ESOP Fiduciary Duties
The employer company (or the plan sponsor) is responsible for funding the plan (the “ESOP”). The investment vehicle is the employer’s equity security. Therefore, the trust (the “ESOT”) can be viewed simply as a long-term 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 trustee has no actual control or responsibility over whether 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 its investment value.
The Prudent Investor Standard
ESOTs are designed to invest primarily in employer company stock. Therefore, the actual investment in employer stock, as opposed to a diversified portfolio of investments, will not be a violation of the duty of prudence. Nonetheless, the Department of Labor has stated that if it is clearly imprudent to invest in company stock, such an investment may be prohibited under the ERISA fiduciary standard.
For instance, if the ESOP trustee observes a deteriorating business condition with respect to the company that would jeopardize the investment or its growth potential, 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.
Naturally, the ESOP trustee may not feel compelled to act if the business condition is viewed as being temporary.
For a continued discussion on this topic, please read Parts IV and V.