Summary of the 2005 IRS Form 5500

The DOL has published Private Pension Plan Bulletin - Abstract of 2005 Form 5500 Annual Reports, a report that provides a summary of the 2005 IRS Form 5500 Annual Reports:

"HIGHLIGHTS FROM THE 2005 FORM 5500 REPORTS

Over the past three decades, as the private pension system has shifted from defined benefit (DB) plans toward 401(k) type defined contribution (DC) plans, the financing of benefits has shifted from employers to participants. In 1978, when legislation was enacted authorizing 401(k) type plans that allow employees to contribute on a pre-tax basis, 29 percent of contributions to DC plans, and only 11 percent of total contributions to all DB and DC pension plans were contributed by participants. The percent of contributions made by the employee to DC plans has doubled since then, but has remained steady at 60 percent for the past seven years. Other findings from Form 5500 series reports for 2005 plan years are summarized below.

• The total number of pension plans fell for the fifth year in a row, by 0.6 percent in 2005, to 679,000 plans. DB plans increased by 0.2 percent, while DC plans fell by 0.6 percent. The decline in DC plans was led by a 20 percent decrease in the number of money purchase plans, which follows a 30 percent decrease in 2004.
  
• In 2005, the total active participant count increased to 82.7 million. However, most of the increase between 2004 and 2005 is due to a change in the definition of active and total participants used for the 2005 report (see page 2 for further explanations). The number of active participants in DB plans decreased to 20.3 million while the number of active participants in DC plans increased to 62.4 million.
  
• 401(k) type plans continued to grow in 2005, with the number of plans increasing from 419,000 to 436,000. The number of active participants increased to 54.6 million (please note that the definition of active participants has changed, see page 2 for further explanations).
  
• Pension plan assets increased for a third year in 2005. Total pension plan assets reached $5.1 trillion, exceeding the previous high of $4.7 trillion in 2004. DB plan assets grew by 7.0 percent to $2.3 trillion, and DC plan assets increased by 8.5 percent to $2.8 trillion. 401(k) plan assets grew 9.5 percent to a total of $2.4 trillion. Aggregate returns of defined contribution plans exceeded those of defined benefit plans for the first time in the last seven years.
  
• DC plan contributions grew by 8.8 percent, to $248.8 billion. DB plan contributions decreased by 1.9 percent to $92.7 billion, a smaller decline than was observed in 2004. Overall, contributions to pension plans increased by 5.7 percent in 2005 to $341.5 billion.
  
• In 2005, pension plans disbursed $354.5 billion for payment of benefits, with $136.6 billion being disbursed from DB plans and $218.0 billion from DC plans. These payments were made either directly to retirees, beneficiaries, and terminating employees, or to insurance carriers for payment of benefits. These amounts reflect a decrease from 2004 of 2.8 percent in defined benefit plans and an increase of 13 percent in defined contribution plans.
  
• Overall, pensions disbursed $13.1 billion or 3.8 percent more than they received in contributions. DB plans disbursed $43.9 billion more than they collected in contributions, while DC plans disbursed $30.8 billion less than they received in contributions."

ESOP Statistics

An IRS Form 5500 was filed for 6,881 ESOPs, 3,756 nonleveraged and 3,125 leveraged. Here is a listing of the ESOP-specific tables provided in the report:

• Number of Employee Stock Ownership Plans (ESOPs), Total Participants, Active Participants, Assets, Contributions, and Benefits by type of plan, 2005
  
• Number of Employee Stock Ownership Plans (ESOPs), Total Participants, Active Participants, Assets, Contributions, and Benefits by type of ESOP, 2005
  
• Number of Employee Stock Ownership Plans (ESOPs) by number of participants and primary or supplemental status,2005
  
• Balance Sheet of Employee Stock Ownership Plans (ESOPs) with 100 or More Participants by leveraged status, 2005
  
• Income Statement of Employee Stock Ownership Plans (ESOPs) with 100 or More Participants by leveraged status, 2005
  
• Number of Defined Contribution Plans, Participants, Active Participants, Assets, Contributions, and Benefits by 401(k) and ESOP status, 2005

Tribune ESOP, 409A Corrections Program, Top 10 Employee Ownership Stories of 2007

The December 28, 2007 Employee Ownership Update is online and discusses the following:

• ESOP, Zell Take Over at Tribune
  
• New 409A Corrections Program Released
  
• Construction Industry Predicts More Employee Ownership
  
• Top 10 Employee Ownership Stories of 2007

Tribune ESOP

As discussed in Tribune ESOP is Born, the Tribune transaction has been finalized, with the ESOP owning 100% of Tribune’s shares and Sam Zell holding warrants convertible into a 40% stake. The Update discusses how the Tribune will be the fifth-largest majority employee-owned company. It also notes how the model of the Tribune transaction has yet to be replicated.

