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When Can I Diversify the Shares in My ESOP Account?

Being an owner in an ESOP is different from being an owner in other ways most people are familiar with. Most notably, employees do not pay for the stock in their accounts (with a few rare exceptions). Owning just about anything else means you have to buy it. In part because of this, ESOP ownership comes with fewer rights, some of which are meaningful, and others not so much. The table below compares being an owner in an ESOP with being an owner of stock in a public company or being an owner of a house.

You have probably been told that ESOPs are part of your retirement plan—and that’s true. In fact, ESOPs are legally part of the Employee Retirement Income Security Act of 1974, which was passed to establish a set of rules to ensure that the tax incentives Congress provides for companies and employees to fund retirement plans are fairly distributed to workers rather than concentrated on a small percentage of well-paid people. ESOPs, pension plans, 401(k) plans, IRAs, and other similar plans are all covered by the law.

ESOPs have to operate according to a complex and detailed set of rules to make sure they really benefit employees. It’s a fair trade—Congress has provided ESOP companies, their owners, and their employees with a number of tax benefits.

Your company’s ESOP valuation sometimes comes as a surprise. Maybe you had a strong year, but the stock price did not go up very much, or even went down. Or maybe you had not such a good year, but the stock price still did okay. What’s going on?

Yes, as long as it follows common best practices.

1. The Idea of Employee Ownership Goes Way Back: Alexander Hamilton and Thomas Jefferson were bitter rivals, but they agreed that the government should help rebuild the whaling industry—but only if the crews got a share of the profits and/or ownership.

Boards of directors can be something of a mystery to employee-owners. Who is on them and what do they do? Do they run the company or just act on a few major issues? Whose interests are they meant to protect?

In thinking about what to say in my closing remarks at this year’s annual conference, I decided to focus on a few things that great employee-owned companies do that set them apart. It’s not a definitive list, but it is what has really struck me about great ESOP companies over the years.

You may have heard about private equity, or perhaps you know someone whose company was sold to a private equity firm. Maybe you have even read that there is a new movement in some private equity firms to include employees as owners in some of their deals. There is a pretty good chance that when your company set up its ESOP, selling to a private equity firm was, at the very least, a potential option.