What's an ESOP? It stands for employee stock ownership plan and is formally defined as "when a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares," according to the National Center for Employee Ownership.

Loren Rodgers, executive director at NCEO, says there are many reasons to utilize this tool, but it is most commonly used for "someone who owns a business and doesn't want to sell it to a competitor when they're retiring, so they sell it instead to their employees and get some cash out of it themselves."

Rodgers adds that it benefits the employees. "The research we've done, and academics show, that employees tend to benefit from ESOPs at 2.5% in wealth," Rodgers says.

That's because employees are getting shares of the company and adding to their retirement savings, according to Janel Leymeister, chair of Conrad Siegel Actuaries' defined contribution committee. Most plans maintain 401(k)s in addition to the ESOP.

"There's no better time to talk about ESOPs than there is now," says Jerry Ripperger, director of consulting at The Principal. "There is $4.8 trillion in privately held equity in the U.S. across those aged 55 to 70 and every 58 seconds a boomer is thinking about retiring."

Rodgers agrees: "The number of ESOP transactions will go up and I think the number of potential ESOP transactions should go way up," he says. "[Advisers] who don't understand ESOPs - that's a vulnerability."

There are approximately 11,000 companies with ESOP plans in the country. Rodgers says only about 4% of transactions where ESOPs are potentially a good fit actually turn into an ESOP.

"My gut feeling is that percentage will go up," he says. "I think the baby boomer generation is more about the value."


The right fit

Sam Geil watched his brother's company, Geil Enterprises in Fresno, Calif., where he is also employed, transition to an ESOP seven years ago.

"Our company values fairness and this seemed right," he says. But he did learn firsthand about the kinds of companies that tend to lend themselves better to ESOPs.

"The bulk of our employment base is security guards and janitors, where we lose people to turnover quite often," he explains. "So that's a natural and inherent challenge in our business."

Rodgers says companies with high staff turnover like Geil's and also those that are smaller than 20 employees or where the ratio of total enterprise value to payroll is big, like real estate management, tend to not work as well with ESOPs. Geil isn't looking back, however.

He says it may simply be a matter of taking the business in a different direction soon.

Ripperger says most people hear about ESOPs from their attorneys or accountants, but there's a clear advantage for advisers to get in on the action.

"It opens up the door to have significant conversations about life insurance, qualified retirement plans, and it's entirely logical that you'd want to manage the ESOP along with your 401(k)," he says.

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