ESOPs Outperform 401(k) Plans by 19%

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Mon, Aug 05, 2013
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Department of Labor ESOP DataThe August 1, 2013 Employee Ownership Update discusses how the average rate of return (ROR) for ESOPs has outperformed the 401(k) plan average ROR by 19% from 1996 to 2010.  Leveraged ESOPs had an even higher average ROR.

The U.S. Department of Labor released data on retirement plans with 100 or more participants that shows ESOPs generally provided a greater aggregate rate of return than 401(k) plans. The average rate of return over the 15-year period from 1996 to 2010 was 6.9% for ESOPs, versus 5.8% for 401(k) plans. Both leveraged and nonleveraged ESOPs outperformed 401(k) plans, though leveraged plans had a higher average return (7.8% versus 6.6% for nonleveraged plans). The report also found that: 

    • Data over 20 years (from 1991 to 2010) shows ESOPs outperforming 401(k) plans in 15 years and underperforming in 4.

    • ESOPs outperformed 401(k) plans by the smallest margin in 2006 to 2010 and by the largest margin in the 1990s.

    • The standard deviation for returns to ESOPs was slightly lower than for 401(k) plans; over the 15-year period, it was 12.0% for ESOPs overall, versus 12.3% for 401(k) plans.

    • The return on leveraged ESOPs had less year-to-year variation and lower standard deviations than nonleveraged ESOPs.

The NCEO used data from the DOL November 2012 Private Pension Plan Bulletin Historical Tables and Graphs.

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Topics: Studies and Statistics, employee stock ownership plan

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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