In the last three months, four lawsuits have been filed against ESOP companies for imprudently investing their cash assets in low-yield investments. These are the first lawsuits ever filed on this topic. The suits are at ESOP companies Aluminum Precision Products, Pride Mobility Products Corp., Aerotech Inc., and Wilson Electric Services Corp. and all were filed by the same law firm, Engstrom Lee.
ESOP trustees and plan sponsors have a fiduciary duty to make sure plan assets are prudently invested. The lawsuits, however, appear to be premised on a theory of prudence more akin to how assets in a profit-sharing plan would be invested. These plans presume a longer-term time horizon for investments than is typical for cash assets held in an ESOP, which are often used to handle repurchase obligations that may arise on a short-term basis. Plan fiduciaries could be deemed imprudent for investing in riskier assets if these funds are needed to buy back stock in the next few years. While plaintiffs may have a hard time making their case, plan sponsors and trustees should have an investment policy that justifies the prudence of the asset mix and takes into account when the funds will be needed. If some portion of the cash may not be used for several years, a more aggressive mix is probably a good idea.