Sean M. Anderson, Risky Retirement Business: How ESOPs Harm the Workers They are Supposed to Help, 41 LOY. U. CHI. L. J. (forthcoming).

Preview of Article for Volume 41, Issue 1

Article Abstract:

The well-publicized implosion of Enron Corporation highlighted the dangers of 401(k) retirement plans' holding large amounts of stock in the employing company. Employee stock ownership plans (ESOPs) are a special form of retirement plan that invests primarily in employer stock. As such, ESOPs are even more dangerous for workers than Enron-style 401(k) plans. When an employer chooses an ESOP, workers are stuck with under-diversified retirement savings, which expose them to unnecessary levels of investment risk. In addition, an ESOP carries with it opportunities for company insiders to serve their own interests or those of the company at the expense of the workers who participate in the ESOP.

Despite these serious dangers, federal law allows and incentivizes ESOPs. Pro-ESOP advocates seek to justify ESOPs as being good for workers. They claim ESOPs are instruments of economic democratization, serving such ends as redistributing capital ownership, enhancing workers’ job satisfaction and productivity, and improving compensation and job stability. There is, however, no solid evidence showing that ESOPs actually produce such effects. Even if ESOPs did benefit workers in some ways, it would be necessary to balance the benefits against the ills of under-diversification and inherent conflicts of interest.

In light of ESOPs' clear harms and, at best, speculative benefits, the author suggests a range of possible solutions, with the ideal being a complete ban on ownership of employer stock by tax-advantaged retirement plans, including both ESOPs and 401(k) plans.