409A Corrections Program

The Update also discusses the 409A correction programs released under IRS Notice 2007-100 - Transition Relief and Guidance on Corrections of Certain Failures of a Nonqualified:

"The guidance is aimed at specified unintentional operational failures as well as failures for up to the limit on elective deferrals under Section 402(g) that are not corrected in the same taxable year (402(g) provides limits on non-taxable deferrals into qualified employee benefit plans). The relief is contingent upon the employer taking "commercially reasonable" steps to prevent recurrence of the problem. In addition, the notice asked for comments on potential expansion of the program to amounts too large for correction under current guidance."

Employee Ownership Trend and Top 10 Employee Ownership Stories of 2007

The Update also discusses the employee ownership trend construction industry and provides the Top 10 Employee Ownership Stories of 2007.

ESOP Fidelity Bonding Requirements

What is a Fidelity Bond

A fidelity bond is defined as "a debt obligation serving to protect an employer from loss in the event that its employees cause damages through dishonest or negligent action."

Bonding Requirements

Every fiduciary and every person who handles plan funds must be bonded per ERISA Section 412(a), 29 U.S.C. Section 1112(a) - Bonding:

• The amount of the bond must be fixed at the beginning of the fiscal year of the plan and must be for 10% of the amount of the funds handled, with a minimum coverage of $1,000 and a maximum coverage of $500,000.


• The bond must protect the plan, either by naming the plan as insured or attaching a rider or separate agreement with the surety company.


• The bonding requirements are separate from any fiduciary insurance purchased by the plan, employer, or the fiduciaries themselves. There is no requirement for fiduciary insurance, but bonding is required.

New ESOP Bonding Requirements

The Pension Protection Act of 2006 (PPA) (Public Law 109–280—Aug. 17, 2006) increased the maximum coverage bonding requirements for ESOPs and other qualified plans holding employer securities to $1,000,000. This change is effective for plan years beginning on or after January 1, 2008:

SEC. 622. INCREASE IN MAXIMUM BOND AMOUNT.

(a) IN GENERAL.—Section 412(a) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1112), as amended by section 611(b), is amended by adding at the end the following: ‘‘In the case of a plan that holds employer securities (within the meaning of section 407(d)(1)), this subsection shall be applied by substituting $1,000,000’ for ‘$500,000’ each place it appears.’’.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to plan years beginning after December 31, 2007.

IRS Examination Guidelines

The following excerpt from the EP Examination Process Guide should give you an idea of what the IRS may be looking for during an audit:

Inadequate or No Fidelity Bond

Plans are required to have a fidelity bond equal to at least 10% of the most current handled assets (DOL Regs. 2580.412-11). The maximum bond required is $500,000. Effective for plan years beginning after December 31, 2007, the fidelity bond maximum is increased from $500,000 to $1 million for plans holding employer securities. No deductible is allowed in the bond and it must be in the name of the plan or trust (not the employer) or the bond must specifically state that the plan or plans (by name) are covered and that the general bond deductible doesn't apply per ERISA requirements.

Are nonspouse beneficiary rollovers required?

Are nonspouse beneficiary rollovers required? Since the enactment of the Pension Protection Act and IRS Notice 2007-7, 2007-5 I.R.B. 395 - Miscellaneous Pension Protection Act Changes, the answer has changed a few times. Revisiting Rollovers to NonSpouse Beneficiaries Before 2008 recaps the various changes to the rules and regulations and how the answer has changed from yes to no to yes, and concludes with the following:

“Section 1107 of PPA permits plans to adopt amendments for PPA as late as the last day of the first plan year which begins on or after January 1, 2009, as long as the plan timely operates according to PPA. For rollovers to nonspouse beneficiaries, until the IRS or Congress states differently, plans are required to permit rollovers to nonspouse beneficiaries for plan years beginning on or after January 1, 2008, and can adopt an amendment to include this provision as part of the plan document no later than the last day of the first plan year which begins on or after January 1, 2009.”

