How Legacy Ownership Plans Don’t Really Work for Hourly Workers

Introduction

Recently, I did a deep dive into the concept of ownership, demonstrating both how critical it is to social mobility and how the low-income labor force has been unable to capture the value they create for the economy in the same way that white-collar workers can.

My research showed that employers actually don’t like this dynamic either (that’s a good thing!). 94% of employers believe hourly workers deserve the same benefits as salaried workers. From increasing wages to inventive equity disbursement plans, companies are doing more than ever to try and provide ownership to their workers. Employers recognize that asset ownership is a necessary element to retain a happy workforce, optimize productivity, and grow the overall labor economy.

So it’s not a question of desire, or objectives. The current lack of ownership is really a problem that arises from the fact that legacy infrastructure and technology are inadequate to meet the needs of the modern hourly worker.

To show this, I’ve done some deep dives into the current alternatives:

401(k) Plans

The 401(k) retirement fund is perhaps the most well-known total rewards program in existence today. Named for the IRS tax code byline that governs it, a 401(k) is a retirement savings account that is automatically deducted from an employee’s paycheck, subject to advantageous tax breaks, and is often tied to employer-managed equity investment funds to help accelerate growth. In simple terms, it helps employees save money for retirement, sometimes with the employer even offering to match contributions. On paper, that sounds like a promising idea. And yet, only 4 out of 5 low-income workers actually participate in a 401k program. There are a few reasons for this:

First, 401(k) contributions are deducted from employee paychecks, just like taxes or healthcare. For a worker making $10 an hour, even contributing as little as a dollar every hour represents a significant reduction in take home pay. Even if studies show that these plans can help hourly wage earners in the long run, it’s understandably difficult to make an argument to someone living and working under the poverty line that they should take home less money at the end of their pay cycle.

401(k) programs can also allow loans to be taken against their balances, which can lead those with limited means or low financial literacy into debilitating debt. According to research by Vanguard, 20% of 401(k) participants with incomes between $30,000 and $50,000 had taken a loan against their retirement account. Even more alarmingly, participants with the lowest 401(k) account balances had the highest percentage of their fund value loaned to them, at 35% — a 40% increase from the second lowest income demographic. This indicates that low-income wage earners are more inclined to view and use their 401(k) — if they have it — as a form of revolving credit rather than a way of planning for retirement or as a means of economic mobility.

Perhaps the biggest pain point, however, is how difficult these retirement plans are to use, including making investment decisions and transferring them from one job to another. As an average hourly worker, you change jobs approximately every three months. At the end of the year, you could have as many as four different 401(k) plans that need to be rolled over. Each requires a separate tome of paperwork, potentially hours on hold with call centers, and a nuanced understanding of how this complex system built in 1978 works.

With a home to maintain, family obligations, and another shift ever looming, it’s no surprise that studies indicate that as many as 78% of workers don’t transfer their 401(k) when they leave a job. This tax amounts to more than $1 trillion in left-behind retirement funds every year since 2014. That’s as much as 20% of the total value of 401(k) assets lost every year to infrastructure inefficiency.

Stock Issuance

Another well-meaning but clunky way companies have tried to bring equity to their low income employees is through stock issuance. This method takes many forms, such as options, Restricted Stock Units (RSUs), Direct Stock Purchasing Plans (DSPPs), and more. (For starters, about half of the US workforce works for privately held companies and so this approach isn’t even relevant for them.)

For our purposes here, let’s take a closer look at RSUs. In the simplest terms, Restricted Stock Unit programs disburse shares of company stock to employees. At first, this sounds great. An asset is being rendered, which can help kickstart the ownership cycle that enables economic mobility.

However, as their name implies, RSU plans involve some disheartening restrictions. In a standard Restricted Stock Unit program, employees can only access their shares of stock after working for the company for a set amount of time — for example, one year. This is particularly limiting for the average hourly worker who may spend only a quarter of a year at a given employer.

Historically, these programs have also only had a minimal economic impact on hourly workers. As an example, Amazon launched an RSU program for its hourly workforce leading up to 2019. Workers who stayed a whole year were given a single share of AMZN stock.

Why are companies so parsimonious with disbursing shares of stock? Simply put, there is a cost to the issuance of these shares from a dilution standpoint. Additionally, it is administratively taxing for the HR/Compensation department to administer these programs. One might argue that stock plans were not designed to address the large-scale issue of asset ownership for hourly employees.

This may be part of the reason why Amazon ended its RSU program in 2019. This news devastated frontline workers, with anonymous hourly employees saying that they depended upon RSU incentives, meager though they were, to make ends meet.

Figure [2], from Twitter

Figure [3], from Twitter

Predictably, the company at large has also suffered in the wake of removing its RSU program for hourly workers. A New York Time investigation revealed that Amazon’s attrition rate was as high as 150% last year, with a staggering 66% of newly-hired hourly workers lasting longer than 90 days. Additionally, documents leaked in early 2022 indicate that frontline turnover is costing the company at least $8 billion per year, demonstrating how critical the issue of employee ownership is to all parties.

“ESOP’s”

The last type of equity benefit plans we’ll look at are ESOPs (Employee Stock Ownership Programs). Most prevalent in smaller or private companies, these plans combine the theory of stock issuance and retirement funds. Without going too deep down the rabbit hole, ESOPs are built around a financial trust that purchases shares of stock from the company to distribute equitably among employees over time.

Like all of these plans, it sounds outstanding in concept, but ESOPs are not without infrastructure issues that make them unwieldy for the workforce at large. First, hiring new employees often requires the company to issue new shares of stock to be disbursed. This, as mentioned above, dilutes the existing supply of shares, which can have a net devaluing effect on stock prices for all shareholders.

(different spelling; same concept though)

Second, as with 401(k)s and RSUs, ESOPs are subject to burdensome time restrictions. In a traditional scenario, for example, the only way to receive a full payout is by leaving the company due to retirement, disability, or death. Those are some pretty extreme terms and conditions for anyone to abide by.

As I’ve previously covered, the vast majority of the low-income workforce does not stay with a single employer through retirement. This means that, barring tragedy, most hourly wage earners with ESOPs will only ever be entitled to a fraction of their overall earned company stock and must wait five years before accessing it. For transient low-income workers living paycheck-to-paycheck, this simply isn’t viable.

For all of these reasons, the number of active ESOP participants has declined steadily by nearly 6% since 2015, and studies show that without participation, these programs produce minimal benefits to employers or employees.

A Modern Problem Requires a Modern Solution

After upon a cursory look into legacy infrastructures, it’s painfully evident how these legacy systems fail to meet the needs of hourly workers. Technology and the capital markets have evolved over the years where I believe we can create an innovative solution to this ownership problem. In January, I will be sharing more in my next post about what and where I think we should build to address these needs.

You can also read Part 1 of this three part series called Ownership at Work: https://jason-lee.medium.com/ownership-at-work-af163f1e65ec