According to recent research from Fidelity, improving economic conditions and a strengthening job market are prompting many U.S. companies to enhance their employee stock purchase plans in an effort to improve their benefits packages (see “Employers Enhancing Stock Purchase Plans”). However, ESPP participation rates lag behind other employee benefits.
When employees do participate, a 2012 Fidelity Investments survey found the majority (57%) of ESPP assets are earmarked by employees for eventual retirement savings or alternate investments (see “Stock Plan Participants Earmarking Assets for Retirement”).
Fidelity outlined key benefits of ESPPs:
- Most ESPPs offer employees the chance to purchase company stock at a discount—usually between 5% and 15%. This means an employee is likely to make money on the shares they purchase. Plus, if the stock price drops, employees can still take advantage of dollar-cost averaging. And according to a 2012 Fidelity survey, many companies are planning to increase their discount over the next few years, meaning that the savings will be that much greater.
- Employees can contribute automatically through payroll deductions, just like with their 401(k). Once an employee enrolls in an ESPP and sets their contribution rate, funds are automatically withdrawn from their paycheck and applied to the purchase of company stock. Employees can generally enroll online, and can monitor and manage their account through their plan service provider’s website. And many companies allow employees to contribute as little as 1% of their paycheck, which makes ESPPs that much more affordable for a greater number of workers.
- Savings within a company stock plan are more accessible than savings within a 401(k). Although taxes may still apply, workers can access the assets within an ESPP without the penalties and/or repayment requirements incurred when they take a loan or withdrawal from their 401(k) account. And savings from an employee stock purchase plan can be applied to a variety of financial needs, such as a down payment for a home, a home improvement project, tuition payments or other life expenses.
An increasing number of workers have access to company stock. This is due to the growth of ESPPs as well as the increasing number of companies being publicly traded, Fidelity says. According to a recent study, 40% of companies that recently went through an initial public offering implemented an ESPP, and all of those companies offered their company’s stock at a 15% discount.
Fidelity provides stock plan administration to 250 employers nationwide, representing $125 billion in grant value.
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