For one thing, the ESOP is usually offered in addition to another qualified retirement plan (typically a 401(k)). Having one retirement plan is table stakes in the competition for talent. Having two, especially one with the opportunity of ownership, sets a company apart from the rest. 

ESOPs are attractive to candidates because the employees gain the benefit of employee ownership without typically having to contribute to the plan. 

Retain

The ESOP also helps retain employees. The ESOP typically includes a vesting schedule that encourages employee retention. Employees may see their balance increase over time due to:

• Contributions to the plan;
• Changes in the share price of the stock. 

Employees see the link between their efforts and their personal financial well-being.

Reward

Rarely does a firm generate success on only the efforts of the business owner. Companies rely on the sweat equity, ideas and time of employees. The ESOP rewards employees for their contributions to the firm's success. According to Corey Rosen at the National Center for Employee Ownership, S Corporation ESOP balances were three to five times higher on average than 401(k) plans. The ESOP allows the employees to benefit from increases in the firm value. And because employees understand that link, they work harder which serves to increase the firm's value and ultimately the reward back to the employee. 

There is an A

The three R's don't just happen. They are supported up by the letter "A" which stands for both appreciate and advisors. Advisors can add value by helping employers with a comprehensive communication and education program so employees understand and appreciate the ESOP.

Although the ESOP is a qualified retirement plan, it is so much more to the company. The ESOP helps create a culture of ownership and engagement. Advisors who can help facilitate an ESOP demonstrate strategic value to their clients.

See also:

• Dare to be different
• A retirement plan of a different color
• Why business owners need to make it personal

No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. Company stock is not a pooled investment. Stock may experience greater volatility and should not be directly compared to investment options that have a more diversified investment mix. It is not intended to serve as a complete investment program by itself.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group (The Principal), Des Moines, IA 50392.