oversight

Private Pensions: Plan Features Provided By Employers That Sponsor Only Defined Contribution Plans

Published by the Government Accountability Office on 1997-12-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Chairman, Subcommittee
                On Civil Service, Committee On
                Government Reform and Oversight,
                House of Representatives

December 1997
                PRIVATE PENSIONS
                Plan Features Provided
                By Employers That
                Sponsor Only Defined
                Contribution Plans




GAO/GGD-98-23
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      General Government Division

      B-275103

      December 1, 1997

      The Honorable John L. Mica
      Chairman, Subcommittee on Civil Service
      Committee on Government Reform and Oversight
      House of Representatives

      Dear Mr. Chairman:

      In accordance with your interest in considering possible changes to the
      structure of federal employee retirement plans, you asked that we develop
      information on the approaches private employers are using to provide
      retirement benefits to their employees, the extent to which these
      approaches may be changing, and the specific features of these pension
      plans. In partial response, we reported on the trends in the numbers and
      types of pension plans sponsored nationwide by private employers in
      October 1996.1

      As agreed with the Subcommittee, this report, which completes our work
      in response to your request, identifies the general features of defined
      contribution (DC) plans in the private sector. DC plans provide retirement
      benefits that are based on employer and/or employee contributions to
      individual employee accounts and the investment experience of those
      accounts. Specifically, this report describes patterns in the plans’
      (1) eligibility requirements for employee participation, (2) arrangements
      for employer and participant contributions, (3) eligibility requirements for
      employee rights to accrued benefits, (4) employee investment options,
      (5) loan and other provisions for participant access to plan assets while
      still employed, and (6) options for withdrawal of benefits upon separation
      or retirement. Consistent with the Subcommittee’s interest, this report
      also presents information on the six features for the Thrift Savings Plan
      (TSP)—the defined contribution plan component of the Federal Employees
      Retirement System (FERS)—for comparison. Also as agreed, this report
      summarizes the explanations provided in retirement literature and by
      pension experts with whom we consulted on why employers might decide
      to sponsor more than one pension plan for the same groups of employees.

      We developed data on the features of pension plans sponsored by a
      representative sample of private employers with 100 or more employees
      that sponsored only single-employer DC plans in 1993 by reviewing
      summary plan descriptions (SPD)—documents describing plans’ features


      1
       Private Pensions: Most Employers That Offer Pensions Use Defined Contribution Plans
      (GAO/GGD-97-1, Oct. 3, 1996).



      Page 1                                              GAO/GGD-98-23 Private Pensions DC Plans
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             that private employers were to file with the Department of Labor (DOL) for
             each pension plan they sponsored. We also report on the subset of
             employers with 10,000 or more employees because these employers may
             provide a more relevant comparison with the federal government. Using a
             computerized research database maintained by DOL, we also developed
             information on the number of plans offered by all employers with two or
             more employees that sponsored only single-employer DC plans in 1993 as
             well as other information useful for our analysis.2 All the numbers
             presented in this report are point estimates of population values and have
             an associated sampling error of not more than 10 percent at the 95-percent
             confidence level unless otherwise specified. As agreed with the
             Subcommittee, because we obtained our plan information from published
             SPDs rather than directly from employers, we generally were able to
             describe how employers structured their DC plans to the extent that the
             information was available in these descriptions, and we were not able to
             provide the rationale behind the employers’ decisions regarding plan
             design. We gathered the information on TSP that is presented in this report
             from published documents.


             Employer-sponsored pension plans, in combination with Social Security
Background   and personal savings, provide millions of retirees and their families with
             retirement income. As we reported in our October 1996 report, most
             employers that sponsor pension plans provide benefits using a DC plan.3
             For a DC plan, the employer establishes an individual account for each
             eligible employee and generally promises to make a specified contribution
             to that account each year. Employee contributions are also often allowed
             or required and can be made on either a pretax or after-tax basis. Pretax
             contributions are not taxed in the year they are earned, but rather, they are
             taxed when withdrawn from the employee’s account. After-tax
             contributions are taxable in the year that they are earned as part of the
             employee’s annual income. Employers can make “matching” contributions,
             which are made only if employees also contribute to their accounts, and/or
             “nonmatching” contributions that are made regardless of whether or not
             employees contribute to their accounts. The employee’s retirement

             2
              In 1993, approximately 490,000 employers with 2 or more employees sponsored only single-employer
             DC plans. For reasons described in appendix I, our sample of 419 employers was drawn from the
             subset of 3,297 of these employers that had 100 or more employees.
             3
              In 1993, approximately 44 million employees participated in private single-employer pension plans,
             and about 20 million (or 45 percent) of these participants were covered by plans of employers that
             sponsored only DC plans. Both of these statistics include only those participants covered by
             employers’ primary plans to prevent double-counting of participants covered by more than one plan;
             however, the statistics undercount the number of participants covered when employers offer multiple
             plans to different groups of employees.



             Page 2                                               GAO/GGD-98-23 Private Pensions DC Plans
B-275103




benefits depend on the total of employer and employee contributions to
the account as well as the account’s investment gains and losses.4

In the early 1980s, Congress began to consider a new retirement system
for federal civilian employees that would be more like private sector
retirement systems and include a DC plan component. As a result, in 1986
the Federal Employees’ Retirement System Act was enacted, which closed
the Civil Service Retirement System (CSRS) to new entrants and established
FERS for employees generally hired after December 31, 1983.5 FERS is a
three-tiered program that includes a basic annuity in addition to the
defined contribution TSP and Social Security.6 Although FERS provides an
annuity in addition to Social Security and DC pension benefits, many
financial planners believe that under current market conditions income
from participant and government contributions to TSP alone could generate
50 percent or more of the retirement income available to most FERS
participants. Thus, it may be useful for policymakers to know how the
features of TSP compare with the features of private sector DC plans.

In comparing the features of private and public sector pension plans, it is
important to consider key differences between private and public
employers. Notably, private sector employers can deduct the cost of
providing pension benefits from their taxable revenues. To qualify for
these tax advantages, however, private employers must be in compliance
with complex and frequently changing laws and regulations. Public
employers need not comply with all of the rules that private employers
face in designing and modifying their pension systems. Public sector
pension benefits must be legislated, and changes to retirement programs
for public employees involve political as well as business, financial, and
human resource management issues.



4
 Private employers are not required to provide their employees with pension benefits; however, those
employers that do so must meet certain minimum legal standards. In particular, under the Employee
Retirement Income Security Act of 1974 (ERISA), as amended, private employers that provide pension
benefits are to manage pension plan funds prudently and in the best interests of participants and their
beneficiaries, inform participants of their rights and obligations, and adequately disclose the plan’s
terms and activities. ERISA also provides certain minimum standards for various plan features,
including those discussed in this report.
5
 For a more complete description of the legislative history of FERS, its early implementation, and
features see Federal Pensions: Thrift Savings Plan Has Key Role in Retirement Benefits
(GAO/HEHS-96-1, Oct. 19, 1995) and Federal Retirement: Implementation of the Federal Employees
Retirement System (GAO/GGD-88-107, Aug. 4, 1988).
6
 Although employees covered by CSRS can contribute to TSP, the government does not make
contributions to their accounts. In this report, we describe TSP as it applies to employees covered by
FERS to more fully describe all of its features.



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                   Notwithstanding the different environments in which private and public
                   pensions evolve, it is also important to recognize that all employers that
                   sponsor pension and other employee benefit programs do so for the same
                   underlying business and financial reasons, which include to (1) attract and
                   maintain an effective workforce in a competitive marketplace,
                   (2) motivate employees to work towards meeting their employers’ goals,
                   and (3) manage the transition of older employees from work to retirement.


                   The designs of DC plans for the 3,297 employers with 100 or more
Results in Brief   employees that sponsored only single-employer plans in 1993 varied
                   greatly with respect to eligibility requirements, contribution arrangements,
                   accrual of benefits, investment options, loan provisions, and withdrawal
                   options so that no single plan design could be identified as representing a
                   “typical” DC plan. With respect to eligibility requirements, the employers
                   reported that they generally established eligibility requirements that their
                   employees must satisfy to participate in their plans. In 1993, 51 percent of
                   the employers specified that employees must meet a combination of age
                   and service requirements—usually age 21 and 1 year of service. Fifty-five
                   percent of the 100 larger employers with 10,000 or more employees
                   reported requiring that employees meet length of service requirements,
                   generally 1 year of service, with no corresponding age requirements.
                   Under the federal government’s TSP, newly hired employees covered by
                   FERS must have from 6 to 12 months of federal service before they become
                   eligible to participate.

