United ESOP Trustees to Start Selling Some Shares

Trustees of United Airline's ESOP will start selling shares in the plan in order to provide some diversification in the face of a possible bankruptcy filing. Reports indicate up to 20% of the shares could be sold now, and perhaps more later. ESOPs are intended by law to invest primarily in employer securities. This rule, however, does not exempt ESOP trustees from fiduciary prudence requirements under ERISA. If the trustees have reason to believe that the stock will not be a sound investment, they are obligated to diversify. If United does declare Chapter 11 bankruptcy, the shares would become worthless, so a good argument can be made that an ESOP trustee, knowing this is a possibility, should diversify at least to some extent. The announcement represents a final act in what has veered between farce and tragedy at United's ESOP. Instituted with great expectations for creating a new labor-management relationship, the United ESOP only got off the ground briefly. Tied to much resented wage concessions, leaving out the flight attendants, and having a pre-specified end point (contributions to the plan were to cease in 2000), the plan's structure was flawed from the outset. Worse still, neither management nor labor was ever committed to using the plan to create an ownership culture. The union leadership that created the plan was replaced soon after it started, while the key management people in charge of labor relations issues never believed the ESOP was a good idea.