Interview with Sue Ledingham
I do have a long history with ESOPs, and I've worn a lot of different hats in the field. My career started not too long before the first ESOPs. My first office job was in 1975, I worked for an insurance agent who did primarily administration of defined benefit plans. Since insurance played a large part in funding for retirement at the time, many insurance agencies had an administration 'arm.'
I started in administration right when ERISA hit. I got my feet wet interpreting ERISA, doing summary plan descriptions and trying to get all the reporting and disclosure requirements caught up for all of our clients. It was a great time for me to dive into the field, because it certainly isn't a career you can study for in school.
Q: You started out as an insurance administrator?
I was doing the administration of defined benefit plans; the calculations, document and reporting requirements. Primarily at that point, in the first couple of years, it was interpreting all of the changes that ERISA brought to the whole qualified plan arena, and getting all of our clients' documents and summary plan descriptions up to snuff.
I've always been a third party administrator working directly with clients.
Q: Where was that?
That was in agent was with Connecticut Mutual and his office was in Beverly Hills.
Q: So you transitioned into ESOP administration right when it happened?
No, when I first started with the insurance agency, it was primarily defined benefit plans, some defined contributions. I've been trying to remember, because somehow I had a conversation with Rainer Schaaf, and he mentioned that, if I was ever looking to change my job, to give him a call.
I was pretty young and self-focused back then, and I thought that it would be a lot nicer to work closer to home, so one day I called Rainer. This was in early '79, and he said, "Come on over, we'll talk!"
So I started working for Rainer in early '79, and that's when I was first introduced to ESOPs. He had some defined benefit, money vs. profit sharing plans, but his primary focus was on ESOPs, because of his history.
Q: How did you meet?
We actually met when I went in after contacting him and basically calling him on his comment to "call me if you're looking for something." As far as how we first met on the phone, I truly can't recall. It may have been just getting hold of him because of a mutual client; I can't for the life of me to remember.
Q: You mentioned moving closer to home. Where is that?
At the time, home was in the San Fernando Valley and Rainer's office was as well, in Woodland Hills, California. If I changed employers, I wouldn't have to go over the canyon and into Beverly Hills every day, Rainer's office was right in my backyard.
At the time, I didn't know what the heck an ESOP was. Boy, did I learn that one quickly.
Q: So it was to shorten your commute, and did you also see that as a growth opportunity?
Growth actually is the foundation of 'me.' My whole focus is always on learning. By coming back to this area, where he worked in different types of plans, was something that could further what I had come to consider as my career. I fell in love with the whole qualified plan concept, in the first 3 or 4 years when I was with the insurance agency. To know that he does a different type of plan, which I had no idea what it was, was very intriguing, and it was something that I wanted to learn more about.
The only reason, or at least the primary reason, I've ever made a company or business change: to learn more.
Q: Previously, you had been exposed to elements of ERISA that weren't ESOPs?
Yes, absolutely. ERISA extends to all qualified employee benefit plans.
Q: Do you have any other stories you can share about your interactions with Rainer? How about when you first started working for him, what was training like - more on the idealistic end? Was that part of the culture of the company?
Rainer is an extremely intelligent and well-grounded person. He embraced the ESOP concept for practical benefits to employers and employees. I don't believe there was much idealism involved. What an ESOP does was the foundation. He worked very closely with Roland Attenborough who did a lot of the legal work for a number of the plans we had. He also worked with Dick Buxton and Kelso. Rainer grew up through his trustee days up in San Francisco with this core group who have actually enhanced, embellished and garnered the ESOP concept.
It wasn't because ESOPs were the thing to work on, it was what an ESOP represented that appealed to Rainer in my mind.
Q: Would you say Rainer also had an interest in the positive impact on people's lives that ESOPs represented?
Oh yes, I think that the benefits of an ESOP, both on the employee side, as well as the benefits to the privately held owner, were the foundation of why he focused on ESOPs. Percentage-wise, the list of administration clients with ESOPs was much greater than any other kind of plan. We had other kinds of plans, but the largest block was ESOPs.
The ESOP was his focus, and he kept it that way all the way through. And the current owners have kept the same premise. RKS has always been focused on ESOPs because of what they provide, the challenges in administration and because they are interesting.
Q: The current owners, who are they?
