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Plan Governance for ESOPs & 401(k) Plans

March 2026
Nate Moody, CPFA

Building the Right Structure for ESOP & KSOP Plan Sponsors

For companies that sponsor both an Employee Stock Ownership Plan (ESOP) and a 401(k) plan, governance matters more than most realize.

Too often, plan governance evolves organically. A CFO signs documents. HR fields participant questions. A trustee handles the valuation. The investment advisor runs quarterly reports. Everyone is doing their part, but no one has stepped back to ask:

Do we have a clear governance structure?

When you sponsor an ESOP and a 401(k) plan, and especially when those plans are merged into a KSOP, thoughtful governance is an important component of prudent fiduciary oversight. Strong governance can help reduce fiduciary risk for participants, support compliance efforts at the company level, and better position individuals serving in fiduciary roles in the event of regulatory review or litigation.  This article is the first in a series focused on supporting ESOP and KSOP plan sponsors. We will start with the foundation: committee structure.

Why Governance Structure Matters

Both ESOPs and 401(k) plans are governed by ERISA. That means fiduciaries must:

  • Act solely in the interest of plan participants
  • Follow a prudent process
  • Diversify investments where applicable
  • Pay only reasonable plan expenses
  • Document decisions and oversight

When you have two plans, you effectively have two sets of fiduciary responsibilities. When those plans are combined into a KSOP, those responsibilities still exist. They do not disappear just because there is one plan document.

This is where governance becomes critical.

Two Distinct Committees: ESOP Trustee Committee & 401(k) Investment Committee

Even if you have a KSOP, you should have two separate and distinct committees:

  1. ESOP Trustee Committee (or ESOP Fiduciary Committee)
  2. 401(k) Investment Committee

They may share members. They may meet on the same day. They may review some overlapping data. But they should be structured and documented as separate fiduciary bodies.

Here’s why.

ESOP Trustee Committee

The ESOP Trustee Committee’s responsibilities are fundamentally different from a 401(k) investment committee.

An ESOP is designed to invest primarily in employer stock. The fiduciary focus is not on selecting a diversified lineup of mutual funds. It is on overseeing:

  • Annual stock valuation
  • Repurchase obligation planning
  • Major corporate transactions
  • Share allocations and distributions
  • Trustee oversight (if a third-party trustee is appointed)
  • Executive compensation reasonableness (in certain contexts)

The ESOP fiduciary’s role is often described as ensuring that the ESOP pays no more than “adequate consideration” for stock and that ongoing valuation and corporate actions are prudent.

This is a highly specialized fiduciary function.

It involves working closely with:

  • Independent valuation firms
  • Trustees (directed or discretionary)
  • ERISA counsel
  • Auditors
  • Corporate leadership

The risk profile here is different. ESOP litigation often centers on valuation, conflicts of interest, and fiduciary process. That is very different from excessive fee litigation common in 401(k) plans.

Because of this, ESOP oversight deserves its own governance framework.

401(k) Investment Committee

The 401(k) side of the house carries a different fiduciary burden.

Here, the focus is on:

  • Selecting and monitoring investment options
  • Benchmarking plan fees
  • Reviewing recordkeeper performance
  • Monitoring service provider compensation
  • Ensuring participant disclosures are accurate and timely
  • Overseeing QDIA selection and performance

This committee should meet regularly, review performance reports, compare investments against benchmarks, and document all decisions.

Unlike an ESOP, where the investment is primarily employer stock, the 401(k) plan must offer diversified investment options and follow ERISA’s prudence and diversification requirements.

The legal risks are also different. 401(k) lawsuits often focus on:

  • Excessive fees
  • Underperforming funds
  • Conflicted service arrangements
  • Failure to monitor investments

These are not ESOP valuation cases. They are investment oversight cases.

That difference matters.

What About KSOPs?

When the ESOP and 401(k) are merged into a KSOP, plan sponsors often assume that governance can also be merged.

That assumption can create problems.

Even in a KSOP:

  • The ESOP portion still requires valuation oversight.
  • The 401(k) portion still requires diversified investment monitoring.
  • The fiduciary standards are not identical.

You may have one plan document, but you still have two distinct fiduciary functions.

