RSM McGladrey ESOP Blog

How to communicate rebalancing?

Have you thought about the question I posed last time? Specifically, how would you communicate the change to the rebalancing method of accounting to the long term participant with an account balance of $100,000? (Prior to rebalancing, his account breakdown was $90,000 in company stock and $10,000 in other investments, and then after rebalancing, his company stock holdings will be reduced to $70,000 and his other investment holdings will be increased to $30,000.)

Here are some possibilities:

• One possible benefit to this participant is the increased diversification of his account. As a long term participant, he may be nearing retirement and that is the time when it may be prudent to diversify his holdings.
• Another possibility is to stress that the ESOP was designed to share ownership with “all” and when all employees receive substantial stock allocations, corporate performance improves. 

Have you had this situation? If so, what has worked for you and what did not work? Please share.

More on Rebalancing

I would like to return to our discussion of rebalancing. I had given the following example in a prior post:

If the total ESOP assets are as follows:

Company stock = $7,000,000
Other investments = $3,000,000
Total = $10,000,000

Then after rebalancing, each participant’s individual account will also be 70% company stock and 30% other investments.

So if you have a long term participant with an account balance of $100,000 and prior to rebalancing, his account breakdown was $90,000 in company stock and $10,000 in other investments, then after rebalancing, his company stock holdings will be reduced to $70,000 and his other investment holdings will be increased to $30,000.

The other side of this rebalancing is a new participant with an account balance of only $10,000 and prior to rebalancing, her company stock holdings are only $2,000 and her other investment holdings are $8,000. Because of the rebalancing, her company stock holdings increase to $7,000 while her other investment holdings decrease to $3,000.

So how would you communicate this change to the ESOP participants? Lets discuss more next time. 

Happy Thanksgiving!

Tomorrow is my favorite holiday. I am not sure why it is my favorite. Perhaps it is because I grew up on a farm and Thanksgiving was at the end of the long and stressful harvest season. Perhaps it is because there is very little commercial hype (at least compared to other holidays) so it seems more relaxing. Or perhaps it is just that I enjoy both food and football.

I have much to be thankful for again this year. First and foremost, I am thankful for the health and happiness of my family and friends. My parents will celebrate their 51st wedding anniversary next Monday and both are in good health.

My career is also very important to me and there is much to be thankful for on that front as well. When I graduated from college with an accounting degree, I don’t think I ever imagined that I would become an ESOP advisor. I am certain that I did not know what an ESOP was at that point. But somehow, my journey from auditor to tax consultant to benefits consultant led me to this point. And for that, I am very grateful. The technical aspects of ESOPs (i.e., the IRS and DOL requirements) are intellectually challenging. And watching employee-owned companies thrive and knowing that we played at least some small role in fostering that success is quite rewarding.

Finally, I am blessed to be part of a very talented team of ESOP consultants and administrators. They are so much more than my co-workers – they are indeed my friends.   

Happy Thanksgiving!

Do you reshuffle?

Do you reshuffle?

Let me be more specific – do you reshuffle/rebalance your ESOP participant account balances?

Reshuffling/rebalancing is a method of ESOP participant accounting that is used by some ESOP sponsors. I prefer the term rebalancing so lets use that term from here on out. But before proceeding, I feel the need for a disclaimer – before making any decision to rebalance, you should consult with your ESOP advisor.  I am only going to provide you with a general overview of how it might work.

There are several reasons why a company might choose to rebalance the accounts of ESOP participants. One reason is as a possible solution to the Haves vs. Have Nots situation mentioned in prior posts.

When an ESOP uses the rebalancing method of accounting, all allocations of contributions, forfeitures, share releases, earnings, etc. are made as normal. Then as a final step, all accounts of all participants are rebalanced so that all are in the same proportion of company stock and other investments.

So if the total ESOP assets are as follows:

Company stock = $7,000,000
Other investments = $3,000,000
Total = $10,000,000

Then after rebalancing, each participant’s individual account will also be 70% company stock and 30% other investments.

If you make a change to the rebalancing method of accounting, it is likely that the Haves will have their company stock holdings reduced because of the rebalancing.  In other words, before the implementation of rebalancing, the Haves would have had a higher concentration of their accounts in company stock.

More next time.

Day #2 of the ESOP Association's Conference

Last Friday was the second day of the ESOP Association's Las Vegas Conference. It was a hectic day for me as I spent much of the afternoon, evening, and night traveling home due to snow in the midwest.

The highlight for me on Day # 2 was the session that I led along with Cindy Prodoehl from Principal Financial Group. Our session was on the Haves. vs. Have Nots that can arise in a mature ESOP. You can refresh your memory on this topic by revisiting my October 4th post.   

