Excerpts from the NCEO Newsletter 7/2015.
More and more ESOP companies are moving toward outside trustees. The NCEO’s 2012 governance survey showed that 37% of companies now have outside trustees. Companies choose to have inside trustees for two primary reasons. One is cost. The NCEO data indicated that directed outside trustees had a median annual cost of $19,000 while the median compensation for independent trustees was $25,000. Costs go up with company size. This is not a huge investment, but is an expense many ESOP companies think they do not need to take on. The second is a fear that an outside trustee may force the company to do things it would not otherwise do. These concerns are understandable, but neither costs nor control may be the issues companies think they are.
Trustees need to be spending considerable amounts of time (days, not hours) in their appraisal reviews and need to bring specific expertise to the table.
How much time will [internal] trustees have to spend on getting trained, reviewing the appraisal, making sure the plan is operated in compliance with the law and the plan document, and all the other duties of a trustee? It is reasonable to assume that each trustee should spend two or more weeks per year on these matters. If a $175,000-per-year CFO is the trustee, that is about $7,000 per year. If you have a trustee committee, costs will start to approach the costs of an outside trustee. Even if this does work out to lower cost, there is an implied cost of fiduciary risk. Having an outside trustee is not a bulletproof vest against adverse litigation or DOL actions, but it creates a much stronger demonstration of prudence.
A directed trustee is chosen from the same pool as independent trustees and does all of what an independent trustee does, but is told what to do by a board, an ESOP administrative committee, or an individual employee. Directed trustees still must make sure plan rules and ERISA are followed.
In short, if you still have inside trustees, it may be time to take a second look.
Contact us if you are interested in using either an external trustee or our cost effective solution of serving as a consultant to your internal trustees.