Latest Estimate of the Potential ESOP Universe

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Tue, Jul 20, 2010
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The July 15, 2010 Employee Ownership Update is online and discusses the following:

  • New Web Site Rates Defined Contribution Plans Versus Peers
  • How Many ESOP "Sweet Spot" Companies Are There?
  • NCEO Sponsors Ownership Thinking Conference in Denver

The Update attempts to quantify the potential universe of ESOP companies and comes up with 400,000:

People working on employee ownership often ask us how many companies fit the "sweet spot" for an ESOP. The size when an ESOP is most likely to be appropriate is, broadly speaking, between 20 and 1,000 employees. According to the most recent census data, there are about 590,000 organizations in that range, and these companies employ about 40% of the private sector work force. There are about 8,500 companies with over 1,000 employees, and they employ about 42.5% of the private sector work force; companies with over 10,000 employees employ 27%.

Of course, many of the appropriately sized companies are not ESOP candidates. Many of those 590,000 organizations are ineligible for ESOPs because they are nonprofits or professional firms. (Generally speaking, law firms, accounting firms in most states, and medical practices, cannot have ESOPs, nor can companies such as real estate agencies that have contract employees.)
It is difficult to gauge how many of these there are in the 20-1,000 employee range, but we suspect that they bring the number of "sweet spot" companies down to about 400,000.

In 2008 we explored some of the statistics that can help with this projection in Statistics: Number of Baby Boomers, Baby Boomer Business Owners, and Potential ESOP Universe.

It also discusses, a website that analyzes and ranks defined contribution plans using the IRS Form 5500 data and other sources. The BrightScope website discusses their ratings system and database:

The BrightScope RatingTM

The BrightScope RatingTM is an industry standard quantitative 401k plan rating developed by BrightScopeTM, Inc. with the help of leading academics and independent 401k fiduciaries. The BrightScope rating algorithm calculates a single numerical score for each 401k plan in the country after considering over 200+ individual data points in broad categories such as total plan cost, company generosity and investment menu quality. The BrightScope RatingTM is designed to assist industry participants in determining the relative quality of a company's 401k plan when compared to a unique peer group with similar demographic characteristics. We believe that industry adoption of the BrightScope RatingTM will ultimately lead to more cost-effective plans, increased participation rates, higher employee satisfaction, and better outcomes for employees who depend on their 401k plan for retirement.

The BrightScope DatabaseTM

BrightScopeTM obtains some of its data from public sources such as the Department of Labor, the Securities and Exchange Commission, the U.S. Census Bureau, the Equal Employment Opportunity Commission, and the Bureau of Labor Statistics. Mutual fund and investment data are obtained from mutual fund prospectuses, statements of additional information, Form NSAR and Xignite, Inc. Data on 401k fees comes directly from plan sponsors who work with us to improve their plan. While all participant level data (ie. names, account balances, identification numbers etc.) is protected and confidential, we aggregate company level fee data across comparable companies to construct relevant benchmarks on fees. BrightScopeTM believes it possesses the most comprehensive private database of 401k information in the country. The company will leverage this database to provide our clients with accurate and high quality data that places them on a level playing field with their providers.

Topics: Studies and Statistics, ESOP, 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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