                   Ninety-seven percent of the 3,297 employers provided for employer
                   contributions to the plan rather than requiring participants to fully fund
                   their own pensions. Under the most common funding arrangement,
                   employers made automatic, or nonmatching, contributions to the plan
                   with no participant contributions allowed or required. The subset of 100
                   larger employers were more likely to allow participants to contribute to
                   their plans on a pretax basis, with the most common funding arrangement
                   consisting of employer nonmatching, matching, and participant pretax
                   contributions—the same arrangement provided for under the federal TSP.
                   Fifty-one percent of the employers that provided for pretax contributions
                   (and 60 percent of the larger employers) allowed participants to
                   contribute more than 10 percent of their salaries, whereas federal
                   employees who participate in TSP are limited to contributing 10 percent of
                   their basic pay on a pretax basis.




                   Page 4                                   GAO/GGD-98-23 Private Pensions DC Plans
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Employers generally did not include enough information in their SPDs to
allow us to determine the maximum potential cost, or liability, of making
employer contributions, expressed as a percentage of compensation.
Moreover, we could not determine an employer’s liability for contributions
without also knowing the portion of these contributions that were used to
reduce the employer’s corporate tax liability in any given year. However,
for the 27 percent of the employers for which we could determine the
liability for contributions, not taking corporate taxes into consideration, 59
percent had a liability of up to 5 percent of participant compensation, and
41 percent had a liability of 6 percent or more of participant
compensation.7 For the subset of larger employers, 76 percent had a
liability of up to 5 percent of participant compensation, and 24 percent had
a liability of 6 percent or more of participant compensation. In
comparison, the government’s maximum potential liability for
contributions under TSP is 5 percent of participant compensation,
assuming participants contribute at a rate that maximizes government
matching contributions.8

Although by law participants have always owned their own contributions
(and earnings on those contributions) to DC plans, employers have often
established minimum service requirements that participants were required
to meet before they could own, or become “vested” in, employer
contributions to the plan. About one-third of the employers provided for
immediate vesting of matching contributions and one-eighth for immediate
vesting of nonmatching contributions. The subset of employers with
10,000 or more employees were more likely to use immediate vesting for
matching (52 percent versus 35 percent) and nonmatching contributions
(23 percent versus 13 percent) compared with all of the employers
included in our review.

The employers used vesting requirements that generally required fewer
years of service for employees to own matching contributions, as
compared with nonmatching contributions. That is, 44 percent of
employers provided for participants becoming fully vested in matching
contributions within 4 years, while 22 percent provided for full vesting for
nonmatching contributions within the same time period. Federal
employees are immediately vested in any government matching
contributions made to their accounts, and most become fully vested in the


7
 Because we were able to determine the liability for contributions for only a small portion of the
employers in our sample, these estimates have a sample error of 15 percent.
8
 In 1996, federal agencies contributed about $2 billion to FERS employees’ TSP accounts.



Page 5                                                  GAO/GGD-98-23 Private Pensions DC Plans
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government’s automatic 1 percent nonmatching contribution after
completing 3 years of service.

A significant portion of the employers did not specify in their SPDs whether
participants could direct how the contributions made to their accounts
were invested, although the subset of larger employers were more likely to
so specify. The majority of those employers that specified participants
could direct the investment of their accounts and specified the number of
investment options available in their SPDs provided at least four investment
options. These employers frequently included investment options such as
employer stock, stock mutual funds, and bond mutual funds. Federal
employees who participate in TSP may direct the investment of their
accounts using three funds—a nonmarketable government securities fund,
a diversified stock fund, and a diversified bond fund. Two additional
funds—an international and a small company stock fund—are scheduled
to become available in 2 to 3 years.

Nearly two-thirds of the employers reported providing plan participants
access to a portion of their account balances prior to separation from
employment. Nearly half allowed participants to borrow from their
accounts up to certain legal limits, and some also allowed participants to
withdraw some or all of their own contributions, usually in the event of a
personal financial hardship. The larger employers were somewhat more
likely to allow participants to borrow from their accounts or make
financial hardship withdrawals; however, they were less likely to allow
withdrawals for reasons other than financial hardship. The federal TSP
includes a loan program and allows participants to make hardship
withdrawals and a one-time withdrawal at age 59½ or later without
separating from federal service.

Nearly all the employers allowed participants to take their account
balances as a lump-sum distribution when they retired; while two thirds
allowed participants to withdraw their accounts in even installment
payments over some specified period of time, and nearly half provided for
an annuity that would produce a regular monthly payment for the rest of a
participant’s life. The subset of larger employers were less likely to
provide an installment or annuity option in their plans. Employers
generally provided the same withdrawal options to participants who
separated for reasons other than retirement; however, most of these
participants could opt to defer any withdrawal from their accounts until
some future date not to exceed the year following the year in which they
turn age 70½. TSP allows federal employees to select from all three



Page 6                                  GAO/GGD-98-23 Private Pensions DC Plans
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              withdrawal options—a lump-sum distribution, installment payments, or an
              annuity. Federal employees who separate from the government before
              retirement may also choose to defer their withdrawal until the year
              following the year in which they turn age 70½.

              A small portion (12 percent) of the approximately 490,000 employers with
              2 or more employees that sponsored only single-employer DC plans also
              sponsored more than one DC plan for the same groups of employees.
              Employers with fewer than 100 employees were more likely to sponsor
              multiple plans covering the same groups of employees than employers
              with 100 or more employees. Experts with whom we consulted suggested
              that smaller employers might be better able to manage multiple plans
              because they had fewer accounts to manage, while larger employers might
              be more likely to offer multiple plans to compete with other employers.
              According to pension experts with whom we consulted and
              pension-related literature, private employers design their pension
              programs principally to control costs, maximize federal tax incentives, and
              comply with ERISA, as amended, while at the same time structuring their
              compensation and benefits to support their overall business and financial
              goals.


              To provide the requested information on patterns in plans’ features, we
Scope and     reviewed SPDs—documents that all private employers were to file with DOL
Methodology   for each pension plan they sponsored—for a sample of private sector
              employers with 100 or more employees that sponsored only
              single-employer DC plans to supplement their employees’ Social Security
              retirement benefits. We stratified our sample by employer size using 3
              groups—employers with 100 to 999 employees, 1,000 to 9,999 employees,
              and 10,000 or more employees. Because of the larger sampling error
              associated with the first two strata, we reported on two groups—all the
              employers in our sample and the subset of larger employers with 10,000 or
              more employees, the one stratum for which our sample included the entire
              population of such employers. Because DOL officials told us that the
              Department would not be able to provide SPDs for all the employers in our
              sample, we requested SPDs from DOL and directly from the employers.9 As a
              result, we were able to obtain and analyze 281 SPDs—67 percent of the 419
              employers in our sample. In considering the representativeness of the
              sample of employers for which we had obtained SPDs, we found that the

              9
               Officials told us that DOL did not monitor or enforce employer compliance with the SPD filing
              requirement because of limited resources and other competing priorities. Effective August 5, 1997,
              with the passage of the Taxpayer Relief Act of 1997, private employers subject to ERISA are required
              to file copies of their SPDs with DOL only upon request.



              Page 7                                                GAO/GGD-98-23 Private Pensions DC Plans
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281 employers were generally comparable to our universe of 3,297
employers, in terms of employer size, industry type, and geographic
region.

We also analyzed pension plan information that was available from DOL’s
research database from which we had selected our sample of employers to
provide additional information on the plans’ features. To provide
information on TSP, we reviewed summary documents published by the
Federal Retirement Thrift Board.

As agreed with the Subcommittee, we limited the scope of our analyses
involving SPDs to those employers with 100 or more employees. Also as
agreed, our review included the largest primary plan offered by private
employers that sponsored only DC plans in 1993, the most recent data
available at the time of our review. We included only single-employer
plans in our analyses, because the research database did not identify all of
the employers associated with each multiemployer plan. Unless
specifically noted, the estimates presented in this report are generalizable
to the population of employers with 100 or more employees that
sponsored only single-employer DC plans in 1993 with a sampling error of
no more than 10 percent at the 95-percent confidence level.10

Also, as agreed with the Subcommittee, we did not independently verify
the accuracy of the information (1) described in the SPDs or (2) contained
in the DOL research database. Moreover, we could not confirm that the SPDs
provided by DOL represented the most up-to-date information for each DC
plan in our sample. Lastly, due to differences such as those described in
the background section of this report, pension plan experiences in the
private sector may not be applicable to the federal government.

