Eli5: What is an ESOP? And what exactly does “vesting” mean? What are the benefits AND consequences to employees with an ESOP benefit?
The company I’m at is introducing ESOP and it’s caused a whirlwind of opinions from coworkers. I tried to google it, but stocks and vesting are the one thing I could never grasp.
Thank you ☺️
In: 7
A lot of different ways / strategies for an ESOP to handle the benefit. My company has been an ESOP for about 30 years. First distribution was 35% of the shares in three years.
We moved to 100% in 2011 distributing the remaining shares over ten years. The DOL keeps a very close eye on any shenanigans, we have an external trustee who approves share value annually and works directly with a third party valuation firm. For us, the value is set annually.
We continue to have profit sharing, 401k match and will start a dividend process this year. The dividend will roll directly into the 401k and will be substantial.
Biggest issue with a successful ESOP for participants is the lack of diversity in a portfolio. We’ve had tremendous growth in our valuation due to success and the balance between our 401k and ESOP balances has become tilted too far into company balances. We will use an annual dividend to assist in the diversification and foster harvesting by vested participants.
An ESOP is a retirement plan. If you stay the idea is that you will have a nice retirement benefit. Government requires diversification windows to open for participants at 55 (a percentage of balance) and I think at 62 and 20 in our plan you can completely exercise a sale of all stock.
For us, the top shareholders are people and it is not tilted to just executives / upper management. I consider an ESOP very beneficial to those who are fortunate enough to be a part of one
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