This ESOP guide outlines what is an ESOP plan and what it can mean for your future.
When you’re negotiating benefits for a new job, you’re reading forms that describe what you’ll make per year and which health insurance plan you’ll use. Your employer could hand you paperwork for an ESOP, as well. Before signing on the dotted line, it’s vital to determine what the plan could mean for your future. Sometimes they’re suitable, and other times, they’re not the best investment. It all depends on your goals.
ESOP overview: What is an ESOP?
You’re excited to start your new job, but one question is on your mind — what is an ESOP? It’s an acronym for an employee stock ownership plan. People who sign up for these plans gain an ownership interest in the company’s stock market performance.
These plans are another way for employees to commit to a company and align themselves more fully with its mission. If they give their all, the business will benefit and so will their stock portfolio.
Pros and Cons of an ESOP
Gaining stock might seem like an intimidating or exciting opportunity, depending on your financial experience. These are the most common pros and cons that people consider before committing to an ESOP.
Pro: There Aren’t Upfront Costs
What is an employee stock ownership program? They’re incentive packages given to new workers, so it’s a bonus to their employment. You won’t have to pay for anything to join because it’s a financial gift.
Con: Profits Take Time
Some people watch the stock market closely to take advantage of peaks and lulls. If you’re someone who loves selling stock at just the right moment and actively reinvesting, an ESOP may not be the best use of your time.
The average stock can take up to a few months to generate any profit, especially if you don’t purchase more than the employer provided. They want you to leave the stock alone and work for them long-term, so it isn’t a chance to make extra money on the side. You’ll have to wait a significant period before selling anything.
Pro: The Company Can Buy Them Back
Sometimes people feel growing pressure when an ESOP package lands on their desk. Your job may be a stepping stone to your dream career. What if you only plan to work there for two or three years?
No matter how long you stay at your current job, the company will buy back your stock when you leave. It’s in their interest to do this because they’ll pass it on to another new hire as an incentive to work hard.
Con: Profits Rely on Leadership
Consider your company’s leadership in the past decade. Does the C-suite team change CEOs or executives every year? Ever-changing executives spell disasters for ESOPs. The stock market approves of stability and innovative leadership, so it will reward companies that stick together and push the boundaries of success. Businesses that can’t retain leaders won’t see the same returns as others with long-term leaders.
Is an ESOP different from 401(k)s?
Now you might wonder — what is an employee stock ownership program compared to a 401(k)? A few key differences are worth noting, especially if you plan on retiring within the next few years.
ESOPs Focus on the Employer’s Stock
The purpose of an ESOP is to get people to care more about their company. The employer provides a specific amount of stock, and in return, the employee can make additional profits from their hard work.
ESOPs don’t include anything other than the company’s stock, so it’s a single investment that doesn’t have exceptions. It also won’t use any money rolled over from accounts at your previous job.
401(k)s Offer Complex Investment Opportunities
Standard 401(k) plans offered by employers include 25 possible investment choices to diversify your portfolio. Picking the right ones could exponentially increase your retirement savings, so people rarely choose a single stock. This freedom isn’t possible with an ESOP because the intention for each account is different.
ESOPs Don’t Require Employee Money
A minimum deposit will likely be required when you open a 401(k) account. You won’t have to pay anything to start an ESOP because your employer gifts it to you. It’s another way to profit from the stock market for anyone who doesn’t have money to invest.
F.A.Q
Where Does ESOP Money Reside?
Every ESOP account has financial assets in stock and cash. Because two parties have equal interests, your ESOP resides in an established trust. You’ll get a copy of the written agreement for your records, which outlines the committee responsible for your investment and the beneficiaries of the funds.
Does an ESOP Give Me Voting Rights?
Everyone gets to vote on major decisions and have an equal voice in an employee-owned company. ESOPs don’t necessarily only come from those types of businesses. You can also have one and work for a traditional corporation.
Many people wonder if owning company stock gives them a vote in what the corporation does. The board of directors will determine this before ESOPs are open to their employees. Most of the time, employee votes only count toward significant decisions like liquidation. Otherwise, the ESOP administrative committee or trustee will vote for the workers.
Considering your future
If you plan to stay at your job long term, an ESOP is an opportunity to invest in your employer and feel more connected to your work. Weigh these factors when thinking about signing up for an ESOP to determine if it’s the right fit for your financial interests.
