By Russell Green
A majority of American households have less than $10,000 in retirement savings. Twenty years ago, Daniele Barajas, like most Americans, hadn’t put much thought into planning for retirement; yet after watching her older siblings struggle to stay afloat financially, long-term economic security became a top priority. “I knew what I didn’t want for myself and tried to go on a different path.” Daniele soon quit a decent paying job and found work at a company that offered an employee stock ownership plan (ESOP). At the time, her co-workers didn’t understand why she would leave a comfortable position – one that she excelled at and clearly enjoyed – especially since she would be taking a pay cut to do so. Her employers even offered her more money to stay on, but Daniele had already made up her mind. She started the entry-level position at Proponent, a leading distributor in the global aircraft parts market, located about 40 minutes southwest of Los Angeles.
Daniele was taking a gamble: she would sacrifice some of her short-term income for the long-term potential retirement benefit offered through the ESOP. Now age 43, married with two children (ages 10 and 15), and working as Proponent’s human resource manager for the West Coast region, Daniele is confident that she made the right choice. “I didn’t know how to explain it to my former co-workers at that time since ESOPs are difficult to get people to understand, but I knew the benefits of working at an employee-owned company and I was determined to make the move.”
Research done by the National Institute on Retirement Security reveals particularly grim post-work statistics. Among households approaching retirement (ages 55-64), the median retirement account balance is about $100,000. Certainly, no paltry sum, yet hardly enough to sustain a 20 or so year retirement. Even more startling, when all households are included, and not only those that hold retirement accounts, the average working family has virtually no retirement savings. The median retirement account balance is only $12,000 for these near-retirement households, and two-thirds of families between 55 and 64 have retirement savings totaling less than 100 percent of their annual income.
Much of this financial malaise can be attributed to a large-scale employer-driven substitution of defined benefit pension plans with defined individual investment accounts, such as a 401(k). In addition, in order to put money into a retirement account, it helps to have easy access to one. Yet, as figure 1 shows, only 52 percent of private sector employees have access to a plan through their work, the lowest share since 1979.
Conversely, at ESOP-owned companies, nearly 100 percent of employees receive retirement stock grants, which, given Daniele’s financial goals, made her decision to change jobs a no-brainer. Daniele, and her husband, Jesse, (who also works at Proponent) are well ahead in the retirement game compared to their peers. The couple plans to retire when Daniele turns 55. “My husband would like to retire at 50, and since he’s a couple of years older than me, that’s right around the corner. I don’t think that will happen, but he can dream.” Even if they don’t make Jesse’s earlier retirement date and are only able to retire when Daniele turns 55, it would still be nearly a decade earlier than the average American, and quite remarkable given Daniele’s humble beginnings.
Raised by a single mother, Daniele grew up in an edgy part of Placentia, Calif. with her three older siblings. Her mother, who worked full-time by day and was paid piece-rate for the parts she spooled together for a local factory at night, instilled a hard work ethic in her children. Daniele’s mother passed away from cancer one month after Daniele graduated from high school. "We knew it was coming as she had been battling cancer for years. I went to college for a couple of semesters but ended up needing to work full-time in order to support myself."
As luck would have it, her high school sweetheart and future husband happened to work at Proponent in the operations and shipping department. He often touted the benefits of working for an employee-owned organization, and Daniele was sold. The couple never looked back. They soon married, purchased a home in Fullerton, Calif. and began raising a family.
Indeed, as members of the middle class, Daniele and Jesse are punching well above their weight in the retirement savings game, one that is heavily dominated by the wealthy. Illustrated by Figure 2, only 25 percent of people in the lowest income quartile have any savings at all, compared to about 90 percent for those in the top income quartile.
Yet as Daniele's story shows, there is a subsection of the population who work as employee owners and enjoy higher accessibility to retirement accounts. Perhaps just as importantly, these employees are also exposed to more information regarding these complex programs.
Companies that are partially owned (or 100 percent owned as Proponent) through an employee stock ownership program, hold frequent ESOP and retirement information sessions – organized and run by rank and file employees – at which workers can become proficient in retirement instruments generally, along with the specifics of their personal ESOP account.
Daniele credits her familiarity with retirement instruments, such as ESOPs and 401(k)s, to hosting sessions like these. "I've learned most of what I know here at work since I work with benefits. We’ve offered 'lunch and learns' for employees to learn more about the different options available to them."
Nevertheless, ESOPs have their risks. The most central of which is a lack of retirement portfolio diversification, as ESOP participants essentially invest in a single stock – the company for which they work. To counter this, most ESOP plan documents stipulate that employee participants over 55 years of age can also invest company proceeds through an IRA, allowing a wide spectrum of investment opportunities. Companies such as Proponent, which have a fairly large percentage of long-term employees who started at Proponent soon after high school, have gone even further and provide their employees over 40 (and with 20 years of service) the opportunity to open an IRA and thereby keep all their eggs from accumulating in one basket. Above and beyond ESOP stock grants, many of these organizations also offer 401(k)s, providing multiple retirement options for all qualified employees, regardless of tenure.
With annual stock grants allocated to employee owner participants and risks that can be mitigated through 401(k) and IRA diversification, ESOPs can provide material retirement advantages for the average worker. As Daniele aptly sums up, "working for an ESOP company is one of the best things there is for your future. It's all about longevity and working hard for the benefit of your company. In the end, the work you put in will benefit both your ESOP account and you."
Russell Green, Rady 2019 MBA candidate