A common best practice is to:

  • Maintain two committees with separate charters
  • Clearly define responsibilities for each
  • Document meetings separately
  • Avoid commingling ESOP valuation discussions with 401(k) fund lineup decisions

This structure can help demonstrate procedural prudence. if reviewed by regulators or courts, documented separation of fiduciary functions may assist in evidencing procedural prudence.

Can Committee Members Overlap?

Yes, absolutely.

In many companies, the CFO, HR leader, or CEO may serve on both committees. That is fine. What matters is clarity of role.

When acting as part of the ESOP Trustee Committee, members are evaluating stock valuation, repurchase policy, and trustee oversight.

When acting as part of the 401(k) Investment Committee, members are evaluating fund performance, fees, and investment policy statements.

Separate agendas. Separate minutes. Separate decisions.

The overlap of people is not the issue. The overlap of fiduciary responsibilities is.

The Role of Fiduciary Liability Insurance

When you serve on either committee, you are taking on fiduciary responsibility under ERISA.

Fiduciary responsibility under ERISA can, in certain circumstances, involve personal liability..

While ERISA requires fidelity bonding to protect plan assets from fraud or dishonesty, that is not the same thing as fiduciary liability insurance.

Fiduciary liability insurance is designed to provide coverage, subject to policy terms, conditions, exclusions, and limits, for certain claims alleging breach of fiduciary duty..

For companies sponsoring both an ESOP and a 401(k) plan, this is especially important because:

  • ESOP valuation disputes can lead to Department of Labor investigations
  • 401(k) fee and investment litigation remains common nationwide
  • KSOP structures combine exposure from both worlds

Every plan sponsor should review:

  • Whether fiduciary liability coverage exists
  • Coverage limits relative to plan size
  • Whether committee members are individually named insureds
  • Whether defense costs are included inside or outside policy limits

Strong governance and documentation are intended to help manage fiduciary risk. Insurance may help mitigate the residual exposure that cannot be eliminated.

Practical Steps to Establish Effective Governance

If you are sponsoring an ESOP and a 401(k) plan, or operating a KSOP, here is where to start:

  1. Establish two formal committees with written charters.
  2. Define fiduciary roles and responsibilities clearly.
  3. Schedule regular meetings (at least annually for ESOP, quarterly for 401(k)).
  4. Maintain detailed minutes documenting process and decisions.
  5. Conduct periodic fiduciary training for committee members.
  6. Review fiduciary liability insurance coverage annually.
  7. Work with experienced advisors who understand both ESOP and 401(k) governance.

Governance is not about creating bureaucracy. It is about creating clarity and establishing a documented fiduciary process.

What’s Next in This Series

This article is the first in a series focused on helping ESOP and KSOP plan sponsors strengthen their retirement plan oversight.

Upcoming topics will include:

  • How to run an effective fiduciary committee meeting
  • Understanding service provider oversight and benchmarking
  • Preparing for audits and DOL inquiries
  • Strengthening employee-owner communication

If your company sponsors an ESOP, a 401(k), or a combined KSOP and you would like to evaluate your governance framework, we would be happy to have that conversation.

At Lebel & Harriman, we believe strong governance is not just about compliance. It is about leadership.

And leadership is what employee ownership is all about.

Sources

  1. Employee Retirement Income Security Act of 1974 (ERISA), Sections 404 and 409.
  2. U.S. Department of Labor, Employee Benefits Security Administration (EBSA), Fiduciary Responsibilities Guidance.
  3. National Center for Employee Ownership (NCEO), Questions and Answers on the Duties of ESOP Fiduciaries, David Ackerman.
  4. National Center for Employee Ownership (NCEO), Understanding ESOPs, Second Edition, Corey Rosen and Scott Rodrick.
  5. U.S. Department of Labor, Meeting Your Fiduciary Responsibilities publication.

Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor. | 130 Springside Drive, Suite 300, Akron, OH 44333–2431 | Telephone: (800) 765‑5201 | Lebel & Harriman, LLP and Lebel & Harriman Retirement Advisors are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.

This material is for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or investment advice. You should consult your own tax, legal, and accounting advisors before making any decision. No governance structure or insurance coverage can eliminate fiduciary risk entirely. Outcomes in regulatory reviews or litigation depend on specific facts and circumstances.

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