ESOP Planning: Allocation Timeline

The annual employee stock ownership plan (ESOP) allocation process involves many different parties as well as different moving parts. In order to complete the ESOP allocation in a timely manner, it is important to effectively manage the allocation process. One of the easiest and most effective ways to manage the ESOP allocation process is by preparing and maintaining an allocation timeline.

What is an allocation timeline?

An allocation timeline is a report that lists the various ESOP deliverables along with the responsible party and due date. The responsible party could be the Plan Administrator, Plan Trustee, internal record keeper or third-party administration (TPA) firm, accountant, auditor, valuation firm, company or qualified-plan attorney, lending institution, or plan consultant or advisor. The level of detail needed for an allocation timeline varies from plan to plan and year to year. While you could use project management software for the timeline, a spreadsheet or word processor document will be sufficient and enable you to easily maintain the timeline and share it with all parties.

What are the benefits of using an allocation timeline?

Using an allocation timeline provides you with a tool to manage the ESOP allocation process and hold all parties accountable to meeting their objectives. It also helps you keep organized by documenting all tasks in one location.

What information should be included on an allocation timeline?

While the format of each timeline will vary, here is a list of some of the common items on an allocation timeline:

• Deliverable or item to be completed
  
• Party responsible for the task (When possible, you should identify a specific person.)
  
• Date the item is scheduled to be completed
  
• Date the item is actually completed
  
• Date the item was completed last year
  
• Number of days it will take to complete
  
• Prerequisites to processing the deliverable

How do I prepare an allocation timeline?

The easiest and most effective way to prepare an allocation timeline is to identify the key deliverables and due dates and work your way backward to the start of the plan year. The most common key deliverables include reporting final account balances, delivering participant statements, conducting employee meetings, and filing IRS Form 5500. As you move backward, you will need to define how many days each item will take to complete. For example, it may take one day to organize the trust statements and one week to prepare and review the trust accounting. If you run out of days, you will either need to change the end deliverable date or look for ways to speed up some of the earlier tasks. The level of detail to include on the allocation timeline varies from plan to plan and plan year to plan year. For example, the trust accounting for one plan may be very straightforward and may only require one item (prepare and review trust accounting reports). Another plan may involve multiple loans that are paid using both dividends and contributions and you may be working closely with the accountant. In this case, you will probably want to identify the items that each party is responsible for separately, such as prepare listing of loan payments, locate minutes containing contributions and dividends, prepare and review release of shares schedules, and prepare and review complete trust accounting reports.

What are some of the best practices to effectively use allocation timelines?

• Assign an owner to the timeline. - The owner will be responsible for ensuring that the timeline is updated (not necessarily doing any or all of the updating) and that all parties are meeting their obligations in a timely manner. If a deadline is missed, this person quickly works with the responsible party to get the allocation back on target or revises the timeline accordingly.
  
• Assign an owner who is not involved with the day-to-day responsibilities of the plan. -
  While this is not always possible, it is very effective because it allows someone to stay focused on the final deliverables and not on the details of a particular item.
  
• Ensure that the appropriate company representatives are involved in the communication process. - One of the worst things that can happen is that all parties involved with the allocation process are on the same page as far as the timing but not on the same page as others at the company (e.g., the owner, senior management, the participants). If the deliverable date is going to be changed, it is essential that the change be communicated to the appropriate people in the company.
  
• Define the number of days that it will take to complete a specific project. - This will illustrate how a delay in one part of the process affects the rest of the process and will assist you in making changes in the timeline. For example, if the final allocation cannot be completed until one week after the stock value is received, and the stock value is three weeks late, then it is impossible to expect the final allocation will be completed on time.

What items should I include on an allocation timeline?

Every allocation timeline will be slightly different. If you use the timeline effectively, you will find more items are added every plan year as your ESOP matures and you become more reliant on the timeline. Plan circumstances will also dictate the specific items on the timeline. For example, if your company is frequently involved with acquisitions and dispositions, you will probably want to add a specific item to the timeline confirming that you have gathered the appropriate information. However, this item would not be relevant for most timelines. Generally speaking, the more detailed the timeline, the better.

Sample Timeline

Here is a link to a sample ESOP allocation timeline.

The ESOP Planning process includes planning for both the current year ESOP administration process as well as the various events that take place over the life of an ESOP. This article is one in a series of ESOP Planning articles authored by Aaron Juckett. Aaron Juckett is an ESOP consultant and the founder of ESOP Insourcing LLC.