To provide information on the use of multiple plans, we used the DOL
research database to identify the number of private employers with two or
more employees that sponsored more than one DC plan to provide benefits
for the same groups of employees in 1993. We did not independently verify
DOL’s criteria for identifying plans in their research database as primary
versus supplementary. To obtain insights on what factors employers may
consider in deciding whether to sponsor multiple plans, we reviewed
retirement-related literature and consulted with pension experts, which
we selected on the basis of prior work we had done on private sector
pensions.

10
 Approximately 8 million participants are covered by plans sponsored by the employers in our
population.



Page 8                                               GAO/GGD-98-23 Private Pensions DC Plans
               B-275103




               Appendixes I and II provide more detailed information on our objectives,
               scope, and methodology and the results obtained, respectively.

               We requested comments on a draft of this report from the Secretary of
               Labor. These comments are discussed at the end of this letter. We did our
               review in Washington, D.C., from October 1996 to July 1997 in accordance
               with generally accepted government auditing standards.


               Employers that sponsor DC plans generally establish certain minimum age
Eligibility    and/or service requirements that employees must meet before they are
Requirements   allowed to participate in these plans. These eligibility requirements allow
               employers to reduce the administrative costs associated with establishing
               individual accounts for employees. Flexibility to establish minimum
               participation requirements may be especially useful to employers facing
               high turnover rates. Such requirements allow employers to use their
               resources to benefit employees who are more likely to remain with the
               employer for the long term. Under ERISA, as amended, employers cannot
               require employees to be over age 21 or to have completed more than 1
               year of service with the employer. However, an exception applies to plans
               where participants immediately own all employer contributions made to
               individual accounts—employers may require that employees complete 2
               years of service to be eligible to participate in these plans.

               Of the 3,297 employers with 100 or more employees that sponsored only
               single-employer DC plans in 1993, 51 percent (1,673 employers) reported
               using some combination of age and length of service to determine when an
               employee was eligible to participate in the plan. The most common
               combination, which was used by 73 percent of these 1,673 employers, was
               that an employee must be age 21 with 1 year of service—the legal limit.
               For the 100 larger employers, 55 percent used only length of service to
               determine eligibility (with most requiring 1 year of service), while
               28 percent used a combination of age and service (with 93 percent
               requiring an age of 21 and 1 year of service). Figure 1 shows the
               distribution of employers according to the type of eligibility requirement
               used.




               Page 9                                  GAO/GGD-98-23 Private Pensions DC Plans
                                    B-275103




Figure 1: Percentage of Employers
Using Various Eligibility             60     Percent of employers
Requirements, by Employer Size
(1993)
                                      50



                                      40



                                      30



                                      20



                                      10



                                       0
                                             ge




                                                                                                                    n
                                                                                                             ipa te
                                                                                       nly
                                                                    ly




                                                                                                                tio
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                                                                 on
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                                                                                    eo




                                                                                                       pa med
                                                               ce




                                                                                  Ag
                                        ce




                                                              rvi




                                                                                                         Im
                                       rvi




                                                            Se
                                     Se




                                      Type of eligibility requirement

                                                     Employers with 100 or more employees (n=3,297)

                                                     Employers with 10,000 or more employees (n=100)



                                    Source: GAO analysis of SPD data (see app. II, table II.1).




                                    Although the summary plan documents did not provide information on the
                                    rate of participation among covered employees, we were able to determine
                                    the percentage of employees with active accounts in 1993 for 2,127 (or
                                    65 percent) of the employers in our review using DOL’s research database.
                                    For these employers, 74 percent had a participation rate of 76 to
                                    100 percent, 18 percent had 51 to 75 percent participation, 4 percent had
                                    26 to 50 percent participation, and 4 percent had 25 percent participation
                                    or less. We could determine the participation rate for 72 of the larger
                                    employers. These employers showed a considerably lower rate of
                                    participation—15 percent had a participation rate of 76 to 100 percent,
                                    24 percent had 51 to 75 percent participation, 15 percent had 26 to
                                    50 percent participation, and 47 percent had 25 percent participation or
                                    less. A high or low rate of participation may be a reflection of whether or



                                    Page 10                                                  GAO/GGD-98-23 Private Pensions DC Plans
                    B-275103




                    not employers contributed to their plans. According to experts with whom
                    we consulted, employers that reported 100 percent participation generally
                    made contributions automatically to participant accounts.

                    Newly hired federal employees covered by FERS are eligible to participate
                    in TSP during the second open season after they are hired. Two open
                    seasons are held each year (May 15 to July 31 and November 15 to
                    January 31); thus, the minimum service required to participate ranges from
                    6 to 12 months. The government establishes and makes automatic
                    contributions to accounts for all eligible employees covered by FERS. As of
                    March 1997, 83 percent of eligible FERS employees made contributions to
                    their accounts.


                    DC plans are funded by means of employer and/or participant
Types of Employer   contributions. Employer contributions can be based on the amount a
and Participant     participant contributes (i.e., matching contributions), on some other
Contributions       criteria unrelated to participant contributions (i.e., nonmatching
                    contributions), or on some combination of the two. For example, an
                    employer could make matching contributions by providing $1 for each
                    dollar a participant contributes up to a specified maximum. Alternatively,
                    an employer could make nonmatching contributions determined on the
                    basis of annual profitability or a specified percentage of participant
                    compensation.

                    In addition to employer matching and nonmatching contributions,
                    participants may be allowed or required to contribute to their DC plan.
                    Plans can provide for participant contributions to be made on a pretax or
                    after-tax basis or on some combination of the two. For pretax
                    contributions, employers generally reduce a participant’s salary by an
                    agreed upon amount and contribute these funds directly to the
                    participant’s DC account, thereby allowing the participant to defer paying
                    income taxes on this portion of their salary until the funds are withdrawn
                    from the account, presumably at or during retirement.

                    Regardless of the type(s) of contributions employers and/or participants
                    make to the plan, each employer must ensure that total contributions to
                    participant accounts do not exceed certain legal limits set by ERISA, as
                    amended. Specifically, the annual dollar contribution limit to a DC
                    participant account is the lesser of $30,000, or 25 percent of participant




                    Page 11                                  GAO/GGD-98-23 Private Pensions DC Plans
                         B-275103




                         compensation.11 Moreover, participant pretax contributions are limited to
                         $9,500 per year and participant after-tax contributions may be limited to
                         allow employers to satisfy certain nondiscrimination rules.12 Contributions
                         that are calculated as a percentage of participant compensation are limited
                         to including a maximum annual compensation of $160,000. Each of the
                         above limits is indexed to the consumer price index to adjust for changes
                         in the cost of living over time.


Most Employers           Of the 3,297 employers with 100 or more employees that sponsored only
Contribute to Their DC   single-employer DC plans in 1993, 97 percent reported providing for
Plans                    matching and/or nonmatching contributions to the plan, and 1 percent
                         funded the plan solely on the basis of participant contributions. For the
                         100 larger employers, 94 percent provided for employer contributions, and
                         6 percent provided only for participant contributions to the plan. Thus,
                         most employers that sponsor only DC plans contribute towards their
                         employees’ retirement benefits rather than require that their employees
                         bear the entire cost. As shown in figure 2, 85 percent of the 3,297
                         employers provided for employer nonmatching, 43 percent for employer
                         matching, 50 percent for participant pretax, and 16 percent for participant
                         after-tax contributions. For the 100 larger employers, 68 percent of
                         employers provided for employer nonmatching, 54 percent for employer
                         matching, 72 percent for participant pretax, and 11 percent for participant
                         after-tax contributions.




                         11
                          Special limits are applicable through December 31, 1999, for employers that sponsor both basic
                         annuity and DC plans covering the same group of employees.
                         12
                          Nondiscrimination rules are designed to ensure that employers only receive tax advantages for those
                         pension plans that provide coverage to a broad base of their employees rather than to highly-paid
                         employees or managers of the company exclusively.


