Why Use External Trustees?

April 4, 2023

Are external trustees a must for your ESOP (Employee Stock Ownership Plan)? The fiduciary regulations and responsibilities of ESOP trustees are extensive. The U.S. Department of Labor keeps a sharp watch on ESOP companies and the ERISA (Employee Retirement Income Security Act) is intricate. With over 65 years of experience working in the ERISA, Aegis’ experts explore why external ESOP trustees are highly advisable.

External ESOP Trustee Objective

A core ERISA concept is that the trustee must act exclusively in the best interest of ESOP participants. Internal trustees may have difficulty distinguishing duties to the employer from duties to the ESOP. Although some companies opt to give responsibility to a trusted insider, a conflict of interest can elicit scrupulous legal investigation and consequences. An external independent fiduciary, such as Aegis, assures that the ESOP trustee can act exclusively for the benefit of the ESOP participants, and guarantees there are no internal conflicts of interest. A plan managed by external ESOP trustees allows participants to be comfortable knowing an objective expert will be negotiating the transaction on their behalf and managing the plan assets.

External ESOP Trustees Are Experts

External trustees often have the experience and knowledge of all the issues that arise in connection with an ESOP. Expert external ESOP trustees know the various ESOP regulations put out by the U.S. Department of Labor’s Employee Benefits Security Administration. Properly fulfilling the requirements takes time and resources. Qualified external ESOP trustees are able to effectively meet the complex fiduciary obligations of trustees. Aegis’ experts are uniquely qualified to fulfill these obligations. Because Aegis’s only business is providing trustee services, properly fulfilling the complex obligations is our business. A sponsoring company benefits from working with the many professionals of the Aegis team.

An External ESOP Trustee Assumes Responsibility

The U.S. Department of Labor’s Employee Benefits Security Administration overseas ESOP transactions and administration. Under ERISA, a trustee is individually liable for breaches of fiduciary duty. External trustees are better equipped to comply with ERISA. With pre-existing processes and systems in place, external ESOP trustees can defend fiduciary decisions against potential legal action by the Department of Labor or class actions by participants.

External ESOP Trustees Provide Fiduciary Insurance

Under ERISA, fiduciaries are also personally liable for the cost of defense, judgment, and penalties. Fiduciary insurance, also known as fiduciary liability insurance, is always advisable to cover these responsibilities. Fiduciary insurance provides protection for the trustee in case of claims of breach of fiduciary duty, negligence, or other errors or omissions related to their role as a fiduciary. It can also help defray the legal defense and any settlements or judgments that may be awarded against the trustee. Executive liability insurance, commonly known as directors and officers (D&O) liability insurance, is insufficient. Even in the case that a director is the same person as the plan fiduciary, D&O insurance plans cannot definitively cover claims related to your ESOP. These D&O plans often exclude coverage of any ERISA violation claims.Unlike most internal trustees, external ESOP trustees should maintain fiduciary insurance in order to cover claims that third parties make against them. Aegis maintains sufficient insurance to cover any losses associated with claims by third parties.

External ESOP Trustee: Responsibility, Regulations, Right Order

External trustees can reliably assume ESOP responsibilities for your company. They can readily supply expertise and advice in navigating the complexities of your ESOP. And, in the case that legal defense is needed, external ESOP trustees provide protection and security for your company.If you are considering an external trustee for your ESOP or want more information about how ESOPs work, contact the expert ESOP attorneys at Aegis Trust Company. Our experts are happy to discuss the ins and outs of an ESOP and what choosing a trustee should  look like for your company.

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