Strategy for my employer’s ESPP?

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gatsby11
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Strategy for my employer’s ESPP?

Post by gatsby11 » Mon Jul 02, 2018 12:51 pm

I know there are many threads on ESPP’s, but I don’t see any with the particulars of my plan. Details:

5% discount on company stock on date of purchase
Up to 10% of salary per year (which is $15k in purchases for me)
No lookback
Bought at the end of EVERY pay period (no holding of money for a quarterly purchase or anything)
$1 per month to participate
Can sell immediately. $15 + $0.10 per share to sell (share price is over $120 right now)

I’m thinking it’s a good enough deal to participate to the maximum and sell shares every 6 months or so to limit fees. Assuming no gains while I hold the shares this benefit is currently worth $700 or so per year for me. Even holding $10k of company shares would only be a couple percentage points of my net worth, so I’m not too concerned about the portfolio risk. I’m also maxing all of my tax-advantaged space and have no debt. Thoughts?
Last edited by gatsby11 on Mon Jul 02, 2018 3:13 pm, edited 3 times in total.

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dm200
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Re: Strategy for my employer’s ESPP?

Post by dm200 » Mon Jul 02, 2018 12:53 pm

gatsby11 wrote:
Mon Jul 02, 2018 12:51 pm
I know there are many threads on ESPP’s, but I don’t see any with the particulars of my plan. Details:

5% discount on company stock on date of purchase
Up to 10% of salary per year (which is $15k in purchases for me)
No lookback
Bought at the end of EVERY pay period (no holding of money for a quarterly purchase or anything)
$1 per month to participate
Can sell immediately. $15 + $0.10 per share to sell (share price is over $120 right now)

I’m thinking it’s a good enough idea to participate to the maximum and sell shares every 6 months or so to limit fees. Thoughts?
Yes - I would consider selling 50-75% of the stock - to keep diversification. Consider donating appreciated shares to charity - either directly or to a Donor Advised Fund

bloom2708
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Re: Strategy for my employer’s ESPP?

Post by bloom2708 » Mon Jul 02, 2018 1:05 pm

If you are maxing pre-tax 401ks, Roth IRAs, HSA, then I put ESPP and Taxable investing on the same level.

I wouldn't do it if you have non-mortgage debt or aren't maxing your other retirement buckets.
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Jack FFR1846
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Re: Strategy for my employer’s ESPP?

Post by Jack FFR1846 » Mon Jul 02, 2018 1:12 pm

Well, having been with a company whose stock tanked and lost my ESPP shares a ton of money, I always sell as I buy. for you to do this, you're paying around 3% in fees to sell, assuming you're paid every other week. I guess I'd still do it, but it's certainly not a great system. I'm sure the goal for the company is for employees to hold the stock and become partial owners, thus wanting to do whatever they can to increase profits.
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ryman554
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Re: Strategy for my employer’s ESPP?

Post by ryman554 » Mon Jul 02, 2018 1:22 pm

bloom2708 wrote:
Mon Jul 02, 2018 1:05 pm
If you are maxing pre-tax 401ks, Roth IRAs, HSA, then I put ESPP and Taxable investing on the same level.

I wouldn't do it if you have non-mortgage debt or aren't maxing your other retirement buckets.
I take issue with that advice. After the first period, ESPP plans become self-funding. Return of contribution to period one become contribution to period two. In this case, it's one month, in reality one day, so the delay on mortgage payment is inconsequential.

Now let's do the math, OP
15k contribution.
About $200 in fees.
750 in ESPP gains, so net $550 or so per year, but it's as close to free and no risk (no holding period) one can get. As long as you can automate the buying/selling/tax stuff, you should do this.

It's not a lot of money, but it's free money.

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dm200
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Re: Strategy for my employer’s ESPP?

