The ESOP Project

A few of you out there may have heard of the Department of Labor (DOL) ESOP Project.  If you’re an ESOP Report reader, you’ll note it was briefly mentioned in the Advisory Committee on Valuation column in the August 2011 issue.  (You can find the ESOP Report online in the members only section of the Association’s website.)

We bring it up here because of an article in the August 18, 2011 Daily Tax Report titled, “Failure to Offset Mutual Fund Fees Tops List of Provider Errors, Official Says.”  The article in a general wrap-up of retirement plan topics and one happens to be the DOL’s ESOP Project.

Article re-cap:  The most common problems with ESOPs, according to Jeffrey A. Monhart, acting director of the Office of Enforcement in DOL’s Employee Benefits Security Administration (EBSA), are unrealistic growth projections and improper discount rates.  It also mentioned improper ESOP loan transactions relying on acceleration clauses that are not allowed under DOL rules as another problem.  Another problem noted is failure to provide diversification when participants reach 55 with 10 years of service.

These comments expose the “hidden” intent of DOL’s proposal making an ESOP appraiser an ERISA fiduciary.  It sets forth that DOL officials do not accept professional judgments of qualified appraisers with regard to discounts and economic projections.  The truth is valuing a non-marketable asset will never be precise, and clearly all qualified appraisers have legitimate disagreements over discounts and economic projections.  Supposedly in a recent DOL audit, in a position reported to the Association, the DOL thinks failure to predict the Great Recession resulted in a violation of ERISA.  DOL’s EBSA team seems to be saying, “We have the final correct answers on all ESOP appraisals.  If our views are not followed, there is an ERISA violation.”

The ESOP community has to keep opposing the proposed regulation.