The origin of intergenerational wealth across the country’s wealthy families is often closely related to concentrated ownership of capital assets. Whether it is setting up a fast-growing company, working for a startup that is acquired or going public, or granting share ownership through company stock plans, many successful individuals make their fortune by owning and owning a significant stake in the company they work for. .
One of the lesser known but effective ways to accumulate significant wealth is by participating in an employee stock ownership plan (ESOP), a type of qualified defined contribution plan that can help fund the retirement of employees. Many of the country’s most successful ESOP programs are located in Kansas City, making it a hot topic in the metro area.
Former CEO and Chairman of Burns & McDonnell Greg Graves published “Create Amazing” in 2021, detailing the advantages and considerations of the ESOP model. Reading is required for those looking for a deeper understanding of the benefits of this unique plan for business owners and their employees.
The book simply defines an ESOP as a retirement plan that provides all employees with retirement savings through investments in the employer’s inventory, at no cost to the employee. Under this arrangement, there are two primary beneficiaries: the original founders or owners, and the employees – the new owners.
For founders or majority owners, ESOP programs offer a distinct tax solution to the succession planning dilemma. Rather than selling to an outside party or allowing a small group of internal executives to purchase a company, creating an ESOP allows all employees to own a part of the company.
Overall, this approach preserves the company’s culture and often boosts morale by rewarding employees for their dedication and loyalty. When employees have a stake in the company’s profits, they become more empowered, motivated, and involved in the success of their company.
Employee owners translate their daily contributions beyond annual salary or wages, and instead connect their efforts to the company’s long-term growth. They directly attribute their ability to achieve long-term personal financial goals through enjoying the powerful compound benefits of ESOP.
It is a powerful incentive when employee owners see the path to financial independence through their daily contributions at work. Graves calls it a “stop moment” — that moment when employees look at their personal annual ESOP data and see great numbers. Employees are then able to connect their day-to-day work mentality to the company’s long-term performance and personal wealth.
For old employees of successful ESOPs, seven-digit retirement balances are the norm and even eight-digit balances are not uncommon.
There are countless national studies before National Center for Employee Ownershipplus local anecdotal evidence, that paint a compelling picture of the ESOP’s ability to deliver above-average long-term growth and create financial independence for employee owners.
However, a note of caution: important consideration must be given to the concentration risks associated with ESOP. For many longtime employers, a significant portion of their net worth is directly related to their company’s success. It is wise to understand these risks and identify opportunities to reduce them through diversification.
To the extent that you can isolate this unique risk factor, we suggest several specific concepts for employee financial planning:
▪ Maintain discipline in other areas of your personal financial life. Specifically, understand current and future spending needs, reduce or pay off “bad” debt when possible, and create other pools of money outside of the ESOP.
▪ Understand the provisions for diversification within the plan. ESOPs must give participants the right to diversify up to 25% of the company’s shares for five years after they reach the age of 55 (provided they have been in the plan for 10 years) and 50% of the shares, in the sixth year after conversion 55. These are the rules Mandatory diversification, but ESOP provisions often provide alternatives to selling company stock through in-service dividends or dividend payments invested in non-company stock.
▪ Review the rules regarding access to retirement funds to avoid early distribution penalties if you decide to retire before age 59.5. These include the “Rule 55” for those who retire after the year in which they turn 55 and “72