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Who's Who Governing ESOPs and ESOP Companies

Anthony Mathews

March 2000

Often, people are confused about the exact roles and responsibilities of the numerous parties involved in the operation of a plan covered by ERISA (the Employee Retirement Income and Security Act of 1974) and the broader responsibility for the operation of an ESOP company. The following essay is intended to clarify some of the commonly used names for the various parties involved and give a brief discussion of the relevant roles and responsibilities.

To Begin With the Plan . . .

Parties legally responsible for the operation and safety of a retirement plan are called fiduciaries. A fiduciary is to a trust fund rather like what a parent is to a family. It is the fiduciary's responsibility to act prudently for the exclusive benefit of the plan and participants and to act in such a way (consistent with the nature of the plan) as to protect the assets and minimize the risk of loss. The major liability-related consideration for fiduciaries emerges from the fact that ERISA fiduciaries can be personally liable for their actions. That is, a fiduciary breach can be required to be remedied by the fiduciary from personal funds.

Beyond that, in every trust funded retirement plan there are two major operational functions: (1) plan administration and (2) maintenance of the assets. The people who perform these functions may be fiduciaries, and, where they are, they have significant legal liability.

In turn, plan administration comprises two facets:

Recordkeeping is a major element of administration and includes the processes of data collection, establishing eligibility, performing allocations, tracking account balances, performing relevant tests, producing statements for participants, preparing tax forms, etc. The responsibility here is generally to be accurate and to follow the law and plan documents. In general, this is the role of your third party administrator.
Interpretation and operation of the plan is the second major element of administration. This refers to the process of interpreting the plan documents with respect to benefits, determining individual benefit claims, directing trust investments, directing distributions, etc.

Maintenance of the trust assets includes both a custodian and an investment manager:

The custodian is the entity actually holding the physical assets of the plan.
The investment manager is the entity making investment decisions with respect to the assets.

In both spheres, the second functions (interpreter of the plan and manager of investments) are clearly fiduciaries while the first functions (recordkeeper and custodian) may or may not be fiduciaries depending on the degree to which they exercise control over the plan or the assets.

On top of all this, Section 404 of ERISA specifies numerous duties of fiduciaries, which duties are generally reducible to the requirement to act prudently and for the exclusive benefit of the plan and participants. ERISA also creates the position of "Plan Administrator" for the person or entity primarily responsible for reporting on and operating the plan.

From the Point of View of the Company

From the ESOP's perspective, the Plan Administrator (with initial capitals) is a legal position occupied by the person or entity designated by the board of directors (usually as defined in the plan document) as the primary party responsible for the reporting of benefits to IRS and participants. Where the Plan Administrator is the company itself (which is typical), it is usually also the primary named fiduciary (i.e. the party primarily responsible for the plan). The term is also used (with lowercase initial letters) to denote the persons doing any of the several administration functions. Often, for example, my firm is referred to as "a plan administrator." We are not, however, "the Plan Administrator" except with respect to our own retirement plan.

The trustee is usually also a named fiduciary and may be either a "directed" or an "independent" trustee depending on the degree of control over the assets. A Directed Trustee who is simply a custodian taking direction from someone else is very different from an Independent Trustee who makes independent decisions with respect to investment and management of the funds. Most ESOPs use a directed trustee who acts at the direction of the company.

Ultimately, though, within the boundaries set by law and regulations, the company's board of directors (on behalf of the shareholders) has absolute authority over all retirement plan decisions because these are actions of the company. This authority is generally exercised by approval of the legal documents (and amendments), which represent the operating provisions of the plan and which must be followed by all parties unless the documents would require a violation of the law.

The board of directors' authority also is exercised through appointment of all other parties performing services or functions for the plan. Like many other rights and authorities, this absolute authority includes the right to delegate it. The delegation of rights and responsibilities by the board is what gives rise to the notion of an ESOP Committee.

Again, as a term of art, the ESOP Committee (or Administrative Committee, or simply Committee) is usually a body to which some or all the administrative functions have been delegated by the board of directors. The Committee usually has some discretion with respect to plan operation, and, therefore, is generally a fiduciary with respect to certain aspects of the plan, but the Board of Directors usually retains the right to make and amend policy to itself.

In general, the company (through the board of directors) remains the Plan Administrator and the named fiduciary represented by the ESOP committee.

For Involved Individuals, the Bottom Line Usually Is:

If you are a director, substantial shareholder, and/or corporate officer, you are almost certainly a fiduciary to any plans the company sponsors.
Other shareholders and employees may be fiduciaries if they exercise any discretionary control of the plan's assets.
An officer or shareholder serving as trustee is a fiduciary probably not only as custodian of the assets but as an investment manager as well.
One can delegate many of the day to day tasks of operating a plan to third-party administrators or committees of employees or bank trust departments (and we/they may assume some fiduciary liability by accepting), but the named fiduciary responsibility remains with the corporation and its board of directors.

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