Leslie Kearns, Deanna Peters, and Wendy Lankes are the three current owners. Both Leslie and Wendy are two of the three original owners who bought the company from Rainer in the '90s. Leslie, the President of R.K. Schaaf Associates, Inc., started working at the company in 1979 as my assistant. She has retained the core premise of the company that Rainer established. Wendy originally started with the company in the mid-1980's, left for a bit and came back. Deanna came onboard in 1991. R.K. Schaaf is owned and operated by a team of true ESOP experts.
Q: You mentioned earlier that Rainer had come up in this group of men who had an interest in ESOPs, their positive effects. Do you recall him ever trying to convince someone of that, such as a client? What would he say to convince someone?
No, I don't recall anything like that, because one thing that has always been very unique about RK Schaaf Associates was that we didn't market. All of our business was through referrals and existing clients would send us people who wanted to talk about whether an ESOP was right for them. We also received referrals through Dick and Roland and contacts within the industry.
We have never marketed, and we still have clients that were with us back in the '80s. Unless there's a financial reason company-wise, or a change in leadership in the company, we don't tend to lose clients.
That was always Rainer's theory, he wasn't going to go out there and push his wares. There are enough people that are interested, and focusing on ESOPs primarily gave the firm a high quality standard out in the industry. I don't ever remember him trying to convince people to establish an ESOP.
And he's just brilliant. When I was working for him back in the 70s and 80s, I was a kid and in awe of this man's intelligence. He did all of the programming for the computer systems which are still valid and are still using today. He was just a very forward thinker, and he was always ready for changes when they came. His whole premise was customer service: do right by the client, get them what they need before they need it. He's just a very brilliant man.
I left Schaaf in the mid-80s, because I wanted to learn more about 401(k) plans and whatnot, and Rainer, rightfully so, was not going to get involved in 401(k) administration. But I wanted to learn about some of the other things that were out there, so I left in the mid-80s and didn't come back until recently - 2009. So I haven't been around Rainer personally in a long time.
Q: So you left to take advantage of an opportunity to learn. What can you share about some of the qualities between the two? Depending on what a company needs, they may need a 401(k) or ESOP?
The purpose and accomplishment that each plan provides is on opposite ends of the spectrum. A 401(k) plan is immediate gratification for an employee; (a) they get a reduction on their income taxes because the amount they contribute is tax-deferred, and (b) 401(k) plans tend to allow for hardship withdrawals and participant loans, so a participant can actually utilize the funds in their 401(k) on and off throughout the years. An ESOP, however, is very clearly a long-term objective, especially in a leveraged ESOP. In a leveraged ESOP the value of the stock may decline immediately after a loan is taken out, and it takes time to build back up. So it's a long-term retirement savings tool, whereas in many people's eyes, a 401(k) is ultimately long-term, but also very widely used in the short term.
Q: Do you think you prefer ESOPs? Why return to RK Schaaf?
Even when I was doing 401(k) administration, I ended up being the ESOP person, so I never got away from ESOP administration. We both were able to get something from each other. I was able to learn about other types of qualified plans and the rules and regulations and administration of them. The company was able to handle the administration of ESOPs - a new service. A lot of companies will administer ESOPs, and it ends up getting pretty poorly done if you don't know all the nuances. So, a lot of these firms just don't touch them, you mention the word ESOP and they cross their fingers in an X in front of you and tell you to go away.
It was nice because I was able to add some value to the company I worked for and at the same time add value to myself, by increasing my learning base. It worked out pretty well. I've never been away from ESOPs, because they are a fantastic ownership tool which creates a positive culture in a company that is second to none.
Even nowadays, you look at the unemployment rate in ESOP companies versus non ESOP companies, and there's about a 4-5% variance nationally. In ESOP companies, the unemployment rate is significantly lower than in non-ESOP companies.
Q: What are some of the challenges you've faced in developing client material?
Even now, there are two things that I always spend the most time on; (a) taking a very dry topic and making it interesting, because really, listening to the technical stuff can be like watching paint dry, and (b) explaining it in terms somebody can understand. We all have our own language, but you can't develop communication materials in our language, because nobody's going to know what we're talking about.
When you develop something, and when you're going to use an acronym you'll have to explain that acronym first, I love it - those are the most challenging things, making the topic both interesting and understandable. Also, you have to look at your audience - if you're doing communication materials for a manufacturing company, it's going to be a lot different than the communication material you're doing for an engineering firm. You have to be clear.
