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ESOP Fable #2: Employees Have All Their Eggs in One Basket!

Some commenters condemn ESOPs by proclaiming that it is unfair that employees should have all of their “retirement eggs in one basket.” Such commentary is misguided. First of all, many ESOP companies have 401(k) plans alongside of their ESOPs so that employees are able to set salary aside and invest in assets other than employer stock. Secondly, the Internal Revenue Code makes it mandatory for all ESOPs to allow employees to diversify their ESOP account upon reaching age 55 with 10 years of participation in the ESOP. Ultimately, such participants can achieve at least a 50/50 balance between employer stock and other, more traditional investments in their ESOP accounts.

It should also be understood that employers with ESOPs are not forcing employees to invest their own money in employer stock. Rather, the employer stock is provided to employees as compensation for the services rendered by the employees. In that respect, it is not much different than an employer matching contribution or an employer profit sharing contribution to a 401(k) plan.

Finally, classifying the employer stock alternative as a “risky” investment begs the following question: How “risky” were 401(k) plan investments in 2008? That is, calling an employer stock investment “risky” implies that the alternative is “safe.” Prior to 2008, many Americans believed that their 401(k) balances were relatively “safe.” Yet, if you worked at the right company, you may have seen your ESOP account grow in 2008 while your 401(k) account was falling. This point illustrates how an ESOP introduces employees to another investment alternative in the employees’ collective retirement plan portfolios, and is not intended to be the only retirement income source.

About the Author

Timothy Stewart is an attorney practicing out of our Metro Milwaukee office. He is a member of the Employee Benefits, ESOP and Labor & Employment Relations practice groups. Contact Tim by email or by phone at (262) 754-2869.

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