JimboPColtrane

I know ESOP Trustees are required to invest ESOP cash (that is not used to buy company stock) in a "prudent" manner. Other than cash instruments (CDs, CDARs, Money Markets, etc) where else are they allowed to invest cash? Or maybe better stated, what investment options are allowable to the ESOP Trustees? Thanks in advance for your feedback.

Thanks for the feedback! We use a 3rd party administrator for some tasks but not check writing. I will investigate this further if there is no practical electronic way to do it.

I am a trustee of my company’s ESOP and historically we have always issued distributions from the plan in the form of a check. However every year or two we will have a check get lost either in the mail, by the participant, or by an investment brokerage. When this happens we will put a stop payment on the check and renew the stop payment one or two times while efforts are made to locate the check, but eventually if the check isn’t found we end up closing the checking account which is a hassle. We would like to move to an electronic form of payment so we don’t have this problem, but ACH payments won’t work because there’s no way to indicate who’s account it should go to when you route it to an investment brokerage’s bank (there’s no memo field as with electronic wires). Electronic wires are expensive because there are fees at both ends of every transaction. And the daily check writing limit is prohibitive for using our bank’s Bill Pay system. What method of payment do other ESOP companies use? Is there a good way to make distributions electronically? Thanks!

I have a long-time friend / financial mentor that has asked me to be the administrator for a charitable trust he is setting up. Upon his death he plans to initiate a $5MM+ charitable trust to benefit a local university to provide scholarships for students-athletes of non-revenue sports. He doesn’t want the university to control the assets, he wants me to “have total control of the asset investments and annual distributions to the school” and I would be responsible for filing taxes, etc for the trust. He has told me that I should draw a modest compensation from the trust for my administration efforts. Does anyone know how much compensation is appropriate for providing this administration? Thanks for your input.

JHawk, this is very helpful. Definitely helps me think it through from another angle. QDROphile & ESOP Guy, thank you also so much for your thought-provoking responses. I appreciate everyone’s input. I realize that there is a side of this that I have not thought through. Although I have access to all the valuation documents I do not know the exact makeup of the share counts used pre-and post valuation. There is an element of information missing here which probably explains my confusion. I am waiting for various Board member summer vacations to pass and then intend to take this up with the group. At this point I think it is very likely there is a simple explanation for my confusion and I will posit my query as a simple point of clarification rather than an accusation or the like. Many thanks for your insight.

Thank you both for your feedback, I appreciate it. I do understand my fiduciary responsibility and will see this through. Just wanted to do as much research on my own as I could before taking the next step. I'm wondering if maybe this is a common issue since all ESOP transactions occur on 12/31 (I assume that's the same for all ESOPs that follow a calendar year?). Was hoping someone would say that since the share sale and the new valuation both take place on the same day, the "denominator" would reflect the reduced share count even though it pushes up the sale price for those same shares? Or do companies use the new enterprise value to determine two different share prices: 1. the sale price for the existing shares using a denominator that includes the count of those shares being sold 2. the new share price for future transactions for the new year using a denominator that reflects those sold shares removed? Meaning shares sold on 12/31 would be valued at a different share price than shares bought in the new year (even though the company enterprise value is the same). Does that make sense?

Yes I have the data. I am a new member to the Board of Directors and ESOP Plan Committee, and as such I am involved in the review of the valuation. Let me be clear – I don’t believe the valuators have done anything wrong – the enterprise value they derived seems appropriate and the new share price is accurate for the new year. Also, I don‘t believe anything willful or fraudulent has taken place; the Board and ESOP Committee are comprised of honest, hardworking, intelligent people. However, I think it is possible a mistake has been made. I have no accounting/finance background so the most likely scenario is that I am not understanding something but I’d like to get some feedback from seasoned ESOP professionals before I pose the question to the Board. I am questioning if the company has correctly applied the valuation to the outgoing shares. It doesn’t seem right to me that someone selling should get the benefit of the decreased outstanding share count. That just doesn't make sense to me. Any feedback by those familiar with with ESOP valuations and the setting of the share price is much appreciated.

I have a question with regards to the application of an ESOP Valuation as is affects the share price paid to outgoing direct shareholders. My employer is roughly 70% ESOP owned and 30% owned by direct shareholders. When a valuation takes place a new enterprise value is reached by the weighted average of 3 different methods (DCF, CCF, & Guideline). A discount for lack of marketability is then applied for a final enterprise value. The final enterprise value is then divided by the number of outstanding shares to get the new share price. Assuming the new valuation is higher than the previous valuation (as is usually the case), the new share price is higher for two reasons: 1) the company is worth more, and 2) there are fewer outstanding shares than the previous year because there are always many more shares sold by departing employees than bought by existing employees. For example, in a recent year the share price went up 14%; 8% was due to an increase in the value of the company while 6% was due to fewer outstanding shares. Since all ESOP transactions take place on the last day of the year the new valuation is as of 12/31 as is the sale of the stock by outgoing employees. My question – if outgoing direct shareholders are paid using the new 14% higher valuation then they are getting the 6% benefit of fewer outstanding shares. This seems like faulty, circular logic to me – there aren’t fewer shares until AFTER they sell so in my opinion they should only be paid at an 8% premium not a 14% premium. But since it all happened on 12/31 the company paid them out at the full 14% premium. Am I correct in thinking this is a problem or am I not understanding something?