Many publicly traded companies give employees the opportunity to own shares in the company they work for. Traditionally, that happens through an employee share plan where employees directly purchase their company’s stock, as provided to employees at Starbucks Corp. and WestJet Airlines Ltd., for example. Ownership is beneficial to both the employer and the employee for many reasons, including entrepreneurial spirit, morale and motivation. But there’s another employer-sponsored option that could be a good fit for some employers: the unitized stock fund.
In a unitized stock fund, participants own units of the fund, rather than shares of company stock. The fund will rise and fall with the shares of the company but it won’t mirror the shares exactly. Also, to enhance liquidity, the funds include a small percentage of cash or similar short-term investments, in addition to stock. The funds enable faster processing of transactions by allowing the plan to net participant transactions and use the cash to make distributions and transfers to other plan funds.
The unitized stock fund has some great benefits for employers. Smaller companies that have low trade volumes can protect the stock from market swings, due to the employee ownership. For example, if a company has a low trade volume and employee share purchases happen every third day of the month, there would likely be a rise in the share value at that time. Also, smaller companies can take advantage of the unitized stock fund, because they can slowly buy the shares and place them in the fund without having to act in real time. That can flatten out spikes in volume that would have resulted from direct stock purchases.
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Many employers would also like to see their employees become shareholders in the company but they don’t want it to be the only choice they offer. While traditional retirement plans offer different investment selections, adding the unitized stock fund as an option to the investment menu provides the employee with the ability to buy shares in the company but not as the only choice. Some employers feel more comfortable with that option, especially when it comes to the employee’s portion of the contribution.
The unitized stock fund can also offer lower transactional costs to the company. Instead of trade processing fees or administration fees charged by a brokerage, the unitized funds have the ability to include costs in the management fee. As a result, the costs move from the employer to the employee who’s actually holding the asset.
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A potential drawback of the unitized stock fund is that it could be more difficult to place any vesting options on the plan. In direct purchase plans, there are vesting and withdrawal restrictions in many situations. The idea is to encourage employee retention. Because the stock fund is typically part of a group registered retirement savings or defined contribution pension plan, there could be an inability to vest the funds.
Some employers would rather not have their employees overweighted in company stock in their retirement account due to plan design. The employer might want to avoid the appearance of giving employees just the choice of company stock. In those situations, unitized stock plans could be the answer.