ESOP Opportunities
Art by Hayden Maynard
A true employee stock ownership plan (ESOP) is one in which all eligible employees, from rank and file to managers and owners, have a piece of ownership in the company through the plan. An ESOP holds a little cash, but its only investment option is company stock.
Yet, with the frequent lawsuits against 401(k) plan sponsors over company stock, and with Department of Labor (DOL) litigation targeting some company stock purchase transactions, one might wonder whether sponsoring an ESOP is a good idea.
Mark Kossow, a member at law firm Clark Hill PLC whose practice focuses on ESOPs, says retirement plan company stock investment lawsuits are outlier cases. He points to empirical evidence that ESOP-owned companies are more profitable. “The benefit as a retirement plan will be valuable to employees and employers,” he says.
According to Joanne Swerdlin, executive vice president, Swerdlin & Co., an Ascensus company, there are more plan assets in ESOP accounts in this country than ever before, and the plans create wealth for more people every day. She says the fact that the DOL litigates certain abuses should reassure participants that there is a commitment to effective oversight and to eliminating bad actors from the industry.
Jerry Ripperger, vice president of consulting at Principal Financial Group, says retirement plan advisers do not provide many services to ESOPs, but they should. He adds that his firm encourages plan sponsors to offer an ESOP as a complement to their 401(k) plan. “Often, an ESOP is set up without plan sponsors understanding how to wrap it with their total retirement program,” he observes. “Advisers can come in with plan designs to help employees meet goals. They should be front and center driving the whole retirement plan strategy.”
According to Kossow, an ESOP transaction involves two attorneys—one for the plan sponsor and one for the ESOP. ESOPs also need an independent trustee—one who has control over assets and considers buys and sells—as well as an appraiser who works with the trustee to determine the fair market value of the stock. In addition, a third-party administrator (TPA) or recordkeeper determines benefit allocations to participants and beneficiaries after an ESOP transaction has been made. Plan advisers can help with selecting all of these parties.
Advisers may also provide employee communications to explain how the plan works, Kossow notes.
Besides cash in the ESOP that needs to be managed, these plans also have a repurchase obligation, Swerdlin says. They face the risk of having too little available cash to pay out if employees becomes disabled, die, retire or leave the company. This could be funded with corporate-owned life insurance (COLI), she says.