Compliance April 1, 2025

Lawsuits Call Attention to ESOP Cash Holdings

Plan fiduciaries have been accused of failing to prudently invest cash held in employee stock ownership plan trusts in recent cases.

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In the last year, at least four companies have faced class action lawsuits over their management of cash holdings in employee stock ownership plans, potentially signaling a new litigation trend.

While investments in company stock have been commonly scrutinized, the focus on cash holdings may be a “significant and novel shift,” according to attorneys Caleb Barron and David Joffe at Bradley Law Firm P.C. 

The same law firm, Engstrom Lee LLC, filed ESOP cash investment-related complaints against Aerotech Inc., Aluminum Precision Products Inc., Pride Mobility Products Corp. and Wilson Electric Services Corp.

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In Schultz et al. v. Aerotech Inc. et al., filed in the U.S. District Court for the Western District of Pennsylvania in April 2024, former and current participants of Aerotech’s ESOP argued that the company failed to invest the non-employer stock assets of the ESOP prudently and for the exclusive benefit of ESOP participants.

According to the lawsuit, the ESOP has two types of assets: Aerotech stock and other investments. The other investments are known as the other investments account.

The company’s Employee Stock Ownership Plan and Trust Committee has kept the OIA invested exclusively in cash equivalents, namely money market accounts and short-term certificates of deposit. The plaintiffs argued that the committee’s investment of the OIA s “unusual and imprudent.”

“Cash equivalents are appropriate only if the investor has a short-term investment objective, needs to preserve their principal balance, and cannot tolerate market risk,” the lawsuit stated. “These investments are not designed or expected to provide competitive long-term growth needed by retirement plan participants.”

The plaintiffs argued that monitoring recent market data would have shown the committee that cash equivalents “earn significantly less over the long term, even when valued during declines in other asset classes.”

Aerotech has kept the OIA invested exclusively in cash equivalents since at least 2009, according to the complaint.

The complaint also suggested that one strategy to avoid investing exclusively in cash equivalents is to allow participants to direct their “other investments” balances to pooled funds that offer stocks and other asset classes. This could be accomplished by offering pooled funds within the ESOP or by allowing participants to move balances to the company’s 401(k) plan.

Attorneys at Bradley Law Firm P.C., who are not involved in any of the ESOP cases, argued in a recent post that the option of moving individuals’ balances to the 401(k) plan is most useful when the accounts of terminated participants are segregated and immediate distributions are not permitted.

“While there are complex pros and cons to this approach, reducing the fiduciary obligations on the ESOP fiduciaries is a clear benefit,” the attorneys wrote.

In a motion to dismiss the case, Aerotech argued that the cash-heavy approach was necessary to meet future repurchase obligations. However, the plaintiffs claimed that the company could have pursued higher-yield investments while maintaining adequate liquidity.

The lawsuit survived a motion to dismiss in February and will proceed to discovery. The court pointed to the “vast disparity” between Aerotech’s cash-heavy approach and the practice of similar ESOPs, arguing that the Aerotech ESOP held nearly 200 times as much cash as comparator ESOPs. The court stated that the vast disparity “supports a reasonable inference of a lack of prudence.” 

Aerotech did not immediately respond to a request for comment.

Many of the other cases are ongoing. The suit against Pride Mobility Products reached a settlement in February.

In January, the Department of Labor issued a proposed regulation aimed at clarifying the term “adequate consideration” regarding the valuation of employer stock in ESOP transactions, as required under the Employee Retirement Income Security Act. The proposal seeks to strengthen protections for participants, while providing fiduciaries with guidance on determining the fair market value of employer stock in these transactions. However, it was withdrawn after the inauguration.

Hillary Abell, the head of the DOL’s Division of Employee Ownership under the Employee Benefits Security Administration, was reinstated to her position in March after initially being terminated in February as part of President Donald Trump’s efforts to downsize the federal government.

Products & Services April 1, 2025

SPARK Institute Announces Financial Literacy Initiatives

In a recent study, “Financial and Retirement Literacy Among Students and Recent Hires,” conducted with Corporate Insight Inc., SPARK found that younger generations have low literacy aptitude rates.

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The SPARK Institute announced several financial literacy initiatives it hopes will help close the financial education gap and is encouraging financial services leaders, educators and policymakers to leverage financial literacy month as a time to advocate for widespread financial education. 

SPARK [the Society of Professional Asset Managers and Recordkeepers] is working closely with other organizations to support the inclusion of financial literacy in K-12 curriculum nationwide.

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“Our goal is to level the playing field by bringing structured, high-quality financial education into schools,” said Snezana Zlatar, co-chair of SPARK’s financial literacy committee, in a statement. “Financial literacy should not be a privilege passed down through wealth—it should be a fundamental part of every student’s education.”

In a recent study, “Financial and Retirement Literacy Among Students and Recent Hires,” conducted with Corporate Insight Inc., SPARK found that younger generations have low literacy aptitude rates. For example, most respondents did not demonstrate a basic understanding of inflation and did not correctly answer a question about the difference between a stock and a mutual fund.

Many of those surveyed also could not identify a 401(k) as a type of employer-sponsored retirement plan, including 42% of recent hires. Many also showed a lack of urgency to save for retirement, as, on average, respondents thought that 30 was the proper age to start saving.

The study also found that wealthier families tend to teach their children financial skills at home, whereas lower-income families frequently lack the confidence or resources to do the same. SPARK surveyed nearly 1,600 recent hires (ages 19 to 35), college students (ages 18 to 23) and high school students (ages 14 to 18) in the study.

SPARK’s financial literacy initiatives include:

  • Expanding financial education in schools by advocating for state-level legislation to mandate personal finance courses in grade schools and high schools;
  • Transforming learning models by collaborating with others to shift from passive financial literacy instruction to hands-on training that “builds confidence and intuition”;
  • Increasing workplace and community engagement by working with employers, policymakers and financial institutions to expand literacy programs beyond the classroom; and
  • Addressing misinformation by raising awareness about the risks of financial misinformation on social media and creating accessible, trustworthy resources for young people.

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