Proposal for a Non-Subsidized, Non-Retirement-Plan, Employee-Owned Investment Vehicle to Replace the ESOP

Abstract

The authors have previously been critical of the existing American legal exemption and subsidy regime for employee stock ownership plans (“ESOPs”). By definition such plans create dangerously undiversified investment programs tying employees’ retirement security to the financial health of a single company – which, to compound the problem, is the employees’ employer, thereby correlating participants’ retirement security risk with the risk of losing their jobs. No demonstrated compensating policy benefit justifies this extraordinary large-scale departure from basic principles of financial prudence. One context, however, where a plausible case might be made for employee ownership is that which arises when a small-company founder retires and doesn’t wish to sell to an (or there is no available) outside buyer. An argument could be made that it should be permissible in that context for the company’s employees to form some collective finance vehicle to purchase all the shares; and perhaps the government might find a way to facilitate or at least allow that. But it shouldn’t be through the retirement system. A conceivable alternative would be to abolish ESOPs but amend the securities laws to allow establishment of an all-employee-owned trust, somewhat analogous to a mutual fund company, to borrow money and buy a company’s shares. Such a thing is currently effectively impractical under federal law except in limited situations amenable to the use of “employee cooperatives.” The new type of proposed entity would not be characterized or treated as a retirement plan, and it would not be tax-subsidized. (And we would need to retain and even strengthen regulatory protections involving such things as stock valuation. That, however, could be modeled after and subject to enforcement mechanisms similar to those that apply to mutual funds, which are subject not to ERISA but instead to securities regulation under the Investment Company Act of 1940.) This approach might be more politically feasible than simple abolishment of ESOPs without any replacement.

Keywords: ESOP, Employee Stock Ownership Plan, Retirement Plans, Retirement Policy, Tax Subsidy, Diversification, Business Organization

JEL Classification: G38, K22, K34