Post by dm200 » Mon Jul 02, 2018 1:25 pm

Yes - not participating is giving up free money - and the risks can be minimized by selling regularly OR donating appreciated shares.

bloom2708
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Re: Strategy for my employer’s ESPP?

Post by bloom2708 » Mon Jul 02, 2018 1:38 pm

ryman554 wrote:
Mon Jul 02, 2018 1:22 pm
bloom2708 wrote:
Mon Jul 02, 2018 1:05 pm
If you are maxing pre-tax 401ks, Roth IRAs, HSA, then I put ESPP and Taxable investing on the same level.

I wouldn't do it if you have non-mortgage debt or aren't maxing your other retirement buckets.
I take issue with that advice. After the first period, ESPP plans become self-funding. Return of contribution to period one become contribution to period two. In this case, it's one month, in reality one day, so the delay on mortgage payment is inconsequential.

Now let's do the math, OP
15k contribution.
About $200 in fees.
750 in ESPP gains, so net $550 or so per year, but it's as close to free and no risk (no holding period) one can get. As long as you can automate the buying/selling/tax stuff, you should do this.

It's not a lot of money, but it's free money.
Issue noted. Taking the 22% or 24% tax break on pre-tax money will probably save more than the ESPP each period. Don't have enough information. Many paths. Different paths.
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emlowe
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Re: Strategy for my employer’s ESPP?

Post by emlowe » Mon Jul 02, 2018 1:39 pm

Well, free money or not, I don't think I'd bother with it.

Assuming you have 24 pay periods every year, that is 24 separate ESPP lots you need to track and manage and INPUT into your taxes. Just entering that data into Turbotax would dissuade me from doing it, even for $500.

And if you hold, you easily risk losing money since your discount is only 5%.

So I would pass on this personally, I think.

diy60
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Re: Strategy for my employer’s ESPP?

Post by diy60 » Mon Jul 02, 2018 3:09 pm

gatsby11 wrote:
Mon Jul 02, 2018 12:51 pm
I’m thinking it’s a good enough deal to participate to the maximum and sell shares every 6 months or so to limit fees. Assuming no gains while I hold the shares this benefit is currently worth $700 or so per year for me. Thoughts?
What if the stock drops in value? Many years ago I participated in an employer ESPP program, it was good until the stock abruptly lost 90% and eventually took a reverse 1 for 10 split. I wouldn't waste my time for the few hundred dollars of free money.
Last edited by diy60 on Mon Jul 02, 2018 3:30 pm, edited 1 time in total.

gatsby11
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Re: Strategy for my employer’s ESPP?

Post by gatsby11 » Mon Jul 02, 2018 3:20 pm

Edited my OP to add a few details. Already maxing retirement space and have no debts. I’m a bit confused on why I should sell immediately given the fee? I understand there is more concentration of risk with a single stock, but it is a very small percentage of my portfolio so even if he stock goes to zero I’m not in complete disaster mode. I think I could wait to sell every 6 months or so.

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Re: Strategy for my employer’s ESPP?

Post by emlowe » Mon Jul 02, 2018 3:26 pm

Only by selling immediately are you getting guaranteed free money - even with the fees.

If you hold, then you risk losing money if the stock drops. The tax implications on disqualifying losses are not in your favour. You have to pay W2 income on the 5% regardless and claim ST losses if the stock drops.

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Re: Strategy for my employer’s ESPP?

Post by roymeo » Mon Jul 02, 2018 3:31 pm

I look at it like a wonderful gift from my employer, like a baby hippopotamus. Sure it may be fun to have around and take down to the bay, but in reality, it isn't something that's consistent with my lifestyle. Maybe it'll turn grow up to be a singing hippo but as much fun as it is to have around, I'm not going to keep it long enough to find out. If I really wanted a hippopotamus, I'd probably already own one. I don't directly own any animals at all, in fact, whether given to me by a previous employer or purchased on my own, so I'd be getting rid of that gift and not letting my employer's largess and kind heart distract me from my plan and goals.