                         Page 12                                               GAO/GGD-98-23 Private Pensions DC Plans
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Figure 2: Percentage of Employers
That Provide for Various Types of          100     Percent of employers
Contributions, by Employer Size (1993)

                                            80




                                            60




                                            40




                                            20




                                             0
                                                         g




                                                                                                                        tax
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                                                                           ing




                                                                                                                 aft pant
                                                                                                  tax
                                                                                               pre nt
                                                                        tch r
                                                                     ma loye
                                                     hin
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                                                                                                                 rtic
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                                                E




                                                                                                                Pa
                                                                                          Pa




                                             Type of contribution

                                                             Employers with 100 or more employees (n=3,297)

                                                             Employers with 10,000 or more employees (n=100)



                                         Note: Because employers can provide for more than one type of contribution to a plan,
                                         percentages do not add to 100 percent.

                                         Source: GAO analysis of SPD data (see app. II, table II.2)




                                         The two most common arrangements for employer and participant
                                         contributions were to provide for (1) employer nonmatching contributions
                                         and no participant contributions (41 percent) or (2) employer matching
                                         and nonmatching contributions plus participant pretax contributions
                                         (25 percent). None of the other arrangements were used by more than
                                         8 percent of the employers that sponsored only single-employer DC plans.

                                         The subset of larger employers were more likely to provide for participant
                                         pretax contributions to their plans than the overall group of employers in
                                         our review—72 percent versus 50 percent, respectively. The most common
                                         contribution arrangements were also somewhat different for these



                                         Page 13                                                        GAO/GGD-98-23 Private Pensions DC Plans
B-275103




employers. Specifically, 26 percent of the larger employers provided for
matching, nonmatching, and participant pretax contributions—the same
arrangement provided under TSP for those federal employees covered by
FERS; 23 percent provided for nonmatching contributions only; 18 percent
provided for matching and participant pretax contributions; and
11 percent provided for nonmatching and participant pretax contributions.
None of the other combinations of contributions were used by more than
6 percent of the larger employers. Table II.2 (see app. II) provides more
details on the combinations of contributions that the employers specified
in their SPDs.

The employers that provided for matching contributions to their plans
used a wide variety of matching arrangements. For example, employers
applied different limits on what level of participant contributions would be
eligible to receive a match, matched different amounts of each dollar
contributed by participants, and sometimes provided different matching
contributions for different levels or types of participant contributions.

Of the 1,410 employers that provided for matching contributions, 815
employers (and 32 of the subset of larger employers) specified the level of
participant contributions that they were willing to match and the amount
of matching contributions that would be provided for each participant
dollar contributed. Of these employers, 60 percent offered to match
participant contributions that did not exceed 5 percent of the participants’
compensation, and 40 percent offered to match participant contributions
that did not exceed 6 percent or more of compensation. Fifty-eight percent
of the employers matched 50 cents or less for each eligible participant
dollar contributed, and 42 percent matched more than 50 cents for each
eligible participant dollar contributed.13 How an employer combined these
two factors—the amount of participant contributions eligible to be
matched and the level of matching contributions provided for each eligible
participant dollar contributed—determined the maximum potential
amount of an employer’s matching contributions. Our analyses showed
that employer matching practices were not related to participant
contribution eligibility practices. That is, employers did not provide a high
rate of matching contributions only when the percentage of eligible
participant contributions was low, nor did they provide a low rate of
matching contributions only when the percentage of eligible participant
contributions was high.

13
  Because only a small portion of the employers in our sample provided for matching contributions
and specified the maximum level of participant contributions eligible for employer matching
contributions and the rate of matching contributions provided for each dollar participants contributed,
the sample errors for these estimates are 15 percent.



Page 14                                                GAO/GGD-98-23 Private Pensions DC Plans
                             B-275103




                             Of the larger employers, 45 percent offered to match participant
                             contributions that represented up to 5 percent of their compensation, and
                             55 percent offered to match participant contributions that represented
                             6 percent or more of compensation. Further, 62 percent of the larger
                             employers matched $1 or more for each eligible participant dollar. In
                             comparison, TSP provides for government matching contributions on
                             participant contributions not exceeding 5 percent of compensation, and
                             the government match equates to 80 cents for each eligible dollar of
                             participant contribution, assuming participants contribute at least
                             5 percent of their salary.14

                             For the 2,786 employers that provided for nonmatching contributions to
                             their plans, 45 percent specified that the dollar amount to be contributed
                             to participant accounts would be determined on the basis of some
                             percentage of annual profits, while another 45 percent specified that the
                             dollar amount would be determined on the basis of some percentage of
                             participant compensation. Seventy-nine percent of these employers did
                             not specify in their SPDs the exact percentage that would be used to
                             determine nonmatching contributions. Similarly, of the 68 larger
                             employers that provided for nonmatching contributions to their plans,
                             45 percent determined nonmatching contributions on the basis of profits,
                             and 36 percent, on the basis of participant compensation. Sixty-six percent
                             of these larger employers did not specify the exact percentages used to
                             determine nonmatching contributions. TSP provides for government
                             nonmatching contributions equal to 1 percent of employee compensation
                             for those employees covered by FERS.


Most Employers Allow         Of the 3,297 employers that sponsored only single-employer DC plans to
Participants to Contribute   provide pensions for their employees, 1,862 (or 56 percent) of these
to Their DC Plans            employers allowed participants to make contributions to their plans. Of
                             these 1,862 employers, 71 percent allowed participants to contribute on a
                             pretax basis, 18 percent on either a pretax and/or after-tax basis, and
                             11 percent on an after-tax basis. Seventy-three of the 100 larger employers
                             provided for participant contributions—85 percent of these 73 employers
                             allowed pretax contributions, and 15 percent allowed both pretax and
                             after-tax contributions.


                             14
                               TSP provides for matching contributions using a graduated schedule—participants covered by FERS
                             receive a dollar-for-dollar match on the first 3 percent of salary that they contribute and a 50 cents
                             match for each dollar contributed for the next 2 percent of salary. Thus, participants who contribute
                             less than 5 percent of their salary experience a higher overall level of match for each dollar
                             contributed. For example, if participants contributed 3 percent of their salary to the plan, they would
                             receive a dollar-for-dollar match from the government.



                             Page 15                                                GAO/GGD-98-23 Private Pensions DC Plans
B-275103




Of the 1,656 employers that provided for pretax contributions (and thus
allowed participants to shelter a portion of their income from current
taxation as well as accumulate savings for retirement), 51 percent allowed
participants to contribute more than 10 percent of their annual
compensation to the plan (not to exceed the Internal Revenue Service
limit). Similarly, 60 percent of the 73 larger employers that provided for
pretax contributions allowed participants to contribute more than
10 percent of their annual compensation to the plan. Federal employees
covered by FERS are allowed to contribute up to 10 percent of their basic
pay on a pretax basis to TSP, up to the current legal maximum of $9,500.15
Figure 3 shows the maximum participant pretax contributions allowed for
plans sponsored by employers that only offer single-employer DC plans.




15
  Basic pay is the rate fixed by applicable law or regulation before any deductions. Basic pay
(1) includes locality-based comparability payments and certain categories of differential or premium
pay and (2) excludes other types of pay, including bonuses, allowances, overtime, and holiday pay.



Page 16                                                GAO/GGD-98-23 Private Pensions DC Plans
                                          B-275103




Figure 3: Percentage of Employers
That Provide for Various Levels of             60        Percent of employers
Participant Pretax Contributions (1993)

                                               50



                                               40



                                               30



                                               20



                                               10



                                                0



                                                                                                      nt




                                                                                                                             nt
                                                                              t
                                                         nt




                                                                                                                                        ied
                                                                             en




                                                                                                    rce




                                                                                                                            rce
                                                    rce




                                                                            erc




                                                                                                                                       cif
                                                                                                 pe




                                                                                                                        pe
                                                    pe




                                                                                                                                    pe
                                                                        0p




                                                                                                                                   ts
                                                                                               15




                                                                                                                       25
                                               o5




                                                                       o1




                                                                                                                                  No
                                                                                            to




                                                                                                                   to
                                               1t




                                                                      6t




                                                                                          11




                                                                                                                  16
                                               Maximum participant pretax contributions allowed

                                                                 Employers with 100 or more employees (n=1,656)

                                                                 Employers with 10,000 or more employees (n=73)



                                          Source: GAO analysis of SPD data (see app. II, table II.8).




