The responsibilities and duties of trustees for qualified employee benefit plans (ESOPs, profit-sharing plans, 401(K)s, etc…), which invest in employer securities are becoming increasingly important. In light of current trends toward more complex ESOP matters, (i.e. mergers and acquisitions of ESOP companies, plan terminations and amendments, maturing plans and the resulting repurchase obligation, and increasing shareholder litigation), trustees need to clearly understand their responsibilities and liabilities. Recognition of this fact is leading to the use of a variety of financial advisors, including Trustees, who are independent to the plan, and have the expertise and knowledge base required to engage in complex transactions.

Fiduciary responsibilities with respect to the purchase and allocation of employer securities as well as the proper maintenance and administration of the plan are set forth in the Employee Retirement Income Security Act of 1974 (“ERISA”). Actions of Trustees of Employee Stock Ownership Plans are also subject to review by the Department of Labor (“the DOL”); therefore, these duties should also be considered in light of the Proposed Regulations Relating to the Definition of Adequate Consideration (Federal Register 29 CFR Part 2510, May 17, 1988) when stock transactions occur. While these regulations are still outstanding in their proposed form, most ESOP trustees, counsel and valuation practitioners still look to these regulations for guidance in determining the value of employer securities.

To summarize, actions with respect to a plan by its Trustee(s) under ERISA, must be discharged solely in the interest of the participant and beneficiaries: 1) for the purpose of providing benefits to participants and their beneficiaries; 2) with the care, skill, prudence and diligence under the circumstances that a prudent person acting in the same capacity with such matters would use under similar circumstances; and, 3) in accordance with the document governing the plan insofar as the documents are consistent with ERISA. In addition, the Trustee must avoid either direct or indirect transactions between the Trustee and another party in interest to the plan.

The DOL recognizes that ERISA regulations are broad, and allows the fiduciary some degree of latitude as long as transactions are conducted in good faith. A fiduciary is generally considered to have acted in good faith if the valuation of employer securities is arrived at subject to a thorough examination of all the relevant factors to the transaction, or if the fiduciary relies on a valuation of the employer security by an appraiser independent of all the parties to the transaction.

In other words, the scope of the Trustee’s responsibility would require that a plan fiduciary either be an expert in stock appraisals, or exercise sound judgment in the selection and assessment of the qualifications of an independent appraiser. Since it is neither practical, nor likely, that most plan Trustees will be thoroughly familiar with business appraisal, the key element of the valuation process from the Trustee’s standpoint is to be confident the appraisal firm selected to perform the valuation is well qualified and independent. Qualifications can be based upon a variety of factors including independence, academic and professional credentials, involvement in professional organizations, and related ESOP appraisal experience (See “Questions to Ask Your Appraiser in the Fall, 1998 issue of

Section 409(a) of ERISA stipulates that a fiduciary who has breached fiduciary obligations be personally liable to make good plan losses which result from the breach, restore plan profits which have been made through the use of assets of the plan by the fiduciary, and be subject to any remedial relief the court deems appropriate. Case studies indicate that the liability for breach of fiduciary duty has usually been limited to restitution (although in egregious cases penalties have been more severe), and provided the courts can determine the Trustee acted in good faith, the Trustee is not obligated to guarantee the outcome of its decisions. The potential for greater monetary penalties may increase the risk factors for all involved. The selection of a qualified appraiser whose appraisal can withstand rigorous scrutiny will assist in minimizing the potential penalties and personal liabilities of plan Trustees.

Mercer Capital is one of the largest ESOP appraisers and one of the largest independent valuation firms in the nation. We have worked with clients in over five hundred industry categories and provided independent valuation services for many personal and corporate purposes, including employee benefit plans. Give us a call if you have any questions or if we can help you in any way.

Reprinted from Mercer Capital’s  – Vol. 9, No. 1, 2000.