Updated: Feb 16
If your company benefit plan includes ESOP contributions, you may be one step closer to growing wealthy. As you near retirement, it is in your best interest to fully understand the benefits and risks ESOP contributions have for your retirement planning strategy.
An employee stock ownership plan (ESOP) is a benefit plan that gives workers ownership interest in the company. Workers receive company stock that can grow tax deferred until retirement.
Who participates in Employee Ownership?
As of 2021, the NCEO estimates there are 6,500 employee stock ownership plans (ESOPs) in the United States covering more than 14 million participants. A list of the 100 largest employee owned companies appears here.
The ESOP is designed to benefit employees who remain the longest and contribute the most to an employer’s success.
What behaviors do ESOP encourage?
An ESOP can provide an employee with significant retirement assets when he or she works at a company for a long period of time and the stock has grown in value. The ESOP is designed to benefit employees who remain with the employer the longest and contribute most to the employer’s success. Stock is granted to each employee’s ESOP account by the company. The employee bears no cost for this benefit. The stock allows employees to share in the profitability and growth of the company.
How Much Do Employees Benefit?
According to a 2010 NCEO analysis of ESOP company government filings in 2008, the average ESOP participant receives about $4,443 per year in company contributions to the ESOP and has an account balance of $55,836. People in the plan for many years could have much larger balances. Some participants become multi-millionaires. More than half of ESOP companies have an additional employee retirement plan such as a 401k.
There is no cost to the employee for company stock.
ESOP vs. Restricted Stock Units (RSUs)
Many modern companies grant RSUs to employees as part of the bonus/performance plan. RSUs are stocks given to the employees and normally have a vesting period (3-5 years) for a portion of the RSUs each year. Both RSUs and ESOP make employees owners of the company. However, there is a major difference between ESOP and RSUs. While RSUs may be sold as soon as they vested, ESOP stock must be held as a long term investment.
Long Term Investment
Contributions to an ESOP are designed to be a long term investment vehicle for the employee. ESOPs are not set up for immediate withdrawal of the contributions by the company. Each year employees receive a statement with the number of ESOP shares and the value of those shares. If the company does well, the value of employees’ shares should increase over time. The long term nature of ESOP wealth building helps companies retain valuable employees and reduces the cost of turnover and training. In return, employees are motivated through their ownership interest to help the company be profitable and grow.
If the company does well, an employee’s wealth grows.
When employees resign or retire, they are entitled to their share of the account according to a schedule in the ESOP plan document. Many plans allow for distributions beginning at age 55. The majority of ESOPs are privately held companies such as Amsted Industries or Publix. As a result, ESOP distributions are made as a check directly to participants or paid to their IRA or 401k designated account. The participant can cash the check (and pay taxes) or do a rollover into a retirement account. Depending on the value of a participant’s shares, ESOP distributions can play a significant role in building wealth and generating retirement income.
Continue learning more about ESOP diversification and distribution. Click here to access the Peak Wealth Planning white paper Demystifying the Diversification of Your ESOP Holdings.
Are you comfortable with your progress towards retirement? How about helping future generations meet their financial goals? If you have a net worth over $2 million and need help from a wealth manager, the Peak Wealth Planning team can assist you.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.