For Your Benefit

No Fable: ESOPs Gain Favor Among Business Owners Looking to Retire

With pending legislation, many soon-to-retire boomers are giving ESOPs a fresh look.

By Patty Kujawa

Having that kind of culture makes it easier for employees to feel empowered to offer ideas for improvement to their company, he said.

“If you are interested in preserving your legacy and rewarding people, ESOPs make sense,” Rosen said. “Selling to someone else makes all of this go away.”

Litigation, cost and lack of guidance are the trifecta that heavily influences doing an ESOP, experts agreed. ESOPs are not as straightforward as 401(k)s, and things get tricky when stock valuations are done to set the price for the stock to be purchased by the ESOP from the owners.

Most lawsuits center on bad stock valuations, said Michael Keeling, president and chief staff officer of the ESOP Association. Often, the Labor Department, which oversees ESOPs, files a lawsuit on behalf of the ESOP against the trustee and/or the owner for the overvaluation.

“Sellers can’t be too greedy, and I think that is what happens,” Wise said.

While it’s important to be fair, Keeling said that the Labor Department tends to focus on the offenders more than the thousands of success stories. For example, according to the Labor Department’s “Private Pension Plan Bulletin Historical Tables and Graphs,” ESOPs outperformed 401(k) rates of return 10 out of the 15 years between 2001 and 2015.

Jennifer Wise

“No doubt that ESOPs will benefit if bad actors are caught,” Keeling said. “But there are so many good examples out there.”

Keeling added he would like to see the DOL issue clearer guidelines for valuations. There are accepted procedures in the industry, but an official best practice guide is what is needed.

Cost of valuations is also a hard pill for many companies to swallow. NCEO’s Rosen said initial valuations can cost between $100,000 and $150,000, and many owners are unable to do that. Wise said she was quoted for valuations going as high as $250,000 before she settled on the best price of $110,000.

Meanwhile, Congress has turned its attention to promoting ESOPs with the introduction of two bills in the House and Senate. The House bill is aimed at giving the Small Business Administration broader authority in helping companies establish ESOPs. The legislation in the Senate also empowers the SBA to promote employee ownership.

Rosen is reasonably optimistic about this round of legislation because Sens. Kirsten Gillibrand, D-New York, and Gary Peters, D-Michigan, along with Rep. Nydia Velazquez, D-New York — all members of Congress sponsoring ESOP legislation — seem to be more serious about providing opportunities for workers to save more for retirement. “The real trick [to passing legislation] is not so much getting the votes, it’s getting someone to make it a priority,” Rosen said. “I think we have that now.”