US Department of Labor issues proposed rule for fiduciaries on valuing employer stock purchased, sold by Employee Stock Ownership Plans

WASHINGTON – The U.S. Department of Labor today announced that its Employee Benefits Security Administration has issued a proposed regulation under the Employee Retirement Income Security Act on the valuation of employer stock acquired or sold by an employee stock ownership plan. 

The proposal implements a Congressional directive in the SECURE 2.0 Act of 2022 and responds to requests from Employee Stock Ownership Plan stakeholders for guidance. ESOPs are federally regulated retirement plans that primarily invest in stock issued by the employer that sponsors the plan. At their best, ESOPs both provide valuable retirement benefits to workers and give them a direct ownership stake in their employer.   

As ERISA-governed retirement plans, ESOPs are managed by plan fiduciaries who must prudently oversee the plans’ investments with undivided loyalty to the interests of the plan’s participants and beneficiaries. Often, employer stock is not publicly traded and there is no ready market price. Without a clear market price, few obligations are more important to proper ESOP plan management than getting the stock price right. The proposed regulation will ensure the plan does not pay more for the stock, or sell for less than, the stock’s fair market value. By valuing the stock appropriately, fiduciaries make sure that the plan’s participants get full value for the employee compensation used on the stock purchase and avoid overpayments that can place employees’ retirement benefits – and even their jobs – at risk.   

The proposed regulation gives plan fiduciaries important principles-based guidance on how to value employer stock, consistent with their obligations as ERISA fiduciaries. In addition, the associated proposed exemption gives an especially detailed road map for sellers and plan fiduciaries interested in creating a new ESOP that will purchase employer stock as required by ERISA. 

“Employee Stock Ownership Plans are a form of worker ownership that can enable workers to share in the financial successes and profits that their labor helps make possible. Workers’ retirement security, and often their livelihood, depend on ESOP fiduciaries getting the price right,’ said Assistant Secretary for Employee Benefits Security Lisa M. Gomez. “The proposals give fiduciaries important guidance on how to get these transactions right in compliance with their duties of care and undivided loyalty to ESOP participants and beneficiaries. The proposals, which reflect input received by stakeholders as well as the department’s own experience in reviewing ESOP transactions, provide important guidance for ESOP fiduciaries and will help safeguard against overpayment for employer stock by ESOPs and their participants.” 

The Notice of Proposed Rulemaking and Notice of Proposed Class Exemption are being published in the Federal Register with 75-day public comment periods and instructions on how to submit comments.