The National Center for Employee Ownership recently released a guide that includes a comprehensive analysis of the Department of Labor’s (DOL) investigations of Employee Stock Ownership Programs. The report’s data comes from the DOL and covers the years 2007 through 2017. DOL investigations are further broken down by issues and results. While the report is comprehensive and very quantitative, there are some high level, important takeaways.

  • Investigation Volume: Over the decade the study covers, the Employee Benefits Security Administration (EBSA) carried out over 2,000 investigations, which represents 20-25% of all ESOPs. Sixty percent of these investigations discovered violations, and of those that found violations, two-thirds led to monetary recoveries.
  • Value of Monetary Recovery: Monetary recovery means that there was a payment back to the plan and/or to the plan participants due to the investigation. Ten percent of the cases resulted in a recovery greater than $1 million, and twenty percent of investigations led to recoveries less than $100,000 but greater than $0.
  • Valuation Violation: ESOP valuation cases, meaning that the ESOP’s value was set incorrectly, resulted in the biggest monetary recoveries. As a trend, the number of valuation violation cases has been increasing, including a sharp increase starting in 2012. With this in mind, plan administrators may want to revisit how the ESOP valuation is calculated to ensure that the methods used are industry standard and the results are reasonable.
  • ERISA Violations: The second most common issue cited by the EBSA for investigation were ERISA violations in loan terms. However, these violations have been decreasing while other issues such as imprudence and beneficiary payment violations have remained steady.
  • Risks Associated with Investigation: Based on this data, ESOP plan administrators can conclude that the risk of investigation is real, but the risk of monetary damages is lower. By paying careful attention to areas such as valuation and plan loans, fiduciaries can avoid the most common problems.
  • Follow DOL Guidance: The DOL has provided ESOP plan administrators with guidance regarding process agreements that have resulted from their investigations. Businesses should pay attention to these plan agreements and implement changes proactively to avoid problems. This guidance shows how the DOL will conduct investigations and how businesses can be prepared to comply with the DOL.

With the help of the experienced benefits attorneys at Hall Benefits Law, our clients who have chosen to implement ESOPs keep their documents and processes up to date in an effort to avoid government investigations. When a client is sent an investigation notice, our team helps them quickly comply with requests and works toward the best possible outcome. Call 678-439-6236 today, or visit the Hall Benefits Law website to learn more.