EBSA resource: A prudent process for ensuring that ESOPs get their money’s worth when they buy employer stock

EBSA oversees retirement benefit plans, including ESOPs, and issues guidance to businesses and service providers on the administration of these plans. ESOPs are employee pension benefit plans and, as such, are governed by the Employee Retirement Security Act of 1974 (ERISA), a federal retirement law. In cases where ESOPs have overpaid for employer stock, EBSA often requires the ESOP fiduciaries to enter into “process agreements” setting out a prudent process for future employer stock purchase transactions that comply with the law. Examples of these process agreements can be found at the following link, under the heading “ESOP Appraisal Process Agreements”: Enforcement | National Enforcement Projects.

These process agreements are an important source of guidance on how ESOP plan fiduciaries can make sound decisions on whether to buy employer stock and how much to pay. Workers’ retirement security, and often their livelihood, depend on the fiduciaries getting the price right. For that reason, ERISA prohibits plan fiduciaries from causing ESOPs to pay more than fair market value for employer stock. When done right, these employer stock transactions both give workers an ownership interest in the company and are a source of valuable retirement benefits for the workers. The process agreements give fiduciaries important guidance on how to get these transactions right in compliance with their duties of care and undivided loyalty to the ESOP’s participants and beneficiaries.

Although the linked agreements set out some best practices for complying with ERISA’s obligations in ESOP stock purchase transactions, it is important to remember that the Department entered into them in the context of specific cases involving specific issues and problems. Depending on the unique facts of their particular transactions, plan fiduciaries may need to take additional actions not included in these agreements.