Part III

Colin M. Henderson ­ Spring 2003

ESOP Fiduciary Duties

The employer company (or the plan sponsor) is responsible for funding the plan. The investment vehicle is the employer’s equity security. Therefore, the ESOP can be viewed simply as an investor, with a controlling ownership interest in the employer corporation. The trustee’s energies, therefore, should be focused on:

  • protecting the ESOP’s investment and
  • seeing the investment increases in value over time.

Of course, the trustee is not directly responsible for the increase of the employer stock investment. The ESOP fiduciary has no control or responsibility over whether or not the investment increases in value. That responsibility rests with the success of the business and with its management. As with any business enterprise, there are numerous risks (both internal and external) that are beyond the investor’s influence. Hence, the ESOP trustee is not a guarantor of the success of the subject business or of its investment value.

The Prudent Investors Standard

ESOPs are designed to invest primarily in employer corporation securities. Therefore, the actual investment in employer securities, as opposed to other investments, will not be a violation of the duty of prudence.

Nonetheless, the Department of Labor has taken the position that if it is clearly imprudent to invest in employer securities, such an investment may be prohibited under the ERISA fiduciary requirements.

For instance, if the ESOP trustee observes a deteriorating business condition with respect to the company that would jeopardize the investment or its growth potenttial, the fiduciary has an obligation to investigate the circumstance under the prudent man standard discussed above. If the investigation results in a determination that it is “clearly imprudent” to invest in the employer securities, then such an investment may be prohibited under ERISA’s fiduciary duty requirements.4

Naturally, the ESOP trustee may not feel compelled to take action if the business condition is viewed as being temporary or cyclical in nature.

Part II   |  Part IV