Employee-owners of privately held businesses called “S corporations” (S ESOPs) benefit from far better retirement savings and job security compared with other U.S. workers, according to a new analysis released April 27 by Ernst & Young (EY).
The analysis—which EY conducted on behalf of the Employee-Owned S Corporations of America (ESCA)—examines trends in S ESOP retirement plans from 2002-2019, including S ESOP plans’ net asset value, number of participants, average account balances, and distributions to participants.
The analysis paints a glowing picture of S ESOPs when compared to 401ks, finding that S ESOPs distributed 25% more on a per-participant basis than 401k plans on average during that 18-year period. S ESOP participants received an annual average of $5,900, while 401k plans distributed an annual average of $4,700 between 2002-2019.
Focusing on average distributions after the Great Recession, S ESOP participants received an annual average of $6,700, while 401k plans distributed an annual average of $5,400. S ESOPs distributed approximately $1,350 more (or 24%) to participants during this period.
For purposes of comparison with 401k plans, active participants, which may include participants who have not yet made or received a contribution, were used.
“Time and again, data show that the S ESOP model provides substantial added benefits to hardworking Americans who are able to be owners of their businesses,” said Stephanie Silverman, President and CEO of ESCA. “From amassing significant retirement savings to enjoying outstanding job security and more, employee ownership of private businesses has a proven track record of helping American workers and businesses thrive, even in the most challenging of climates.”
Silverman added that she thinks Congress should seize the opportunity to encourage the creation of more S ESOP companies.
“The U.S. House took a helpful step in this direction by including a partial incentive for business owners to transition to employee ownership in the bipartisan SECURE [2.0] Act, aimed at increasing retirement savings, which passed with overwhelming bipartisan support last month. We are hopeful that the U.S. Senate will include a similar incentive in their own bipartisan retirement savings legislation.”
Since 1998, S corporations have been permitted to maintain employee stock ownership plans, a type of defined contribution retirement plan. These “S ESOPs” allow S corporations to provide compensation to employees and enhance their retirement security in the form of an ownership interest in the company, much like similar ESOP plans offered by C corporations.
The EY analysis found that the role of S ESOPs in enhancing retirement security grew significantly during the study period. Both net assets and the number of employee-owners rose significantly between 2002 and 2019. Net assets were 678% higher in 2019 ($94 billion) than in 2002 ($12 billion) and the number of participants increased by 286%, from 244,000 in 2002 to 941,000 through 2019.
The average S ESOP account balance was over $100,000 in 2019, and an individual employee-owner participating in an S ESOP gets nearly $26,000 each year as an added benefit. This figure takes into account firm contributions, increased job security, and growth in S ESOP assets, the EY report states.
The analysis relies on official filings made by companies offering S ESOPs that are publicly available from the U.S. Department of Labor. The report does not analyze any data from 2020 or the effects of the coronavirus pandemic. To read EY’s full findings, CLICK HERE.
SEE ALSO:
• ESOP Advocate Touts Retirement Savings Advantages Revealed in New Study
• ESOP Feature of Wells Fargo 401k Under DOL Investigation
• Success with Succession: How an ESOP Helps Maintain Company Culture and Legacy
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
