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The Employee Ownership Update

Loren Rodgers

April 1, 2015

(Loren Rodgers)

U.S. Secretary of Labor Thomas Perez Explores Employee Ownership

On March 18, U.S. Secretary of Labor Thomas Perez hosted a group of 16 experts on employee ownership for a discussion titled "Not Just the Bottom Line: New Strategies for Inclusive Prosperity." The group included people with a wide variety of perspectives on employee ownership, ESOPs, and other forms of stock plans, including representatives of ESOP and other companies and critical voices from academia, the plaintiffs' bar, and elsewhere. Loren Rodgers participated on behalf of the NCEO.

Earlier that day, when the Secretary spoke at hearings of the House Committee on Education and the Workforce (see 1:27:31 to 12:29:10), he responded to a question about ESOPs by saying "ESOPs are a very effective way of helping people, whether it's the cashier at the grocery store or the owner of the grocery store, giving them the opportunity not only to build a nest egg but [to have] skin in the game....I think it can lead to a sense of shared prosperity. I look forward to working...to see if there is public policy we can undertake that can help expand and promote a model that I think has had real success in building wealth for working people across the country."

The meeting included vigorous discussions about the impact of employee ownership on companies and employees, ESOPs as retirement plans, ownership culture and employee inclusion, challenges around the role and identity of the ESOP trustee, the impact of stock-option expensing, and the role for employee voices in governance.

New Report on the Impact of S Corporation ESOPs

A new analysis of the economic impact of S corporation ESOPs released yesterday examines trends in account balances, distributions to participants, total return, and the existence of other retirement plans. The study, performed by EY's Quantitative Economics and Statistics (QUEST) practice for the Employee-Owned S Corporations of America (ESCA), uses data from the Department of Labor and other sources. Its findings include:
  • S corporation ESOPs are growing by many measures. They represented 22% of ESOPs in 2002 and 42% in 2012. The number of plans, participants, and net assets also increased over that time.
  • The total return for participants in S ESOPs was 11.5% from 2002 to 2012, compared to 7.1% for the S&P Total Returns index. That return translates to $99,000 per participant.
  • S corporation ESOPs paid average distributions per participant that were 56% higher than 401(k) plans, totaling $30 billion from 2002 through 2012.
  • 65% of S corporation ESOP comapnies offer two retirement plans (e.g., one in addition to the ESOP), while 45% of establishments overall offer any retirement plans.
  • The average participant account balance is $78,000 for S ESOPs, which is 58% higher than the 2002 average, but below the pre-recession peak value.

    Supreme Court Asks Solicitor General for Brief in RJR Employer Stock Case

    The Supreme Court may take up another employer stock case this year. It has asked the Solicitor General to prepare a brief in the case Tatum v. RJR Pension Inv. Comm., in which the Fourth Circuit Court of Appeals ruled that the standard for the fiduciaries of RJR's 401(k) plan should be whether a prudent fiduciary "would have" made the same decision, not, as the district court ruled, "could have."
    The case involved the elimination of two previously frozen company stock funds as investment options in the company's 401(k) plan. Between 1999, when the funds were frozen, and 2000, when the plan was eliminated, the value of company stock had dropped sharply. The plaintiff sued after the stock later recovered sharply. The district court ruled that the plan committee had acted improperly in eliminating the plan, spending just one hour making the decision, and therefore was required to show that its decision was prudent in light overall fiduciary obligations.

    The Fourth Circuit ruled the "could have" standard was too lenient and that the "would have" standard has been widely applied by other courts in a number of fiduciary contexts. That standard asks if, given all the evidence from an appropriate investigation, a prudent fiduciary would have made the same choice. The "could have" standard would mean that a much broader range of choices could still be considered prudent.

    Many Households Have No Retirement Account Assets

    A new report by Nari Rhee and Ilana Boivie for the National Institute for Retirement Security says that 45% of working-age households have no assets in retirement accounts. The 40 million households without retirement plan assets are especially common among lower-income households, and the authors conclude that "account ownership rates are closely correlated with income and wealth" (p. 1). The median value in retirement accounts for all households headed by a working-age adult is $2,500. For "near-retirement households" (those headed by people aged 55 to 64), the median is $14,500, meaning that 62% of such households have retirement assets less than one year's current annual income.

    Upcoming Employee Ownership Meetings

    Two upcoming meetings on employee ownership may be of interest:

    Author biography and other columns in this series

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