ESOP Admin: What Do ESOP Administrative Committees Do?

An ESOP administrative committee is a committee designated by the ESOP plan document. Its duties can vary from one company to another and need to be specified in its rules. In many companies, it is simply the board; others have a separate body for that function. There is no legal requirement for there to be an ESOP administrative committee, but in practice, plan documents almost always specify that there be one.

Because many of the committee’s functions are inherently board duties that are delegated to the committee, most ESOP administrative committees are appointed by the board. Other than general legal and fiduciary concerns, however, there are no rules about who can be on the ESOP administrative committee or how they should be selected. In many companies, the committee consists of members of management and/or the board; in some, it is just a single member of management. More participative companies may involve nonmanagement employees in the committee, either as minority or majority members. Usually, these members are elected by other employees, but sometimes they are appointed by management or are simply volunteers. Most actual committees range from three to six people.

Is the ESOP administrative committee the same as the plan fiduciary or the plan trustee?

The committee may be the named fiduciary of the plan, or that function may rest with the ESOP trustee. Occasionally, the committee is the trustee. If named a fiduciary, and if there is a separate trustee, the committee will direct the trustee as to the voting of the shares, approval of the valuation, changes in plan documents, and other potential fiduciary decisions. Just because the committee is not named as a fiduciary, however, does not mean it might not be considered to be acting as one if it takes an action that causes the trustee to make a decision, such as by providing misleading information to a trustee or, even if not named as a fiduciary, nonetheless directing the trustee to take an action.

Duties

Legally, the ESOP administrative committee must make any decision as to the voting or tendering of shares (other than those for which the plan provides a pass-through to participants) based on the best interest of plan participants as participants. In other words, the committee (or any other fiduciary) cannot consider the employment interests of participants. Instead, the ESOP administrative committee must look to the long-term value of the accounts in the plan.

All ESOP administrative committees must make sure that participants receive a summary plan description (SPD), a summary of material modifications in the event of a plan amendment, a summary annual report, and appropriate reports on their individual account balances.

Beyond this, the list of possible duties is long, but some of the key functions are:

1. Keeping committee meeting minutes.
2. Recommending plan changes to the board.
3. Ensuring that the plan administrator incorporates everyone who is qualified into the plan, and that once they are there, they receive their proper allocations, statements, and forfeitures.
4. Ensuring that the administrator files the proper reports with the government, obtains the necessary forms for spousal consent, follows the plan’s procedures for reincluding employees who left the company and returned, etc.
5. Guaranteeing that proper procedures are followed in the case of employee complaints about the plan and that other employee rights, such as voting and the opportunity to inspect plan documents, are upheld.
6. Hiring a plan administrator and an investment manager for nonstock assets in the plan.
7. Assuring that contributions to the plan are properly credited.
8. Overseeing plan distributions to ensure they are done properly.
9. Having a repurchase obligation study done and creating a strategy to deal with the repurchase obligation (this may also be a responsibility of the company, however).
10. Interpreting plan provisions.
11. Adopting any additional rules that may be necessary to operate the plan and to make specific what maybe general plan provisions (e.g., plans sometimes provide discretion to the ESOP administrative committee about when to make certain distributions, provided the distributions are made in a nondiscriminatory way and are spelled out in a written policy).
12. Providing the administrator with the information needed to operate the plan and procuring from the administrator the information the company needs to file tax reports.

This may sound like a daunting list, but in practice, most of the work is done by the plan’s administrator. However, the ESOP administrative committee must ensure that the administrator is competent and must oversee their functioning.

In some cases, the committee may perform only a few of these functions and may instead assume an advisory role to the fiduciaries. Sometimes, such committees act as the vehicle for communicating the plan to participants and even oversee the company’s employee involvement program, although many companies choose to have these functions performed by a separate committee (which is the preferable approach). The duties of the communications committee are very different. Companies often want the communications committee to comprise some, if not all, nonmanagement employees. On the other hand, companies usually want several members of the management team on the administrative committee. Each committee involves a lot of work, and mixing the two can be too much of a burden.