The many attendees at this session were quite willing to share. So what I learned from them includes the following:

1. There are many ESOP companies that (a) are currently experiencing a Haves vs. Have Nots situation or (b) are on the brink of having such situation.
2. These companies are struggling to find that "silver bullet" solution that will provide shares to the Have Nots without any adverse impact to the Haves. (I believe they are struggling because there is no such "silver bullet" solution.)
3. Once these companies do identify a compromise solution, they struggle with how to best communicate the change to employees.

I will share some of the possible compromise solutions in future posts and look forward to your feedback.

Day #1 from the ESOP Association ESOP conference

Well, Day #1 of the ESOP Association’s Las Vegas conference is in the books. What I know after Day #1 includes:

1. I certainly will not be able to retire from my current gig as an ESOP advisor based on my winnings here in Vegas. So I guess you will continue to hear from here at this blog.
2. While the percentage of companies in the country that sponsor an ESOP is relatively small, those companies represented here that do currently have an ESOP are quite enthusiastic about how the ESOP has impacted them.

It is easy to understand such enthusiasm when you review some of the benefits of an ESOP:

1. It provides a market for the stock of a shareholder seeking diversification or ownership succession.
2. The company is able to fund this buy-out of shares more easily due to the ESOP’s tax advantages. Later in the life of the ESOP, those same tax advantages may help the company fund acquisitions.
3. The employees benefit from what is generally a much more generous level of retirement plan benefits.
4. The company benefits from the increased productivity of the employee-owners.

And on and on and on.

More from the conference later.

Viva Las Vegas!

Many of our ESOP team, including me, will be attending the ESOP Association’s conference in Las Vegas tomorrow and Friday. I will try to update you on the activities at the conference but it is Las Vegas and the distractions are many. So don’t be offended if you do not hear from me until next week.

It occurred to me that you may not know what exactly our ESOP team does for clients and why we would be attending this conference. We serve our clients by providing annual ESOP administration services, serving as an advisor to them as they cope with the day-to-day operation of their ESOP, provide repurchase obligation studies, etc. We also assist companies considering an ESOP by providing feasibility studies and other consulting services.

The ESOP Association’s conference in Las Vegas is a great technical conference so some from our team are attending to obtain continuing education. There are a couple of us that will be making presentations. And finally, it gives us an opportunity to meet with those clients that are attending the conference.

So we hope to see you tomorrow or at a future conference.

Viva Las Vegas!

Thoughts from the Pre-Election Party

More from Dawn Hafner on her Pre-Election party experience...

Well, we went to the Pre-Election party.  We have small children, so any opportunity to get out of the house for a real date is welcome.  Plus, I looked forward to the opportunity to have lively conversations regarding the issues. 

The party hosts did a great job of developing a mock ballot that not only allowed everyone to vote for the candidates in our district and state, but also to voice an opinion on the issues.  The issues jumped started most of the conversations. 

I went to the party looking forward to conversing with people of opposing views, but I found that the group was surprisingly homogeneous.  Of the people attending it was about an 85/15 split by the traditional party affiliations.  Even the people that labeled themselves Independents tended to vote the issues along the dominant party line represented.

It left me wondering how my group of friends could be so lacking in diversity?  I was disappointed in the fact that I seem to have surrounded myself with people who apparently think just like me.  What do you think would happen if your group of friends held a similar event?  Would you have a similar result?  Do we tend to gravitate towards people of like thinking without even knowing it?

How do you take steps to expose yourself to new thoughts and differing views?  Are you doing enough to open yourself to new experiences and learning opportunities that help you grow?

Pre-Election Party Anyone?

More thoughts from Dawn Hafner....

With the elections coming up next week I am pretty sure we can all agree that an end to the political attack ads will be a welcome change.

I had an interesting opportunity last weekend.  Some friends held a Pre-Election Party.  The invitation indicated that this was a party to come and discuss the issues related to the election, and to vote in a mock election.  There was also going to be a “politics-free” zone where no politics could be discussed. (Thankfully this was also the food zone!)

When I got the invitation in the mail my first thought was “Wow… now that is risky.”  To invite over all your friends and neighbors to discuss topics that tend to get everyone’s blood boiling and temples throbbing.  Would we all remain friends after disclosing our deeply held political views?

Why is it that politics is considered such a taboo subject?  It is considered by most simply rude to lay your political views out there or to inquire about someone else’s political views.  In some households (mine included growing up) spouses do not even disclose to each other who they voted for, let alone discuss it at dinner.

More on how the party went in the next posting.