Most Employers Did Not                    Of the 3,297 employers included in our review, 883 (or 27 percent) of the
Specify Their Liability for               employers included enough information in their SPDs to allow us to
Contributions in Their                    calculate the maximum potential cost, or liability, of making employer
                                          contributions—matching, nonmatching, or both—to their plans. Thus, our
SPDs                                      results regarding employer liability for contributions are not generalizable
                                          to all the employers included in our review. Of the 883 employers,
                                          59 percent had a liability of up to 5 percent of participant compensation,
                                          and 41 percent had a liability of 6 percent or more of participant
                                          compensation (with the greatest liability being 18 percent).16

                                          An employer’s actual liability for contributions may be less than the
                                          potential maximum in any given year for a variety of reasons, including

                                          16
                                           Because we could only determine the employer’s liability for contributions for a small portion of the
                                          employers in our sample, these estimates have a sample error of 15 percent.



                                          Page 17                                                          GAO/GGD-98-23 Private Pensions DC Plans
          B-275103




          when participants do not contribute enough to maximize employer
          matching contributions or when employers elect to contribute less than
          the maximum allowable nonmatching contributions in any given year.
          Moreover, an employer’s effective cost of contributions cannot be
          determined without knowing what portion of those contributions may
          have been deducted from the employer’s corporate taxes in any given
          year.

          We could determine the maximum employer liability for contributions for
          38 of the 100 larger employers. Of these 38 employers, 76 percent had a
          liability of up to 5 percent of participant compensation, and 24 percent had
          a liability of 6 percent or more of participant compensation. In
          comparison, the government’s maximum potential liability for
          contributions for employees covered by FERS is 5 percent of
          compensation—consisting of up to 4 percent in matching contributions
          plus 1 percent in nonmatching contributions. In 1996, government
          agencies contributed about $2 billion to FERS employees’ TSP accounts.


          Participants of DC plans accrue the right to pension benefits, or become
Vesting   “vested,” by meeting certain requirements established by employers. By
          law, participants are always fully vested in any pretax or after-tax
          contributions that they make to their accounts, whether these
          contributions are voluntary or mandatory. Thus, employer vesting
          requirements apply only to the participant’s right to employer-matching
          and/or nonmatching contributions. ERISA, as amended, requires that
          participants become fully vested in 100 percent of employer contributions
          to their accounts (1) within 5 years if the employer uses “cliff” vesting,
          where no rights to benefits are earned in prior years or (2) within 7 years if
          the employer uses “graduated” vesting, where rights to benefits are earned
          gradually over the period starting no later than the third year. Employers
          may also use more liberal vesting requirements if they choose. For
          example, immediate vesting occurs when an employer sets no vesting
          requirements. Employers can use vesting schedules to reduce the cost of
          providing pension benefits to employees who do not remain with an
          employer for at least 5 to 7 years.

          Of the 1,410 employers with 100 or more employees that sponsored only
          single-employer DC plans in 1993 and made matching contributions to their
          plans, 1,374 employers specified vesting requirements in their SPDs. Of
          these 1,374 employers, 56 percent reported using graduated vesting;




          Page 18                                   GAO/GGD-98-23 Private Pensions DC Plans
B-275103




35 percent, immediate vesting; and 9 percent, cliff vesting.17 Larger
employers were more likely to use immediate vesting—52 percent used
immediate vesting, 26 percent used graduated vesting, and 22 percent used
cliff vesting. Of the 2,786 employers that made nonmatching contributions
to their plans, 2,755 employers specified vesting requirements in their SPDs.
Of these 2,755 employers, 70 percent used graduated vesting, about
17 percent used cliff vesting, and 13 percent used immediate vesting. For
the larger employers, about 51 percent used graduated vesting, 26 percent
used cliff vesting, and 23 percent used immediate vesting.

Regardless of the type of vesting schedule used, employers generally used
more liberal schedules for matching contributions compared with
nonmatching contributions. Forty-four percent of the 1,410 employers that
provided for matching contributions specified that participants became
fully vested in these contributions within 4 years, while 22 percent of the
2,786 employers that provided for nonmatching contributions specified
that participants became fully vested in these contributions within the
same time period. Similarly, 57 percent of the subset of larger employers
provided for employees to become fully vested in any matching
contributions within 4 years, compared with 25 percent for nonmatching
contributions within the same time period. Federal employees covered by
FERS are immediately vested in any matching contributions, and most
become fully vested in the automatic 1 percent nonmatching contributions
after completing 3 years of service.18 Figure 4 shows the length of time to
full vesting for employer-matching and nonmatching contributions for
plans sponsored by employers that only offer single-employer DC plans.




17
 Because only a small portion of the employers in our sample provided for matching contributions
and specified vesting requirements in their summary plan descriptions, the sample errors for these
estimates are no greater than 11 percent.
18
  FERS employees in congressional and certain noncareer positions become vested in the automatic
1 percent nonmatching contributions after completing 2 years of service.



Page 19                                               GAO/GGD-98-23 Private Pensions DC Plans
                                         B-275103




Figure 4: Percentage of Employers
That Require Various Lengths of          Percent of employers
Service for Full Vesting in Matching     100
and Nonmatching Contributions, by
Employer Size (1993)
                                          80




                                          60




                                          40




                                          20




                                             0
                                                      1,4 g
                                                            )


                                                                   (n=tchin r
                                                                      2,7 g
                                                                            )




                                                                                            (n=ing
                                                                                                    )


                                                                                                                 n= r
                                                                                                                      )
                                                         10




                                                                         86




                                                                                                 54



                                                                                                                   68
                                                                     a ye




                                                                                                              g ( ye
                                                  (n=tchin



                                                                  nm lo




                                                                                               h



                                                                                                           hin plo
                                                                                           atc
                                                                no Emp
                                                    a




                                                                                                        atc Em
                                                 rm




                                                                                      rm
                                             ye




                                                                                      ye
                                          plo




                                                                                    plo




                                                                                                    nm
                                        Em




                                                                                 Em




                                                                                                   no




                                       Type of contribution

                                       Employers with                           Employers with
                                       100 or more                              10,000 or more
                                       employees                                employees
                                       (n=3,297)                                (n=100)

                                                                    Not specified

                                                                    Full vesting in 5 to 7 years

                                                                    Full vesting in 1 to 4 years

                                                                    Immediate vesting



                                         Source: GAO analysis of SPD data (see app. II, table II.10).




                                         Using DOL’s research database, we were able to determine the proportion
                                         of participants who were fully vested in 1993 for 2,825 (or 86 percent) of
                                         the employers in our review. For these employers, more than half of the
                                         current employees were fully vested for 62 percent of the plans, while half
                                         or less of the employees were fully vested for 38 percent of the plans. For




                                         Page 20                                                                          GAO/GGD-98-23 Private Pensions DC Plans
                B-275103




                the 83 larger employers for which we were able to determine the
                percentage of fully vested participants, the proportion of plans with more
                than half and half or less of participants fully vested were virtually the
                same as for all employers—63 percent and 37 percent of employers,
                respectively.


                By law, employers that sponsor DC plans can either invest employer and
Investment of   participant contributions made to the plan, or they can allow participants
Contributions   to direct the investment of their own accounts. Employers that provide for
                “participant-directed” accounts in their plans must meet certain DOL
                regulations to insulate themselves from being liable for any losses that
                result from a participant’s exercise of investment control. Specifically,
                employers that allow participants to direct their own accounts must offer
                a broad range of investment alternatives, consisting of at least three
                diversified investment alternatives, each having different risk and return
                characteristics. Moreover, participants must be allowed to change their
                investment decisions at least once in every 3-month period. Employers
                must also provide participants with descriptive information on each
                investment option, including risk and return characteristics, transaction
                fees and expenses, and copies of prospectuses.

                A considerable portion of the employers with 100 or more employees that
                sponsored only single-employer DC plans in 1993 did not specify in their
                SPDs whether participants could direct the investment of contributions
                made to their accounts, as shown in figure 5. As also shown, the larger
                employers were more likely to specify who could direct the investment of
                each type of contribution. For those employers that did report on who
                could direct the investment of account assets, participants were more
                frequently allowed to direct the investment of all but nonmatching
                contributions made to their accounts. The larger employers were more
                likely to allow participants to direct the investment of all types of
                contributions made to their accounts.




