Employee stock ownership plan (ESOP) participants are better off than those who work for non-ESOP companies with a 401(k) plan, and the benefit can serve as a retention tool for businesses, as well as a cushion for employees to be more financially resilient in a crisis, according to research from the National Center for Employee Ownership (NCEO).
The paper, titled “Measuring the Impact of Ownership Structure on Resiliency in Crisis,” examined how businesses dealt with the COVID-19 pandemic and the attendant impact it has had on participants. The research was completed using Department of Labor (DOL) Form 5500 data on businesses’ retirement plans.
“Given the nature and purpose of ESOPs and the forward-looking company culture that often accompanies them, there is strong reason to believe that having an ESOP in place prior to the worst of the crisis helped businesses not just survive but, for many, take the best advantage of growth opportunities more so than their conventional counterpoints,” the paper states.
The paper analyzed more than 300,000 plan filings that cover over 43 million employees.
ESOPs offer workers ownership interest in their companies in the form of shares of stock. Plan sponsors can benefit from various tax advantages by using ESOPs, and the plans are subject to similar Employee Retirement Income Security Act (ERISA) rules that non-ESOP 401(k)s face.
The NECO research asked whether there is significant evidence that ESOPs had measurable benefits compared with similar conventional firms without ESOPs.
“Overall, we find measurable evidence of this resiliency in greater financial security for employees heading into and during the pandemic, and job retention at the firm level compared to comparable conventional firms,” the paper states.
Before the pandemic, the average ESOP account balance at an S-corporation ESOP was more than double the average account balance at a comparable conventional firm. In 2019, the average ESOP account balance was $132,362, compared with $63,925 for the average 401(k) account balance.
The paper also found that the average yearly employer contribution to the ESOP was 2.6 times more than that of companies offering a 401(k) ($6,567 vs. $2,507); 94% of total contributions to ESOPs came from the employer, compared with 31% of employer contributions for 401(k) plans; and having an ESOP was associated with retaining or adding an additional six employees from 2019 to 2020, compared with non-ESOP employers.
Previous research found that not only do they build employees’ wealth at a faster rate than retirement plans, but ESOPs contribute to business performance and resilience.
Additional research, completed early last year, found evidence that employee ownership was a strong buffer for workers during the pandemic. The John Zogby Strategies survey found that employees of non-ESOP companies have experienced greater job losses or downsizing than those at employee-owned businesses, and non-ESOP company workers’ financial security was more adversely affected.
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