America’s crisis of retirement security only became more severe during the last economic downturn. According to some recent estimates, half of working Americans currently have no work-based retirement accounts, and one in five approaching retirement has no money saved at all.
One reason is that tens of millions of workers have no retirement plans available in their workplace. However, the law provides these private companies and their workers with an interesting alternative business structure — one with which many private companies are unfamiliar. This is the employee stock ownership plan, or “ESOP.”
Today, S corporation ESOPs are doing just what Congress intended when it created them almost 20 years ago: giving middle class Americans an opportunity to own a stake in the companies for which they work.
These employee stock ownership plans share many of the same characteristics as other defined contribution retirement plans, such as traditional 401(k)s, but with a difference: They are almost always exclusively funded by the employer, at no cost to the worker.
According to the most recently available statistics, over 7,000 ESOPs are currently operating in the United States, covering about 10 percent of the private sector workforce, or about 14 million employees. Subchapter S corporations owned mostly or entirely by their workers are the fastest growing form of employee ownership in the U.S., now accounting for nearly half of all ESOPs and providing an important source of job creation, while displaying a dynamism and vitality lacking in other sectors of our economy.
One important measure of the success of such companies is the extent to which they are providing retirement security. A newly released study by former senior Treasury official Robert Carroll, head of EY’s Quantitative Economics and Statistics (QUEST) practice, shows just how well these plans have performed for their employee-owners in recent years. Total returns per participant have outperformed the S&P 500 Total Returns Index by 62 percent, providing retirement distributions to participants of nearly $30 billion. Net assets were up over 300 percent in just 10 years, and annual distributions increased almost sixfold.
Secretary of Labor Thomas Perez recognized the unique contributions of S corporation ESOPs at a recent hearing of the Education and Workforce Committee. He said that they are providing many workers with “opportunities not only to build a nest egg, but to have skin in the game … [ESOPs are] a model that has had real success in building wealth for working people across this country.” It is a model that we would do well to make available to more companies.
As income inequality and faltering retirement security have become major concerns for the American electorate, policy makers in Washington would be wise to respond with serious prescriptions for action. Expanding the availability of ESOPs to more companies and more workers would be smart strategy for a political class suffering from the perception that their agenda is beholden to the Fortune 500 and the status quo of concentrated corporate ownership.
Both politically and practically, the time is ripe for making it easier for privately held businesses and their employees to more effectively save for retirement while providing those employees with greater opportunity to own a “piece of the rock.”
The Promotion and Expansion of Private Ownership Act, legislation designed to encourage more private companies to convert to ESOPs, which garnered broad bipartisan support in the last Congress, will be introduced in both the House and the Senate in April. Both parties have an incentive to find common ground in enacting new and innovative policies that hold the promise of promoting retirement savings.
The evidence is compelling that expanding ESOPs would also create jobs, generate more economic activity, and encourage the formation of businesses that are more stable and successful because they provide their employees with the kind of built-in incentives conducive to loyalty and productivity.
If we wish to make the “ownership society” long extolled by proponents of a free economy more of a reality, then ESOPs should be an element of our current policy debates regarding tax reform and retirement security. The issue offers a rare opportunity to bridge the partisan divide and helps promote a brand of capitalism that works for all, providing a boost to middle class workers well beyond the prospects of virtually any other policy opportunity before Congress today.
Stephen R. Smith is the Chairman of the Employee Owned S Corporations of America (ESCA) and Vice President at Amsted Industries. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions for editorials, available at this link.
