The Employee Ownership Update
July 15, 2010
New Web Site Rates Defined Contribution Plans Versus PeersBrightScope.com is a potentially very useful Web site that ranks defined contribution plans in most companies filing Department of Labor Form 5500 reports, although some smaller plans are not yet included. The site went online in 2009. You can type in a company name and get results for an ESOP, 401(k) plan, profit sharing plan, or other defined contribution plan. A chart then shows the average account balance as of the last filing and the number of participants. There is also a rating for the company relative to a selected group of peers (listed in a sidebar) based on the size of the company contribution, plan fees, employee deferral rates, average account balances, and investment menu choices. The ratings are free, and by registering (also free) you can get suggestions on how to improve the plan.
The ratings system should be viewed with caution. It does not work well for companies with more than one retirement plan because it rates each plan as if there were not any other plans. Ratings also include factors that can downgrade a plan that may actually be advantages (such as zero employee deferrals into an ESOP). But the data on account balances and company contributions can be a good way for companies to see how they compare with peers and may be a very useful communication tool for employees if used appropriately.
How Many ESOP "Sweet Spot" Companies Are There?People working on employee ownership often ask us how many companies fit the "sweet spot" for an ESOP. The size when an ESOP is most likely to be appropriate is, broadly speaking, between 20 and 1,000 employees. According to the most recent census data, there are about 590,000 organizations in that range, and these companies employ about 40% of the private sector work force. There are about 8,500 companies with over 1,000 employees, and they employ about 42.5% of the private sector work force; companies with over 10,000 employees employ 27%.
Of course, many of the appropriately sized companies are not ESOP candidates. Many of those 590,000 organizations are ineligible for ESOPs because they are nonprofits or professional firms. (Generally speaking, law firms, accounting firms in most states, and medical practices, cannot have ESOPs, nor can companies such as real estate agencies that have contract employees.) It is difficult to gauge how many of these there are in the 20-1,000 employee range, but we suspect that they bring the number of "sweet spot" companies down to about 400,000.