Apr 29 2019

How to Use an Employer Stock Plan

But investors should be wise about how much to buy – and when to sell.

WHILE FINANCIAL EXPERTS and advisors often advise against choosing individual stocks, the one exception is employer stock purchase plans (ESPPs), which give employees a chance to profit from their loyalty and their publicly-traded employer's success.

"Like employer 401(k) matching contributions, I consider this to be one of the no-brainers of investing," says Mark Wilson, founder and president at Mile Wealth Management in Irvine, California.

That's because some plans allow employees to purchase stock at a discount of about 15%. Employees often contribute to the plan through payroll deductions during an enrollment or offering period and the shares are then purchased on the employee's behalf during a purchase period. Some companies even include a "lookback" provision that allows the shares to be purchased at the lowest price that was available during the offering period.

While participating in this benefit can help grow your net worth, investors should be wise about how much to buy and when to sell. It may not be for everyone.

"As is typically the case, there are rarely 'always' or 'never' ideas or situations when it comes to investing," says Cory Bittner, co-founder and chief operating officer at Falcon Wealth Advisors in Kansas City, Missouri. "It creates a sense of ownership for employees to want to work hard and do well to help their company succeed. However ... an employee needs to have confidence and conviction that their company is doing things the right way and for the right reasons."

These five tips can help an employee-investor navigate employee stock purchase plan opportunities:

Don't put all your eggs in one basket.
Sell the stock as soon as possible.
Know your firm.
Know the restrictions and opportunities.
Understand the tax consequences.
Don't Put All Your Eggs in One Basket
Your employee stock should be a relatively small piece of your portfolio, so that you are adequately diversified in all your holdings.

If something happens with the company, your discount – and potentially your principle – could be moot, says Brian Koble, chief investment officer at Hefren-Tillotson in Pittsburgh.

"Some of the biggest corporate failures in history have witnessed people not only losing their job, but their life savings, when a company fails," says Robert Johnson, professor of finance at Heider College of Business at Creighton University. "Oftentimes, investing in own company stock is a result of overconfidence. In other words, you believe that your firm has a much better future than it actually does."

Bittner says he wouldn't recommend for your company's stock to make up any more than 20% of a person's portfolio, and that can still be "quite aggressive," depending on a person's situation.

Sell the Stock as Soon as Possible
When participating in employee stock purchase plans, "it is important to have a disciplined selling strategy in order to make sure you are not becoming overexposed to the stock," says Timothy McGrath, managing partner at Riverpoint Wealth Management in Chicago.

Although the tendency is to want to keep the stock, "take the discount and run," says Wilson.

The longer you stay at the company, the more emotionally attached you may become to the stock and abandon your plan to sell the shares, McGrath says. This "exposure" can have devastating effects, such as at Enron and others.

Know Your Firm
If you're going to take advantage of discounted employee stock, make sure your company is legal and ethical, Bittner says.

"There are plenty of examples of companies with high-flying stock prices that eventually crashed because they were unethical, or outright fraudulent," he says.

Consider whether leaders who may own large amounts of company stock are making decisions that are in the best long-term interest of the company, or simply in the best interest of the share price, McGrath says.

"While tax consequences should be secondary to prudent investment decisions, they should still be understood and considered," he says.



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