This is a fictitious story about Billy and Bobby.

Billy and Bobby grew up in the same town and were best friends.  They attended school together through college where they both received an engineering degree.  After college Billy accepted a position at ABC Company, where the company provided a 401K Plan with a 100% match of the employee’s first 3 percent deferral.  Bobby accepted a position at XYZ Company which was an ESOP and also offered a 401K plan with the same 100% match of the employee’s first 3% deferral.  Billy and Bobby’s starting salary were the same at 60,000/year.

After 10 years (not accounting for salary actions or promotions) how did Billy and Bobby make out?

Billy deferred 3% of his salary or approximately $1,800/year and received an equivalent in matching funds.  After 10 years assuming a 5% market return Billy had ~$48,000 in retirement savings.  Billy contributed $18,000 of his wages or about 37.5% of the total.

Bobby also contributed to his company’s 401K and received a similar return.  In addition, because of the ESOP, Bobby received a share allocation each year once he became eligible to participate in the plan.  Assuming that the company maintained a profitability consistent with their history and each year contributed a consistent free cash flow from those profits, the value of Bobby’s ESOP account after 10 years was approximately $70,000.  However, unlike the 401K there was no employee wage contribution required to generate this wealth.

Billy created $48K in retirement wealth requiring a wage contribution of 37.5%, Bobby created $118K in retirement wealth requiring a wage contribution of 15% (37.5% for the 401K and 0% for the ESOP)

Who would you rather be Billy or Bobby?