Duties of the ESOP Committee
What Is the ESOP Committee?
An ESOP Committee is usually appointed by the board of directors and delegated the responsibility to oversee day-to-day operations of the plan. It is often called the ESOP Administration Committee or Plan Administration Committee. In what follows, we will use the term "ESOP Committee" to mean the same thing as these other committees.
Although all ESOPs must have a trustee and someone to administer the plan, there is no legal requirement for an ESOP Committee. In practice, however, plan documents almost always specify that there be an ESOP Committee to administer the plan and oversee its operations. This article explores what the committees typically do.
ESOP Committees can have several responsibilities. They often make decisions on plan design and amendments. They usually either direct the trustee on plan decisions, such as voting shares, or actually serve as trustee, but they can just have an advisory role. They often assume responsibility for administrative oversight of the plan (making sure that statements go out, that participants are paid, that allocations are properly made, etc.), although they rarely do the administration. Finally, they often act as the vehicle for communicating the plan to participants and even oversee the company's employee involvement program.
There are no rules about who can be on the ESOP Committee or how they should be selected. In many companies, the committee consists of members of management and/or the board; in some, it is just a single member of management. More participative companies get non-management employees involved on the committee, as minority or majority members. Usually, these are elected by other employees, but sometimes they are appointed by management or are simply whoever volunteers. Most committees have three to six members.
Making Plan Decisions
To the extent the ESOP Committee actually makes decisions affecting the plan, acts as the plan trustee, or directs a trustee to make such decisions, it is acting as a plan fiduciary, meaning it is legally responsible for the operation of the plan. This is the case whether the ESOP Committee is actually named as the plan fiduciary or not.
ESOP fiduciary decisions would include, but not be limited to, making decisions as to the voting of shares in the ESOP where the law does not require a pass-through of voting rights to participants, making decisions about investing plan assets both in employer stock and other investments, selling stock, insuring that the ESOP pays no more than fair market value, selecting qualified advisors, assuring that the operation and design of the plan comply with ERISA, and moving assets from the ESOP to another plan.
By contrast, committee actions such as establishing or terminating the plan, changing its features within acceptable ERISA boundaries, increasing or decreasing funding of the plan in a non-leveraged situation, voting for the board, and doing the day-to-day plan administration, presuming it is done in compliance with the law, are all examples of things that are not normally fiduciary acts.
Key plan administration oversight duties include the following:
- Keeping minutes of committee meetings.
- Making sure the plan administrator gets everyone who is qualified into the plan, and that once they are there, they get their proper allocations, statements, and forfeitures.
- Making sure the administrator files the proper reports with the government and provides required forms to plan participants.
- Guaranteeing that proper procedures are followed in the case of employee complaints about the plan and that other employee rights, such as voting and the opportunity to inspect plan documents, are provided.
- Hiring a plan administrator and an investment manager for non-stock assets in the plan.
- Assuring that contributions to the plan are properly credited.
- Overseeing plan distributions to assure they are done properly.
- Having a repurchase obligation study done and creating a plan to deal with the issue.
- Interpreting plan provisions.
- Adopting any additional rules that may be necessary to operate the plan to make specific what may be general or discretionary plan provisions.
- Providing the administrator with the information needed to operate the plan and getting from the administrator the information the company needs to file tax reports.
This may sound like a daunting list, but, in practice, most of the work is done by the plan's administrator. The ESOP Committee must make sure that the administrator is competent and must oversee its functioning, however.
Communicating the Plan
The principal legal responsibility of the ESOP Committee in terms of plan communications is to make sure that participants receive a summary plan description, an annual report on their account balances, reports on amendments to the plan, and access to certain documents on request.
In practice, the ESOP Committee is usually also responsible for other communications to plan participants, such as simplified brochures describing the plan, coordinating employee ownership month activities, helping design and deliver information about company financials, developing videos, audio tapes, or other non-written material, coordinating employee orientations to the ESOP and periodic company meetings, and working on other activities designed to help people understand the plan and the company.
In some companies, the ESOP Committee also serves as the coordinating committee for employee involvement programs (work teams, suggestion systems, etc.), but this may be too much responsibility to give to a single group.
See our book The ESOP Committee Guide for a wealth of information on ESOP committees.