You want to customize the material to fit the client's needs, you don't want to be so simplistic that your engineers are going to roll their eyes and you lose them in the first five minutes. You also don't want to be so technical that your rank and file staff member of a manufacturing company is just not going to get it. I love that, I love developing communication materials explaining an ESOP, educating both the clients and their employees on what the ESOP's all about and finding ways to do that effectively.
Q: What's your proudest moment in developing this?
Actually, I've gone to the client's site, and held employee meetings, and at times, because there are different shifts, you're holding seven meetings a day throughout the morning, evening, and early hours of the morning, so I don't think I've done too many communication projects that have just been sent off to the client.
It's always been something that I have prepared and presented in person. I had a client when I lived in Western Kansas that happened to be very close to me geographically (which is very unusual in Western Kansas). They would have their employee meeting every year and I would bring brownies and cookies for their luncheon and chat about the ESOP. Then I'd meet with their ESOP committee would talk about whatever they needed to cover. It was a lot of fun just going in and interacting with them once a year and being considered part of their "family" during their ESOP meeting. This makes it all worthwhile.
I got them back as a client now that I'm back at Schaaf, so it's great.
Q: Can you share some stories that you were particularly proud of?
Yeah, there was actually one when I hopped the fence over to the corporate side. One of my clients offered me the position of their director of compensation and benefits. Again, this would broaden my learning base. I was involved in compensation analyses, all benefits administration and at one point was also interim director of HR for the firm. I was brought aboard to help sell the company because they were 100% ESOP owned. They adopted the ESOP in the '90s and converted to S Corp status in 1998. All of their work was government contracts, they were a manufacturing company, and in the early 2000s their stock value went through the roof.
We had to do communication materials in English, Spanish and French in order to make sure that employees understood what was going on. We had to communicate the potential sale, because the employees had to vote on it, and explain the entire sale/plan termination process. In building up to that we were analyzing all of the proposals that came in from potential buyers in order to decide which ones we wanted to toss and which ones we wanted to keep.
The whole process of going onto the corporate side; (a) helping the employees understand where the business is, (b) why it's a good idea to sell it, (c) helping them understand that in 3 different languages, (d) then going through the whole process of the sale and post-sale, and (e) helping the new company reorganize, was a fabulous experience.
This was a company whose stock initially went for $6.80 per share and was sold for $32.50. Those employees made a significant amount of money as a result of that ESOP.
Q: Can you share a story of how you helped a client achieve an "aha!" moment? Can you recall a time when you helped someone really get it?
There have been a number of times. Since coming back onboard with RK Schaaf, I went and visited a few of the clients that I inherited, because we tried to divide them by location so that the time zone would be more feasible for the client.
There was one little warehouse company. They'd had their ESOP for about 7-8 years, and they had no idea what they had. To them, it was an albatross, it was a pain in the neck, because they had to get an appraisal every year, they had no idea.
I spent an inordinate amount of time sitting down with the three key people in the company, and explaining to them what the ESOP is and what it can be doing for them. They took that information and sat there at the table going "You're kidding me, this ESOP can actually get people to be more loyal to us?" "Absolutely, you go through the whole process of what an employee's sense of ownership is..." If the ESOP is just another plan - that means nothing, it's just a piece of paper and they're going to look at the balance and throw it away every year. They need to understand that everything they do affects the bottom line - it affects the financials, which affects their stock value.
You don't need to go as far as counting paper clips, which some companies have experienced, but some level of diligence pays off.
Q: People do treat stuff differently when they feel like it is their own.
Boy, do they. But there are things, like coming up with ideas that are time savers, that can save the company money. Or, let's say some process when done differently may take 45 minutes off the process. Well, that saves 45 minutes of somebody's time. Enabling employees to bring their ideas to leadership, to help make it a more profitable enterprise, that's what ESOP this company did.
They have since merged with another warehouse company, so they're no longer in the business as a stand-alone company. This happens quite often, and anybody you talk to in this business will tell you that there have been times they've sat across the table from somebody, and when you start talking about what the ESOP can do for them, their jaw drops, because they never saw it that way. It was done strictly because the owner who retired 10 years ago wanted to sell his shares, and now they're stuck with this thing.
So it's fun to help them realize what it can do for them, it's not exactly one particular moment. This little warehouse company was a biggie, because it was awful to them, they just thought this plan was horrible. Then they started enabling their employees, and also sharing some of the financials, and they saw an actual increase in their stock value, so we started tracking that for the employees every year, "This is what your efforts have done." Feedback is important.
Q: Do you have an example of skillful interaction with a client, any advice for people starting out?