In every case I take a look at the particular rules and consequences, taxes, how much of a part of my portfolio it really is, what my situation is, etc. and make the best timing decision on when to ditch that hippo. Just don't fall in love.
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dbr
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Re: Strategy for my employer’s ESPP?

Post by dbr » Mon Jul 02, 2018 3:36 pm

Sure, you sell immediately and get a pay increase of 0.5% Whoopee. Of course if they are charging you a transaction cost to sell, that kind of sucks. What kind of people are these anyway? It used to be at my employer we got a monthly allocation at 15% discount and 10% of salary. They booked the grant the last day of every month and you could sell automatically the next day with no trading cost. So we got a 1.5% pay bump. After awhile they put in a one year vesting period and at the time I didn't want to carry 10% of my annual income in company stock.

gatsby11
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Re: Strategy for my employer’s ESPP?

Post by gatsby11 » Mon Jul 02, 2018 3:37 pm

emlowe wrote:
Mon Jul 02, 2018 3:26 pm
Only by selling immediately are you getting guaranteed free money - even with the fees.

If you hold, then you risk losing money if the stock drops. The tax implications on disqualifying losses are not in your favour. You have to pay W2 income on the 5% regardless and claim ST losses if the stock drops.
By selling immediately I won’t really make any money. It’s $20 every time I sell. That’s every 2 weeks so it’d be $500 a year, almost completely wiping out the gain.

I don’t really see a reason to be hugely risk averse here. If the stock dips slightly it’s not a big deal. If it completely crashes it’s still not a big deal, I’ve just lost a few thousand dollars.

bloom2708
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Re: Strategy for my employer’s ESPP?

Post by bloom2708 » Mon Jul 02, 2018 6:04 pm

gatsby11 wrote:
Mon Jul 02, 2018 3:37 pm
emlowe wrote:
Mon Jul 02, 2018 3:26 pm
Only by selling immediately are you getting guaranteed free money - even with the fees.

If you hold, then you risk losing money if the stock drops. The tax implications on disqualifying losses are not in your favour. You have to pay W2 income on the 5% regardless and claim ST losses if the stock drops.
By selling immediately I won’t really make any money. It’s $20 every time I sell. That’s every 2 weeks so it’d be $500 a year, almost completely wiping out the gain.

I don’t really see a reason to be hugely risk averse here. If the stock dips slightly it’s not a big deal. If it completely crashes it’s still not a big deal, I’ve just lost a few thousand dollars.
This is why I skip our ESPP. If you hold, when do you sell?

One of two things happen. You have nice gains and now have a big capital gain staring you in the face.

The other option is you lose big. Well, that is no fun. Now you sell at a loss or you feel you have to hold to get your money back.

If you do do it, you sell the day they hit your account and take the gain. Then move the money to your Total US or Total International (3 fund) funds.

The fees do make it not as great a deal.
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gatsby11
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Re: Strategy for my employer’s ESPP?

Post by gatsby11 » Mon Jul 02, 2018 9:22 pm

bloom2708 wrote:
Mon Jul 02, 2018 6:04 pm
gatsby11 wrote:
Mon Jul 02, 2018 3:37 pm
emlowe wrote:
Mon Jul 02, 2018 3:26 pm
Only by selling immediately are you getting guaranteed free money - even with the fees.

If you hold, then you risk losing money if the stock drops. The tax implications on disqualifying losses are not in your favour. You have to pay W2 income on the 5% regardless and claim ST losses if the stock drops.
By selling immediately I won’t really make any money. It’s $20 every time I sell. That’s every 2 weeks so it’d be $500 a year, almost completely wiping out the gain.

I don’t really see a reason to be hugely risk averse here. If the stock dips slightly it’s not a big deal. If it completely crashes it’s still not a big deal, I’ve just lost a few thousand dollars.
This is why I skip our ESPP. If you hold, when do you sell?

