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More Employees Turning to ESPPs to Acquire Company Stock

While employees continue to invest in their company’s stock, more are choosing to invest through an Employee Stock Purchase Plan (ESPP) instead of buying company stock through their 401(k), according to a recent analysis.

Fidelity Investments found that the percentage of employees with company stock in their 401(k) has dropped by almost half, from 41% in 2005 to 23% in 2016. Meanwhile, the percentage of employees participating in their ESPP increased to 28% in 2016, up from 23% in 2014.

Fidelity notes that these changes suggest employees appear to be taking a more balanced approach to how company stock is allocated within their savings strategy. Employees also seem to prefer the accessibility of stock purchased through an ESPP in order to be able to address a variety of financial needs, the analysis suggests.

Employees report that they use company stock acquired through their ESPP, often purchased at a discount, to pay down debt, add to their retirement savings, finance home purchases or set aside for an emergency, the analysis explains.

Moreover, company stock can also help employees protect their retirement savings by reducing the likelihood they will borrow against their 401(k). According to the analysis, employees who participate in their company’s ESPP are three times more likely to sell company stock for emergency cash rather than take a loan from their 401(k) and over half (52%) added that it was “highly unlikely” they would tap their 401(k) if they needed cash.

The analysis also suggests that, in addition to employees, employers are taking a “more measured approach” to company stock within their 401(k). Examining company stock changes within 401(k) plans over the past decade, Fidelity found that:

  • only 28% of employers still offered company stock through their 401(k) in 2016, dropping from 39% in 2005; and

  • only 9% of employee 401(k) assets were in company stock in 2016, down from 16% in 2005.

Meanwhile, employees apparently are optimistic about the future performance of their company stock. Fidelity found that 83% of employees who participate in their company stock plan expect the value of their company’s stock to increase over the next several years. In addition, 52% expect the value of their company’s stock to increase at a modest rate, while 21% expect the value to increase substantially in the next two years.

“Making company stock available to employees is a great way for companies to motivate their workforce and give workers a sense of ownership in their company, as well as help attract and retain talented individuals,” says Mark Haggerty, Stock Plan Services head for Fidelity Investments. “However, employees should remember that their company’s stock, just like any other stock, should be part of a balanced and diversified investment portfolio, especially if it’s part of their 401(k).”