                Page 21                                 GAO/GGD-98-23 Private Pensions DC Plans
                                      B-275103




Figure 5: Percentage of Employers
That Specified Participant Versus     Percent of employers
Employer-Directed Investment, by      100
Contribution Type and Employer Size
(1993)
                                       80




                                       60




                                       40




                                       20




                                        0
                                                           (n=tchin r
                                                                2,7 g
                                                                      )

                                                                1,4 g
                                                                      )


                                                                1,6 x
                                                                      )


                                                             (n=r-tax
                                                                     0)




                                                                                                               n= r
                                                                                                                       )


                                                                                                              (n=ing
                                                                                                                       )


                                                                                                              (n=tax
                                                                                                                       )


                                                                                                              (n=tax
                                                                                                                       )
                                                                   86


                                                                   10



                                                                   56




                                                                                                                    68



                                                                                                                    54



                                                                                                                    72



                                                                                                                    11
                                                             a ye




                                                                                                            g ( ye
                                                           (n=preta
                                                           (n= hin




                                                                  54




                                                                                                                re



                                                                                                                 r-
                                                         nm lo




                                                                                                        hin plo




                                                                                                                 h
                                                             atc




                                                                                                             atc
                                                              fte




                                                                                                             fte
                                                     no Emp




                                                                                                             tp
                                                                                                    atc Em
                                                             t



                                                          ta




                                                                                                          ta
                                                        rm




                                                                                                        rm
                                                          an




                                                                                                          an
                                                       an




                                                                                                       an
                                                      cip




                                                                                                      cip
                                                     ye




                                                                                                     ye
                                                   cip




                                                                                                   cip
                                                plo




                                                  rti




                                                                                                plo




                                                                                                  rti
                                                                                        nm
                                               rti




                                                                                               rti
                                             Pa




                                                                                             Pa
                                            Em




                                                                                            Em
                                            Pa




                                                                                            Pa
                                                                                       no




                                        Type of contribution

                                            Employers with 100 or more                   Employers with 10,000 or more
                                            employees (n=3,297)                          employees (n=100)

                                                       Employer directed
                                                       Participant directed

                                                       Not specified



                                      Source: GAO analysis of SPD data (see app. II, table II.11).




                                      Of the employers that specified participants could direct the investment of
                                      their accounts and specified the number of investment options in their
                                      SPDs, the majority provided participants with at least four investment
                                      options from which to choose. About half of the employers did not list the
                                      specific investment choices available to participants in their SPDs;
                                      however, investments commonly listed included employer stock, stock
                                      mutual funds, bond mutual funds, balanced funds consisting of both




                                      Page 22                                                GAO/GGD-98-23 Private Pensions DC Plans
B-275103




stocks and bonds, guaranteed investment contracts providing a fixed
interest rate through an insurance company, U.S. government securities,
and money market investments consisting of short-term securities.

Although we could not determine the proportion of participants who
actually selected each available investment option, we were able to
determine the proportion of total plan assets invested in (1) stocks and
(2) bonds in 1993 for approximately three-fourths of the employers in our
review using DOL’s research database. For these employers, 81 percent had
25 percent or less of their total plan assets invested in stocks (not
including an employer’s own company stock) and 95 percent had
25 percent or less of their total plan assets invested in bonds. For the
larger employers, 93 percent had 25 percent or less of their total plan
assets invested in stocks, and 100 percent had 25 percent or less invested
in bonds. We were unable to determine what proportion of these
investments resulted from employer contributions, participant
contributions, and market gains or losses over time.

Regardless of how plan assets are invested, employers must receive, hold,
and transmit plan assets up to the time the assets are withdrawn by plan
participants. Employers generally do so using a trust fund, an insurance
account, or a combination of the two. Using the DOL research database, we
were able to determine how 2,831 (or 86 percent) of the employers in our
review managed their participant accounts in 1993—70 percent of these
employers used trust funds, 20 percent used a combination of trust funds
and insurance accounts, and 10 percent used insurance accounts. The
larger employers also used these same methods in approximately the same
proportions.

Federal employees who participate in TSP may direct the investment of
their accounts using three investment funds—the “G fund” that is invested
in short-term nonmarketable U.S. Treasury securities, the “C fund” that is
invested in the stock of the same 500 companies selected by the Standard
& Poor’s Corporation for its S&P 500 index, and the “F fund” that is
invested in U.S. government, corporate, and mortgage-backed securities.
In 2 to 3 years, participants will have two new funds—a small company
stock fund and an international fund—which will bring the number of
investment options up to five funds. Participant accounts are managed by
the Federal Retirement Thrift Investment Board, an independent
government agency tasked with managing TSP prudently and solely in the
interest of participants and their beneficiaries.




Page 23                                 GAO/GGD-98-23 Private Pensions DC Plans
                        B-275103




                        Employers that sponsor DC plans can permit participants to access some
Participant Access to   portion of their account balances while they are still actively employed
Account Assets Prior    using loan, voluntary withdrawal, and/or hardship withdrawal provisions.
to Separation or        Employers can include loan provisions that permit participants to borrow
                        a portion of their vested account balances and repay this amount in level
Retirement              payments over a specified number of years at a specified interest rate.
                        ERISA, as amended, generally limits a participant’s outstanding loan balance
                        to the lesser of $50,000 or 50 percent of the participant’s vested account
                        balance. Employers can also allow participants to make voluntary
                        withdrawals from their after-tax contributions and/or employer
                        contributions (and the earnings on these contributions) without requiring
                        that the funds be repaid; however, a 10 percent tax penalty applies to most
                        of these distributions if they are made before age 59½. Some employers
                        specify that participants will face additional penalties for making a
                        voluntary withdrawal, such as losing the right to make contributions to the
                        plan for 1 year. An employer can allow participants to make a hardship
                        withdrawal from their pretax contributions (but not the earnings on those
                        contributions) to meet immediate and heavy financial needs for which no
                        other resources are available. Needs that meet the legal definition of a
                        hardship include medical expenses, purchase of a principal residence,
                        tuition for postsecondary education, and prevention of eviction from, or
                        foreclosure on, a principal residence. Nearly two-thirds of the 3,297
                        employers reported providing plan participants access to a portion of their
                        account balances prior to separation from employment. Figure 6 shows
                        the percentage of employers with 100 or more employees that sponsored
                        only single-employer DC plans in 1993 and provided for each type of
                        participant access to their accounts.




                        Page 24                                 GAO/GGD-98-23 Private Pensions DC Plans
                                       B-275103




Figure 6: Percentage of Employers
That Provide Various Types of Access     Percent of employers
to Participant Accounts, by Employer     60
Size (1993)

                                         50



                                         40



                                         30



                                         20



                                         10



                                          0
                                                                     raw ip
                                                                        als




                                                                                            als




                                                                                                             ec s
                                                                                         raw y




                                                                                                                    d
                                                                                                           sp cces
                                                                                      thd tar




                                                                                                               ifie
                                                                  thd sh
                                               s
                                              an




                                                                                    wi olun
                                                                wi ard
                                              Lo




                                                                                                             a
                                                                   H




                                                                                                         No
                                                                                      V




                                         Type of access to participant accounts

                                                       Employers with 100 or more employees (n=3,297)

                                                       Employers with 10,000 or more employees (n=100)



                                       Note: Because employers can provide for more than one type of access to participant accounts,
                                       percentages do not add to 100 percent.

                                       Source: GAO analysis of SPD data (see app. II, table II.13).




                                       Of the 3,297 employers included in our review, 46 percent specified that
                                       participants could borrow from their accounts; 43 percent provided for
                                       hardship withdrawals, and 21 percent specified that participants could
                                       make voluntary withdrawals from their accounts. Of the larger employers,
                                       57 percent provided for loans, 58 percent provided for hardship
                                       withdrawals, and 15 percent provided for voluntary withdrawals.

                                       For those 1,530 employers that included a loan feature in their DC plans,
                                       11 percent reported allowing participants to borrow from their accounts
                                       for any reason, while the remaining employers allowed participants to




                                       Page 25                                                    GAO/GGD-98-23 Private Pensions DC Plans
B-275103




(1) borrow from their accounts only for specified purposes or (2) submit
an application to the employer for approval. ERISA, as amended, allows
employers to set a minimum loan amount of up to $1,000; however,
47 percent of the employers either did not specify a minimum loan amount
in their SPDs or specified a minimum amount that was less than $1,000.
Moreover, only 27 percent of the employers specified that participants
were limited to one outstanding loan at any given time. The vast majority
of employers (98 percent) allowed participants to borrow up to the legal
limit of $50,000 (or 50 percent of their vested account balance, if less).
Although the 57 larger employers that provided for loans were more likely
to allow participants to borrow from their accounts for any reason
(35 percent versus 11 percent for all employers), the other components of
their loan programs were generally comparable to the group of employers
as a whole.

