Understanding ESOPs: How Employee Stock Ownership Plans Can Secure Your Retirement

When I started my last job, I became eligible to participate in our company’s Employee Stock Ownership Plan (ESOP). Having never been offered this benefit before, I really had no idea what it was or how it would actually benefit me.

As the years progressed and I began to receive statements in the mail, I saw that this was a truly unique employee benefit that could really help my family build wealth.

What started out as a few thousand dollars of free money from my employer, finished out as a nice six-figure sum. This free money is going to help me and my wife retire comfortably.

Read More: Guide to Employee Equity Compensation

What is an Employee Stock Ownership Plan (ESOP)?

An ESOP is a benefit plan that gives equity (or ownership stake) in the company to their employees.

In my employer’s case, the longer I worked there, the more shares I would receive. This awesome plan incentivized me to work harder, sell more, and save more for the company because I felt like (and was) an owner, too.

Over the years I was employed at my company, our share price had double digit percentage growth year over year. I was amazed at the growth. Every time I received a statement, I was blown away.

Advantages of an ESOP for the Employee

Having worked at my company for nearly seven years, I can attest that the ESOP was a major benefit to my overall financial wellness as an employee. Not only did it help my financial future look a bit brighter, it made me feel like I was a part of something bigger than just my job.

Here are just a few advantages of the ESOP from my perspective:

• Made me feel invested in my company’s growth
• Collaboration on team projects felt more genuine since my colleagues were “owners” too
• Provided a double retirement benefit outside of my 401k employer match

Evidently, my feelings around my company’s ESOP aren’t just personal. They are proven to be effective in helping employees keep their jobs in times of crisis as well.

According to the ESOP Association, employee owned businesses are 6.2 times more likely to keep employees on the job than conventionally owned companies. So when times get tough, employees put their best foot forward because they know their job (and their ownership stake in the business) is on the line.

Disadvantages of an ESOP for the Employee

As I started to expand my investing knowledge, one of the major downsides I found with my company ESOP was it’s lack of diversification. My ESOP portfolio isn’t a portfolio at all. It is a six-figure sum in one stock.

I’m a guy that loves portfolio diversification. It makes me feel relaxed and calm knowing that if one of my investments is not performing at it’s best, then the others will be picking up the slack.

Since my shares have not yet been converted to cash after leaving my company, 10% of my family’s assets are currently invested in a single stock. That makes me nervous.

What if my former employer hits a major downturn? This six-figure sum would start losing some figures.

The waiting time to receive the ESOP is also another disadvantage. Unfortunately, I was unable to receive my ESOP funds when I left my company. This may not be the case with all company ESOPs though. It is important to understand the specifics around your employee equity plan where you work.

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How We’ll Use the ESOP to Retire Comfortably

I will soon have access to funds in my ESOP. My wife and I have debated about what to do with the money (much like we often do with our tax refund).

What makes this newfound money different is that there are taxes and penalties associated with using it upon distribution. If we roll our ESOP funds over to our traditional IRA, then we won’t experience those taxes and penalties.

So as much as my wife and I might like to use it for a trip to Europe or a hot tub, we’ll be doing the smart thing and investing it for our retirement. My wife would typically call this a “BORING” move but she’s on #TeamInvest for this one. The penalties and tax hit today just wouldn’t be worth it.

Depending on where things net out, this amount of money would help our traditional IRA balance total $350,000. If we waited until 65 and let this money compound at a 7% interest rate, we could have close to $1.9 million come retirement time.

When I see that number, I’m immediately grateful for the opportunity to have a comfortable retirement. This is a company benefit that is not required, but man, is it a lovely perk.

Personal Perspective: Katie’s Employee Equity & SRI Experience

Is it Worth it to Work at a Company with an ESOP?

At the end of the day, the employee equity benefits that are available through working at an ESOP company are incredible. My retirement nest egg has grown substantially and it appears we’re well on our way to a comfortable retirement.

That being said, having a bulk of our wealth tied up in a single stock is nerve wracking. It’s been even more important for us to diversify our investment portfolio. Because even though I’m nearing the end of my time owning this single stock, anything could happen to the value of my shares. This six-figure sum could decrease significantly and leave us high and dry.

If I have the opportunity to be employed at a company in the future, I’ll definitely seek out one that provides an ESOP. The collaborative nature that spawns from everyone being an employee-owner is infectious. And there’s no doubt the financial benefits are top notch as well.

I’ll just make sure to not let it be my only avenue to a comfortable retirement.

Do you have employee equity? You can sort through the details with the help of Personal Capital’s financial advisors in their Guide to Employee Equity Compensation.

When you download the guide, you also gain access to Personal Capital’s free, award-winning financial tools. I love these tools for tracking our net worth, planning for retirement, and analyzing our investments.