Baby Boom Generation to Start Retirement in January

US braces for baby boom retirement wave discusses how the first of the baby boom generation is set to start retirement in January, "setting off a demographic tidal wave with wide-ranging economic, political and social implications." The article includes some interesting statistics:

• There were an estimated 80 million Americans born between 1946 and 1964.
  
• "The cost for government-funded social security and medical care for the boomers leaves a funding gap of between 40 and 76 trillion dollars for next 75 years"
  
• "An unprecedented number will soon be entering the retirement stage of life. One-third of the population will be over 50 by 2010. One in five will be over 65 by 2010."
  
• "Americans aged 50 and over have a collective one trillion dollars in disposable income and control 67 percent of the US wealth"
  
• "71 percent of adults surveyed plan to work in some capacity after their formal "retirement.""

For more information on baby boomers, generations, and how they relate to ESOPs, here are some related links:

• Baby Boomers Selling to ESOPs
• Why the Number of ESOPs is not Growing at a Faster Rate
• Motivational Buttons
• Tribune Shareholders Approve Deal/Exit Strategy

Tribune ESOP is Born, Employee Ownership in the Construction Industry

Tribune ESOP is Born

Tribune Buyout Closes; Zell's Shake-Up Starts and Tribune Completes Going-Private Transaction; Sam Zell Named Chairman & CEO discuss how the $8.2 billion buyout was finalized today. The company's stock will cease trading at the today's market close. History of Tribune Transaction provides a history of the Tribune transaction. In addition, An ESOP for the Tribune Company? Things to Know in Assessing the Transaction provides a very informative analysis of the transaction, and Tribune cleared to go private this year discusses the regulatory issues that the transaction faced.

Employee Ownership in the Construction Industry

A press release includes employee ownership as one of four-standout trends in the construction industry:

"Employee Ownership. Ownership turnover within the construction industry will bring change and challenge over the next decade. Family ownership is declining while broad-based employee ownership is increasing."

IRS Notice 2008-7 - Extension of Transitional Relief for Diversification Requirements for Certain Defined Contribution Plans

The IRS announced the release of IRS Notice 2008-7 - Extension of Transitional Relief for Diversification Requirements for Certain Defined Contribution Plans:

"Notice 2008-07 provides relief for certain defined contribution plans holding publicly traded employer securities under Notice 2006-107, 2006-51 I.R.B. 1114. The transitional relief provided for the period prior to January 1, 2008, in paragraph 4 of Part III.D of Notice 2006-107 will continue to apply after 2007 until new regulations go into effect.

Notice 2008-7 will be published in Internal Revenue Bulletin 2008-3, dated January 22, 2008."

Extension of Transitional Relief

• "It is expected that these regulations, when finalized, will not be effective before plan years beginning on or after January 1, 2009."
• "Except as otherwise provided in the proposed or final regulations, plans must continue to apply Notice 2006-107 until the regulations go into effect."
• "For this purpose, the transitional relief provided for the period prior to January 1, 2008, in paragraph 4 of Part III.D of Notice 2006-107 will continue to apply after 2007 until the regulations go into effect."

Reasons for ESOP Plan Termination, Alternate Bonus Program, Five Errors in Equity Plan Design

The December 14, 2007 Employee Ownership Update is online and discusses the following:

• Repurchase Not Major Driver of ESOP Plan Termination
  
• Useful Analysis of Proposed Changes in Taxation of S ESOP Synthetic Equity in Rangel Bill
  
• Stewardship-Sequenced Payouts: An Innovative Idea for Bonuses
  
• New Article Looks at Five Common Errors in Equity Plan Design in Closely Held Companies
  

Reasons for ESOP Plan Termination

The Update discusses the results of the final report of the reasons for ESOP plan termination. The results are consistent with our discussion in Why the Number of ESOPs is not Growing at a Faster Rate.

The second phase of the study obtained data from administration firms representing about 1/3 of the ESOP population. According to the results, less than 2% of the companies terminated their plans each year, which is half the rate of DC plans in general. The study found that over half received an attractive offer they could not turn down, even though they could handle the repurchase obligation. The remaining reasons were split between the following:

• Companies that were dissatisfied with the ESOP for reasons other than repurchase
  
• Companies that were doing well financially but could not handle the repurchase obligation
  
• Companies that were in financial difficulty

The Update also notes the following:

"The study also found that 49% of all companies in the sample were majority ESOP-owned and 40% were S corporation ESOPs. S ESOPs were about half as likely to report that difficulty with repurchase was a cause for plan termination as C ESOPs."

