ERISA Rules Every ESOP Fiduciary Needs to Know to Avoid Breach Claims

Employee Stock Ownership Plan (ESOP) fiduciaries are governed by ERISA rules just as administrators of other qualified retirement and benefit plans are. This includes any person who has discretion or control in the management of plan assets, provides advice to the plan for a fee, or has responsibility for the administration of the plan. In some cases, these fiduciaries do not act completely independently but rather at the direction of company officers. These individuals are all, however, plan fiduciaries with the responsibilities and duties this entails.

Common Problems

With a surge in ERISA litigation over the past decade, plan administrators are paying increased attention to the types of behaviors and common problems that lead to increased liability. ESOP fiduciaries are no exception and need to be aware of certain areas where problems can occur in order to avoid breach claims.

Fiduciaries are obligated to prioritize the best interest of the plan and plan participants, specifically their future financial interest in their retirement income. If a conflict of interest does arise, a fiduciary is expected to remove himself or herself from the situation until the conflict is resolved or appoint an independent advisor who can investigate the situation and recommend a solution.

A fiduciary is prohibited under ERISA from engaging in certain types of transactions that would violate this exclusive purpose rule.  While this may create issues for “directed trustees” who are subject to input from company directors and other outside parties, plan documents should be drafted such that these individuals have the option to seek independent outside counsel.

Similarly, a plan fiduciary is required to manage their responsibilities while taking into account the prudent man rule.  This requires individuals with discretionary authority over plan assets to act with the amount of care, skill, and diligence that a prudent man would exhibit when managing personal assets.  In this situation, it takes more to meet this fiduciary duty than simply seeking independent counsel.  A fiduciary must also complete an investigation based on the information and advice given and make an intelligent determination.

Self-dealing is another common way that a plan fiduciary implicates liability.  This occurs when an individual who is a plan fiduciary gets involved in a transaction where their interests are adverse to the interests of the plan.  An example of this is a plan fiduciary who makes a loan to the plan and is then paid interest.  The Department of Labor may find that in this situation that the interests of the plan are adverse to the interests of the plan fiduciary.

Avoiding these and other common problems is part of what the team of benefit attorneys at Hall Benefits Law helps our clients manage.  From ensuring that transactions involve adequate, but not excessive, consideration to determining who has a liability in the event of a breach are other ways our team can help.  We work with our clients to ensure that all plan documents and contracts are clear on liability and party responsibilities. We also review processes and procedures with ESOPs to ensure that issues will likely be identified. To learn more or to get help making changes to your plans today, call 678-439-6236 today or visit the Hall Benefits Law website.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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