Once the sponsoring-employer’s stock shares are in the ESOP Trust, then what? Who handles:
-Custody
-Valuation
-Trust administration / reconciliation
-Governance
-Long-term Trust sustainability (including repurchase obligations)
The ESOP Trustee does.
Who serves as the Trustee then? Whomever the Board of Directors appoints.
Who should the Board appoint? Someone internally? Or someone external to the company? There are pros/cons either way. An internal Trustee will be more familiar with the nuances of the company, but less familiar with ESOP regulation and administration. An external Trustee, though not as familiar with the inner workings of the company, specializes in ESOP administration and may be better suited to handle the ESOP Trust.
The ESOP Plan Administrator (usually the Board, or an appointee thereof), still has a heavy hand in the ESOP, but using an external Trustee may mitigate some of the Board’s liability and risk exposure compared to an internal Trustee who may not have as much ESOP-related experience.
Many years ago, most ESOPs – about 70% – had internal Trustees. Nowadays, that ratio is flipped: about 70% have external, professional Trustees. The risk is high and the consequences are heavy for non-compliance.
If a company were to add up the costs of education, experience, training, research, and lost productivity of having someone internal serve as Trustee (let alone the risk exposure and liability), the company may more than offset any professional fees paid to an independent, external Trustee.