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.
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.