Employee Stock Ownership Plans ("ESOPs") are a mainstay form of compensation according to the National Center for Employee Ownership ("NCEO"). Compiled statistics for the end of 2008 reveal that there are over 12,000 incentive and 401(k) plans with nearly 21 million participants that own stock issued by their respective employer. Given these large numbers, it's no surprise that the recent U.S. Department of Labor ("DOL") initiative to equate appraisers of company stock as ERISA fiduciaries has come under attack by various organizations.

In "Is the Appraiser a Fiduciary? ESOP Valuations" (Business Valuation Notes, Volume 11, Issue 3, March 2011), veteran business valuation expert Randy Schostag says that such a change "would almost certainly result in a very large increase in fees charged for doing valuations for Employee Stock Ownership Plans." He quotes me as asking parenthetically whether "already thin profit margins [will] get even thinner due to compliance costs."

In terms of full disclosure, this is a point I made directly to the U.S. Department of Labor when I was invited to present various workshops on risk management and valuation issues to ERISA plan examiners and regulators. While I wholeheartedly endorse the creation and implementation of smart policies and procedures as relates to "hard-to-value" investments, there is always a tradeoff between costs and benefits with the imposition of any mandate. At the margin, some ESOP trustees may opt for no or more infrequent independent assessment of company issued equity because the costs to hire an appraiser who will only assume additional liability if he or she can pass along insurance costs to clients are deemed too high. Another bad outcome is for trustees to hire "cheap" appraisers who do not have the right qualifications to render an independent and comprehensive opinion of value.

Given the importance of understanding what drives value of company stock for an ESOP or other type of employee incentive or benefit plan, along with the need for an objective third party to provide insights, bad, incomplete and/or sloppy assessments of private company stock are dangerous.

No action occurs in a vacuum.

Should appraisers be deemed ERISA fiduciaries and cease offering valuation services or agree to do them but only if they are paid a lot more money as a result, the likely fallout is ambiguity about whether ESOPs should continue as a way to recapitalize organizations and motivate employees. If they are deemed too risky, what could replace them, if anything, and what would that mean for companies that might otherwise prosper if placed in the hands of employee-managers/owners?Additionally, plan sponsors may see even more litigation surrounding questions about the appropriateness of including company securities in 401(k) plans.

Fiduciary liability has a pricetag. An injuring party that is found culpable of breach will pay. In late February 2011, U.S. District Court jurist, Judge Rebecca R. Pallmeyer, denied the ESOP defendants' request to cap damages related to fiduciary breach at the $15.3 million paid for a $250 million note to finance the purchase of company stock. Click to read the February 28, 2011 opinion of Judge Pallmeyer in the matter of the GreatBanc Trustee of Tribune ESOP Case and "Tribune Trustee Can't Cap Damages at $15M" by Bridget Freeland (Courthouse News Service, March 7, 2011).

Note to Readers:

• Click to read "AICPA Opposes DOL's Proposed Changes to the Definition of 'Fiduciary': Institute official testified at today's Labor Department hearing" (AICPA Press Release, March 2, 2011).
• Click to read the January 31, 2011 letter from The ESOP Association to the Employee Benefits Security Administration Regarding the "Proposed Regulation, 'Definition of the Term Fiduciary'."