employee-owned company,  employees

ESOPs Offer a Retirement Savings Solution

If Canada is facing a retirement savings crisis, then expansion of Canada Pension Plan (CPP) is only a small part of the solution. How else can we encourage Canadians to save for retirement?

A model that’s proven to be extremely effective in helping more people build wealth while keeping businesses competitive is employee share ownership plans (ESOPs).

ESOPs are formal plans that allow employees to participate in the long-term value growth of the business through the purchase of an ownership interest.

Saving for retirement

The model works extremely well because you’re not only encouraging people to make investments, but most importantly, to make an investment in a place where they actually can affect the outcome.

There are many individual stories in Canada and internationally of people building tremendous wealth as a result of being part of their company’s ESOP.

At the Canadian Employee Ownership Conference held in June, former Syncbase CEO Ramy Taraboulsi recalled how he was able to hand out cheques of hundreds of thousands of dollars, tax free, to many of his employees after his ESOP company was sold.

In the United States, where there is extensive legislation to promote employee share ownership, Mary Josephs has written a number of articles on employees working in grocery stores to trucking retiring with million dollar bank accounts as a result of their company’s ESOP.

The most common criticism of ESOPs is their lack of diversification — that employees are essentially putting all of their eggs in one basket. Again, we can look to the U.S. experience where research from the National Center for Employee Ownership shows this theory to be untrue.

First off, the assumption is that if a company has an ESOP it won’t have an additional retirement plan. However, U.S. ESOP companies are slightly more likely to have secondary retirement plans (even defined benefit plans), than non-ESOP companies are to have even just one plan.

In cases where companies just have an ESOP, research shows it is on average a better investment than traditional retirement plans.

Most recently, Forbes magazine published its annual list of the Best Workplaces to Retire From. This list reviewed 401(k) plans, health insurance, phased retirement offerings, defined pension benefits, and internal promotion rates at more than 600 employers to come up with the Top 30.

Of the winners that were eligible to offer employee ownership (some were nonprofits, and legal and accounting firms), nearly 30 per cent had ESOPs.

In fact, the second best place to retire from in America is Edward Jones, which offers broad-based employee ownership to its employees through stock purchases.

In most of the reviews for ESOP companies, employee ownership was cited not just as a financial perk, but something intrinsic to their workplace satisfaction and sense of purpose.

“I have one word — ownership. I started at Burns & Mac as an intern. Next year I will retire with over 34 years of service. I have lived it. Employee ownership works. I am sorry to say it but I feel you cannot understand it without experiencing it. I am blessed,” states one employee.

In Canada we are far behind other countries in recognizing the power of ESOPs to help people save for retirement while creating better companies. With the momentum and consensus around the need to ensure more Canadians are prepared for retirement, ESOPs present a practical solution that deserves greater attention.

By Camille Jensen, vice-president of ESOP Builders Inc.