S Corporation ESOPs Can Give Workers a Retirement Savings Advantage

S Corporations are likely to be fully employee stock ownership plan (ESOP) owned, and S Corporation ESOPs, in particular, tend to prepare workers much better for retirement than other types of workplace retirement savings plans, according to the National Center for Employee Ownership (NCEO).

ESOP participants have an average retirement balance of $170,326, more than twice the $80,339 that other workers have saved, NCEO says. Even for ESOP employees making less than $25,000 a year, their balances average $55,526, compared to the $22,447 that their counterparts have saved at other companies.

Ninety-seven percent of companies with an ESOP offer at least one other retirement plan in addition to the ESOP. By comparison, 32% of workers in the U.S. are not offered a retirement savings plan. Among the 68% who are offered a retirement savings plan at work, 49% do not participate in it.

S ESOP workers nearing retirement have a median account balance of $147,522 in their ESOP plus $98,942 in non-ESOP plans. By contrast, 35% of all workers nearing retirement have neither individual retirement savings or a pension. Among low-income workers nearing retirement, 50% have neither retirement savings or a pension.

As such, NCEO says, the median account balance for all U.S. workers between the ages of 55 and 64 is zero. Among workers who have retirement accounts, the median balance is $100,000.

Millennial workers at S ESOP companies have a median ESOP account balance of $22,588 and $11,239 in a non-ESOP account. In contrast, the median savings of U.S. Millennials is zero.

Lower wage workers at S ESOP companies, those making between $10 and $12.85 a hour, have a median ESOP account balance of $4,381 and $2,149 in a non-ESOP account. In contrast, nationally, 56% of workers in this category are not offered any retirement benefits at work, translating their median savings to zero.

NCEO says there are 6,669 ESOPs in the U.S. with 14.4 million participants and $1.3 trillion in assets. Among them, 3,192 are S corporations, which have 850,000 participants and $80 billion in assets.

NCEO says that while employees must select their deferrals into a 401(k), which are commonly matched with a company contribution, in a ESOP, the company must allocate contributions based on relative pay or a more level formula not determined by what employees put in.