20 Misconceptions about Fiduciary
Responsibility and Liability
Ben Wells – Dinsmore & Shohl LLP – 513-977-8108
John Banasek – Prairie Capital Advisors, Inc.
– 630-443-9933
Bill McIntyre – Ohio Employee Ownership Center – 330-672-3028
GUEST EXPERTS
Dave McCoy – Business Valuations, Inc.
–
513-522-1300
Tina Fisher – Principal Financial Group –
330-836-6220
Jeff Gelburd – Marsh USA, Inc.
– 717-234-3333

#1 – A person NOT named as a fiduciary is NOT a fiduciary.
• If a person performs fiduciary functions, the person is a fiduciary.
• A fiduciary is anyone with discretionary authority or control over management and/or administration of the Plan or Plan assets or who provides investment advice for a fee.

#2 – Board of Directors does
NOT have fiduciary responsibility for the ESOP
• Board of Directors generally selects & appoints ESOP fiduciaries – that is a fiduciary decision by the Board

#3 – Management hires the
ESOP Trustee
• No – the Board of Directors usually has the responsibility to select the ESOP
Trustee
• Management may assist in the process, but it is a Board decision

#4 – An ESOP fiduciary must act solely for the benefit of the company’s employees
• No – ESOP fiduciaries must act solely for the benefit of ESOP PARTICIPANTS and their beneficiaries
• ESOP fiduciaries have NO duty to act for the benefit of employees

#5 – Management hires the
ESOP independent valuation advisor
• No – The ESOP independent valuation advisor is hired by the ESOP Trustee

#6 – The independent valuation advisor sets the price for ESOP shares of company stock
• No – the independent valuation advisor is only an advisor
• Independent valuation advisor is NOT a fiduciary
• ESOP Trustee determines the stock price
• Valuation report is a recommendation to the
Trustee – it can be accepted or rejected

#7 – TPA (Third Party
Administrator) has fiduciary responsibility to the ESOP
• The TPA is a recordkeeper who does not have discretionary authority or control over the Plan or Plan assets
• TPA merely assists the Plan Administrator named in the Plan
• TPA is NOT a fiduciary

#8 – The ESOP Administrative
Committee has fiduciary responsibility only if the Trustee is a directed Trustee
• ESOP Administrative Committee has responsibility for:
– Interpreting the Plan
– Establishing policies and procedures to implement the Plan
• It HAS fiduciary responsibility for the ESOP

#9 – A “Not For Sale” Resolution by the Board of Directors means the Company can ignore offers to purchase the Company
• Regarding the ESOP, the Resolution is worthless
• If followed, it may be a breach of fiduciary responsibility

#10 – An ESOP Trustee MUST accept any offer to purchase ESOP shares for greater than the current appraised ESOP stock price
• No – several reasons why it’s NOT true:
– Circumstances have changed
– Value for strategic buyer is not the same as Fair
Market Value for ESOP – would require a new and different appraisal
– Other items may be involved in purchase other than the purchase of ESOP stock
– Compare total offer to “underlying intrinsic value” of the ESOP shares

#11 – Pass-through voting by
ESOP Participants is required on any merger or acquisition
• Merger – YES
• Acquisition – NO
– Unless the acquisition involves a merger

#12 - Pass-through voting by
ESOP Participants is required on a sale of ESOP stock
• Sale of ESOP shares – NO, unless a merger is involved
• Sale of substantially all of the Company assets - YES

#13 – A person with a conflict of interest in a transaction CANNOT serve as ESOP Trustee for that transaction
• No – it is NOT illegal
• May not be smart
• May invite lawsuits
• BUT it is NOT illegal

#14 – Trustees fulfill their fiduciary responsibility re ESOP stock price by hiring a qualified independent valuation advisor
• Hiring a qualified, competent, experienced, independent
ESOP valuation advisor is a good start, HOWEVER
• Trustees must understand and agree with the independent valuation advisor’s:
– Assumptions
– Methodologies
• Trustees must review the valuation report draft to identify any mistakes
• Maintain a permanent record file of all reviews

#15 – Only MBAs/CPAs can be ESOP
Trustees;
NonManagement employees do NOT qualify to be Trustees
• ESOP Trustee can be a committee
• Someone on the committee should be able to read and understand financial statements
• No requirement that everyone serving as an
ESOP Trustee be a financial expert
• Trustee MUST be knowledgeable of the responsibilities of being a Trustee
• “Good heart & empty head” is NOT sufficient

#16 – “Business judgment” doctrine protects fiduciaries; therefore, they should NOT document their process
• PROCESS is the key
• Follow process of due diligence
• Ask questions
• Document everything

#17 – Fiduciary liability is a company liability, NOT a personal liability
• Fiduciary liability IS a personal liability
• Fiduciaries may have to pay any judgment against them out of their own pocket
• Yes, you could lose your house

#18 – The Company’s indemnification clause protects fiduciaries from personal liability
• Exceptions in the indemnification clause may exclude protection if the fiduciary failed to fulfill fiduciary responsibility
– gross negligence and/or willful misconduct is an industry standard
• If the Company is out of business, the indemnification may not be worth much

#19 – Either the Fidelity Bond, D&O
Insurance, or Fiduciary Insurance will protect fiduciaries from personal liability
• Fidelity or ERISA Bond protects the Plan, not the individual, for theft of Plan assets
• Directors & Officers (D&O) Insurance contains an ERISA exclusion:
– no coverage for breach of fiduciary duty involving qualified ERISA plans
• Fiduciary Insurance often excludes ESOPs
• Make sure:
– your fiduciary insurance covers ESOPs
– your D&O insurance does not contain:
• a major shareholder exclusion (ESOP)
• a specific ESOP exclusion

#20 – Fiduciaries can fulfill their fiduciary responsibility by following the terms of the ESOP Plan Document
• Usually Yes, but not always
• ERISA overrules the Plan
• If following the Plan would violate ERISA, then the fiduciary must ignore the Plan and comply with ERISA