ESOP's and Financial Planning: Eagle Rock Wealth Management's Patrick Maguire discusses 3 Levels of Need

EAST HANOVER, N.J., Dec. 13, 2018 /PRNewswire/ -- "Many of the deficiencies of our economic system could be alleviated if ways were found to broaden the ownership of the means of production... This has happened in some companies through ESOPs.  Successful approaches of this sort would pay dividends in terms of employee commitment and morale.  And they would not deprive anyone of his present holdings since they are based on future growth." -John D. Rockefeller

ESOP's tend to be viewed as monolithic by nature?but this belies how different many ESOP's are.  A newer ESOP has different challenges than one that has been around for many years, and nowhere is that clearer than in the arena of Financial Planning for ESOP companies.  As John D. Rockefeller references in the above quotation, ESOP's can provide value?both to the original owner and to the employees of the company?but that life cycle compels the company to act in very different ways.  The needs of the company, the owners and executives and the employees are quite different. The challenge facing many companies is how to approach planning at every level.

An ESOP has a completely different set of responsibilities with respect to cash flow management than your normal taxable corporation.  Between repurchase liability obligations, the ongoing day to day operations and other concerns, cash flow management is an essential and difficult component to any ESOP organization.  Depending on the life cycle of your company, debt repayment, repurchase liability or strategic planning for growth can be the most important issue of the day.  All require a different approach to money management, and since most companies are balancing them all at the same time, having a hybrid approach that focuses on short term cash flow while creating long term value for the participants can help.

ESOP's should have a multi-faceted approach starting with a strong cash position and a variety of fixed income strategies that take advantage of their unique tax structure to provide real value to the ESOP and its participants, while remaining flexible enough to address any "rainy day" scenarios.  The problem is that many advisors are not familiar enough or technical enough to understand exactly how to provide both returns and flexibility that meet the challenges of this unique structure.

The changing nature of our current interest rate environment is creating disruption in traditional bond markets.  This presents both risk and opportunity to cash management operations.  The risks: rising rates cause bond funds to lose value in the short term, making a seemingly safer investment more volatile.  The opportunity: alternatives that ESOPs are uniquely positioned to take advantage of that mitigate that risk.  This is just one of the ways that having an adviser who understands the ESOP structure can help you navigate the current financial environment.

In addition to cash flow concerns, many ESOP's end up in a situation where they want to reward top management essential to the growth of the ESOP, but are restricted from doing so in part by ESOP regulations.  To balance these needs, you need to be aware of IRS regulations in relation to a tax-exempt entity, that close many of the traditional avenues associated with deferred compensation plans.  These additional compensation issues can be attacked creatively, especially in conjunction with a well laid out personal financial plan, to provide meaningful value to the executive while accomplishing the goals of the ESOP with respect to cash flow and strategic growth.  This can also be a great retention tool in a competitive labor market that demands employers take a more varied approach towards its key employees.

Finally, whether it be as part of their 401k or ESOP balances, there is a real dearth of education and planning with respect to the line employees in the ESOP marketplace.  These services can be a great way to not only engage employees on what it means to be an ESOP participant, but can provide real, lasting value to the participant.  While many advisors are focused solely on corporate or executive planning, many ignore the needs of the ESOP as a whole?and this includes all the participants in the plan. The most successful ESOPs all feature a great owner/employee dynamic?and we have found that concrete planning and sound financial advice can be a huge benefit for any participant, while increasing buy-in for the health and welfare of the company as it relates to them.

We believe the future of ESOPs is bright, and that competent, professional wealth advisory services at all levels (Corporate, Executive and Participant) can create lasting value.  As Rockefeller notes above, broadening the ownership of companies results in dividends in terms of employee commitment and morale.  By utilizing ESOPs to take advantage of the unique structure in the wealth planning arena, you can reward that commitment and provide value for all who participate.

Patrick Maguire, Managing Partner at Eagle Rock Wealth Management, and expert in ESOP financial management, is available for interview via phone or email.  Please contact Gina Rowley at 201-424-2530 or [email protected] to arrange an interview. 

Media Contact: 
Gina Rowley
(201) 424-2530
[email protected]

SOURCE Eagle Rock Wealth Management