Equity Compensation Plays a Role in Employee Retirement Strategies

If employees are offered an equity compensation plan and able to participate, it's a way for them to have a mix of taxed and tax-deferred savings.

Sixty percent of workers who have an equity compensation plan intend to use the money to help fund retirement, according to a survey of 1,000 equity compensation plan participants who currently receive incentive stock options or restricted stock awards and/or participate in employee stock purchase plans (ESPPs). Their average vested balance is $97,711 and the average total value of their equity compensation is $149,835, according to Schwab Stock Plan Services.

Retirement savings is, by far, the most common goal for those building equity compensation wealth.

Amy Reback, vice president of Schwab Stock Plan Services, tells PLANSPONSOR that having a diversified portfolio of both taxed and tax-deferred savings is a good strategy: “People who enter retirement with the appropriate amount of taxed and tax-deferred savings are more likely to have an enjoyable retirement. If you only have tax-deferred savings, you are still taxed when you draw down those assets, and you could have a pretty large tax bill. It could be as much as 20% or 25% of your assets.”

Schwab’s survey also found that among those with an equity compensation plan, it makes up 27% of their net worth on average. Sixty-eight percent also hold company stock outside of their equity compensation plan, primarily in their 401(k) plan. Sixty-five percent are very or extremely confident their equity compensation plan will help them meet their financial goals, and 28% are somewhat confident.

Equity compensation plans are not just for the highly compensated, says Aaron Shapiro, founder and CEO of Carver Edison. Options and restricted stock units are generally granted to highly compensated employees, but employee stock ownership plans and employee stock purchase plans are designed for broad-based employees, he says.

“The availability of equity compensation plans is out there, but the challenge is that most people who are eligible to participate in them cannot afford to see their paychecks get smaller,” Shapiro says. 

Workers want help from their employer to understand their equity compensation program, according to the Schwab survey. The specific areas they want help with are planning for retirement (68%), meeting their financial goals (55%), developing a financial plan (52%) and balancing equity compensation with other investments (51%).

A survey by E*Trade found that when it comes to their company’s stock plan benefits, only 71% of employees said they understand how to access their account. Only 59% understand how their vesting schedule works. Just over half, 53%, said they understand the benefit, and only 46% know how to find information about their stock plan benefit.

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