The Report concludes with the following:

"The data provide considerable encouragement that ESOPs are an increasingly stable and significant business form, not a transitional tool."

More information on the first phase can be found here:

ESOP Terminations

Reasons for ESOP Termination/ESOPs and Economic Development/Next Step in Tribune Transaction

Rangel Bill Analysis

The Update discusses the blog post discussed in Detailed Description of Rangel Proposal with Examples.

Alternate Bonus Program

This section discusses an article from the 4th Quarter 2007 WorldatWork Journal:

"Executive Stewardship Incentives from Innovative Bonus-Payout Methodology

By Timothy S. Clark, The George Washington University Balaji Krishnamurthy, Ph.D., LogiStyle
Instead of the conventional approach of concurrent payout of bonuses, a sequential methodology ensures those with less influence get due rewards before those with more influence, providing clearer incentives for the application of that influence in ways that benefit broad sets of stakeholders. This paper introduces stewardship-sequenced payout."

The Update describes an alternate system of paying bonus that is considered to be more responsible and more credible to employees and shareholders:

"The concept is simple: bonuses are paid at LogiStyle when shareholder return targets are met. If they are, then bonuses are paid to lower-level employees until their bonus targets have been met. The bonus triggers cascades up through however many layers of the company the company sets, with the CEO getting a bonus only if everyone else's bonus targets are met. To recognize the additional uncertainty, the size of the CEO bonus could be increased over what it might have otherwise been."

Five Errors in Equity Plan Design

The Update provides a link to Five Key Errors in Designing Equity Compensation Plans in Closely Held Companies, and article that discusses the following five errors and provides five tips to building a dynamic model:

1. Error One: The 10% Solution
   
2. Error Two: Most of the Equity to Be Given Will Be Given Out Up Front
   
3. Error Three: Unless We Sell or Go Public, No Exercise Is Allowed
   
4. Error Four: Only "Key" Employees Will Get Equity
   
5. Error Five: How Much Each Employee Gets Will Be Based on Some Number I Read or Heard

More Information on Fee Disclosure Proposed Regulations

The DOL recently announced Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee Disclosure, a DOL Proposed Regulation on fee disclosures. Reasonable Compensation Proposed Regs Floated by DOL discusses how the proposed regulations are "directed at amending ERISA Section 408(b)(2), 29 U.S.C. Section 1108(b)(2) - Exemptions from prohibited transactions - Enumeration of transactions exempted from section 1106 prohibitions to clarify the meaning of "reasonable" contract or arrangement.":

• The furnishing of goods, services, or facilities between a plan and a party in interest to the plan is generally prohibited under ERISA Section 406(a)(1)(C), 29 U.S.C. Section 1106(a)(1)(C) - Prohibited Transactions - Transactions between plan and party in interest
  
• Exceptions to the above-mentioned rule are provided in ERISA Section 408, including ERISA Section 408(b)(2), 29 U.S.C. Section 1108(b)(2) - Exemptions from prohibited transactions - Enumeration of transactions exempted from section 1106 prohibitions, which "exempts certain arrangements, including service contracts, between plans and service providers which would otherwise be prohibited by ERISA section 406 as long as the contract or arrangement is reasonable, the services are necessary for the establishment or operation of the plan, and no more than reasonable compensation is paid for the services."
  
• The proposed regulation is also proposing changes to Schedule C of Form 5500. Final Revised Form 5500 -- New Fee Reporting Rules is an article that discusses these changes in more detail. The PPA Blog post asserts that "in the land of unintended consequences, this proposed change to Schedule C may make some very interesting information public and available in a way in which it is not currently available."

Required Minimum Distributions (RMD) and Resources

I recommend that you use this post as a reminder to make sure you have complied with the required minimum distribution (RMD) requirements as provided under IRC Section 401(a)(9) - Qualified pension, profit-sharing, and stock bonus plans - Required distributions. To better understand the RMD requirements, here is an excerpt from the Distributions installment of ESOP Planning:

• Are any participants due to receive required minimum distributions (RMDs)? The IRS requires that participants must begin taking RMDs once they reach age 70½. The actual date that they must begin receiving RMDs is generally no later than the April 1 after the later of reaching age 70½ and the date of termination (unless you are a 5% owner, in which case you must begin receiving RMDs regardless of your termination date). They must continue to receive RMDs each December 31 until they no longer have an account balance. The value of the RMD is calculated based on actuarial tables provided by the IRS, the age of the each beneficiary (if any), and the beneficiary's relationship to the participant. You should carefully analyze the RMD status of all employees age 69 and older so you are not caught off guard. If the participant does not take the RMD each year, the participant will owe a 50% penalty on the amount her or she should have withdrawn and the plan risks becoming disqualified.
  