One of two things happen. You have nice gains and now have a big capital gain staring you in the face.

The other option is you lose big. Well, that is no fun. Now you sell at a loss or you feel you have to hold to get your money back.

If you do do it, you sell the day they hit your account and take the gain. Then move the money to your Total US or Total International (3 fund) funds.

The fees do make it not as great a deal.
That's the thing though; there is not much "gain" to be had if I sell every two weeks. The "sell immediately" advice is predicated on only buying stocks once per quarter or 6 months. If I sell every pay period I will just barely break even. I'd also point out that when there's a loss that's a great time to sell, as I'd get to tax loss harvest.

It seems as though this advice is trying to ensure people don't lose money with ESPPs. Why is that? If my megacorp stock were to drop 5% right before I sell it, okay I break even. No biggie. I must be missing something: why I should be so skittish to ensure I hold no company stock that I would settle for $400-500 in selling fees per year rather than selling once or twice per year for $25-50?

I would have thought the choices here were either don't participate in the plan or buy and hold for a little while. I'm surprised so many seem to still think "sell immediately" is the best option.

bloom2708
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Re: Strategy for my employer’s ESPP?

Post by bloom2708 » Mon Jul 02, 2018 9:27 pm

Most plans are quarterly. The money comes out of your paycheck each time and builds up and then you buy each quarter.

If you buy per paycheck, then you will have a mix of cost basis lots and could incur a swing of gains or losses over the quarter or 1/2 year or year you hold.

Best to give it a whirl and see how it works.
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emlowe
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Re: Strategy for my employer’s ESPP?

Post by emlowe » Mon Jul 02, 2018 10:18 pm

As I mentioned I wouldn't participate.

The typical advice is to sell immediately because I like guaranteed free money. Your guaranteed free money is so small, and with all the added tax stuff, it's not worth it to me. Now, if you don't sell immediately - IMO you are basically investing in your company stock. Maybe you really like your company stock - but I'd rather invest in a broad-based total market index fund so I would take my 10% of pay and buy VTI

ryman554
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Re: Strategy for my employer’s ESPP?

Post by ryman554 » Mon Jul 02, 2018 11:48 pm

bloom2708 wrote:
Mon Jul 02, 2018 1:38 pm
ryman554 wrote:
Mon Jul 02, 2018 1:22 pm
bloom2708 wrote:
Mon Jul 02, 2018 1:05 pm
If you are maxing pre-tax 401ks, Roth IRAs, HSA, then I put ESPP and Taxable investing on the same level.

I wouldn't do it if you have non-mortgage debt or aren't maxing your other retirement buckets.
I take issue with that advice. After the first period, ESPP plans become self-funding. Return of contribution to period one become contribution to period two. In this case, it's one month, in reality one day, so the delay on mortgage payment is inconsequential.

Now let's do the math, OP
15k contribution.
About $200 in fees.
750 in ESPP gains, so net $550 or so per year, but it's as close to free and no risk (no holding period) one can get. As long as you can automate the buying/selling/tax stuff, you should do this.

It's not a lot of money, but it's free money.
Issue noted. Taking the 22% or 24% tax break on pre-tax money will probably save more than the ESPP each period. Don't have enough information. Many paths. Different paths.
Yikes, I really should learn not to respond whilst waiting for the start of a performance. Not only did I read your reply incorrectly, I did the math wrong (in my head -- must be going senile), so my issue would be giving the OP wrong advice. I agree 100% with everything you said -- do all the tax-advantaged stuff first -- or anything which is going to cost you $100 or so to delay.

And the math, I underestimated the fees by 2.6x (calculated 1x per month, not 1x per two weeks), so your net is closer to $200 than $500. Not worth it.

sorry about that...

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corn18
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Re: Strategy for my employer’s ESPP?

