For What Purpose and when is an Independent ESOP Trustee or Fiduciary Needed?

When a company executive or significant shareholder, who is also a current trustee or fiduciary of a retirement plan, is considering a capital change that affects the shares of stock in the ESOP or other qualified plan then an independent fiduciary is a critical consideration. Common examples of such capital changes are purchases or sale of company stock from or to a plan.

The independent trustee, fiduciary can protect the current ESOP fiduciary by taking on the role of the decision maker. This entry of an independent trustee or fiduciary provides a safe harbor to the executive from violations of the federal law standard business judgment rule, conflicts of interest, prohibited transactions and/or charges of uninformed decision-making.

Then, after the review and decision is made by the independent fiduciary, the executive can resume their role as trustee or fiduciary. This gives necessary protection to current plan fiduciaries who are also company executives without requiring the intervention and long term added expense of a permanent trustee/fiduciary replacement.

For What Types of Transactions is an Independent Trustee or Fiduciary Called In?

Fiduciary Services, Inc. acts as an independent trustee, fiduciary for employee benefit plans that hold stock of the plan sponsor. In this role we are often called on to review and give an opinion on the fairness of the purchase price of company stock at the time of Plan Formation or the price upon a sale of stock in the event of Plan Termination. Other types of events occurring at the company that may require these review and decision making services are:

  • Mergers and Acquisitions
  • Restructuring of capital and/or debt of the company
  • Spin-offs
  • Recapitalization
  • Pass-through voting
  • Tender offers
  • Leveraged, un-leveraged and multi-investor ESOP buy-outs
  • Hybrid securities

What Role and Responsibilities Does the Independent Trustee or Fiduciary Perform?

In all these situations Fiduciary Services, as the independent trustee fiduciary, makes decisions for the purpose of protecting the interests of the plan participants and beneficiaries. This is particularly important and needed where inherent conflicts of interest exist between management and plan participants. The roles and responsibilities of the independent fiduciary are spelled out below:
  • Determine the fair market value of the company.s shares
  • Evaluate the transaction from a financial point of view
  • Advise the fiduciary during negotiations and structuring of the transaction
  • Render the necessary opinions of fair market value and fairness from a financial point of view and provide suitable documentation for such opinions

Documentation of the opinions is important. The relevant factors in reaching the conclusion of adequate value and fairness must be carefully spelled out and given support.

What is the Legal Basis of the Need for an Independent Trustee or Fiduciary?

Under federal law called ERISA plan fiduciaries must make important decisions regarding the plan assets in a prudent manner and solely in the interest of and for the exclusive benefit of the plan participants and their beneficiaries. If the transaction is between an ESOP and a party in interest, the ESOP must receive adequate consideration for its stock in order to avoid a prohibited transaction. A transaction between an ESOP and either a plan sponsor or a party in interest (such as an employer, officer, director or a shareholder owning more than 10of the company.s stock) is a prohibited transaction.

The transaction may not go through in the case of a prohibited transaction without the threat of reversal and payment of penalties to the federal government unless the transaction meets a statutory exemption. To qualify for an exemption the ESOP may receive no less than adequate consideration for the securities it buys or sells. The Department of Labor.s proposed regulation 2510.318(b) defines the term adequate consideration as the fair market value of the asset or security as determined in good faith by the trustee or named fiduciary.

What Qualities Should be Sought When Selecting an Independent Trustee or Fiduciary?

Thus the fiduciary should have the appropriate qualifications for this role. Some factors to consider are:

  • Familiarity with the type of transaction
  • Business valuation experience
  • Knowledge of ERISA and other pertinent regulations
  • Adequate resources to take on and finish the engagement
  • Reputation for fairness, integrity and independence


Fiduciary Services uses a fiduciary committee to make all fiduciary decisions related to the ESOP. The committee is composed of experienced attorneys, a certified public accountant, and an accredited valuation advisor. One of the most important decisions the trustee makes is valuing the stock it purchases for ESOP participants, and the committee works with an independent financial advisor to determine the appropriate price. This ensures that participants do not pay more than fair market value for the stock. The committee members with valuation and financial expertise work closely with the financial advisor and the legal team to review all relevant information and assess its impact on stock value. The committee also considers other important factors, such as loan terms, compensation for selling shareholders, board composition, synthetic equity, and other relevant issues.


ESOP transactions usually take about two to four months. Fiduciary Services will request a detailed list of legal and financial documents necessary for its due diligence. After reviewing these documents, Fiduciary Services and its independent financial advisor will meet with the company’s senior management to gather more information on the company’s operations, financial history, and future expectations. Once Fiduciary Services is confident in their understanding, negotiations between the selling shareholders, the company, and Fiduciary Services as trustee will begin to establish the terms of the transaction. These terms will then be documented in transactional documents.


Fiduciary Services’ fiduciary committee convenes on a regular basis to review any issues that may arise during the negotiation of transaction documents and to assess the status of the stock valuation. This experienced committee works closely with Fiduciary Services’ independent financial advisor to evaluate various methodologies and factors that may affect the stock’s fair market value throughout the transaction process.