• Do you have enough cash in the ESOP to pay RMDs? Another factor to consider for RMDs is that the plan may not have enough cash to pay to the participant(s) to satisfy the RMD requirements. If this is the case, the plan will most likely have three options:
  
  
  • The stock will be repurchased (recycled) in the plan to other participants - cash will need to be contributed to the plan.
    
  • The stock will be sold and the proceeds used to pay the participants – a stock appraisal on the date of the sale will need to be obtained.
    
  • The stock will be distributed and put back to the company (or the ESOP). It is important to note that as it gets closer to December 31, it becomes more likely that the stock value may be "stale" (see above discussion) and not an accurate reflection of the actual stock value.

  This situation can be avoided if you have identified RMDs ahead of time and have a well-planned distribution policy.

RMD Resources

Required Minimum Distributions (RMD) - April 1 Deadline provides a basic explanation of how to calculate the required beginning date and the information to use in the calculation:

Generally, all participants must receive their first RMD by the April 1 of the year following the year they meet both of the following requirements: attain age 70½ and terminate employment. This date is referred to as the participant's required beginning date.

Here is an example of a participant that met both requirements in 2006:

• Required Beginning Date – Since the participant met both requirements in 2006, the required beginning date is April 1, 2007.
  
• RMD #1 - The participant must receive their first RMD by April 1, 2007. This RMD is the participant's 2006 RMD and is calculated using the 2005 balance.
  
• RMD #2 - The participant must receive their second RMD by December 31, 2007. This RMD is the participant's 2007 RMD and is calculated using the 2006 balance.
  
• Each subsequent RMD - Each subsequent RMD will be due on each subsequent December 31 (calculated using the prior year's balance).

Some plans provide eligible participants with the option to take their first RMD in the year they satisfy both requirements. Using the example, the participant would take their first RMD in 2006.

Another option is for the participant to take both their first and second RMDs before April 1 of the year the RMDs are due. Using the example, the first two RMDs would be taken in 2007 by April 1, 2007.

Here are two online RMD calculators you may find useful.

1. 2007 RMD Calculator – This calculator requires you to enter the age as of December 31, 2007, and the balance as of December 31, 2006. This calculator will not handle the scenario of a spouse beneficiary that is more than ten years younger than the participant, as this scenario requires the usage of the Joint Expectancy tables.
   
2. Financial Calculators – Required Minimum Distribution (RMD) – This calculator has more factors to input and is able to handle the beneficiary scenario discussed above. The calculator will also estimate future RMDs and account balances based on the future estimated rate of return.

Last year I tested the calculators using this Uniform Lifetime Table and my calculation agreed with the online calculators.

The IRS also has a Retirement Plans FAQs regarding the Required Minimum Distributions on their website.

Ownership – A Three-Step Formula to Creating a Motivated Workforce

Ownership: The Ultimate Motivator discusses how encouraging employees to take ownership of their work will result in better customer service and a stronger company. The article provides a three-component formula for creating a turbo-charged workforce:

"Make work feel more like play, shift the collective focus of the organization outward to helping customers, and let employees develop their own strategies for improving the customer experience."

The article stresses the importance of using a systematic process to implement the changes to the culture and suggests a four-step experiment:

1. "Have at least one employee come up with at least one new and original idea for improving the customer experience."
   
2. "Encourage the employee to take charge of implementing the idea. Provide help or support if needed."
   
3. "Make it convenient for customers affected by the idea to supply positive feedback about it."
   
4. "Observe the effect of this feedback on the employee who originated and implemented the idea."

The article mentions three additional articles, one for each component of the formula. The first two articles are currently available:

1. Creating a Turbo-Charged Work Force – This article discusses four ways to instill a sense of winning:
   
   
   
   1. The element of challenge
      
   2. A clear set of rules
      
   3. A scoring mechanism for immediate feedback
      
   4. The satisfaction of winning
      
      
2. The Biggest Motivation-Killer – This article discusses cynicism and the cultural characteristic that high-performance businesses have in common:
   
   "Despite other differences, high-performance businesses all share one striking cultural characteristic: Their predominant collective focus is not internal, on profit or organizational self-interest. In these organizations the predominant focus is external, on filling customers' needs or on improving customers' lives in some way."
   

