Competing or Complementary? The connection between ESPPs and 401(k)s

ESPPs 101
Employee Stock Purchase Plans (ESPPs) provide a broad base of employees the opportunity to purchase company stock, often at a discount.

Employees contribute post-tax dollars to their ESPP through regular payroll deductions. These contributions accumulate until a pre-set “purchase date,” when the company uses the employees’ accumulated funds to purchase company stock on behalf of the participating employees.

The purchase price is often at a discount of 15% from the price of the stock on the purchase date. However, some employers will take a lower price, either at the beginning or the end of the accumulation period (called a “lookback”) and apply the discount to the lower price, which can provide additional value to employees in an appreciating market.

Fidelity recently analyzed how ESPPs and 401(k) plans work together. Read further to see the results, the findings may surprise you!

ESPPs are good for 401(k) savings!

In an effort to understand savings habits, Fidelity analyzed how employees participate in their ESPPs and how that influences their overall savings rates.

Employees who participate in an ESPP have higher defined contribution (DC) savings rates than employees who participate solely in DC plans. This positive outcome is observed across all incomes, ages, and genders.* Additionally, there is higher engagement with retirement planning and investing tools among DC participants who also participate in their ESPP. When ESPP and 401(k) are offered in an integrated experience, employees logging in to NetBenefits® regularly to enroll, manage, and monitor their ESPP have more exposure to powerful guidance tools.

Generally, ESPP plans enhance, rather than compete with, DC participation. 90% of ESPP participants are also in a DC plan, and they defer more than DC-only participants.

DC/ESPP participants have tenure 17% longer than DC-only participants. Longer tenure is evident at every age group.

Offering a 15% discount with a lookback is the most effective way to be inclusive of all income levels. Participation for employees in the lowest income quartile is low unless the plan offers a 15% discount with a lookback.

When normalized for income, the number of ESPP participants is nearly equal between men and women; yet women participate to a lesser degree because they contribute less to ESPP.

In conclusion, ESPPs and 401(k)s are complementary! … and can be a powerful combination when offered in an integrated experience.

Next steps
Well-designed ESPPs can be a great way for employees to quickly save more, build an emergency savings, and easily start investing. Add in an integrated 401(k) experience and we see higher retirement savings among employees and more engagement with guidance tools.

Interested in boosting your 401(k) with your ESPP? Contact your Fidelity representative to learn more about our integrated benefits offerings.

Do you want to revisit your current ESPP plan design? Or are you considering a new ESPP? Our guide provides points to consider, insights, and best practices while you walk through the decision process.


This information is intended to be educational and is not tailored to the investment needs of any specific investor. Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Approved for use in Advisor and 401(k) markets. Firm review may apply.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

© 2020 FMR LLC. All rights reserved.