Using DOL’s research database, we were able to determine the proportion
of total plan assets represented by outstanding participant loans for 787
(or 51 percent) of the employers that allowed participants to borrow from
their accounts. For 88 percent of these employers, participant loans
represented 5 percent or less of the plan’s total assets, which suggests that
the majority of plan contributions were being held and invested for
retirement rather than being tapped by participants for preretirement
spending. An even greater percentage—94 percent—of the 32 larger
employers for which we could determine this information had outstanding
participant loans of 5 percent or less of total plan assets.

For those 1,419 employers that allowed participants to make hardship
withdrawals from their accounts, 86 percent specified neither limits on the
number of hardship withdrawals that could be made in 1 year nor a
required minimum amount that must be withdrawn. Similarly, 79 percent
of the 58 larger employers that provided for hardship withdrawals did not
specify such restrictions in their summary plan documents. However,
77 percent of the employers (and 79 percent of the larger employers)
specified some form of penalty for participants who made a hardship
withdrawal from their accounts—the most common penalty being the
suspension of a participant’s right to contribute to the plan for some
period of time. Thus, although participants may not be able to control their
need to make a hardship withdrawal from their accounts in all
circumstances, employer penalties may discourage participants from
tapping their accounts prior to retirement.




Page 26                                  GAO/GGD-98-23 Private Pensions DC Plans
                     B-275103




                     For those 709 employers that allowed participants to make voluntary
                     withdrawals from their accounts, 20 percent limited participants to one
                     such withdrawal per year and 13 percent specified that participants must
                     withdraw some minimum amount ranging from $100 to $500. Moreover,
                     one-third of these employers required participants to meet certain age and
                     service requirements before they could make a voluntary withdrawal from
                     their accounts. For example, the most common requirement was that
                     participants must be at least age 55 and have 10 years of service with the
                     employer. Twenty-one percent of the employers penalized participants
                     who made voluntary withdrawals from their accounts, for example, by
                     suspending a participant’s right to contribute to the plan for 12 months.
                     For plans that provided for employer matching contributions, such a
                     penalty also suspended a participant’s ability to receive matching
                     contributions over the same time period. The 15 larger employers that
                     provided for voluntary withdrawals were more likely to set a minimum
                     amount that participants must withdraw; however, other limits and
                     restrictions were generally comparable to those provided for by all the
                     employers included in our review. All of the above limits, restrictions, and
                     penalties can reduce an employer’s administrative burden for allowing
                     participants to make voluntary withdrawals from their accounts as well as
                     encourage participants to preserve their accounts for use in retirement.

                     The federal TSP includes a loan program, which allows participants to
                     borrow from their own contributions (and earnings on those
                     contributions) for any reason. The federal program sets the minimum loan
                     amount at $1,000, allows two loans outstanding at any one time, and is
                     limited to the same $50,000 limit as private sector plans. The federal
                     program also provides for hardship withdrawals, and participants who are
                     at least age 59½ may make a one-time voluntary withdrawal from their
                     accounts while they are still in federal service.


                     Employers that sponsor DC plans can allow participants to receive their
Benefit Withdrawal   pension benefits from their individual accounts in a variety of ways at
Options              retirement—generally as a lump-sum distribution or an annuity. For a
                     lump-sum distribution, employers disburse a participant’s entire account
                     within 1 taxable year. For an annuity, the participant receives regular
                     payments for the participant’s remaining lifetime. Employers that offer
                     annuities must also offer a joint and survivor annuity that provides a
                     surviving spouse with at least one-half the amount of the participant’s
                     benefits. Employers generally pay for the additional survivor benefits by
                     reducing the participant’s monthly benefit. In addition to a lump sum or



                     Page 27                                  GAO/GGD-98-23 Private Pensions DC Plans
B-275103




annuity, some employers allow participants to withdraw their accounts
using installment payments that deplete the account over a period of time
that can be specified by the employer or the participant. Employers are
currently required to begin disbursements from pension accounts no later
than April of the year following the year participants turn age 70½.

Of the 3,297 employers with 100 or more employees that sponsored only
single-employer DC plans in 1993, 92 percent reported providing for
lump-sum distributions, 67 percent for installment payments, and
47 percent for annuities when participants separated from the employer at
retirement. Of the 100 larger employers, 97 percent provided for lump-sum
distributions, 52 percent for installment payments, and 32 percent for
annuities when participants retired. Although the majority of employers
provided more than one withdrawal option in their plans, less than
one-third of the plans specified that participants could opt to withdraw
their accounts using a combination of withdrawal options—for example,
by taking a portion of their account as a lump-sum withdrawal and
purchasing an annuity with the remainder of their account balance.
Limiting participants to one withdrawal option may allow employers to
control their administrative costs. Figure 7 shows the combinations of
withdrawal options provided for by employers that sponsor only
single-employer DC plans.




Page 28                                GAO/GGD-98-23 Private Pensions DC Plans
                                        B-275103




Figure 7: Percentage of Employers
That Provide for Various Combinations         40    Percent of employers
of Withdrawal Options at Retirement,
by Employer Size (1993)

                                              30




                                              20




                                              10




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                                          Combination of available withdrawal options

                                                            Employers with 100 or more employees (n=3,297)

                                                            Employers with 10,000 or more employees (n=100)



                                        Source: GAO analysis of SPD data (see app. II, table II.14).




                                        For those participants who separate from an employer for reasons other
                                        than retirement, employers generally provided for the same withdrawal
                                        options as those available at retirement. However, the majority of the
                                        employers allowed participants to defer making a withdrawal from their
                                        accounts until a later date, thus providing them an option to avoid the
                                        10 percent tax penalty assessed on pension assets withdrawn prior to age
                                        59½. The ability to maintain vested account balances with a prior employer
                                        or to “roll over” funds to either a special individual retirement account or a
                                        new employer’s retirement plan reflects the portability of DC plans. ERISA,
                                        as amended, allows employers to unilaterally cash out a participant
                                        account if the balance is $5,000 or less—72 percent of the employers (and



                                        Page 29                                                          GAO/GGD-98-23 Private Pensions DC Plans
                        B-275103




                        80 percent of the larger employers) specified that participants with small
                        account balances would be required to receive a lump-sum distribution of
                        their accounts.

                        Under TSP, participants can choose to withdraw their accounts as a
                        lump-sum distribution, an annuity, or regular monthly installment
                        payments. For married participants who withdraw their accounts as a
                        lump sum or monthly installment payments, their spouses must first waive
                        their rights to a 50-percent joint life annuity. Participants with vested
                        account balances of $3,500 or less are to be automatically cashed out
                        unless participants select another withdrawal option or elect to leave the
                        funds in the plan. Participants may defer receiving any immediate
                        withdrawals from their accounts until April of the year following the year
                        they turn 70½—the legal limit for pension deferral.


                        According to DOL’s research database, in 1993, 12 percent of the
Use of Multiple Plans   approximately 490,000 employers that sponsored only single-employer DC
and Possible            plans covering 2 or more participants sponsored more than one DC plan for
Explanations            the same group of employees. An employer may sponsor multiple plans to
                        provide primary benefits to different groups of employees, primary and
Provided by Experts     supplementary benefits to the same group of employees, or a combination
and the Literature      of both. It is important to note that employers that sponsor supplementary
                        pension plans do not necessarily offer more comprehensive or “generous”
                        retirement benefits than employers that offer only a primary plan.
                        Administrative costs are generally insignificant compared with the cost of
                        employer contributions, and pension programs with either one or multiple
                        plans can be designed to result in the same total cost to an employer.

                        The proportion of employers that sponsored multiple plans covering the
                        same groups of employees was fairly consistent across different employer
                        size categories—12 percent of employers with fewer than 100 employees
                        sponsored supplementary plans, as compared with 9 percent of employers
                        with 100 to 9,999 employees and 14 percent of employers with 10,000 or
                        more employees. One expert with whom we consulted suggested that a
                        greater proportion of larger employers may sponsor supplementary plans,
                        because these employers are more likely to have initially sponsored plans
                        that were later supplemented with a 401(k) plan to compete with other
                        employers.19 This same expert also noted that smaller employers were


                        19
                          Under a 401(k) plan, participants may direct their employers to defer a portion of their compensation
                        to be directly deposited into their pension accounts. Taxes on these contributions, as well as any
                        investment earnings, are deferred until the participant receives a distribution from the account.