The third article, which has yet to be posted, will discuss how employees are allowed to experience high levels of involvement and ownership.

An Attractive Acquisition Offer was the Primary Reason for ESOP Termination

The Employee Ownership Foundation issued a press release announcing the release of a final report on reasons for ESOP terminations:

"WASHINGTON, Dec. 14 /PRNewswire/ -- The Employee Ownership Foundation today released a final report on the reasons why companies terminate ESOP plans. The report was completed in two phases and found that the most common reason for termination of an ESOP is acquisition of the ESOP company by new owners. The report was commissioned and funded by the Employee Ownership Foundation and conducted by the National Center for Employee Ownership in Oakland, CA.

Phase I of the report found that while the most common reason for termination may be acquisition, there is no one reason to explain ESOP termination. Thirty executives of former ESOP companies, who were well-known in the ESOP community, were interviewed in depth for Phase I and were asked about repurchase obligation (Repurchase obligation is a closely held company's obligation to repurchase its stock from former ESOP participants and their beneficiaries.), acquisition offers, S corporation status, company size, percentage of ESOP ownership, and corporate performance to determine the reason for their companies' ESOP termination. It is important to note that a very small sample of executives from ESOP companies were interviewed for Phase I of the survey as companies that have terminated ESOPs and/or were acquired are difficult to track. This small number of companies brings into question the validity of the Phase I statistics; in any event, Phase I finding are:

-- 17% of acquired companies said that repurchase obligation was one of the primary reasons the ESOP was terminated; another 28% said it was a important reason; 6% said it contributed to the decision; 6% said it played a minor role; and 44% said it played no role

-- For 17% of companies that terminated the ESOP, repurchase obligation was the sole reason; another 17% said it was the primary reason; 33% said it was an important reason; 17% said it had a minor impact; and 17% said it played no role

Phase II of the report was conclusive that an attractive acquisition offer was the primary reason for ESOP termination. Phase II of the report surveyed service providers to ESOP companies at ESOP advisory firms and large plan administrators. From the files of these service providers, data from 455 ESOP plan terminations was analyzed and revealed:

-- 51.2% of the companies could handle repurchase obligation but received an attractive acquisition offer that was too good to turn down

-- 15.6% were dissatisfied with the ESOP for reasons other than repurchase obligation

-- 13.2% of companies were doing well financially but could not manage their repurchase obligation or did not expect to do so in the future

While repurchase obligation is an ongoing issue for ESOP companies, according to Phase I of this report, about 85% of the terminations were in response to an offer "too good to refuse" as the price offered for shares was very lucrative. Clearly, employee participants in these cases received significant money for their retirement security."

I was unable to locate a copy of the report online. It should be posted sometime in the next few days and will provide a link in a separate post. Here are some related links about the first phase of the study and the reason that ESOPs are not growing at a faster rate.

Why the Number of ESOPs is not Growing at a Faster Rate

ESOP Terminations

Reasons for ESOP Termination/ESOPs and Economic Development/Next Step in Tribune Transaction

The press release concluded with the following request to explore the key drivers to ESOP sustainability:

"Immediate Past Chair of The ESOP Association Steve Voigt, CEO of the King Arthur Flour Company in Norwich, VT, a 100% S corporation ESOP, commented on the survey's findings saying, "The research is a great jumping off point. I encourage the two ESOP Association Directors and Trustees Retreats in 2008 to explore the key drivers of ESOP sustainability including: Board understanding of and commitment to ESOPs, their success in developing 2nd generation ESOP management, and repurchase obligation. If the ESOP community continues to explore key drivers of ESOP sustainability your country stands to gain many benefits, not least of which is long-term wealth creation for employee owners.""

ESOP Planning

There are only 20 days, including today, remaining in 2007. Yes, that is right, only 20 days. For calendar year ESOPs, the 2007 plan year is almost over, and it is almost time to process the 2007 allocation. If you have not already done so, now is definitely the time to start preparing for the 2007 ESOP allocation process. Last year I introduced a series of ESOP Planning articles. This year I will be updating the articles and posting them on this blog. I will start today by providing an introduction to ESOP planning.

Let's start by defining planning:

"Planning is one of the most important project management and time management techniques. Planning is preparing a sequence of action steps to achieve some specific goal. If you do it effectively, you can reduce much the necessary time and effort of achieving the goal.

