Building retirement savings is not the same as wealth creation.
Wealth creation, and getting rich quick, are very tempting, especially in an era of high-flying stocks and mega-growth companies.
But stock grants and stock options today — and the promises of wealth they offer — are not a substitute for retirement security in 20 or 30 years. Outside of a retirement account, what is to prevent someone from spending a windfall when it lands? It is unclear how this equates to preparing for retirement.
Pensions & Investments on Feb. 8 reported that Tesla Inc. in 2020 did not make matching contributions to its 401(k) plan, and had not for three consecutive years.
The plan allows for an "employer discretionary matching and/or an employer discretionary non-elective contribution subject to certain eligibility requirements." Those requirements were not met for the 2019 plan year. The nature of the requirements for Tesla to make contributions to the 401(k) plan was not available.
In a tweet, Tesla CEO Elon Musk had this to say to a question about the lack of a 401(k) contribution: "Everyone at Tesla receives stock. My comp is all stock/options, which I do not take off the table. That's what you're missing."
In other Twitter comments on P&I's story, some said that stock grants and options are more attractive to employees — and maybe more valuable — than a matching 401(k) contribution.
And they cited the automaker's soaring stock price. For the year ended Dec. 31, it was up 695%.
That may be true, but they are not equal and there are risks.
Buying or holding stock in the same company that pays your salary is often seen as a sign of loyalty and faith in the business. It is also the opposite of diversification and an example of putting all your eggs in one basket.
And there are additional risks of which employees (and others) looking at that stock price may not be aware.
Olivia Mitchell, executive director of the Pension Research Council at the The Wharton School of the University of Pennsylvania, noted that when stock and stock option grants are held outside of a retirement account often they cannot be sold immediately, and any gains will be taxable when exercised. Also stocks and options typically have vesting periods, which could run to several years. The latter makes stock and option grants riskier, as the price could go down in that period.
"My general view is that most employees would be better off with a tax-qualified retirement account invested in a well-diversified, low cost, indexed fund, unless the risk compensation paid to hold the risky stock/options were truly substantial," she said.
Tesla, and any company, is within their rights to offer whatever pay and benefits they choose, and employees should be able to decide for themselves what kind of compensation they want for their labor, but it is wrong to conflate wealth creation and retirement security.
They are not the same thing.
