Compliance March 18, 2015

DOL Alleges Company’s ESOP Creation Was Flawed

Accurate company valuations are critical when it comes to establishing an ESOP, the DOL says in an enforcement action announcement.
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The Department of Labor (DOL) contends that, when establishing an employee stock ownership plan (ESOP), a company’s owner sought to inflate the company’s stock price to benefit himself.

The DOL filed a lawsuit in federal court against Dr. Roy Geronemus, owner of the Manhattan-based Laser and Skin Surgery Center of New York, and plan trustee Samuel Ginsberg, alleging the stock valuation process when setting up the Laser Skin and Surgery Center ESOP in 2009 was flawed, and the ESOP’s subsequent $24 million purchase of the stock violated the Employee Retirement Income Security Act (ERISA).

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The department’s complaint, filed with the U.S. District Court for the Southern District of New York, seeks to have the defendants restore all losses to the ESOP; have Geronemus disgorge any and all ESOP assets and profits earned by him as a result; require the defendants to undo the prohibited transactions; and bar the defendants from serving as fiduciaries or service providers to any ERISA-covered plans.

The lawsuit says Geronemus appointed Ginsberg, his personal accountant, as the ESOP’s trustee for the sale of Dr. Geronemus’ stock to the ESOP. Ginsberg retained Trenwith Valuation LLC, which valued the company at $48 million, including $24 million for the 400,480 shares sold to the employees. This valuation had several obvious errors, the DOL contends.

First, the company’s valuation was flawed because it relied on data that inflated its value, namely a projection that Geronemus would earn only $663,439 in compensation annually when, in fact, he had and would continue to receive $1 million to $3 million annually. This made the company’s operating costs seem lower than they were. Ginsberg and Geronemus knew, the lawsuit alleges, that Geronemus would make significantly more than $663,439 each year.

Trenwith also valued the company by comparing it to allegedly similar companies. However, five of the 12 companies that Trenwith used for the comparison were based in Europe and listed on European stock exchanges exclusively. They were not appropriate examples to use and were likely chosen to inflate the value of the company.

“As a result of the defendants’ actions, the ESOP significantly overpaid for the stock. These were open and obvious flaws that the defendants knew or should have known, which resulted in a financial loss for the plan and its participants,” says Jonathan Kay, the DOL’s Employee Benefit Security Adminstration regional director in New York. “In addition, the defendants breached their fiduciary duties under ERISA by allowing the ESOP to engage in the prohibited transaction. They must now make restitution of millions of dollars to the plan and its participants.”

Data and Research March 18, 2015

Retirement Plan Assets Reach $21.5 Trillion

Public sector retirement plan assets have exceeded $4 trillion for the first time, according to a Spectrem market report.
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Assets held in employer-sponsored retirement plans increased 11.5% to reach $11.3 trillion at the close of 2014, according to Spectrem’s 2015 Market Insights Report.

Individual retirement accounts (IRAs) maintain an additional $5.4 trillion of savings, Spectrem says. According to the report, total retirement assets across public plans, private plans and IRAs stand around $21.5 trillion.

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Other findings reveal more than $3.5 trillion in defined benefit (DB) accounts is held by public sector workers, along with $458 billion in defined contribution (DC) accounts and $241 billion in 457 plans. Further, in the last five years the DB amount has grown by nearly $1 trillion, while both the DC and 457 plans have grown by more than $100 billion.

The report reveals a near complete recovery of public sector DB plan assets from the losses suffered in the financial crisis of 2008. Additionally, DC plans, including the 457 plans which are employee funded, have grown beyond pre-recession amounts.

Conversely, private sector DB assets have been slow to recover from the 2008 financial crisis, recording $2.6 trillion in net assets in 2014. At $8.53 trillion, DB plans account for two-thirds of the total amount of corporate sector retirement assets. Almost three-quarters of union retirement dollars, or $458 billion, is held in DB plans.

Spectrem’s research shows over 80% of IRA assets are held in either mutual fund or self-directed accounts, which maintain $3.47 trillion and $3.14 trillion, respectively. Driven primarily by rollovers from qualified plans, IRA assets have grown at an average annual rate of 2.5% over the past five years.

The Spectrum 2015 Market Insights Report is available for purchase here.

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