Practical Cents #10: Should You Participate in Your Company's ESPP?

Hello everyone and thank you for joining me. One of the great things about working for a large company are the wide variety of benefits offered to employees. And one we often get asked about is the employee stock purchase program, also known as the ESPP. An ESPP essentially allows employees to buy their company's stock using payroll deductions during a set window of time at a discount of up to 15%. Getting a chance to buy your great company at a discount, who wouldn't? But before doing so, make sure you're asking the right questions and viewing this through the correct frame of mind.

Unlike a broadly diversified portfolio of hundreds or even thousands of stocks, where if one falters the many others balance it out, with a single stock you are at the mercy of how that company alone performs. Nothing else to pick up the slack or blend away any hiccups. But to further drive this point home, in this instance, that single company is the one you work for, the one where your entire livelihood is connected. Just think about the meaningful ties you already have to your employer: your salary, your health care benefits, your retirement plan. That is a lot of exposure. Acquiring shares of your company through the ESPP is further concentrating this exposure to a single company, the one that is most impactful to you and your family.

Okay, but what about the discount? A common objection, and one that on the surface seems like a no-brainer. Acquire the stock up to 15% lower than everyone else and then sell it, locking in a built-in gain. Free money, right? First, we already know that positive returns are not guaranteed. But even if the share price does increase in value, if you don't meet the required holding period before selling them, you need to be prepared to pay a lot in taxes. And depending upon where you live, after you include state income taxes, we could be looking at 50% of your gain wiped away if your plan wasn't to hold on to the shares for at least 2 years.

Now, for those of you still not with me, or perhaps even saying, "What should I do instead of participating in my company's employee stock plan?" Here are just a few other options of how those dollars could be repurposed: after-tax contributions to your 401(k) if your plan allows it, or funding an investment account if it doesn't; paying down high interest debt; establishing a general savings account or emergency fund. All ways to better help prepare you for retirement. Hint: reducing the exposure to your employer rather than increasing it with employee stock ownership.

So now what? If you were considering participating in your company's ESPP, maybe reconsider. Or let's talk about how doing so would impact your financial plan. And if you already have a significant amount of ESPP shares, let's talk and find a way to help you reduce your exposure to single stock risk, diversify out of the shares in a tax-efficient manner, and put the proceeds towards helping you retire sooner. Thanks for watching.