As reported by The Motley Fool, according to Vanguard’s analysis of ~5 million retirement accounts in 2021 the average 401K balance in 2020 was $129,157. Investopedia reports the average company match is 4.3% of the worker’s pay, so the vast majority of assets in a 401K is contributed by the worker (wage income). The funds invested in the 401K plan are pre-tax which is a benefit but this also reduces the earner’s disposable income. Workers just entering the job market, or lower wage workers have less disposable income and may not be in a position to take advantage of this benefit.
We can see this effect by looking at the average/median 401K balances based on income range. For those earning $30-$49K/year the average balance was $29K with a median of $10K. For those earning $75-$99K the average balance was $121,570 with a median of $58,572, (of course part of this difference may be length of investment and capital appreciation).
How can an Indiana ESOP make a difference, in retirement wealth generation for our citizens?
Based on the most recent DOL5500 Indiana data (eliminating ESOPs with 0 participants or 0 assets), Indiana is home to 177 companies that employee owned and organized as Employee Stock Ownership Plans. ESOP companies provide retirement benefits to their employees through allocation of company stock which in most cases require no capital investment from the employee. In Indiana our ESOPs provide retirement benefits for ~ 160 thousand citizens with an average account balance of $131 thousand and a median balance of $103 thousand. Potentially doubling the retirement wealth of our citizens.
How does an ESOP work? In simple terms, the ESOP purchases the stock from the company with a note for a defined interest rate and term. Each year the company makes a contribution to the ESOP, the ESOP uses this contribution to pay down the promissory note which triggers a share release to the eligible employees. Each year, providing the employee remains eligible, they will receive an allocation of shares based on the ESOP plan. In addition, each year the company is independently valued to determine the share value. Assuming the employees are doing their job, and the company is growing and performing the share price should increase. The employees gain wealth through the increased number of shares plus the capital appreciation of those shares!! All at no cost to the employee.
As Louis O. Kelso stated: Labor is the source of subsistence, capital is the source of affluence. My idea is to make everyone a capitalist, and therefore, financially secure, and the point is to make the pie grow faster and distribute the new growth more equitably.