DEFINITION of 'Employee Trust'

An employee trust is a fund that an employer establishes on behalf of its employees. In an employee trust the company is the grantor and its employees are the beneficiaries. The person responsible for managing the employee trust or assets of the trust is called the trustee.

BREAKING DOWN 'Employee Trust'

The most common forms of employee trusts are employee stock ownership plans (ESOP) and employee pension plans. With an ESOP, a company contributes to a trust fund, and the trustee purchases stock on behalf of the employee/beneficiaries. Pension plans earmark funds for the employee for post-retirement income. In both cases, the employee is the beneficiary.

Employee Trust and ESOP

Breaking down ESOP even further: this is a qualified defined-contribution or DC employee benefit plan, designed to invest primarily in the stock of the sponsoring employer. ESOP plans are covered under (ERISA) or the Employee Retirement Income Security Act of 1974. ERISA sets minimum standards for participation, vesting, benefit accrual and funding for these employee plans. For example, the law defines how long a person may be required to work before becoming eligible to participate in a plan and accumulate benefits, along with detailed requirements for plan sponsors to provide adequate funding for the plan.

ESOPs are also "qualified" in the sense that the ESOP's sponsoring company, the selling shareholder, and participants receive certain tax benefits. Managers will often use ESOPs as part of a corporate finance strategy to align the interests of a company's employees with those of its shareholders. In addition to ESOP employees may own the company in other ways, such as via direct purchase programs (DPPs), stock options, restricted stock, phantom stock, and stock appreciation rights.

Employee Trust and Pension Plans

A pension plan is perhaps the most well known form of an employee trust. Pension plans exist for corporations, as well as government agencies, and public service organizations like the New Brunswick Teachers Pension Plan (NBTPP). Many of these organizations that have been in operation for a long period of time have grown their plans to a sizable amount of assets. For example, the California Public Employees Retirement System or CALPERS had assets under management (AUM) of $326.4 billion as of June 30, 2017.

As of August 31, 2017, the Teachers Retirement System of Texas (Texas TRS) had AUM of $145.9 billion. These are among the largest pension funds in the world. A study by Willis Towers Watson, a prominent pension fund consultant, published findings from 22 major pension markets in the world (P22), which have total pension assets of $41.4 billion as of February 2018.

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