September 23, 2025
Is your company offering an Employee Stock Ownership Plan, or “ESOP”? ESOP stock can be a valuable benefit. But like any investment, it comes with both advantages and potential risks. At first glance, it may seem like there’s no downside to receiving company stock in exchange for years of service. But ESOPs differ from other retirement plans, such as 401(k) plans, which usually offer a diversified menu of investment options; or defined-benefit pensions, where you are guaranteed a fixed monthly retirement check for the rest of your life. ESOP stock carries unique considerations employees should understand. Here are three key points to keep in mind:
- ESOP shares are not “gifts” from your employer.
It’s a common misconception that stock contributions to your ESOP account are simply a gift—something employees should accept without question. In reality, ESOP contributions are a form of compensation, not charity. When your employer contributes stock to your ESOP account, it is doing so in place of other forms of pay or benefits. In fact, your employer receives tax deductions for ESOP contributions precisely because the IRS views ESOP contributions as part of employee compensation.
- Your ESOP investment may carry more risk than other investment options.
ESOPs for non-publicly traded companies invest in private employer stock, which is not traded on an open market. This can create significant investment risk. If a valuation is flawed or the company faces financial trouble, the value of company stock—and therefore the value of your ESOP account—can decrease. On top of that, employees’ livelihoods are already tied to their employer, which means a downturn could hit both your job and your retirement account at once.
- ESOP shares are sometimes overvalued or inflated at the time of contribution.
The value of ESOP shares is determined at the time the ESOP purchases the company and then reassessed annually. But the valuation of private company stock is complex and depends on factors like:
- Whether the ESOP received a controlling interest in the company.
- Whether the shares are marketable (can be sold or liquidated).
- Whether the financial information and projections used to value the company were realistic and unbiased.
For instance, employees may technically “own” 100% of company shares but they often lack key shareholder rights such as electing the board. If a valuation doesn’t properly account for lack of control, limited marketability, or other factors, employees may end up overpaying for company stock. Yet most employees receive little to no information about how these valuations are conducted, leaving uncertainty about whether their retirement savings reflect fair value.
Bottom Line: ESOP stock is not a gift—it is compensation employees earn through years of service with a company. That’s why federal law (ERISA) requires that the stock allocated to your ESOP account was based on fair market value. Both current or former employees (with vested ESOP stock) have the right to ensure their stock was fairly valued during the initial ESOP transaction and to protect themselves from being short-changed on their hard-earned retirement benefits.