4 Benefits of Employer Share Purchase Plans and Pensions and 1 Downside

• Posted by The Dividend Guy in Pension Plan, Savings Contributions

At this time of year, I realize that I am one of the fortunate
individuals who works for a company that still provides a good employer
share purchase plan as well as matching pension contributions. Although
these contributions happen on a monthly basis for me, it is during
spring that I am especially glad because it is when bonuses are paid.
Never mind the additional cash I receive from the bonus - the best part
is that this bonus is subject to the same matching that I receive all
year for both the defined contribution pension plan and the employer share savings plan.

As I was thinking about the positive impact this event has had on my investment portfolio
in terms of a large additional contribution to both the share purchase
plan and the pension plan, I realized there were 5 benefits of an
employer share purchase plan (ESPP) and pension plan and 1 downside

The Benefits

1. Free Money - this one is pretty obvious, but I look at the
pension matching and ESPP matching as free money. Yes it is part of my
overall compensation package, but it is a benefit I would not get
unless I was working for the company.

2. Tax Efficient Investing - my pension plan contributions occur
with before tax dollars. In other words, it reduces my tax obligations
off of my pay cheque which allows me to save and keep more money as
opposed to giving it to the government.

3. Simple selection of investments - this one depends on your own pension plan, but my pension plan allows me to buy index funds which I do. I can diversify broadly and without buying mutual funds

4. Restrictive trading - this one can be both a positive and a
negative, however I view it more positively. In the pension plan, that
money is locked in eliminating the temptation to take the money out for
spending. I am “forced” to keep the money invested and working for me.
In the ESPP, there are rules about selling - I can sell the shares for
free once per year which if managed properly has worked very well.
However, it can limit my ability to act quickly on these shares if need
be as I have to consider the fees my actions will generate.

The Downside

1. Overweight in employer stock - as months and years go buy, an
employee can accumulate a large chunk of employer stock if not managed
properly. Think of all those poor souls at Enron

For more information on 4 benefits and 1 downside of ESPP.

Posted by Dan Walter

Performensation: Equity Compensation for High Performance Companies.