ESOPs Get Even More Attractive

Many workers spend more in retirement than they did while working.
Many workers spend more in retirement than they did while working.

ESOP companies that offer additional retirement options, such as 401(k)s, may have just gotten more appealing to job applicants.

Here’s why: Typically, workers are advised to think of the fraction (80 percent, 60 percent, etc.) of their current take home pay they will want to have available in retirement. But many workers spend more when they retire, not less, according to new research from the Employee Benefits Research Institute (EBRI).

And that means companies offering multiple ways to save—such as a combination of an ESOP and other vehicles—should be even more attractive to workers.

EBRI found that nearly half (45.9 percent) of households it studied spent more per year in early retirement than they did while working.

How much more? In the first two years of retirement, 28 percent of households studied spent 20 percent more, per year, than they did before quitting their day jobs. And while spending in general trended downward over time for those studied, for some it still remained high: Six years after retirement, 23 percent of households were still spending 20 percent more, per year, than they did before retiring. (See chart.)

These finding suggests two things:

  • It’s wise to let current employee owners know they may need to save more than they expect for retirement.
  • Companies that offer multiple retirement savings options may want to point out to current and prospective employees the value of having multiple ways to build up retirement savings.

If your ESOP firm is not one of those offering multiple ways to save, the data show you are in the minority.

Among ESOP Association members, 96.2 percent also offer a 401(k) plan or pension plan, according to 2015 member survey data.

More broadly, 56 percent of companies that have an ESOP offer a second retirement savings plan. Only 47 percent of companies overall offer even one defined contribution retirement plan. So ESOP companies are more likely to offer two forms of retirement savings—the ESOP and another plan, such as a 401(k)—than most companies are to offer one. (These are the findings of a study released in 2010 of Department of Labor Form 5500 data. The study was funded by the Employee Ownership Foundation and conducted by the National Center for Employee Ownership.)

Offering two retirement options means ESOPs are also providing employees with another way to diversify their retirement savings.

For example, Chris Tiel, executive vice president and CFO of Alterman Group, an ESOP company, recently was quoted by the Motley Fool as saying: “We offer 401(k) with a match to help our employee-owners achieve a diversified retirement portfolio.” Alterman Group was recently singled out by Principal Financial Group as one of 10 companies that have the most financially healthy employees.