Employee ownership could be the key to solving our retirement security crisis
At a time when retirement seems out of reach for many Americans, there is clear and convincing evidence that people who work for private businesses with Employee Stock Ownership Plans (S corporation ESOPs) have far greater retirement security than the average American.
That is why when we were in Congress, we led bipartisan legislation to encourage the creation of more private, employee-owned companies, paving the way to resolve decades of regulatory uncertainty. It is now up to the Labor Department to do its part to support employee ownership by providing clear, workable rules.
We know for a fact that ESOPs boost people’s savings. That is because ESOPs provide an opportunity for everyday Americans to own a piece of their employer. A recent study by Ernst & Young found that the average S ESOP account balance was over $100,000 in 2019, and an individual employee-owner participating in an S ESOP gets nearly $26,000 each year as an added benefit. Similarly, a study by the National Center for Employee Ownership concluded that employees at ESOP companies have far greater retirement security compared to American workers overall.
Because ESOPs have a culture of shared company ownership, they are also considerably more likely to provide employees with additional retirement and other benefits, like a 401(k) plan, further boosting employees’ financial security. As a result, employees at private, ESOP-owned companies have more than twice the average total retirement savings than Americans who work at non-ESOP companies.
So why don’t more people have the chance to work for an ESOP?
Part of the problem is that regulatory uncertainty has made it more difficult for a company to establish an ESOP. According to a new report by Matrix Global Advisors, “a lack of formal regulatory guidance from the Department of Labor” has many businesses confused and unsure of what to do when they are ready to convert to employee ownership. As the report explains, this “creates burdens and risks that can discourage employee ownership and hamper ESOP-owned businesses.” At the same time, legal complexities have exacerbated the regulatory uncertainty, driving up costs by $385.5 million, according to a recent analysis of ESOP litigation over the past 10 years.
The lack of clear and workable ESOP rules has been bad for the economy, bad for employee ownership and bad for retirement security. But things may be about to change.
The Labor Department recently announced its intention to move forward with a regulatory project on long-awaited ESOP guidance. Although the devil is in the details, new rules have the potential to finally put to bed the regulatory uncertainty that has cast a shadow over employee ownership for decades. That would go a long way toward growing the number of ESOPs and providing more financial stability to working-class families.
It is now up to the Labor Department to seize this tremendous opportunity by supporting ESOPs and washing away regulatory uncertainty. The ESOP community stands ready to work constructively with the Labor Department and the administration to usher in a new era of employee ownership and improve retirement security for American workers.
Ron Kind (D-Wis.) and Erik Paulsen (R-Minn.) are former United States representatives, where they both served on the House Ways and Means Committee.