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Risky Retirement Business: How ESOPs Harm the Workers They are Supposed to Help

37 Pages Posted: 19 Mar 2009 Last revised: 27 Oct 2009

Sean M. Anderson

University of Illinois College of Law

Date Written: March 18, 2009

Abstract

The well-publicized implosion of Enron Corporation highlighted the dangers of 401(k) retirement plans' holding large amounts of stock in the employing company. Employee stock ownership plans (ESOPs) are a special form of retirement plan that invests primarily in employer stock. As such, ESOPs are even more dangerous for workers than Enron-style 401(k) plans. When an employer chooses an ESOP, workers are stuck with under-diversified retirement savings, which expose them to unnecessary levels of investment risk. In addition, an ESOP carries with it opportunities for company insiders to serve their own interests or those of the company at the expense of the workers who participate in the ESOP.

Despite these serious dangers, federal law allows and incentivizes ESOPs. Pro-ESOP advocates seek to justify ESOPs as being good for workers. They claim ESOPs are instruments of economic democratization, serving such ends as redistributing capital ownership, enhancing workers' job satisfaction and productivity, and improving compensation and job stability. There is, however, no solid evidence showing that ESOPs actually produce such effects. Even if ESOPs did benefit workers in some ways, it would be necessary to balance the benefits against the ills of under-diversification and inherent conflicts of interest.

In light of ESOPs' clear harms and, at best, speculative benefits, the author suggests a range of possible solutions, with the ideal being a complete ban on ownership of employer stock by tax-advantaged retirement plans, including both ESOPs and 401(k) plans.

Suggested Citation

Anderson, Sean M., Risky Retirement Business: How ESOPs Harm the Workers They are Supposed to Help (March 18, 2009). Illinois Public Law Research Paper No. 08-19; Loyola University Chicago Law Journal, Vol. 41, 2009. Available at SSRN: https://ssrn.com/abstract=1363879

Sean M. Anderson (Contact Author)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States
217-244-8256 (Phone)
217-244-1478 (Fax)

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