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The Employee Ownership Update

Corey Rosen

February 14, 2008

(Corey Rosen)

ESOPs Grow Significantly in 2007

New NCEO estimates show that ESOPs and ESOP-like plans added over $250 billion in assets in 2007 and added about 700,000 participants. The net number of plans grew more slowly, adding about 120 plans.

The table below shows comparative data:
Year Plan participants Assets Number of plans
2007 11.2m $928b 9,774
2006 10.5m $675b 9,650
2001 8.85m $400b 8,050
1995 7.75m $226b 8,000
There is no scientific way for us to assess why there was such as large increase in the value of plan assets, but our experience, and that of plan advisors, points to a few trends. First, the market itself generally went up in 2007, with gains of 6% to 10% depending on the index used. ESOP companies tend to perform better than other companies, so some additional growth in asset value and employment would come from that. Most important, however, is the striking trend in the last few years for ESOP companies to do acquisitions. This would increase the value of plan assets and the number of participants at a potentially rapid rate. The relatively slower growth in net plans is a result of the interaction of terminations (running about 3% of plans per year, somewhat below the termination rate for other defined contribution plans but high enough given the number of existing ESOPs to offset many of the new plans being established). On the other hand, many companies are becoming de facto "new" ESOPs because they are being purchased by an existing ESOP company.

How We Derived the Numbers

The numbers are necessarily estimates. First, we looked at all the Department of Labor Form 5500 filings for the most recent years available (2006 for some plans and 2005 for others). These data provided a baseline number for plan assets, plan participants, and number of plans. The data are subject to reporting errors, so we cannot call our projections anything other than reasonable estimates. Then we used IRS data on the number of letters of determination for new plans and plan terminations. These numbers, unfortunately, appear subject to serious reporting errors and inconsistencies, but the relationship between terminations and new plans seem fairly consistent. Using that data, and input from plan providers on trends on new plan formation, we made a conservative estimate of how many net plans were added in 2006 and 2007 that would not have been picked up in the Department of Labor data.

We defined ESOPs to include plans that filed as ESOPs, stock bonus plans, and profit sharing plans primarily invested in company stock. There were 530 profit sharing plans so invested with about $50 billion in assets and 630,000 participants. While these profit sharing and stock bonus plans are not technically ESOPs, functionally there are few differences, especially for participants.

Wall Street Journal Features ESOPs

The February 7 issue of the Wall Street Journal has a full page of articles on ESOPs. The story was the result of a suggestion to Journal reporters from the NCEO. The stories look at how NCEO members Smith-Bucklin used its ESOP to acquire another company, Van Meter Industrial revived its ownership culture, and Brookfield Engineering Labs diversified its ESOP to provide employees with greater long-term financial security. A related Journal Web page has a terrific podcast of an interview with Web Industries Hartford's Michael Quarrey about how the company has used employee involvement to create a strikingly productive company (Quarrey and several Web Industries employees will be presenting their story at our annual conference in Chicago). The Web site also has other useful material on employee ownership. The site can be found here.

Given the importance of this first-ever special coverage of ESOPs in the Journal, we want to encourage NCEO members to send the link to their contacts. Suggested language for the email appears below:
I wanted to call your attention to what I think is a great set of stories you might not have seen.

The Wall Street Journal on February 7 ran a full-page of articles on employee stock ownership plans. There is a link to all this material and more at online.wsj.com/small-business/small-business-link.

I think this is one of the best explorations of employee ownership in a major publication ever produced, and anyone with any interest in the topic should take a look.

The article was the product of a suggestion to the paper from Corey Rosen of the National Center for Employee Ownership. The center is a great resource on employee ownership. They have books, webinars, and an upcoming annual meeting that covers all aspects of the topic. Their site is well worth visiting as well. Their site is at www.nceo.org.

New Data on Employee Ownership in 401(k) Plans

A new NCEO analysis of Form 5500 filings shows that in 2006, company stock represented about $300 billion in 401(k) plan assets in about 2,900 companies. Of this, $133 billion was in the 748 401(k) plans that had a majority of their assets in company stock. Almost all of these are public companies. According to the Employee Benefit Research Institute/Investment Company Institute, the percentage of assets invested in company stock has steadily declined in the post-Enron era. While in 2006 it stood at 11% of total 401(k) plan assets, in 1999 it was 19%. Not all plans offer company stock, however. The 748 companies, we estimate, are about 40% of the number of companies who had a majority of the employer stock in 401(k) plans in 2001.

Entries Open for Annual Principal 10 Best Small and Medium Sized Companies for Financial Security Awards

For several years now, I've had the opportunity to sit on an independent judging panel that selects The Principal 10 Best Companies for Employee Financial Security. Over the years, employee ownership companies have often made the list, although few have applied. We'd like to encourage companies to enter the competition this year. The judges do not know the names of the companies during the judging process. Judges include some of the leading benefits experts in the country.

Now in its seventh year, The Principal 10 Best Companies program recognizes growing businesses (5-1,000 employees) that excel at ensuring employee financial security through benefits and other programs. Each entrant receives a free, customized employee benefits report prepared by the market research firm Mathew Greenwald & Associates.

Winners receive extensive recognition and are highlighted in a Best Practices Guide. They also receive a donation to the local charity of their choice. The recognition itself is an invaluable tool in recruiting and retaining high performing employees.

You can enter online here. The deadline is May 1. Winning companies will be announced in the fall of 2008.

You can learn more about the characteristics of last year's winners by reviewing the 2007 Best Practices Guide: The Formula for Success here.

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