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Challenges to Fiduciary Indemnification Agreements in ESOPs

Posted by Corey F. Schechter | May 08, 2018

It has generally been the Department of Labor's (DOL's) position that certain fiduciary indemnification agreements in ESOPs are void as against public policy. There is no clear legal precedent on the issue of how far indemnification agreements can go before they become invalid. However, recent ESOP litigation settlements may be coming down on the side of plaintiffs challenging ESOP fiduciaries.

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that establishes the minimum standards for most voluntary private pension and health plans. ERISA sets forth fiduciary duties for plan managers and those who control plan assets. Most employee ownership stock programs (ESOPs) also fall under ERISA. Under ERISA, fiduciaries who value ESOP stock prices may have a fiduciary duty to plan participants.

Section 410 of ERISA prohibits, “any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy.”

ESOP fiduciaries are subject to ERISA, including the fiduciary duty requirement to act in the best interests of plan participants. When fiduciaries fail to investigate flawed stock valuations in an ESOP, they may be liable to plan participants. However, when plan participants are unhappy with changes in the stock valuation, they may also blame the fiduciary and take their complaints to court.

The DOL's position is that broad indemnification agreements for fiduciaries by the ESOP or ESOP sponsor are void. According to the DOL, ESOPs and sponsors cannot indemnify fiduciaries to pay for settlements of lawsuits that come out of plan assets. However, DOL regulations do allow for fiduciary liability insurance policies that protect against claims for breach of fiduciary duty).

There has been no clear legal precedent on the issue. Some districts have sided with the DOL while others have found justification in allowing for certain types of indemnification. Companies looking to establish ESOPs may be unclear on how far they can take indemnification language for plan fiduciaries, including independent fiduciaries tasked with valuing company stock.

As a condition of settling ESOP fiduciary litigation, the DOL has been requiring ESOP sponsors to agree that the indemnification agreements are void. Rather than take the chance of going to trial and racking up litigation costs without any guarantee that the ESOP will indemnify the sponsor, the incentive is to agree the agreements are void and settle the claims.

If you have any questions about ERISA litigation or fiduciary counseling, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law and ESOPs. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.


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