PLANADVISER - January/February 2022 - 29

A
Each employee gains with
an ESOP or a KSOP-how to
transform a client's plan
EMPLOYEES want a piece of the action. According to Morgan
Stanley at Work's " 2021 State of the Workplace Financial
Benefits Study, " 75% of employees agree that equity compensation
and stock ownership are the most effective ways to
motivate employees. Such programs could also provide a
retention benefit: 86% of employees said they will be more
apt to stay at their company if it places greater emphasis on
equity compensation.
According to the National Center for Employee Ownership
(NCEO), employee stock ownership plans (ESOPs)-
qualified plans in which workers are given ownership in
the company-are the most frequently adopted form of
employee ownership program in the U.S.
Corey Rosen, founder of NCEO in San Rafael, California,
says the most common reason for establishing an ESOP is to
facilitate succession planning in a privately held business.
Some owners will be ready to exit their business entirely,
while others want to share ownership with employees but
stay on in some post-transfer capacity. ESOPs are designed
to ease those transfers. " Congress has been extraordinarily
generous to ESOPs in providing tax benefits to them, to the
owners and to the company, " Rosen says.
From the employee's perspective, an ESOP looks like a
improving outcomes / total retirement
SHARE
WEALTH
of the
401(k) plan. All full-time employees of ages 21 and older may
participate. The ESOP allocates shares to participants' individual
accounts, subject to vesting rules. There are limits on
the company's deductible contributions to its ESOP and on
the amounts the plan may allocate to participants' accounts.
When employees with an ESOP account balance leave, they
receive their account value as a stock distribution or cash
equal in value to the stock.
Despite the potential benefits to owners and employees,
there are relatively few ESOPs among U.S. companies. NCEO
reports that, as of year-end 2019, there were 6,482 ESOPs,
with a total 13.9 million participants. Both of those figures
are down slightly from 2014, which had 6,717 plans, with
14.05 million participants. Privately held ESOPs are far more
numerous than publicly traded company ESOPs: in 2019,
5,880 vs. 602, respectively. But the larger public companies'
plans had the most participants: about 11.9 million vs. 2.04
million for private firms.
In contrast, as of this past September 20, the Investment
Company Institute (ICI) reported, there were about 600,000
401(k) plans with 60 million active participants and $7.3 trillion
in assets.
Identifying ESOP Candidates
The owner's motivation for exiting his business will determine
whether an ESOP is a good fit.
Rosen cites a hypothetical case in which the owner of
a closely held company is considering retirement. Creating
an ESOP is one option. But this individual is also weighing
selling to another company or to a private equity (PE) firm.
Art by Claudi Kessels
planadviser.com January-February 2022 | 29
http://www.planadviser.com
PLANADVISER - January/February 2022

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