ESOPs Versus 401(k) Plans for Retirement Security*

April 15, 2020

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	ESOPs	401(k) Plans
Contribution rate from company to the plan	6% to 8% of pay per year for all eligible employees.	4% of pay of those eligible employees making deferrals per year (about two-thirds to three-quarters of eligible employees defer into the plan).
Rate of return	Department of Labor data indicate ESOPs had a 9.1% annualized rate of return from 1990-2010.	Department of Labor data indicate 401(k) plans had a 7.8% annualized rate of return from 1990-2010.
Volatility	Department of Labor data show that ESOP returns were less volatile between 1990 and 2010 than 401(k) plans.	Department of Labor data show that 401(k) plan returns were more volatile between 1990 and 2010 than 401(k) plans.
Diversification in the plan	Mature ESOPs tend to partly diversify over time and participants can choose to partially diversify at age 55 and 10 years of participation.	401(k) plans are generally, but not always, well diversified.
Secondary plans	ESOP companies are slightly more likely to have a 401(k) or pension plan than non-ESOP companies are to have any retirement plan.	Most companies with 401(k) plans do not have secondary plans.
Coverage of younger and lower income employees	All employees meeting minimum age and service requirements are in the plan and receive contributions based on a percentage of pay or more level formula. Employee contributions are rarely required.	Most 401(k) plans require employees to make deferrals to get company matching contributions; lower paid and younger employees are the least likely to defer and defer and lower percentages of pay.
Job security	Employees in employee ownership plans are one-third to one fourth as likely to be laid off as non-plan participants.	Employees not in employee ownership plans are three to four times as likely to be laid off as employees in these plans.
Bottom Line	ESOP participants have approximately 2.2 times as much in their accounts as participants in comparable non-ESOP companies with DC plans	Most of the money in a 401(k) plan comes from the employees, not the company. Median account balances for 401(k) participants age 55-64 are only $120,000 (2012 data from Center for Retirement Research at Boston College).

*Sources: Data compiled from Department of Labor plan filings; Plan Sponsor magazine employer survey; Employee Benefit Research Institute, and the General Social Survey.

Source: National Center for Employee Ownership (NCEO)

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