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Department of Labor ESOP Fiduciary Investigations

Posted by Corey F. Schechter | Oct 10, 2017

Department of Labor (DOL) investigations into fiduciary breaches in ESOPs can result in significant civil liability, penalties, and even possible criminal charges. The majority of these investigations are triggered by civil lawsuits, whistleblowers, or participant complaints, but a small handful are the result of random audits. Many of these investigations do not initiate until years after the relevant fiduciary breach events took place.

Increasingly, companies are turning to Employee Stock Ownership Plans (ESOPs), as a qualified retirement plan that investments in employer securities. With an ESOP, employee participants can have a stake in the company they work for through stock interest as a benefit of working for the company.

ESOPs fall under ERISA. As a result, there is a fiduciary duty for those who administer, manage, or control plan assets. Fiduciaries are required to act solely in the interest of plan participants and fiduciaries. Recent court decisions have found ESOP fiduciaries are subject to the same standards as other ERISA fiduciaries, except for the requirement to diversify assets.

In recent cases, the DOL has filed lawsuits against fiduciaries of ESOPs for incorrect valuations of company stock and causing ESOPs to overpay for company stock. These cases generally involve an investigation by the DOL's Employee Benefits Security Administration (EBSA). The EBSA enforces ERISA regulations and carries out civil and criminal investigations.

The DOL provides online access to the EBSA Enforcement Manual, which details investigation checklists and guidelines. Plan sponsors may benefit from reviewing the enforcement manual during internal audits to ensure fiduciary compliance. It may also help plan sponsors understand how an EBSA investigation works.

During an EBSA fiduciary violation investigation, the investigators look to identify at least one fiduciary duty violator, the actions taken which constituted a breach of the fiduciary's duties, and sufficient evidence to satisfy the elements of a breach.

Investigations include examining actions in establishing the plan, establishing a trust, selected expenses paid, and identifying prohibited transactions. Prohibited transaction investigations include comparing a list of plan sponsors, managers, and service providers. Investigators determine how plan management identifies parties in interest and prevents conflicts.

In fiscal year 2016, the EBSA recovered $777.5 million for direct payment to plans, participants, and beneficiaries. This includes more than $350 million from enforcement actions. In many cases, the EBSA will pursue voluntary compliance. However, where compliance is not appropriate, the cases will be referred for litigation. In pursuing litigation, the department may seek restitution and penalties against any fiduciary who breached any of their duties to plan participants.

If you have any questions about ESOP fiduciary duties or EBSA/DOL investigations, 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 ERISA and employee benefits law. 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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