Some ESOPs also provide supplementary materials, such as manuals or FAQs, to improve participant understanding. But, at a minimum, you can expect to receive the documents described above.
Your ESOP Documents: A Quick Guide for Participants
As a participant in an employee stock ownership plan (ESOP), you’re entitled to certain plan information. You have the right to view the full ESOP plan document and trust agreement. These are the legal foundation of the ESOP and the ultimate authority on what participants are entitled to. Just ask your plan administrator for copies.
In addition, under the Employee Retirement Income Security Act of 1974, your plan must provide key documents each year or when important changes occur. Here’s what to expect:
Documents you should receive automatically
Explains how your ESOP works, including your rights, how shares are allocated, how distributions are made, and what happens if you leave the company.
- When you receive the SPD: Within 90 days of becoming a plan participant, or within 120 days after a new ESOP starts.
- Why it matters: Keep this on hand as it’s your go-to reference for understanding how your ESOP works.
Shows the fair market value of your ESOP shares, your account balance, how much is vested, and how your balance has changed over the year.
- When you receive your statement: Annually.
- Why it matters: Helps you track your ownership and retirement savings.
Summarizes your plan’s annual financial filing (Form 5500) submitted to the U.S. Department of Labor. It includes details on plan assets, employer contributions, earnings, expenses, and distributions.
- When you receive the SAR: Annually, usually within nine months after the end of the plan year or two months after your plan submits its Form 5500.
- Why it matters: Helps you understand how your ESOP is performing and how your retirement benefit is managed.
Covers any changes to the plan or updates to the SPD.
- When you receive an SMM: Within 210 days after the plan year in which the changes occurred.
- Why it matters: Keeps you informed about significant changes to your plan.
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 here:
- Horizon Bank – Process Requirements
- Farmers National Bank – Process Requirements
- Alpha Investment Consulting Group, LLC – Process Requirements
- Lubbock National Bank - Fiduciary Engagements and Process Requirements
- James F. Joyner III - Fiduciary Engagements and Process Requirements
- First Bankers Trust Services, Inc. – Process Requirements
- GreatBanc Trust Company – Fiduciary Engagements and Process Requirements
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. 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.