If USAID contractors fold, staff retirement plans will disappear too

As over 80% of U.S. Agency for International Development programs officially end, many contractors that rely on USAID funding face plummeting stocks and potential bankruptcy. Employees not only stand to lose their jobs but also the funds that they invested in the company’s stock. Several USAID contractors encourage employees to take out employee stock ownership plans, or ESOPs, which gives workers ownership interest in the company. U.S. Secretary of State Marco Rubio was a big proponent of ESOPs as senator, leading the creation of The Employee Equity Investment Act in 2023, which provides up to $5 billion in loan guarantees for private investment funds called Employee Equity Investment Companies, devoted to boosting employee ownership. ESOPs are different from typical stock shares. They operate as an Internal Revenue Service-qualified retirement plan. It has similarities to the more well-known U.S. employer retirement option, a 401(k) plan, which allows employees to contribute a part of their salary into a long-term investment — but 401(k)s are diversified and don’t include company ownership stock. The benefit of the ESOP is that employees can purchase stock at a lower-than-market price. The downside is that it involves an investment in just one stock — their employer. 401(k) used to offer this option but stopped after Enron and Worldcom went bankrupt and employees lost their entire retirement. Only U.S. employees who have been at their company for a specified period are enrolled, but once they meet those requirements, most companies have automatic enrollment. Several contractors working with USAID have implemented ESOPs. Chemonics, which was the largest for-profit contractor for USAID, is 100% employee-owned through its ESOPs, which means that all of its stock is owned by employees. In the fiscal year to the end of September 2023, Chemonics received $1.4 billion from USAID. The U.S. government has terminated 92 contracts and cooperative agreements with Chemonics in recent weeks. Another 14 indefinite delivery, indefinite quantity contracts, known as IDIQ contracts, have also been terminated. DAI Global, which is also 100% employee-owned, received $489.2 million in contracts from USAID in FY23. And Abt Associates, which was USAID’s third-largest contractor in FY23, also operates under an ESOP. Now, these contractors are bracing for either a significant drop in value or complete bankruptcy, which could be a shock to employee retirement plans. “If the firms go bankrupt, which some will because their sole source of funding was USAID, the employees will lose any retirement savings tied up in the company,” said Namaan Mian, the chief operating officer of Management Consulted, a consulting firm that focuses on these companies. Mian explains that the company's shares in an ESOP are owned in a trust, so any current or former employees are beneficiary shareholders. If the company goes bankrupt, they lose not just their jobs and their health insurance, but also their retirement savings because the shares wouldn’t be worth anything. An industry expert who asked to be anonymous due to the nature of their job said that all members enrolled in an ESOP at one of the large USAID contractors have already lost all the money they had invested in their ESOP. Some workers nearing retirement have lost 20% of their savings. However, these employees are unlikely to lose all their retirement savings. Loren Rodgers, the executive director of the National Center for Employee Ownership, said that employees almost always have a 401(k) in addition to their ESOP. ESOP participants get more retirement savings through this company-sponsored plan than they would have if they solely had a 401(k) — but they do still have a 401(k). “If the value of the ESOP goes away, they should still have their 401(k) — which is equal to a typical retirement plan,” Rodgers said. While he added that there could be some outliers who put all of their savings into an ESOP, most likely wouldn’t. “Thankfully, it’s not that dire.” A study by the Rutgers Institute for the Study of Employee Ownership and Profit Sharing showed that ESOPs tend to have additional 401(k) plan benefits. “The problem is not with ESOP mechanism itself but the administration’s arbitrary and capricious actions are doing irreparable harm to employee owned organizations.” --— An anonymous employee of Chemonics and DAI Official spokespeople from Chemonics and DAI Global did not respond to requests for comment, but Rodgers said that they are struggling. Many of these contractors are in the midst of furloughs and layoffs. “They are treading water,” he said. “They are doing their best to stay up while they can. There are a bunch of Hail Marys out there, asking the Gates Foundation to fill the gap.” For now, it’s a waiting game. About 17% of USAID’s funding is yet to be allocated, so many of these companies are waiting to see if they will be among the lucky few to get some of their contracts back. “The conversation is still happening,” said Mian, adding that the remaining funds will be administered through the State Department. “It’s company-dependent,” Mian said. “It depends on how good and how much foresight your CEO had. How strong is your balance sheet? And how much cash on hand do you have?” But experts say the damage is done. “The stock valuation is going to be worthless at this point in time,” said a former employee at Chemonics and DAI Global with knowledge of the ESOP programs. They asked to stay anonymous due to the nature of their work. They estimate that 90% of the stock value has been lost. “The objective of this administration is to wipe the slate clean, restart it, and reissue it to the people they want to reissue things to. There’s no doubt about that.” Industry experts shared that at least one contractor is down to just 10% of their previous portfolio with hundreds of furloughs and many people working part-time. The former employee said that administrators could potentially make a claim against the company in order to get some of the value back from the plan, but that it is unlikely to make up their losses. Despite the significant loss, experts are supportive of ESOPs. “We need to keep in mind the problem is not with ESOP mechanism itself but the administration’s arbitrary and capricious actions are doing irreparable harm to employee owned organizations,” said the former employee of Chemonics and DAI. This could be an omen for other aspects of the American economy. About 20% of the economy has some federal contracting. Rodgers said that companies beyond the scope of USAID are thinking about ending their employee ownership as a safeguard. “They haven’t decided yet, but I think you can make the case that what’s happening at USAID has ripple effects beyond foreign assistance,” Rodgers said.