Only 48% of all private sector employers offer any kind of retirement plan, but about 80% of those with more than 50 employees do. Most of these plans are 401(k) plans. The Bureau of Labor Statistics says that 70% of employees in the private sector have access to a retirement plan, but just 54% of eligible employees participate (some surveys show even lower numbers). That is because 68% of all 401(k) plans require employees to contribute their own money, and some employees don’t contribute at all. The lower the wage, the lower the participation rate. Only 25% of the lowest-paid workers participate, compared to 52% of those in the next 25%. Employers typically budget about 3% of pay for 401(k) and similar plans, much of it based on a matching formula. Just over half of all employees work for an employer who contributes 50 cents on each dollar deferred or less, usually up to a maximum. So if you put in $1,000, your employer might put in $500. Nine percent of workers work for an employer with a larger maximum, but 38% work for an employer with no match at all. It’s all your money. Overall, about two-thirds of what is in 401(k) accounts overall comes from employees.
Because 401(k) plans are usually based on employee deferrals, and because higher-income people defer more, their benefits are skewed upwards—in other words, higher-paid people get a higher-percentage contribution from the company than lower-paid people.
● In the vast majority of ESOPs, the employee contributes nothing.
● ESOP companies generally contribute more to their plans than companies do to 401(k) plans, typically from 4% of pay on up to a much higher number. So if your employer is putting in 4% of pay or more, your plan is more generous than typical 401(k) plans.
● ESOPs allocate contributions based on relative pay, not what you defer. So if the company contributed 5% of pay to the ESOP, everyone gets 5% contributed to them. In 401(k) plans, lower-paid people would typically get less than that. ESOPs thus tend to be a lot better plans for people who have a hard time contributing to 401(k) plans.
Critics of ESOPs say they are too risky. If the company stock drops a lot, employees will have inadequate assets for retirement. By contrast, 401(k) plans and other retirement plans that employers offer have to be diversified—they are or can be invested in a variety of things. Diversification is a good thing—it means that if one investment fails, you still can do well with others. The risk that you will end up with major losses is much lower than if you are just invested in one investment, no matter how good that investment is.
But there are some things to consider here. First, when you get to age 55 and have 10 years in the plan, you can start to diversify your ESOP. Second, most ESOP companies offer a 401(k) plan, and you can (and should!) still invest in that, just as you would if there were no ESOP. It is still a great deal because your money is not taxed before it is invested. That typically means you automatically make a first-year return on your investment of 30% or more just because you did not pay taxes. ESOP companies are somewhat more likely to offer a secondary retirement plan, in fact, than most companies are likely to offer any kind of plan at all.
Finally, there is a less obvious but very important factor. Your retirement plan won’t do you much good if you don’t have a job and have to spend that money just to get by. The good news about ESOPs is that ESOP companies lay people off at one-third to one-fifth the rate of non-ESOP companies. That more stable employment means you stay in your job, see your benefits vest and, usually, get salary increases as you go along rather than being laid off and starting over again. You may have to wait in a new job to be able to join a retirement plan, and you may need to start vesting again.
So it is mostly very good news. Overall, ESOP participants end up with about 2.2 times the retirement assets as employees not fortunate enough to be in ESOPs. That will vary a lot company by company, though. Although it’s not common, some ESOPs do go bankrupt or see dramatic declines in stock value. So don’t just assume that the money will be there. Save what you can in a 401(k) or other savings vehicle. Think about what you will need to retire, and make a plan. AARP has a useful calculator to help you figure this out.