I regret to say I didn’t participate in my employer’s pension plan. However, I did join the employee savings plan – now called employee stock purchase plans. The resulting investment eventually became the backbone of my retirement plan.

Many employers have stock plans that allow their employees to purchase shares in the company at a reduced rate. Employee stock purchase plans, or ESPPs are a great forced savings method and a way to purchase stock at a bargain. Your bosses are hoping that by having a stake in the company, you’ll work harder, increase profits, and keep the stock price soaring.

How do Employee Stock Purchase Plans work?

For whatever reason, some people who work for companies with stock purchase plans don’t take part in them. They may feel they can’t afford to, or are reluctant because they don’t fully understand how they work.

In general, an ESPP lets you set aside a percentage of your pay to buy stock of the company you work for. This amount is used to buy shares at market value every pay period – most companies even offer them at a discount. Your contributions may be matched in part (mine was 50%), or in full by your employer. They are incentives for employees to participate in the plan.

Other advantages are:

  • the purchases are not subject to transaction costs
  • dividends are automatically reinvested
  • buying the stock frequently gives you the advantage of dollar-cost averaging

The employer matched amount, as well as the discount (the difference between the offering and market value), are fully taxable to you as an employee benefit.

Employee Stock Purchase Plans

Building your long-term portfolio

I was able to transfer the vested stock directly into my Self-Directed RRSP account. I definitely became over-weighted in bank stock, but the accumulated dividends purchased other investments over time.

Be cautious about overloading on company stock if you are building your retirement savings this way. At some point you must diversify. Putting all your eggs into this one financial basket could have serious future consequences.

How would you feel if your company’s share price starts decreasing? Would you feel concern about your overall employment security? Your paycheque already depends on the financial health of your employer.  It’s too risky to have the majority of your portfolio riding on the same place your paycheque is coming from.

If your company performs badly you could lose both your income source and your investment value. Not likely, you say. That was also the opinion of the employees of Nortel, Enron, and US K-Mart until they saw their investments dwindle to next to nothing.

How much should you hold? It depends on your company – a financial institution vs a start-up software company, for example.

In any case, it’s a good idea to limit your single stock holding to not more than 30%. So, as your holdings increase, sell some company stock and put the money into other investment vehicles.

I’m just going to sell the stock

Many of these plans will allow you to cash in your shares at any time, others allow you to cash in after a set period, such as one year.

Hopefully, over the course of the year the stock will increase in value, but even if it doesn’t, you will be buying the stock frequently, possibly giving you a lower average cost than if you’d made one lump-sum purchase. Of course, the stock price could drop as well, but even if it does, you would be buying stock at the reduced price plus have company matching.

A few of my colleagues immediately sold their shares as soon as the vesting period ended. Even after paying taxes, with the discounted price and employer matching I would think that they most likely sold at a profit.

So, the ESPP can still work for you if you use the sale proceeds to invest elsewhere, or even use it to pay down debt.

Final thoughts

It’s always a good idea to take advantage of any offering by your employer that will increase your wealth. An Employee Stock Purchase Plan with a discount can be a great employee benefit. It’s a good way for young people – even those with part-time jobs – to start investing.

It can be the first step in developing a diversified portfolio. But, make sure you do diversify.

Have you considered owning stock in the company where you work?

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11 Comments

  1. Chris on April 4, 2017 at 7:17 pm

    This is a great topic and quite fortuitious as I will be cashing out mine in the next month.

    I usually cash mine out to my Cheqing account and then take that money and purchase stock for my TFSA. I only do this because it’s really the only thing I know how to do. I’ve often wondered if this is the best way to handle the purchase plan?

    I work in an industry that is quite volitile, hence my decision to cash out every year. I don’t want to leave too much money in our stock due to the volitile nature.

  2. rhonda on April 4, 2017 at 8:13 pm

    Is it correct that the %you take from your pay to buy stocks reduces your salary as it is bought with pre-tax dollars?

    • Dre on April 5, 2017 at 4:17 am

      If you change your contribution to RRSPs that allotment can actually increase your net pay.
      Happened to me. As you said pre tax dollars, so you owe less taxes on payday.

    • Dividend Earner on April 5, 2017 at 9:24 am

      Yes, ESPP is with after tax money so you get less in your paycheck.

      Often times you are allowed to participate between 0%-10% of your salary as a contribution.

      What I have seen is that many that participate in their employer’s plan do not do proper analysis of the company and keep a lot of money with their employer blindly. It’s just another holding in your portfolio and you need to manage it like a portfolio.

  3. AndrewGr on April 5, 2017 at 4:13 am

    Worked for a startup from 1999-2002, it was a great experience. We had stock options offered to us. It was fun for a while until we saw our companies share value drop below the option price.

    Currently working for another tech company that offers an employee stock purchase at a 5% discount. I’ve never bothered to look much into it as I’m already putting 6% of my pay into a GRRSP and getting the 6% match. That strips enough off my income and I invest in my own set of things on the side beyond that.

  4. Dre on April 5, 2017 at 4:20 am

    Good warning on recognition that some of us work in volatile industries. Where the company stock price is too volatile.

  5. Jon on April 5, 2017 at 4:27 am

    I certainly agree with cashing out regularly. Diversify and don’t assume your employer has your back financially, no matter how much you like your co-workers and bosses. When I was in my teens, I watched heartbroken as a family friend only a few years from retirement lost his job, saw his company stocks plummet to pennies a share, and learned his “invincible” lifelong employer had quietly raided/underfunded its pension plan for years, before declaring bankruptcy. Experienced more so in the US and Europe than Canada, but even government pensions are not guaranteed, particularly as life expectancies wonderfully continue to increase beyond projections.

  6. Grant on April 6, 2017 at 3:47 pm

    Marie, I’m curious that you advise letting a single stock (and of the company you are working for) get as high as 30% of your portfolio? Isn’t that too much? I’d tend to think of it as play money, and as such, not let it get higher than 5% before selling it and putting the money in a diversified portfolio.

    • boomer on April 6, 2017 at 7:30 pm

      @Grant. I don’t advise keeping it at 30%. Since most people who buy their employer’s stocks for their retirement portfolio (as opposed to those who sell right away) usually keep way too much, especially if they are doing well (eg bank stock). Many are as high as 80-100%. It’s these people I warn not to have more than 30% since they tend not to sell.

  7. Grant on April 7, 2017 at 10:05 am

    No, I meant letting it get as high as 30%. Isn’t that too high for a single stock?

    • boomer on April 9, 2017 at 10:36 am

      @Grant: Holding 5% of a single stock is the normal rule of thumb for good diversification. But, if you are just starting a portfolio with employee stock purchases, the amounts may be too small at first and could be costly to properly diversify. By 30% there should be more wiggle room. I’ll give you an example. My first employee stock purchase gave me about $2,800 worth which I transferred to my SDRRP – this is 100% in one stock. 5% is $140 which would have left me with about 5 shares. Reinvesting the rest might have made me more diversified, but at a significant cost ($29.99 per trade at that time). Once I started adding my own personal contributions I could start selling the employee stocks more regularly and, in time, my portfolio became more balanced and at less cost.

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