401k vs ESPP?

Question

I am curious to hear opinions about which option, or a combination of the two, are best for long term financial growth for retirement purposes. Here are the basic details of both plans:

401k - Company matches 50% up to 6% of employee's contribution. Contributions are made per paycheck, which is every two weeks.

ESPP - stock is purchased at a 15% discount against the lower of two prices, the start or ending price of the period. There are 2 periods annually (6 months each).

So basically, for the same money, is it better to contribute to a 401k and get the match or contribute to the ESPP and get the 15% right off the bat. We do have the option to flip our stock at the period's close.

Answer 1

Fundamentally the 401(k) is better, but if you are wealthy why not do both? The primary problem with an ESOP is the lack of diversification. Ask the people who worked at Enron what can happen when all of your eggs are in one basket.

Answer 2

I had the exact same ESPP deal with a company I worked for. It's nice to have a guaranteed minimum 15% return on your investment every six months. And if your company does well over that six month period, you can potentially make a large sum of money.

However, you should always be maxing out to get your highest employer match on your 401k first. Not only is that a "guaranteed" 50% return on investment, but also it is with pre-tax money. Usually ESPPs are with post-tax money. In your 401k all the money you would have paid in taxes helps the growth of the money. The only obvious downside is that you have to wait until retirement to get it. But you won't get a better deal than this in any retirement investment.

Also, it is never good to have too much of your money in one stock.... even if you do flip it. Diversification is the key to long term growth. You should never have more than 10% of your investments in your own company stock. Especially if it's going up at the time of the buy every 6 months, it's very tempting to hold on to it and not flip it... trust me, I know.

Also, I found that with my ESPP, the transaction was rather slow to do. You had to fill out paperwork and they had to go through a third party... one time it took 3 weeks to execute the sale, and by then the price had actually dropped below my purchase price. I was really angry because I thought I'd at least get the 15% discount.

ALSO, did you know that you get taxed on your discount? They count it as compensation through your company, so you actually only wind up getting like a 10% discount after it's all said and done. Plus if you "flip" it, you have to pay short term capital gains on your gains... so your original 15% "gain" winds up being closer to 7-8%... which is not that much better than savings.

So if you have to chose one or the other, definitely do the 401k. Definitely don't do the ESPP in lieu of it. Only do the ESPP if you have extra investment money that you can "play" with that can stand a little risk.

Answer 3

i would try to do both -- just put the minimum about that covers the companies matching and put the other in the espp!!!

Answer 4

I really don't know but i can tell you that my roth IRA is doing well