Political Prospects for Employee Ownership

The new Congress and Administration will be under increased pressure to reduce employee holdings of company stock in retirement plans. Many financial advisors have been urging such restrictions in the last several weeks. Congress already has made changes to public company 401(k) plans to make it easy for employees to diversify their holdings, but further changes might put an absolute cap on company stock. That would most likely apply only to public companies; private companies generally do not hold much company stock in 401(k) plans. Whether ESOPs will be attacked on the same grounds is unclear. The data on ESOPs make it very clear that companies with ESOPs actually are more likely to have diversified retirement plans than comparable companies are likely to have any kind of retirement plans. ESOP participants have about three times the account balances of comparable employees in comparable non-ESOP companies, and the diversified portion of this is about the same as the total retirement benefits of comparable employees. In other words, the ESOP is gravy. While that gravy is undiversified, 100% an undiversified holding is better than a 100% diversified holding of zero. ESOPs also are more egalitarian in their allocation patterns than 401(k) plans because they are not based on employee deferrals, which tend to skew company matches towards higher-paid people. Getting these arguments in front of Congress will be essential in 2009.