The IRS requires diversification of stock for employee owners after they reach 55 and have participated in the plan for 10 years. ESOP's often have assets besides employer stock in the plan. ESOP's (and EOT's) are also not risky because employees typically do not pay anything in.
Diversification of stock is a risk management best practice, and so it was with employees approaching retirement in mind that the IRS requires diversification of stock for such employees.
According to the NCEO: "After ESOP participants reach age 55 and have participated in the plan for 10 years they have the right during the following five years to diversify up to a total of 25% of company stock that was acquired by the ESOP after December 31, 1986, and has been allocated to their accounts; during the sixth year, they may diversify up to a total of 50%, minus any previously diversified shares. To satisfy the diversification requirement, the ESOP must:
- offer at least three alternative investments under either the ESOP or another plan such as a 401(k) plan or
- distribute cash or company stock to the participants.
It's important to keep in mind also that ESOP's often have assets besides employer stock in the plan.
ESOP's (and EOT's) are also not risky because employees typically do not pay anything in order to benefit from stock ownership.
Finally, consider that ESOP companies almost never fail to repay the loan that most take out to become employee owned (under 0.5% in a study conducted by the NCEO).
In contrast, similar purchases of companies by private equity firms fail at a rate that is 10 to 20 times as high.