New white paper: Employee Stock Ownership Plans: Are They Worth the Risks?

New white paper: Employee Stock Ownership Plans: Are They Worth the Risks?


Employee Stock Ownership Plans, or “ESOPs,” are retirement plans that invest in employer stock. They are growing in popularity not only because they receive tax benefits that are not available to other types of retirement plans, but also because of their philosophical appeal: they let the employees own part or all of the company that they work for.

Unfortunately, ESOPs also have a number of pitfalls about which many American workers, including workers who are participating in ESOPS, are not aware. This lack of awareness can lead workers who are participating in ESOPs to depend too heavily on that ESOP and to not save enough in other types of retirement plans. Because ESOPs are heavily invested in company stock, ESOP account balances can rise and fall with a company’s success or failure. This means that, if the ESOP should fail, workers might experience dramatic negative consequences in retirement.

The Pension Rights Center has published a working paper authored by Michael S. Gordon Fellow William K. Bortz titled, “Employee Stock Ownership Plans: Are They Worth the Risks?” The paper highlights the various shortcomings of the three basic types of ESOPs. In particular, it demonstrates how overinvestment in employer stock violates the fundamental investing principle of diversification, and how, if an employer begins to struggle financially, it becomes likely that the value of the employer stock in the ESOP will be down at the exact time that employees are likely to be laid off and need to sell their stock. “Employee Stock Ownership Plans: Are They Worth the Risks?” is an important read for employees participating in ESOPs, employees whose companies are considering an ESOP, and employers who are thinking of starting an ESOP.

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