A plan is like a map. When following a plan, you can always see how much you have progressed towards your project goal and how far you are from your destination. Knowing where you are is essential for making good decisions on where to go or what to do next.

One more reason why you need planning is again the 80/20 Rule. It is well established that for unstructured activities 80 percent of the effort give less than 20 percent of the valuable outcome. You either spend much time on deciding what to do next, or you are taking many unnecessary, unfocused, and inefficient steps.

Planning is also crucial for meeting your needs during each action step with your time, money, or other resources. With careful planning you often can see if at some point you are likely to face a problem. It is much easier to adjust your plan to avoid or smoothen a coming crisis, rather than to deal with the crisis when it comes unexpected."

ESOP planning is planning for both the current year ESOP administration process as well as the various events that take place over the life of an ESOP. If ESOP planning is not a part of your administration process, you should schedule an ESOP planning meeting right away to get the process started. Most companies schedule planning meetings in advance and on a regular basis. You should meet at least once per year, and depending on where you are at in the planning process, you may need to meet more often. While there is no specific time that you have to conduct your meeting(s), most companies schedule them prior to the end of the plan year, at the start of the plan year, or after the annual allocation has been completed.

If you are not already, you should consider involving other members of the ESOP team (such as your internal or external recordkeeper, ESOP consultant, and ESOP attorney) in your discussions. They will be able to contribute their experience and expertise to the process as well as gain a better understanding of the timing of the allocation process and the issues that the ESOP team is facing.

Over the next few weeks, we will examine some of the different items you should consider during the review and preparation process, including the following:

• Allocation Timeline
• Plan Documents and Disclosures
• Plan Expenses
• Distributions
• Contributions
• Dividends and S Distributions of Earnings
• Appraisal of Employer Securities
• IRS Form 5500 and Plan Audit

Establishing and Maintaining a Training Program

Practical Training Tips for Smaller Firms is a checklist that suggests tips for establishing and maintaining a training program:

• Purchase training software
  
• Create a resource book for new employees of processes
  
• Set specific dates each month to offer new-hire training
  
• Use the software program Camtasia Studio to capture screen shots
  
• Create a training library
  
• Find grants or tax credits
  
• Use your reps
  
• Use DVDs to focus on technical skills
  
• Videotape all training sessions
  
• Create learning plans for your employees and use them as part of the mentoring process
  
• Bring in outside trainers
  
• Turn repetitive questions into a weekly or monthly tips e-mail
  
• Be creative with training opportunities

Transcripts of ESOP Commentary and Why ESOPs Should Care About the Rangel Proposal

Last month I discussed the 2007 Las Vegas Conference & Trade Show, including the keynote address by Dr. J. Robert Beyster and the commentary by ESOP Association President Michael Keeling. Here are links to the transcripts for your reference:

1. Dr. J. Robert Beyster keynote address at Employee Ownership Foundation luncheon – His address includes a discussion of using hybrid (ESOP and direct) ownership structures and blending employee ownership with a meritocracy. It also provided some specific examples of how the employee ownership system provided the company with a competitive advantage.
   
2. Why Now? – The November ESOP report contains a copy of the ESOP Association president J. Michael Keeling's commentary, which includes a discussion of five reasons why the ESOP community should be concerned about the current legislative climate.

Related to #2, Should S ESOPs Care About Proposed Law Change?, a post by J. Michael Keeling, explains why S Corporation ESOPs should be concerned about the Rangel Proposal (see related links below), even if they do not have any synthetic equity or if they are grandfathered in under the proposal. It also stresses how the legislation would be a bigger setback for the Association's Vision ("the number of employee owners through ESOPs grows and grows until a substantial majority of private sector employees are owners of the companies where they work") and how that could impact future ESOP law for both S and C corporations.

Related Links

Why the Number of ESOPs is not Growing at a Faster Rate
Detailed Description of Rangel Proposal with Examples
409A Extension/Rangel Proposal/ESOPs and Succession Planning/CEO Stock Options
Rangel's Corporate Tax Proposal
Update on Rangel's Corporate Tax Proposal
Text Of Rangel's Tax Proposal

LaRue Case, IRS Form 5500 Changes, Benefits of Participating in an ESOP

The December 3, 2007 Employee Ownership Update is online and discusses the following

• Supreme Court Hears Case on Standing of Individual Plan Participants
  
• DOL Drops Schedule E Filing Requirement for Form 5500
  
• Retirement Plan Participation Falls