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Expert Advice: Employee Share Purchase Plans

Do you have a financial question that's keeping you up at night? Ever wished you could get a second, or third, opinion on what to do with your money? Here's your chance: Bankrate.ca is introducing a new monthly feature whereby you submit [CanadianEditor@bankrate.com] a question, and we ask two industry experts to weigh in. The topics are up to you -- you ask the questions, and we'll get the answers.

Here's this month's question: "I'm a new employee with XYZ company and I'm being offered an Employee Share Purchase Plan. How do these plans work and is this kind of share ownership a good way to diversify my investment portfolio?"

Experts agree an Employee Share Purchase Plan (ESPP) is a great way to diversify a portfolio and take advantage of what many see as 'free money.' ESPPs (also known as Employee Share Ownership Programs) are company-run programs in which employees can purchase company shares -- usually at a discounted price of 15 per cent.

In most cases, an employee contributes a percentage of their after-tax earnings (typically 2 per cent to 5 per cent), which is matched partially or fully by the employer. The money is pooled and the shares are purchased every pay period, capitalizing on the benefits of dollar cost averaging.

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ESPPs are offered by both public and private companies. Share-based compensation is hugely attractive, but there are a number of questions to ask and things to consider before jumping in. It's usually best to discuss your individual plan and financial circumstances with a certified financial planner (CFP).

Sterling Rempel, a CFP with Future Values Estate & Financial Planning in Calgary
"I certainly encourage all my clients if there's a company matching program to take full advantage of it," says Rempel, adding it's important to understand how your plan works.

If you're working for a well-established organization, such as a bank, participants are usually fairly confident in the program (note that doesn't mean losses don't occur), but with a newer company you want to ensure the plan is administered properly and shares are valued accordingly.

With a public company, it's straightforward: the market determines value. With a private company, however, there should be an agreed upon method of valuation and investments should be held with a trustee.

Read the fine print to get a clear picture of any restrictions. Some employers stipulate you must hold shares for a certain period of time -- a month or even a year. The less liquidity you have, the greater the risk.

But what happens if you're terminated, retire or move on to a different employer? Check whether there's a forced sale or if you can roll the shares into a self-directed account.

"The free money with the company matching is often the biggest draw," says Rempel, adding while he's a fan of ESPPs, he encourages clients to diversify: "In any portfolio, we seek to limit investment in a single area to 10 per cent."

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-- Posted August 5, 2011
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