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The New Year's resolution every advisor should make

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As the final notes of Auld Lang Syne fade away, 2014 will make a grand entrance, bringing with it plenty of resolutions to make changes both personally and professionally.

The most popular New Year’s resolutions tend to revolve around challenging lifestyle changes: weight loss, smoking cessation, improved finances. Predictably, most of these resolutions won’t make it to February.

Here’s one resolution for financial professionals that may prove much easier to keep. It doesn’t involve wholesale lifestyle change and it can help grow business:

This year I resolve to talk to my business owner clients about employee stock ownership plans (ESOPs).

What is an ESOP?

An ESOP is a qualified defined contribution retirement plan that is invested primarily in the stock of the sponsoring company. ESOPs are unique in that they can borrow money and qualify for a prohibited transaction exemption if structured properly. ESOPs are afforded preferential tax treatment and work for both C and S Corporations.

See also: Principal Financial’s Jerry Ripperger Talks up ESOPs

An ESOP allows business owners to sell all or part of their company to a retirement plan trust established on behalf of their employees. To a large degree, the selling owner controls the degree and timing of exit. The ESOP offers a flexible approach that can be designed around the needs of the selling owner, the company and the participants.

Adding an ESOP does not have to change the operation of a business. The ESOP does not change the management or governance structures of the company. There is no requirement to share financial information with employees.

Why ESOPs and why now?

There are good reasons for financial professionals to target employee stock ownership plans in 2014. ESOPs have been around since 1974 (although a few trace their roots earlier than the passage of ERISA). Forty years after the passage of ERISA, current and future ESOPs continue to present a significant opportunity for financial advisors.

Simply put, existing ESOPs cover a significant number of American employees and hold almost a trillion dollar in assets. There are approximately 10,000 ESOPs covering 10.3 million employees, or about 10 percent of the private sector workforce. ESOPs are found in all industries and across companies of varying sizes, from the small to the very large. According to the ESOP Association, 97 percent of ESOPs are sponsored by privately held companies.

According to Corey Rosen, cofounder and senior staff member of the National Center for Employee Ownership, S Corporation ESOP balances were three to five times higher, on average, than 401(k) plans. Total assets owned by ESOPs in the United States are estimated to be $869 billion, according to Ibid.

The outlook for new ESOPs is equally bright. Demographic changes taking place make this a very attractive time to have the ESOP discussion with your current and prospective business owner clients.

  • More than 10,000 baby boomers turn 65 every day.
  • Every 57 seconds, a baby boomer business owner turns 65.
  • The value of pre-retiree business ownership for those owners ages 55 to 70 is $4.8 trillion. That’s more than this age group has in every other investment, excluding their primary residence.

By and large, these business owners are moving toward retirement without a plan to transition the ownership of their business. LIMRA research has found that nearly 9 out of 10 business owners do not have a formal exit strategy, and only 14 percent of business are expected to transition to a family member. This planning gap provides an opportunity for you to assist the business owner and grow your practice.

See also: 3 reasons you need a succession plan — now

ESOP opportunities

Employee stock ownership plans open the door to multiple opportunities for financial advisors. A brief list of the possibilities includes:

  • ESOPs effectively convert an asset than can’t be invested — private equity — into cash that can. Many of the selling business owners will need guidance, as this may be the first time they have actually had significant liquid assets to invest. After all, many of their companies have grown to be successful because of the owner’s willingness to reinvest earnings in the company.
  • The formation of an ESOP is a great time to review the existing life insurance of the selling owner and the company to determine if it is adequate given the new plan. Additional insurance may be necessary for a variety of reasons, including collateral for the loan to finance the transaction, protection for the estate of the selling owner, and funding of the repurchase liability obligation that will pay benefits as participants retire.
  • The change in personal situation will likely require the review of the owner’s estate plan. Trusts may need to be amended (or created), for example. This is a good time for a comprehensive review.
  • The ESOP is a qualified retirement plan. Best practice would be to manage the plan in conjunction with other plans so the company can achieve the overall goals and objectives of its retirement program.
  • According to the ESOP Association, “an overwhelming majority of ESOP companies have other retirement and/or savings plans, such as defined benefit pension plans or 401(k) plans to supplement their ESOP.” As the advisor who introduced the selling owners to the ESOP concept, you would be in a great position to assist them with this broader initiative.
  • As participants retire, they typically receive a distribution in cash. These proceeds can be rolled into another qualified plan, such as an IRA, to potentially defer taxes. This can be a sizable opportunity given the average account balance among ESOP Association members is $195,222.

Resolve to learn about ESOPs

The ESOP opportunity is significant, and it is now. The first step to capitalize on it is to get educated. You don’t have to be an expert on ESOPs to identify opportunities and introduce the concept. You can learn more at

Learning more about ESOPs and how to include them in your practice is a New Year’s resolution that can provide benefits for years to come.

For more on ESOPs, see:

Creating perpetual motion that moves companies forward

AICPA attacks DOL fiduciary plan’s ESOP language

The pros and cons of ESOPs


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