The Importance of Equity Compensation in a Retirement Portfolio

Many workers view equity compensation plans as a way to build significant wealth; experts say it is important to have a mix of taxed and tax-deferred savings.

Sixty percent of workers who have an equity compensation plan intend to use the money to help fund retirement, according to a survey of 1,000 equity compensation plan participants who currently receive incentive stock options or restricted stock awards and/or participate in employee stock purchase plans (ESPPs). Their average vested balance is $97,711 and the average total value of their equity compensation is $149,835, according to Schwab Stock Plan Services.

Retirement savings is, by far, the most common goal for those building equity compensation wealth. The next highest selections are financing their children’s education (9%), financing their lifestyle for the short term (8%) and paying off debt and buying a home (both at 5%).

Amy Reback, vice president of Schwab Stock Plan Services, tells PLANADVISER that having a diversified portfolio of both taxed and tax-deferred savings is a good strategy: “People who enter retirement with the appropriate amount of taxed and tax-deferred savings are more likely to have an enjoyable retirement. If you only have tax-deferred savings, you are still taxed when you draw down those assets, and you could have a pretty large tax bill. It could be as much as 20% or 25% of your assets.”

Schwab’s survey also found that among those with an equity compensation plan, it makes up 27% of their net worth on average. Sixty-eight percent  also hold company stock outside of their equity compensation plan, primarily in their 401(k) plan. Sixty-five percent are very or extremely confident their equity compensation plan will help them meet their financial goals, and 28% are somewhat confident.

Forty-one percent have exercised or sold some of their equity compensation during their career. The three most common reasons for doing so were thinking market conditions were favorable (41%), being fully vested and wanting to cash out (27%) and wanting to make a large purchase (25%). Among those who have never sold or exercised their equity compensation, the top three reasons were waiting for more favorable market conditions (37%), being concerned about the tax implications (30%) and wanting for their equity compensation to become fully vested (28%).

The survey also found that workers view their equity compensation plans very favorably. Thirty-one percent say it is an essential benefit, and 44% say it is an important benefit.

Asked what they like about their equity compensation benefit, 51% say it allows them to participate in the growth of their company. Fifty percent say it will help them significantly build their wealth, and 43% say it means that the success of their company will play an important part in their own success. Twenty-eight percent say the equity compensation offering was the reason or one of the main reasons they took their job, and 29% say they wouldn’t consider another job until their next vesting event. Twelve percent say they wouldn’t consider an offer from another company at all.

However, workers do want help from their employer to understand their equity compensation program. The specific areas they want help with are planning for retirement (68%), meeting their financial goals (55%), developing a financial plan (52%) and balancing equity compensation with other investments (51%).

Likewise, a worker survey by E*Trade found that when it comes to their company’s stock plan benefits, only 71% said they understand how to access their account. Only 59% understand how their vesting schedule works. Just over half, 53%, said they understand the benefit, and only 46% know how to find information about their stock plan benefit.

Equity compensation plans are not just for the highly compensated, says Aaron Shapiro, founder and CEO of Carver Edison. Options and restricted stock units are generally granted to highly compensated employees, but employee stock ownership plans and employee stock purchase plans are designed for broad-based employees, Shapiro says.

“The availability of equity compensation plans is out there, but the challenge is that most people who are eligible to participate in them cannot afford to see their paychecks get smaller,” Shapiro says.