Understanding 3 Employer Benefits That Get You Invested (401k, ESPP & RSUs)
Have you ever noticed how many of us focus on employer benefits when we’re first considering a job, but then, if you’re like me, we get so busy doing the job we forget to use, optimize, or even just try to UNDERSTAND all the different benefits we have (especially the confusing acronym ones)?
Well, it wasn’t until I used my benefits package to negotiate a raise 4x the national average that I realized just how much benefits truly translate into MONEY.
And that’s when I got serious about understanding not just some but ALL of my benefits, and getting strategic.
I’d like to teach you about 3 employer benefits in particular… 3 employer benefits which, if you have and/or are using, mean, congratulations, you’re already investing (whether you realize it or not)!
Let’s jump into de-mystifying the 401(k), ESPP, and RSU.
1) 401k = RETIREMENT PLAN
First, let’s discuss one of the most common benefits and the one you’ve most likely heard of… the 401k - more accurately written as. You may or may not know that this is a type of retirement plan - but let’s talk about what that means.
Before we get into the details, I’d like you to learn the term brokerage account. Just like how your bank account is like the middleman between you and your everyday transactions, a brokerage account is like the middleman between you and purchases in the stock market.
So, with a normal bank, you deposit money, then you go spend that money whether its online or in the real world. With a brokerage account, you deposit money, then that money is used to buy investments from the stock market.
Think of a 401(k) as a special type of brokerage account where your money goes to buy investments from the stock market, except unlike regular brokerage accounts, you cannot take money out of a 401(k) until you’re 59 ½* years old without a penalty. Depending on when you’re reading this, this age may have changed but the idea is you cannot withdraw money from this account without facing a fine until you’re of or near the generally-accepted retirement age.
Again this is YOUR account and YOUR money and you CAN take money out if you must, however, because this type of account is meant to be for RETIREMENT, it is set up to encourage you to leave your investments alone to grow for years and years and years before you take anything out - and the way they encourage you to leave those savings alone is with that big fine if you pull money out early.
So if you have and are using your 401(k) - congrats! That means you’re investing, and that’s great. Although you can’t use that money until retirement - again, without facing a hefty fine - this is a fantastic first step.
Before moving on, there are 3 things I highly recommend you do:
Find out if your company offers a 401(k), if you’re allowed to use it, and if you’re already contributing to it. An easy way to figure this out is to look at your paystub and see if there’s money being removed for your 401(k). If you’re not sure, ask an HR representative to help.
Find out if your employer offers a match and consider contributing at least that much to your 401(k) to avoid leaving money on the table. Here’s how it works - to encourage you to save for retirement, some employers will match your contributions up to a certain percentage of your annual income – usually 3-6%*. For example, say you make $100K a year and your employer matches 3%. 3% of $100K is $3K, so if you contributed $3K in a year (about $250/month) to your 401(k), your employer would ALSO contribute $3K… meaning total contributions to your 401(k) for the year would be $6K… $3K from you, and $3K from your employer. Any additional contributions you make over that $3K would not be matched.
Remember how I said a brokerage account is like the middleman between you and the stock market? It’s the place where your contributions go - in other words, where you deposit money - so that it can go into the stock market. It’s the same with a 401(k). That means there is ANOTHER STEP. You DO NOT simply contribute money to your 401(k)... you need to then go into the account and MAKE SURE that money is actually invested. This is critical and so important and I’ve seen so many people make this mistake… thinking their money was invested when it was simply sitting in another account not growing or gaining that good compound interest at all. Hugely important, so make sure your money is actually invested.
2) ESPP = EMPLOYEE STOCK PURCHASE PLAN
An Employee Stock Purchase Plan (ESPP) is a program employers offer allowing eligible employees to buy company stock at a discount*. In my past corporate experience, the stock was discounted around 15%.
Here’s how it works: First, you see if you’re eligible to participate and, if so, whether or not you’re already signed up. If not, you’ll likely need to find out when the enrollment period is because, typically, you can’t just sign up whenever you want, it usually happens a couple of times a year.
When you enroll, you select how much of your paycheck you want to contribute to the ESPP, and for some time, let’s call it 6 months, that amount is taken from your paycheck and held separately for you. After the designated period, your company takes all the money they’ve been saving up for you for the past 6 months and buys company stock with it at the discount rate - again, let’s call it 15%.
Here’s how that helps you and why your company does it: The reason it helps you is that since your money is used to buy stock at a discount, the second it moves under your ownership, it's already worth more than you paid for it, so you can sell it for a profit (minus applicable taxes). Or, if you think the price may continue to increase, you can hold it. But either way, you’re getting it cheaper than anyone else can get it on the day of the purchase.
The reason your company offers this to you is because when you own stocks - also known as ‘shares’ - that makes you a shareholder… in other words, it makes you part owner of the company. And as part owner of the company, no matter how small, you probably want to see the company grow and succeed so that the stock price goes up, which makes you more money. As a result, you may work harder in your daily job.
If you’re interested in participating in your company’s ESPP, here are the steps I recommend:
Find out if your company offers an ESPP and whether you’re already enrolled. An easy way to see if you’re enrolled is to check your paystub to see if any money is being removed for an ESPP. If not, find out if you’re eligible and, if so, when the next enrollment period is. You can check with your HR representative to learn more.
Once enrollment opens, decide how much of your paycheck you want to contribute to your ESPP. This will depend on a few things, like how much you can afford to contribute, your belief in the company you’re working for and the direction it's headed, and how much of this particular stock you want to hold relative to your other investments, financial strategy, and goals.
