Once an organization decides to offer an Employee Stock Ownership Plan (ESOP) to its employees, team members may experience excitement, uncertainty, and confusion about what this means for them. It’s helpful to provide education about what, exactly, an ESOP is and how it exists to promote the best interests of the employees.
Most importantly, one of the primary responsibilities of an ESOP trustee is to safeguard employee interests. In fact, this is legally mandated: An ESOP Trustee must act ONLY in the employees’ best interest.
An ESOP’s Duty: Safeguarding Employee Interests
People are inherently self-interested. As a general rule, humans are going to be primarily concerned with their own needs, as well as the stability and security of themselves and their families. Consider Maslow’s Hierarchy Of Needs model as a prime example - you’ll see that “employment” is considered one of the lowest, most essential tiers, as it relates to humans’ need for safety.
What does this have to do with ESOPs?
ESOPs provide a way for employees to do what’s best for the company because it serves their own interests and intrinsic, basic needs. When they do “what’s best for the company,” they’re doing it because it also serves them.
That’s why ESOPs are so successful in empowering employees. When they own a piece of the company they help build, through stock acquisition, it fosters a culture where responsibility is shared and success is collective. This unity results in companies that are more productive and possess a strong, positive corporate spirit.
Legal Obligations to Employee Participants
When it comes to keeping the trust of these employees, an ESOP needs a trustworthy entity to handle all fiduciary responsibilities and legal obligations on its behalf. That’s why every ESOP trustee must fulfill ERISA obligations in an ethical and prudent manner. “ERISA” refers to the Employee Retirement Income Security Act of 1974, which established minimum standards to protect plan participants.
These fiduciary and legal requirements include:
- Acting only in the interest of plan participants and beneficiaries
- Defraying reasonable plan expenses
- Diversifying the investments of the plan, unless it is clearly prudent not to.
- Acting in accordance with the plan’s documents.
Read more about the key responsibilities of ESOP trustees for regulatory compliance.
The Role of Trust in ESOP Ownership Plans
In its annual Trust Survey, the Pew Research Center found that “the most important trust-building issues [for employees] are paying appropriate wages, protecting employee data, and communicating clearly.” The existence of trust - between employees and the ESOP - is also a foundational piece to the ESOP puzzle.
Building Employee Trust in the Ownership Plan
When a company offers an ESOP, the importance of trust is paramount. Employees need to know that their shares are handled securely and with the utmost fiduciary integrity.
So while every ESOP must have a trustee, per federal law, and it isn’t mandatory to have an independent trustee, it’s strongly suggested to choose a third-party partner that is outside of your organization. This ensures an objective and unbiased professional relationship. By law, this trustee must act only in the employees’ best interest.
Why Choose Aegis Trust Company?
At Aegis, our reputation precedes us. We are proud to provide the benchmark for excellence in ESOP administration. We believe deeply in the transformative power of ESOPs, because they are proven to lead to more prosperous and equitable businesses. Schedule a consultation with our team, today!