ERISA Insider Vol II., Ed. III: Why You Should Hire An Independent Fiduciary To Ensure Your ESOP Is ERISA Compliant During A Merger or Acquisition

An independent fiduciary brings a special perspective to the valuation and transition process of an ESOP from a seller to a buyer.

Dear Employer,

Mergers & Acquisitions are some of the most complex business transactions you can enter into. If buying or selling your Employee Stock Ownership Plan (ESOP) is part of that transaction, it adds another layer of difficulty to the process.

One way you can mitigate the challenges you will face as you make the transition is to hire an independent fiduciary to help keep you in compliance with ERISA – and take on fiduciary liability during the transaction.

The Employee Retirement Income Security Act of 1974 (ERISA) has a strict set of rules for carrying out a merger or acquisition of a company health or retirement plan to best protect its participants and beneficiaries.

In this newsletter, we’re going to tackle the primary ways an independent fiduciary can help you stay in compliance with ERISA.

With all of the work that’s being done to make sure your merger or acquisition is a success, it’s easy to overlook these simple yet crucial measures to make the transition run smoothly.

While we can’t cover every step here, we will highlight 3 key actions an independent fiduciary will take to protect participants & beneficiaries, and keep your trustees out of trouble with the Department of Labor.

An Independent Fiduciary Can Help To Ensure A Non-Biased Valuation Of The ESOP To The Buyer

Perhaps the most crucial step when buying or selling an ESOP is determining the fair market value of the company and its plan.

This creates a challenge right out of the gate because the seller’s goal in a merger or acquisition is to derive the highest value for any assets being exchanged in the transaction.

Therefore, it is difficult for a seller to engage in the valuation process in an unbiased way. The Department of Labor is aware of this, and keeps a close eye on these types of transactions as a result. This is where an independent fiduciary can step in. 

The big benefit of engaging an independent fiduciary to partake in the valuation process is that he or she brings an unbiased perspective into the transaction.

An independent fiduciary who has worked with ESOPs before understands the valuation process, and will operate at arms length to ensure the interests of plan participants and beneficiaries are placed above the interests of the seller. 

That independent voice signals to the DOL that you are taking the necessary steps to reduce the risk of producing an unfair valuation that would deliver an offer that benefits the owners and is not fair to the ESOP. 

By removing the influence of the owners in the selling party, and majority shareholders, the independent fiduciary creates a fair environment for the transaction.

When Hiring An Independent Fiduciary, Make Sure He or She Will Act As A Trustee And Assume Fiduciary Liability Under ERISA

While removing the seller and any majority shareholders from the valuation process is a powerful first step, it is not enough to ensure compliance.

When hiring an independent fiduciary, it is best to go with someone who is confident in their skills and has the necessary expertise to assume personal liability for the transaction.

By acting as the Trustee under ERISA, the independent fiduciary is fully committed to ensuring the valuation process and the transaction as a whole is carried out fairly. 

If problems arise and your ESOP falls out of compliance, the burden falls back on the independent fiduciary.

Therefore, when interviewing potential ERISA fiduciaries to take on this position, it is critical to ask these two questions:

  1. Do you have experience taking part in the valuation of an ESOP during a merger or acquisition?
  2. Are you willing to act as the Trustee and assume personal liability for this transaction?

The answers to these questions will determine whether an independent fiduciary is qualified to step in and be that independent voice to oversee your transaction.

Preferably, you want to hire someone who answers YES to both of these questions, and fully understands the liability attached to the position.

By Acting As The Trustee, An Independent Fiduciary Will Work With Stock Valuation Firms To Carry Out The Process

Once an independent fiduciary is appointed Trustee for your ESOP, he or she will engage and work with stock valuators to determine the fair market value of the plan.

During this process, he or she will take the following action steps:

  • Engage the Valuation Firm to provide stock valuators with all of the information they need to determine the fair market value of the ESOP
  • Sit in on interviews the stock valuator holds with the CEO, CFO, Controller and other key management to better understand the structure, goals and current status of the ESOP
  • Review transactions and plan documents to check for potential problems that could violate ERISA compliance standards
  • Take any necessary corrective actions to bring the ESOP into compliance so the buyer does not inherit problems that would later need to be addressed
  • Answer a potential inquiry from the DOL or work with investigators should the plan later be subject to an EBSA audit
  • Oversee the transition process from seller to buyer to ensure the process is carried out fairly and in compliance with ERISA

Speak To An Independent Fiduciary At The ERISA Advisory Group To Get Help With Your ESOP

At the ERISA Advisory Group, we have been helping companies keep their plans in compliance since 1995. Our founder and president, William Kropkof, CEBS, formerly worked as an investigator for the US Department of Labor and has over 30 years of experience working with ERISA Health & Welfare and Qualified Retirement Plans.

If you’re seeking an expert who can act as the Trustee for your ESOP during a merger or acquisition, please schedule a free consultation with him to see if we can help.

Mr. Kropkof will answer any questions you have, and will offer insight into the next logical steps you can take to ensure a successful transaction.

Click Here To Schedule A Free Consultation With The ERISA Advisory Group Today