A new proposed regulation this week from the Department of Labor’s Employee Benefits Security Administration on the valuation of employer stock acquired or sold by an employee stock ownership plan will ensure that ESOPs do not pay more for the stock—or sell for less than—the stock’s fair market value.
“The proposals give fiduciaries important guidance on how to get these transactions right in compliance with their duties of care and undivided loyalty to ESOP participants and beneficiaries.”
EBSA Secretary Lisa M. Gomez
The proposal implements a Congressional directive in the SECURE 2.0 Act of 2022 and responds to requests from employee stock ownership plan stakeholders for guidance. ESOPs are federally regulated retirement plans that primarily invest in stock issued by the employer that sponsors the plan. At their best, EBSA noted in a Jan. 16 press release detailing the proposed regulation, ESOPs both provide valuable retirement benefits to workers and give them a direct ownership stake in their employer.
“The proposals give fiduciaries important guidance on how to get these transactions right in compliance with their duties of care and undivided loyalty to ESOP participants and beneficiaries,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez.
As ERISA-governed retirement plans, ESOPs are managed by plan fiduciaries who must prudently oversee the plans’ investments with undivided loyalty to the interests of the plan’s participants and beneficiaries. Often, employer stock is not publicly traded and there is no ready market price. Without a clear market price, few obligations are more important to proper ESOP plan management than getting the stock price right.
By valuing the stock appropriately, EBSA said fiduciaries make sure that the plan’s participants get full value for the employee compensation used on the stock purchase and avoid overpayments that can place employees’ retirement benefits—and even their jobs—at risk.
The proposed regulation gives plan fiduciaries important principles-based guidance on how to value employer stock, consistent with their obligations as ERISA fiduciaries. In addition, the associated proposed exemption gives an especially detailed road map for sellers and plan fiduciaries interested in creating a new ESOP that will purchase employer stock as required by ERISA.
“Employee Stock Ownership Plans are a form of worker ownership that can enable workers to share in the financial successes and profits that their labor helps make possible. Workers’ retirement security, and often their livelihood, depend on ESOP fiduciaries getting the price right,’ said Gomez said. “The proposals, which reflect input received by stakeholders as well as the department’s own experience in reviewing ESOP transactions, provide important guidance for ESOP fiduciaries and will help safeguard against overpayment for employer stock by ESOPs and their participants.”
Data shows that ESOP formation remains low. A study from nonprofit National Center for Employee Ownership estimates that around 250 new ESOPs are created each year. These ESOP formations tend to involve smaller businesses in the industrial and service sectors, with only around 4% having over 500 employees.
A 2023 study from the National Center for Employee Ownership found ESOP respondents estimated median account balances across participants was $80,500, not including other retirement savings vehicles they provide like a 401(k). This compared to $30,000 at the time for the average retirement planning investor with a workplace 401(k) plan.
The EBSA Notice of Proposed Rulemaking and Notice of Proposed Class Exemption are being published in the Federal Register with 75-day public comment periods and instructions on how to submit comments.
SEE ALSO:
• New Coalition Promotes ESOP Adoption
• ESOP Workers Report Higher Retirement Account Balances
• DOL Updates Voluntary Fiduciary Correction Program
• DOL Announces Enforcement Relief for Missing Participants
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.