Post by corn18 » Tue Jul 03, 2018 5:48 am

I decided years ago that my 5% ESPP was not worth the trouble. After tax, I would net $500 and our plan tied up the cash for 6 months. Not worth it.

gatsby11
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Re: Strategy for my employer’s ESPP?

Post by gatsby11 » Tue Jul 03, 2018 8:22 am

bloom2708 wrote:
Mon Jul 02, 2018 9:27 pm
Most plans are quarterly. The money comes out of your paycheck each time and builds up and then you buy each quarter.

If you buy per paycheck, then you will have a mix of cost basis lots and could incur a swing of gains or losses over the quarter or 1/2 year or year you hold.

Best to give it a whirl and see how it works.
Yes I'm aware most plans are quarterly. Mine just isn't.

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roymeo
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Re: Strategy for my employer’s ESPP?

Post by roymeo » Thu Jul 05, 2018 4:37 pm

I didn't say sell the baby hippo every pay-period. :)
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gatsby11
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Re: Strategy for my employer’s ESPP?

Post by gatsby11 » Mon Jul 09, 2018 12:55 pm

Anyone else have advice on this?

a5ehren
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Re: Strategy for my employer’s ESPP?

Post by a5ehren » Mon Jul 09, 2018 1:20 pm

No lookback and a meagre 5% discount make this a "don't bother" thing for me in this situation.

After the sales commission, the "sell immediately" plan looks roughly like this:
$15k/yr/ 26 pays = ~4-5 shares per pay period
Assuming $120 share price, 5% discount saves you a whole $24 on 4 shares.
You immediately give back $15.40 of this on the sales fees + the $1/pay (?) to participate.

Basically you're tying up 10% of your check and adding an extra tax form for less than $200/year in extra income.

If you're buying company stock as a buy+hold play for whatever reason anyway, then go for it. Otherwise, ehhhhhhhh.

gatsby11
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Re: Strategy for my employer’s ESPP?

Post by gatsby11 » Mon Jul 09, 2018 1:48 pm

a5ehren wrote:
Mon Jul 09, 2018 1:20 pm
No lookback and a meagre 5% discount make this a "don't bother" thing for me in this situation.

After the sales commission, the "sell immediately" plan looks roughly like this:
$15k/yr/ 26 pays = ~4-5 shares per pay period
Assuming $120 share price, 5% discount saves you a whole $24 on 4 shares.
You immediately give back $15.40 of this on the sales fees + the $1/pay (?) to participate.

Basically you're tying up 10% of your check and adding an extra tax form for less than $200/year in extra income.

If you're buying company stock as a buy+hold play for whatever reason anyway, then go for it. Otherwise, ehhhhhhhh.
Yes, I agree. Based on the feedback I've gotten so far I'm either going to buy-and-hold or forego the benefit. I'm unconvinced that "buy and sell immediately" is the right choice here. Still leaning towards buy-and hold over forego based on the 5% expected additional return. Granted there's a lot of variance with it, but that is not a huge concern given the size of the investment.

a5ehren
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Re: Strategy for my employer’s ESPP?

Post by a5ehren » Mon Jul 09, 2018 1:59 pm

Yeah.

The reason the primary advice on BH is "sell immediately" is because we don't want to B+H a single company as part of a retirement plan. If your investment plan doesn't otherwise call for you to purchase company shares, in this case I would bypass the benefit.

My ESPP is 6mos, with a better discount and lookback, so I participate as part of my short-term savings. Made $1600 in the first period this year, but a typical half is more like half that.

NancyABQ
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Re: Strategy for my employer’s ESPP?

Post by NancyABQ » Mon Jul 09, 2018 2:22 pm

I think I'd either not bother, or do what you were thinking: participate and sell every 6months to minimize fees.

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greg24
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Re: Strategy for my employer’s ESPP?

Post by greg24 » Mon Jul 09, 2018 2:27 pm

I wouldn't participate.

Seems like a decent bit of work and tying up your money for limited upside.

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