While there are a number of benefits associated with ESOPs, they can present problems and complications. Understanding the fiduciary risks of an ESOP malfunction helps you avoid them. Learn more in our video.
There are two types of fiduciary required under ERISA—trustee and plan administrator. Fiduciary risks are categorized by those functions.
For the trustee, there is a risk that a transaction may be deemed imprudent or as a prohibited transaction because too much was paid for the stock or not enough was received when the stock was sold.
For a plan administrator, the fiduciary risks can include improperly administrating the plan, failing to properly pay benefits, or failing to direct the trustee if in fact the trustee is directed by the plan administrator.
The enforcement of ERISA is either from the Department of Labor or a civil participant. Both have the right to sue either or both of the fiduciaries for any form of fiduciary breach. The best protection against fiduciary risk is procedural prudence. The trustee takes the appropriate steps to determine that decisions are made in a prudent fashion for the exclusive benefit of plan participants.