An Employee Stock Ownership Plan (ESOP) is a tax-qualified retirement plan authorized and encouraged by federal tax and pension laws.

Typically offered in a closely held company, an ESOP allows employees to own part of or all the company they work for. Unlike a traditional 401(k), ESOPs are required by law to invest primarily in the shares of stock of the sponsoring employer.

While an ESOP can be a great way for employees to accumulate wealth, it can also be used by the wrong type of employer to exploit its workers. For those of you who are ESOP participants, here are the most common abuses to watch out for:

• Management will use the ESOP as a dumping ground for their stock holdings at an over-inflated price. Typically, this is accompanied by the ESOP taking out a loan to pay for the stock. When the ESOP defaults on the loan, unsuspecting employees are left holding worthless stock.
• Anticipating a sale-of-the-company, Management will induce employees to sell their stock to them or the company at below fair market value. Management turns around and sells the company to a buyer for a premium.
• Management of a faltering company continues to offer an ESOP to employees even though it is fairly apparent that the company will fail.

Some of the time, the employer will be acting alone, other times, third parties – trustees and appraisers – are enablers of the abuse.

Employees Are Protected from ESOP Abuse

A federal law called ERISA (the Employee Retirement Income Security Act of 1974) protects employees from this type of ESOP abuse. ERISA requires employers to act in the best interests of the ESOP when dealing with assets of the ESOP. When employers fail to act properly and with due care, ERISA requires them to make the ESOP whole for all losses caused by their failures.

Contact Nationally Recognized ERISA Attorneys

Sanford Heisler Sharp McKnight has extensive nationwide ERISA experience. Led by San Diego Managing Partner Charles Field, our nationwide Financial Mismanagement and ERISA Litigation practice is nationally recognized for its expertise in aggressively pursuing financial recovery of employees’ hard-earned retirement savings.

If you believe your company retirement plan is being mismanaged, contact us using the form below to connect with our firm. We have secured tens of millions of dollars in settlements for employees by holding plan managers accountable for their fraud or mismanagement.