The Perils and Promise of Employee Stock Ownership Plans (ESOPs)

By Ali Khawar

The United States continues to face problems of income and wealth inequality, as well as levels of retirement readiness that are too low. Against that backdrop, policymakers continue to search for solutions that can rebuild a prosperous middle class and ultimately improve retirement outcomes. One bipartisan area of interest is a longstanding type of retirement plan: the Employee Stock Ownership Plan (ESOP).

At their best, ESOPs can build wealth for rank-and-file workers, improve a business’s profitability and resilience, and increase worker voice. However, those outcomes are not automatic, and achieving them depends on appropriate implementation, regulation, and oversight.

Having served in various roles at the U.S. Department of Labor, I’ve seen both the potential and pitfalls of ESOPs. My takeaway is clear: When implemented properly, ESOPs can deliver meaningful, long-term value to workers, companies, and communities while reducing wealth inequality.

What Are ESOPs and Why Do They Matter?

An ESOP is a type of retirement plan that primarily owns some or all of the stock of the sponsoring employer. By doing so, it gives the participants in the plan, who typically are active workers, an ownership stake in the company they work for and can better align the workers’ financial incentives with the company’s financial interests. Over the years, research by the National Center for Employee Ownership (NCEO) has found evidence that ESOPs can increase employee retention; enhance company performance; and significantly grow retirement assets, particularly for lower- and middle-income workers. They can also promote a culture of inclusion and engagement, where workers have a vested interest in the company’s success.

As one example, NCEO examined ESOPs at S-Corporations and found that participants had retirement balances more than twice that of participants at comparable conventional firms, even when controlling for income and tenure (NCEO, 2022).

One of the main selling points of ESOPs is that they can democratize access to capital across income levels without compromising capitalism or market principles. As highlighted at the Georgetown University Center for Retirement Initiative’s 2025 Annual Policy Innovation Forum, there is a wide range of support for ESOPs across the ideological spectrum, and they hold promise as an innovative way to build wealth and create retirement security.

DOL ESOP Enforcement

However, ESOPs are not without risks. Workers face a concentrated risk if an ESOP is their sole retirement vehicle — if the company does poorly, employees’ jobs and retirement security may both be in jeopardy. In my view, this risk can be significantly mitigated by ensuring that ESOPs are not the only form of retirement benefit made available to employees.

Combining a plan like a 401(k) and an ESOP can be a powerful driver of wealth accumulation, but with more diversification. Even this approach is not risk-free, though; for example, if the 401(k) also invests heavily in the company stock, that creates risk. Another risk comes from the fact that ESOPs can legally create worker ownership without worker voice. If a company’s governance structure and operating practices don’t change — for example, if rank-and-file workers still have no opportunity to identify and address problems and inefficiencies, an ESOP’s transformative potential will be limited.

Under the Employee Retirement Income Security Act (ERISA), fiduciaries must operate in the best interests of participants and beneficiaries. In the ESOP context, this means (among other things) ensuring that the ESOP purchases (and sells) company stock at fair market value. Since 2005, the Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) has had an enforcement project focused on ESOPs. A significant focus of the Department’s work has been the ESOP’s initial acquisition of company stock — investigations into the ongoing operation of ESOPs are comparatively less frequent.

A primary reason for this focus is because the conflict of interest between a selling owner and the ESOP is most acute at the time of the initial purchase/sale transaction. The seller, for obvious reasons, wants a price as high as possible, but if the price is too high, the financial strain of repaying debt can have an impact on the company’s performance. This conflict is typically addressed by recusing the selling owner from the fiduciary decision-making process and ensuring the key decisions for the plan are made by more independent fiduciaries.

Unfortunately, not every fiduciary treats their duties with the seriousness required, and compliance remains an ongoing challenge. DOL activity in this area has been called a “War on ESOPs,” a characterization I believe is both unfortunate and misleading. Rather, DOL’s activity has been focused on ensuring that the financial upside of an ESOP, which receives significant tax benefits, goes to the ESOP participants as well as the selling owners.

One case that I worked on as an EBSA investigator illustrates why the Department’s enforcement efforts are important. In that case, which the Department ultimately litigated, the ESOP was being created to purchase 100% of the plan sponsor’s stock in a leveraged transaction. The first attorney hired to represent the ESOP was fired for disagreeing with the selling owner’s terms, and the first appraiser hired to independently value the company was fired by the selling owner because the valuation was too low. Ultimately, after a new, more compliant attorney and appraiser were hired, the ESOP purchased the stock — but at a price that a U.S. District Court found and U.S. Court of Appeals agreed was inflated and excessively influenced by the selling owner.

For example, there was evidence of collusion to reach a higher valuation of the company (financially benefitting the seller), including by the appraiser sending drafts of the appraisal to the selling owner for review and feedback before submitting it to the other trustees (who were more independent and were responsible for actually authorizing the transaction).

WORKing on Ownership

The Worker Ownership, Readiness, and Knowledge (WORK) Act, enacted as part of the SECURE 2.0 Act of 2022, marked an important milestone. During my tenure in the Biden Administration, we created a Division of Employee Ownership to ensure we robustly implemented the WORK Act — even without additional funding. The Division’s primary purpose is to promote employee ownership through ESOPs, as well as worker cooperatives and employee ownership trusts that are not retirement plans.

At the time I left the Department, this was mainly through creating broader familiarity with some of the basic concepts of worker ownership, but the goal was to grow the program into one that could disseminate best practices, educate service providers to remove market barriers to broader adoption, and provide technical assistance to states and companies.

The WORK Act also created a grant program for employee ownership programs in states, but the grant program was never implemented, due to a lack of appropriations. Although the Trump Administration has called ESOPs transformative and indicated a willingness to foster them, its actions to date have not reflected this. It has not requested additional funding to implement the WORK Act, including the grant program; it already withdrew a Biden-era proposal to provide additional regulatory clarity, and any replacement guidance is not expected before 2026; and it fired, then rehired, the head of EBSA’s Division of Employee Ownership.

Looking Ahead

Far too few financial or retirement professionals are familiar with ESOPs or other forms of worker ownership, which can be a significant impediment to greater adoption. This is a big part of what the EBSA Division of Employee Ownership was intended to address.

In addition, the bipartisan interest in these issues continues, as evidenced by the Senate HELP Committee’s unanimous passage of S.1728 and S.2403, two bills aimed at encouraging the growth of ESOPs. However, strong fiduciary standards – and enforcement of those standards – remains critical, given the clear conflict of interest between an owner selling their company and the retirement plan (often controlled by that same owner) purchasing it. In small, closely held companies, it is essential to obtain accurate, unbiased, and independent valuations of company stock to make these transactions work for all parties and unlock the potential of worker ownership.

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Ali Khawar is a Non-Resident Scholar with the Georgetown University Center for Retirement Initiatives (CRI); a former Deputy Assistant Secretary in the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA); and a founder of FCP, LLC, a company that offers strategic and benefits-related consulting.