Take note of the purchase date and, on that day, decide if you want to sell to immediately gain the profit from the discount you received, or hold in hopes that your stock will continue to increase in value. I recommend doing a quick online search for tax implications based on when you sell to ensure you’re considering everything.
3) RSU = RESTRICTED STOCK UNIT
Restricted Stock Units (RSUs) are a type of compensation issued by an employer in the form of company stock. Technically, it is a promise of future stock in the company and not technically worth anything immediately*.
Because RSUs are a promise for future stock, this is a retention technique the company uses to try to get you to stay on with them as their employee for as long as possible.
Here’s how it works: Let’s say you’re awarded 100 RSUs that vest over 4 years… that means you have a 4-year vesting period, which can be thought of as a waiting period. But, usually, you don’t have to wait the full vesting period to access all your stocks… from my experience, you normally receive an equal percentage each year.
For example, let’s say you were awarded those 100 RSUs on January 1, 2024, with a 4-year vesting period. That would likely mean on January 1, 2025, you get 25% of your RSUs - so 25 of your 100 company stocks would officially become yours to do with as you please. You can sell those 25 stocks, hold them, or sell part of them and hold part of them.
The key point is: at that time they become yours and you can act on them. Then, you wait another year, and on January 1, 2026, you get the next 25% of your promised stocks. Then it repeats for the year 2027 and, finally, on January 1, 2028, you get the final 25% of your promised stocks.
Since RSUs are a retention technique, they’re usually used as a reward for good performance… in other words, your company wants to keep you around. So, if you want all your stocks, you have to remain an employee of the company until all of your stocks vest. That’s why RSUs are incredibly important to consider if you’re thinking of switching employers.
Depending on how many you have been promised and your company’s stock price, it may be a financial reason to stick around a little while longer. But if it’s not worth it to you to stay, then it’s certainly a point of negotiation for your next employer while you’re discussing compensation since you’ll be missing out on the money that comes with the RSUs that have been promised to you at your current employer.
THE BIG PICTURE
Employer benefits can make up a huge part of your overall compensation, so it's worth your time to learn about them and how to strategically optimize them so you’re getting as much money out of them as possible.
Understanding things like taking full advantage of an employer match on a 401(k), how an ESPP works, and what you could be missing out on by leaving a company before all your RSUs vest - or how you could use your promised RSUs to negotiate a higher pay at a new company you're considering…
All of this plays a role in how you’re paid and, ultimately, how much money you can make, save, and hopefully use to invest to generate even MORE money moving forward.
NEXT STEPS
RSUs - I’ll start with RSUs as they’re quite simple… if you want RSUs, you must perform well at work. Period. These are handed out to keep high performers from leaving. If you want more information on how to track and prove you’re performing well, listen to The Goodbye July Podcast Episode 39: “Get a Raise: The Anatomy of Your Quarterly Review (with Your Boss!)” where I talk about the importance of aligning on goals with your manager and using those goals to prove you’ve been performing well and, therefore, deserve a raise (and maybe some RSUs!)
401(k) - As for your 401(k), I think it's wise to take full advantage of your employer match, meaning contributing AT LEAST as much as your employer will match to your 401(k) every paycheck. This means you’ll need to find out your employer match percentage and see what that comes to for your paycheck and whether or not you can afford to contribute that much. If you need help seeing what you can afford to contribute to your 401(k), I suggest checking out my financial dashboard which can help with this specifically, and so much more as it provides one place to list all your expenses and income, runs the math for you, and can show you what you have left over at the end of the month… and that will tell you how much you can afford to put toward your 401(k) and/or invest elsewhere.
ESPP - Your ESPP is a bit trickier as it depends on you, your company, and your goals. So for this, I’ll simply tell you what I’ve done in the past. For me, I always participated in the ESPP and as soon as my stocks were bought at a discount, I’d sell all of them. This did have tax implications, but I still came out ahead and used the profit to re-invest in my managed investment account where it was automatically distributed across a variety of other investments that aligned with my goals.
I did this mainly for 2 reasons:
Since my company gave employees a 15% discount on the purchase price, I knew if I sold the day of the purchase, I’d immediately make 15% (minus taxes), whereas I wasn’t sure what would happen if I held the stock longer term.
My separate automated investing system was set up according to my personal risk tolerance and goals, and it was designed to spread my money across a variety of different stocks to further reduce risk (rather than keeping a lot of money in stock from one single company - my employer - which felt risky).
Again, the ESPP is a larger conversation, but I do encourage you to learn more about what is offered at your company because it is indeed a benefit from which you can financially gain. If you’re curious about the approach I used for my ESPP profits, you can learn all about how to set up your own automated investing system inside my program Investor Prep School. The goal of the course is for you to build a financial system that positions you to grow your money on auto-pilot while you’re out living your life. Learn more, join the waitlist, or sign up if enrollment is open.
TAKE ACTION TODAY
Whether you want to focus on taking full advantage of your employer’s 401(k) match, optimizing your ESPP strategy, or improving your performance to obtain RSUs - now you have specific next steps for each.
At the very least, do some digging to learn more about your benefits in your Employer Benefits Portal, and don’t be afraid to reach out to your HR Representative for help. Remember, your benefits translate directly to money (especially these three because they’re literally designed so you can acquire stocks and other assets, which do in fact make you an investor, in case you didn’t realize!), and employer benefits are there for a reason… so don’t neglect them, USE THEM!
I hope you learned something new and helpful, and I hope you take at least one small action today… action that can ultimately result in more money in your pocket.
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