I can give you my pet peeve, and that's people who don't know how to say that they don't know, when they don't. You don't always have to have an immediate answer for your client. There are so many facets to the Internal Revenue Code, ERISA, even within each individual document and how legal counsel may interpret it, you can't be expected to know everything. It's important when something is thrown at you in the form of a question and you don't know the answer, hey, just tell them that you don't know, you'll find out and you'll get back to them.
There's nothing wrong with that, but there are so many people who are given misinformation because the consultant was not willing to say they don't know. If you don't know, just say it.
Q: You helped develop the ESOP Administration Handbook, can you tell us about it?
Yes, and I have the gray hair to prove it. The ESOP Association was officially formed in '79. I started going to the annual meeting in the beginning of the 80s, probably 82 or 83. I was at the first fall meeting they had in Richmond, and I've been on the administrative advisory committee since probably 1986. I'm still on it; they're stuck with me, since I'm a past chair - I chaired the committee for a two-year stint.
With regard to the Handbook, we came up with this idea as a committee, along with Michael Kealing, back in the late '80s, early '90s. Once the content was decided, we all selected a chapter that we'd like to work on. Everything was peer-reviewed, edited and peer-reviewed again. It was a long process, but the end result was very much worth the time.
Everybody was doing volunteer work as The ESOP Association is basically supported by volunteers. ESOP third-party administration, consulting, the CPAs, valuators and attorneys are very busy all of the time. Therefore, sometimes it's a little difficult to get a project to the final stage. It took us a couple of years to get the first handbook out, which has since been updated.
We keep it as a very viable document, and it's very nice to say that just about everybody that belongs to the ESOP Association, the company members, have a copy of the ESOP Administration Handbook in their office. It is a very comprehensive but easily understood handbook and it gives you enough information to know what you need to ask your advisors. It's not necessarily a how-to book for in house administration, but it certainly points out all of the nuances that are very unique to ESOPs. It was a blast putting this handbook together, trying to determine what chapter should be in there, what topics should we cover. Since then, when in 1998 S-corporations were able to sponsor ESOPs, we've added chapters on that.
It gave a lot of us techy type people on the Administration Advisory Committee the opportunity to be a little creative, and also provide some substance. It's a fantastic tool for ESOP companies.
Q: Are most ESOP companies members of the Association?
No, I wouldn't say that. I'm not sure how many company members there are right now, but there's a lot of ESOPs out there right now. I believe there are about 6,500 to 7,000 ESOPs out there right now, not counting non-ESOP plans holding company stock, and TEA may have 20% of that.
Q: Can one get the Handbook if one isn't a member of the Association?
The ESOP Association sells the Handbook, so anyone can buy a copy. You can just go to the website or purchase one at one of their conferences.
Q: One of the things we are doing at ESOPMarketplace is build a community of ESOP companies and advisors. What other advice would you give new advisors that are specializing in ESOP administration?
A large portion of our function is interpreting the plan document. A very important piece of that is to confirm your interpretation if its not entirely clear. A lot of the ESOP documents are drawn up by ESOP attorneys, which is great because they know the nuances of an ESOP. You can't just take a 401(k) document and throw the word "company stock" in there. Sometimes however things can be a little fuzzy as far as "What am I supposed to do? How do you really want this rebalancing or this particular function to work?" So I'll look at the document, I'll interpret it, and then I'll go to the client and whoever drafted the document with my interpretation, and ask for either confirmation or clarification.
One thing you don't want to do is do something contrary to the terms of the plan. Oh, and I think the most important thing is, read your plan. That sounds basic, but you'd be surprised.
I would read the plan document, get confirmation or clarification on anything that isn't point blank. Sometimes, the document is silent on something, so you have to ask, what do you want me to do? What are you expecting to happen with this?
You have a pretty big box of things you're allowed to do, and if a document is silent on something, you don't want to pick the wrong thing.
Q: If the document is silent, would you say that's an opportunity to show their worth, to show that they are going above and beyond?
Oh, we do every day, and I guess I just take it as something we should do. If something is silent, and we see that, based on the make-up of the company, their demographics, etcetera, I offer alternatives. Possibly a certain way of handling the issue would be more beneficial than another and I'll suggest that. Once I get confirmation and clarification on that suggestion from the company and their advisor we're good to go.
We have to offer options and alternative to our clients all the time, and if we don't do that it's a detriment to the client and I'm not doing them any good.