New Coalition Working on ‘Expanding ESOPs’

According to the group, its efforts can improve wealth-building efforts for American workers.

A coalition of more than 50 foundations, financial institutions, advisory firms, law firms and advocacy groups launched the Expanding ESOPs initiative on Tuesday, intended to promote wider adoption of employee stock ownership plans.

The initiative aims to enhance the current ESOP model and make it both simpler and more accessible to businesses of all sizes and from all industries. According to Expanding ESOPs, the program it is advocating can strengthen the U.S. economy by tackling issues such as the wealth gap, low employee engagement and widespread financial illiteracy.

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“Employee ownership gives workers a stake in their companies and a seat at the table,” Pete Stavros, the organization’s head and the co-head of global private equity at private equity firm KKR, said in a statement. “Polling clearly shows that Americans across the political spectrum want to see workers participate in company ownership to a far greater extent, and ESOPs represent our best shot of achieving that goal.”

The group, in particular, aims to increase the prevalence of partial ESOPs, which take a minority interest in the business.

“Expanding ESOPs aims to reverse the decline in partial ESOPs while maintaining 100% ESOPs in their current form,” the group wrote in a statement.

James Bonham, president and CEO of the ESOP Association, in a July 1 article titled “What Private Equity Gets Right, and Wrong, About Employee Ownership,” wrote that the new group is “is seeking federal legislative and regulatory changes that would provide incentives for PE firms to offer equity stakes in more of their acquisitions, especially larger companies.”

Bonham wrote that the new group “does make a few compelling arguments,” but, he added, “there is genuine and legitimate cause for concern with some of the proposed ideas being advanced by the Expanding ESOPs coalition. First, their new version of ‘ESOPs’ is not employee ownership, no matter how much they may want to ride on our coattails. It’s more like profit sharing, and it’s conditional on the business being sold for a large enough profit and on employees working for the company at the time of sale.”

A traditional ESOP is a program that gives employees ownership interest in the company. Through an ESOP, a company sets up a trust fund and allocates shares to employees based on factors like salary or tenure.

Employees earn company shares as part of their benefits. The shares vest over time, and employees gain full ownership once they meet specific requirements. Upon leaving or retiring, they can sell the shares back to the company. ESOPs offer tax advantages to both companies and employees and are often used for succession planning and employee retention.

ESOPs were established under federal law in 1974 with the passage of the Employee Retirement Income Security Act. Currently, about 250 new ESOPs are formed each year, primarily among smaller businesses. Only about 4% of companies with newly created ESOPs have more than 500 employees. Additionally, these plans are concentrated in a few industries, with 75% of new ESOPs found in the industrial and service sectors.

“ESOPs have been around a long time, and they are an incredible wealth creation tool for workers who have been able to participate, but we simply haven’t had enough of them,” Corey Rosen, founder of the nonprofit National Center for Employee Ownership, said in a statement. “ESOP participants and their families have 92% greater net household wealth than those without comparable benefits.”

As part of its announcement, Expanding ESOPs launched a website to educate the public and policymakers about the organization and its goals.

At an April conference, Employee Benefits Security Administration Head Lisa Gomez said the Department of Labor is working on a proposal regarding adequate appraisal of the value of shares in ESOP plans, as many of the companies that issue shares to their employees as part of this type of qualified retirement plan only have a very small public market, if any at all.

Section 346 of the SECURE 2.0 Act of 2022, known as the WORK [Worker Ownership, Readiness, and Knowledge] Act, mandated that the DOL issue regulations in this area to establish legal certainty. ESOP adequate consideration appeared in the DOL’s Fall 2023 regulatory agenda.

Federal Court in California Grants Dismissal of Thermo Fisher 401(k) Forfeiture Suit

A participant in Thermo Fisher’s 401(k) plan accused the employer and its pension committee of violating ERISA by using forfeited funds to reduce future company contributions to the plan, but a district court dismissed the complaint.

A complaint against biotechnology company Thermo Fisher Scientific Inc. over how it allocates forfeited 401(k) funds was dismissed by U.S. District Judge Todd Robinson in U.S. District Court for the Southern District of California last week.

Because fiduciary provisions of the Employee Retirement Income Security Act did not create a benefit and did not evade either Treasury regulations or “settled rules regarding the use of forfeitures in defined contribution plans,” Robinson concluded that the case’s allegation that Thermo Fisher breached its fiduciary duty was “too broad to be plausible.”

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The court granted without prejudice Thermo Fisher’s motion to dismiss the lawsuit. The plaintiff, Konstantina Dimou, is able to file an amended complaint within 30 days.

Dimou, a participant in Thermo Fisher’s 401(k) plan who was represented by law firm Hayes Pawlenko LLP, alleged in Dimou v. Thermo Fisher Scientific Inc. et al. that the employer breached its fiduciary duties by choosing to use forfeited funds to the company’s own benefit and by using these plan assets “solely to reduce future company contributions to the plan.”

The Thermo Fisher Scientific Inc. 401(k) Retirement Plan has more than $7 billion in assets and 56,872 participants, according to its most recent Form 5500 filing.

The original complaint was filed as a class action in September 2023, but in December 2023, Dimou removed her class action allegations and filed an amended complaint, seeking only plan-wide relief in a representative capacity. In January, Thermo Fisher filed its motion to dismiss.

Judge Relies on Northern California’s Hutchins Decision

Robinson’s decision stated that the Department of the Treasury and Congress have “long understood” that forfeitures in defined contribution plans could be either: reallocated to the remaining participants under a nondiscriminatory formula, used to reduce future employer contributions, or used to offset administrative expenses.

In addition, Robinson wrote in the ruling that, generally, decisions concerning the design, establishment or modification of an employee benefit plan are settlor functions, not fiduciary functions, because they do not “implicate program management,” whereas transactions that deal with a pool of assets, like selecting investments, are fiduciary in nature.

Dimou had countered that when a company transfers funds to the plan, the funds become the plan’s assets and that Thermo Fisher was acting as a fiduciary when deciding how the plan’s assets—including forfeitures—were allocated.

Robinson summarized the opinion of U.S. District Judge Beth Labson Freeman in the Northern District of California in Hutchins v. HP Inc. that, “although the decision to include a plan term setting forth various permissible uses for forfeitures is a settlor function, implementing that decision is a fiduciary function.”

But Robinson also relied on the Hutchins dismissal in his grounds for dismissing the complaint, contending that because ERISA does not require a fiduciary to maximize pecuniary benefits and the plan document did not create an entitlement to such benefits, the court would be at risk of “improperly extend[ing] ERISA beyond its bounds” if it established such an entitlement.

Dimou’s filings also argued that when Thermo Fisher used forfeitures to offset the company’s matching contributions, the company contributed less than 100% of the first 6% of the compensation contributed to the plan, which the company agreed was the matching formula between 2017 and 2022. As a result, Dimou alleged that the employer violated the anti-inurement provision of ERISA because it used the plan’s assets to forgive the employer’s debt to the plan.

However, Thermo Fisher argued that the matching contribution is not mandatory under the plan, so it is not a debt to the plan. Robinson agreed with a prior case in which the court ruled that allegations of “indirect” benefits to an employer are insufficient to bring an anti-inurement claim.

Several other forfeiture cases have been filed in the last few months, but courts seem to be split on decisions. Judges have rejected petitions by Qualcomm Inc. and Intuit Inc. to dismiss complaints, but they have dismissed lawsuits against HP and BAE Systems.

Lawyers representing Dimou in the Thermo Fisher case did not immediately respond to a request for comment.

Thermo Fisher is represented by law firm Covington & Burling LLP.

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