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How ESOPs Can Address Wealth Inequality

Posted by Marc S. Schechter | May 14, 2019

A new study from the Rutgers Institute for the Study of Employee Ownership and Profit Sharing has found that Employee Stock Ownership Plans (ESOPs) can reduce wealth inequality for low and moderate income families. The study found that employees, through education and investment, can increase retirement savings and asset wealth, especially among low and moderate-income families.

Wealth Inequality Study Findings

According to the study, there were 5 specific elements that enable workers at employee-owned firms to build assets. Including:

  1. Building ESOP account equity and financial knowledge;
  2. Expanding workforce capabilities through on the job training, external education, and internal mentoring;
  3. Enabling asset preservation and personal investments;
  4. Increasing access and inclusion by gender, race, and ethnicity; and
  5. Improving health and well-being through the quality of work life experience and balance.

One of the unique aspects of an ESOP (compared to a 401(k) or Roth IRA) is there is no reduction in pay to begin building retirement savings. Savings in an ESOP are company funded and do not require payroll deductions or employee decisions on how much one can afford to put away. The ESOP contributions are also not generally taxed while the employee is working and are not considered for asset or income eligibility for state or federal benefit programs.

Among the starkest contrasts in the study were the retirement savings of the 25th percentile of low to moderate-income employees. Nationally, the average retirement savings were $10. For that sector in the survey sample, the average retirement savings was $113,325. For the total population, the average retirement savings is $17,000

“Employee ownership can have particular benefits for low-income women and certain minorities, who are often marginalized at the bottom of workplace organizations,” said the study's co-author Lisa Schur in an article from the ESOP Association. “Not only can employee ownership lead to economic rewards, but it can also help these workers attain increased voice and skills in the workplace.”

Need for California Pro-ESOP Legislation

Legislators in California can promote ESOP formation through pro-ESOP legislation to reduce income inequality for low and medium-income workers in California, many of whom have little to no retirement savings. As we noted in a previous blog post, a recent survey showed employees who participate in an ESOP had almost double the retirement savings compared to non-ESOP covered workers.

pro-ESOP bill was introduced in the California Senate in February. Like other states which have passed similar legislation, including Iowa, Missouri, and Colorado, this bill could provide incentives necessary to help small and medium-sized businesses adopt ESOPs. Not only could this lead to higher retirement savings for California workers but it could also provide a succession plan for the coming retirement of millions of baby boomer small business owners.

ESOP Benefits for Low-Income Women and Certain Minorities

Income inequality in the U.S. disproportionately impacts lower-income women and people of color. According to the Rutgers report, women hold 68% less wealth than men in the U.S. Additionally, white family wealth is 5 times greater than Hispanic family wealth and 7 times greater than black family wealth.

These workers and those in their community can see increased retirement saving and wealth accumulation through ESOPs, even for hourly workers. The retirement savings survey noted that hourly employees averaged more than $6,500 in retirement savings when the majority of hourly workers do not participate in any retirement savings plans.

ESOP Incentives for San Diego Companies

If you have any questions about ESOP incentives, possible legislative changes, or how an ESOP could benefit your California business, Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Marc S. Schechter

Marc Schechter specializes in the areas of employee benefits, ERISA, and business matters.


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