Explaining the thinking behind a newly published Fidelity Investments survey, Mark Haggerty, the firm’s head of stock plan services, says part of the goal of the study was to dispel a longstanding misconception.

Historically, retirement plan industry experts have been concerned that employees who have access to a 401(k) and an employee stock purchase plan (ESPP) are faced with an “either/or” decision, Haggerty says. However, the freshly published Fidelity data demonstrates that when employees have access to both plans, in an integrated environment, combined participation is associated with better retirement savings behaviors and greater overall financial wellness.

Fidelity’s findings are based on an analysis of more than 250,000 employees who have access to both a 401(k) and ESPP. The study shows that employees in both plans contribute an average of 12.5% and 6.3% of their salary in their 401(k) and ESPP, respectively, while employees that only participate in their 401(k) contribute an average of 8.8% of their salary.

Notably, the higher contribution rate for employees in both plans is consistent across all income levels, not just among executives or highly paid staff. For example, Fidelity’s data shows, employees with annual salaries between $25,000 and $50,000 who participate in both plans contribute an average of 8.3% and 4.7% to their 401(k) and ESPP, respectively, compared with a 7.4% contribution rate for employees that only participate in their 401(k).

These figures match data published last year by Schwab Stock Plan Services. At the time, Amy Reback, vice president of Schwab Stock Plan Services, told PLANSPONSOR that having a diversified portfolio of both taxed and tax-deferred savings is almost always a good strategy. ESPPs, unlike a traditional 401(k), are generally set up in a way that will result in participants contributing after-tax dollars, potentially reducing their income tax burden down the line. As explained by the publication MyStockOptions.com, plan sponsors can deliver special tax advantages to ESPP participants if the plan is structured to meet the requirements of Internal Revenue Code (IRC) Section 423.

Schwab’s 2019 survey found that, for those with an equity compensation plan, it makes up 27% of their net worth on average. Sixty-eight percent also hold company stock outside of their equity compensation plan, primarily in their 401(k) plan. Sixty-five percent were found to be very or extremely confident their equity compensation plan will help them meet their financial goals, and 28% were somewhat confident.

The fresh Fidelity data shows these dynamics have not changed during the coronavirus pandemic. If anything, they have solidified. Today, Fidelity finds, nearly nine out of 10 (89%) employees that participate in their company’s ESPP also participate in their 401(k), and employees that participate in both plans are more likely to take advantage of financial guidance made available by their employer, which can contribute to improved overall financial wellness.

As Haggerty emphasizes, when participation rates for employees in both their ESPP and 401(k) are analyzed by income, the analysis shows double-digit participation rates at every income level. The research also finds that participation in both plans was consistent among male and female employees.

The Fidelity research shows plan design matters as much for ESPPs as it does for a 401(k) or health care benefit plan. Simply put, an easier enrollment and account management process brings about potentially much higher participation.

One ESPP plan design feature shown to be particularly important is called a “look back” period. While ESPPs often offer workers the chance to purchase company stock at a discount, ranging from 5% to 15% off the regular price, many ESPP plans with a 15% discount also offer a look back period, which can stretch the discount when the stock price is appreciating. In other words, a look back compares the price at the beginning of the offering period to the price at the end of the purchase period and applies the discount to the lower price.

Fidelity’s analysis suggests that ESPPs offering a 15% discount with a look back provision have a participation rate of 44%—well above the participation rates for plans that offer lower discounts or no look back.

“This analysis demonstrates that while it’s important for employers to consider the workplace benefits they make available to their employees, it’s also important to recognize how the benefits are structured and the positive impact of offering employees multiple benefits in an integrated environment,” Haggerty says.