Over 50 foundations, financial institutions, advisory firms, law firms, and advocacy groups have launched a new coalition aimed at expanding usage of employee stock ownership plans (ESOPs).
The alliance, called Expanding ESOPs, intends to make ESOPs more accessible to businesses of any size across all industries, in order to provide front-line workers with the benefits of employee stock ownership. The group specifically focuses on partial ESOPs, where workers can own a part of the business they are employed at.
ESOPs were first established with the passage of the Employee Retirement Income Security Act of 1974 (ERISA) and provided a vital wealth creation tool for workers wanting to own and capitalize on company stock.
Still, data shows that ESOP formation remains low. A study from nonprofit National Center for Employee Ownership estimates that around 250 new ESOPs are created each year, with the latest figures showing 274 in 2021. These ESOP formations tend to involve smaller businesses in the industrial and service sectors, with only around 4% having over 500 employees. Partial ESOPs have especially reduced in past years due to statutory and regulatory complexity, limited liquidity at closing for selling shareholders, and long transaction timelines.
“ESOPs have been around a long time and they are an incredible wealth creation tool for workers who have been able to participate, but we simply haven’t had enough of them,” said Corey Rosen, founder of the National Center for Employee Ownership. “ESOP participants and their families have 92% greater net household wealth than those without comparable benefits. Company stock is the greatest wealth-building asset ever created, so expanding ESOP participation to a significant portion of the U.S. workforce could ameliorate the destructive trend in the concentration of wealth.”
Expanding ESOPs says it aims to reverse the decline in partial ESOPs while maintaining 100% ESOPs in their current form. It includes a set of core principles that would drive ESOP expansion, including:
- Align tax incentives as to be suitable for partial ESOPs,
- Offer safe-harbor guidelines in situations where there’s a market-based valuation-check to ensure that workers in new ESOPs are treated fairly and to avoid undue litigation risk,
- Give disproportionate ESOP benefits to front-line workers (as opposed to highly-compensated executives),
- Protect the spirit of the ESOP by assuring workers receive meaningful value in situations where companies utilize tax incentives,
- Provide the ESOP at no cost to the employees, and ensure that the ESOP is not the sole retirement plan for workers,
- Allow workers to access a portion of their ESOP value before retirement without penalty, and
- Maintain the current structure and benefits that have been highly effective for existing ESOPs (particularly 100% ESOPs)
“Employee ownership gives workers a stake in their companies and a seat at the table,” said Pete Stavros, founder of Expanding ESOPs. “Polling clearly shows that Americans across the political spectrum want to see workers participate in company ownership to a far greater extent, and ESOPs represent our best shot of achieving that goal.”
As part of its launch, Expanding ESOPs unveiled a new website to educate the public and policymakers about ESOPs. More information about the coalition can be found here.
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
