ESOP Plans: Beware of Outside Appraisals
DOL officials identified the following key mistakes in appraisals that can make a valuation suspect:
- No discount applied for lack of marketability;
- Failure to take into account the risk associated with having only a single supplier or customer;
- Inflated projections;
- Inconsistencies between the narrative of the valuation and the math in the appendices;
- Use of out of date financial information;
- Improper discount rates;
- Incomparable benchmark companies – for example using a large public company as a comparable to a small private company; and
- Failure to test the underlying assumptions.
These types of mistakes by ESOP plan fiduciaries/trustees in using and relying on appraisals could support breach of fiduciary duty litigation by ESOP participants, and if such mistakes caused a loss to the plan, they could be sufficient to impose liability on fiduciaries/trustees. So, it is important that plan fiduciaries/trustees pay close attention to each of the points listed above when handling ESOP valuations.
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If you need more information regarding this or any other topic affecting your retirement plan, visit our Withum ERISA Knowledge Corner online, follow us on Twitter at WSB_ERISA or contact us at [email protected] to arrange a free consultation today.
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.