                        Page 30                                                GAO/GGD-98-23 Private Pensions DC Plans
B-275103




better able to cope with managing multiple plans during the period before
computer technology was readily available.

The proportion of employers that sponsored multiple plans covering the
same groups of employees were also fairly evenly distributed across
different industry categories, although employers in the services industry
were about 30 percent more likely to sponsor supplementary plans, on
average. Employers in the mining, communications, and utilities industries
as well as tax-exempt employers were the least likely to sponsor
supplementary plans. Appendix III provides more detailed information on
the number of employers that sponsored primary and supplementary plans
in 1993, stratified by employer size and industry group.

Pension experts with whom we consulted and pension-related literature
suggested various factors that may explain why some employers might
choose to offer more than one pension plan to their employees. According
to these sources, employers that sponsor pension plans are primarily
concerned with controlling benefit costs, maximizing the federal tax
incentives for providing pensions, and meeting the legal requirements of
ERISA, as amended. Employers must also design their compensation and
benefit packages to support their overall business and financial goals. For
example, employers may use multiple pension plans to (1) recruit and
retain certain groups of employees while also satisfying longer-tenured
employees, (2) enhance productivity and employee morale, (3) reduce
pension liabilities by shifting a portion of pension contributions to
employees, and/or (4) link compensation to performance for higher paid
employees, as described in more detail below. These sources also said that
computer technology has made it possible for more employers to manage
multiple pension plans than would have been practical using only paper
records. As a result, employers may choose to sponsor multiple plans that
provide different combinations of pay and benefits to different groups of
employees.

According to the experts, employers must meet industry benefit standards
to remain competitive in attracting new employees and encouraging those
employees to stay with the company. By providing more than one pension
plan, employers can encourage career employment while meeting the
needs of younger, more mobile, workers with desired skills. For example,
younger and more mobile workers may demand a 401(k) plan in their
benefits packages to allow them to build up retirement benefits that are
fully portable should they change jobs. On the other hand, a basic annuity
(or “defined benefit”) plan may provide better benefits for employees who



Page 31                                 GAO/GGD-98-23 Private Pensions DC Plans
B-275103




remain with an employer for the long term. By offering a pension program
consisting of both these types of plans, employers can satisfy the needs of
both groups of employees.

Employers may sponsor employee stock option plans (ESOP) and profit
sharing plans for a variety of reasons, only one of which is to provide
employees with primary or supplementary retirement benefits. These
plans can enhance employee productivity by increasing employee
identification with the company and providing a more direct incentive for
improved job performance. These plans also give employers the option of
whether to contribute to the plan in any given year, depending on
company profitability. For an ESOP, other benefits can include creating a
more liquid market for closely held stock, raising new capital, obtaining
financing at below-market interest rates, and sheltering profits from
corporate income taxes.

New retirement programs that include one or more DC plans may reflect a
cultural shift away from benefits paid solely by the employer towards a
partnership relationship between the employer and employees. By offering
a combination of pension plans, employers allow employees to influence
their own level of benefits according to their participation and investment
choices. Employers that offer a combination of a basic annuity and a DC
plan can guarantee a certain minimum level of retirement benefits, while
employees can choose the extent to which they participate in
supplementary plans to increase their potential benefits upon retirement.20


Employers can increase the benefits available to their senior executives
and other highly paid employees by sponsoring supplementary plans that
are not covered by ERISA and benefit only selected groups of employees.
Although these “nonqualified” plans are not accorded preferential tax
treatment, and therefore do not provide employers with tax benefits,
employers can use them to motivate executives by linking the amount of
benefits to some measurable level of performance, such as total sales.
Nonqualified plans also allow employers to provide higher-paid employees
with the same retirement income replacement rate as lower-paid
employees, while still complying with ERISA’s nondiscrimination



20
 Under FERS, the government guarantees that each participant will receive a certain minimum level
of retirement benefits from their basic annuities and Social Security and a 1 percent automatic
contribution to TSP. Participants who choose to contribute to their TSP accounts can add to this
guaranteed level of benefits.



Page 32                                              GAO/GGD-98-23 Private Pensions DC Plans
                     B-275103




                     regulations and annual limits on employee contributions to the employer’s
                     other qualified pension plans.21


                     We requested comments on a draft of this report from the Secretary of
Agency Comments      Labor. In a letter dated October 28, 1997, the Assistant Secretary of Labor
and Our Evaluation   for Pension and Welfare Benefits provided Labor’s comments. (See app.
                     IV.) DOL provided no substantive comments; however they did make one
                     technical comment regarding the fact that nonqualified plans are not
                     accorded preferential tax treatment. We clarified the report to reflect this
                     comment.


                     As agreed with the Subcommittee, unless you publicly announce its
                     contents earlier, we plan no further distribution of this report until 30 days
                     after the date of this report. We will then send copies of this report to the
                     Ranking Minority Member of the Subcommittee, the Chairman and
                     Ranking Minority Member of the Senate Governmental Affairs Committee,
                     the Secretary of Labor, and other interested parties. We will also make
                     copies available to others on request.

                     Major contributors to this report are listed in appendix V. If you have any
                     questions, please call me at (202) 512-8676.

                     Sincerely yours,




                     Michael Brostek
                     Associate Director, Federal Management
                       and Workforce Issues

                     21
                       Because employers and/or participants are legally limited in the amount of contributions they can
                     make to a qualified plan account each year, certain higher-paid employees cannot accrue benefits at
                     the same rate as lower-paid employees under some plans. For example, for plans that allow
                     participants to contribute up to 10 percent of their salaries on a pretax basis, those participants that
                     earn more than $95,000 will not be able to contribute a full 10 percent of their salaries because of the
                     $9,500 annual limit on pretax contributions. Some employers sponsor additional plans that cover only
                     those higher-paid employees that cannot accrue benefits at the same rate as lower-paid employees
                     under the employers’ other pension plans. Because these additional plans explicitly exclude lower-paid
                     employees (i.e., they do not meet nondiscrimination rules established by ERISA, as amended), they are
                     nonqualified plans.



                     Page 33                                                GAO/GGD-98-23 Private Pensions DC Plans
Contents



Letter                                                                                            1


Appendix I                                                                                       38

Objectives, Scope,
and Methodology
Appendix II                                                                                      44

Summary Plan
Description Analysis
Results
Appendix III                                                                                     57

IRS Form 5500
Analysis Results
Appendix IV                                                                                      59

Comments From the
Department of Labor
Appendix V                                                                                       60

Major Contributors to
This Report
Tables                  Table I.1: Distribution of the 419 Employers by Employer Size            40
                        Table I.2: Disposition of Employers in the Sample by Employer            41
                          Size
                        Table II.1: Number and Percent of Employers That Sponsor Only            44
                          Single-Employer Primary Defined Contribution Pension Plans by
                          Participation Requirement and Employer Size
                        Table II.2: Number and Percent of Employers That Sponsor Only            45
                          Single-Employer Primary Defined Contribution Pension Plans by
                          Contribution Source and Type and Employer Size
                        Table II.3: Number and Percent of Employers That Sponsor Only            46
                          Single-Employer Primary Defined Contribution Pension Plans by
                          Basis for Making Nonmatching Contributions and Employer Size




                        Page 34                              GAO/GGD-98-23 Private Pensions DC Plans
Contents




Table II.4: Number and Percent of Employers That Sponsor Only             46
  Single-Employer Primary Defined Contribution Pension Plans by
  Maximum Employer Nonmatching Contributions and Employer
  Size
Table II.5: Number and Percent of Employers That Sponsor Only             47
  Single-Employer Primary Defined Contribution Pension Plans by
  Maximum Level of Participant Contributions Eligible for
  Employer Matching and Employer Size
Table II.6: Number and Percent of Employers That Sponsor Only             48
  Single-Employer Primary Defined Contribution Pension Plans by
  the Maximum Level of Employer Matching Contributions and
  Employer Size
Table II.7: Number and Percent of Employers That Sponsor Only             49
  Single-Employer Primary Defined Contribution Pension Plans by
  the Maximum Potential Employer Cost of Contributions and
  Employer Size
Table II.8: Number and Percent of Employers That Sponsor Only             50
  Single-Employer Primary Defined Contribution Pension Plans by
  the Maximum Participant Contributions Allowed and Employer
  Size
Table II.9: Number and Percent of Employers That Sponsor Only             51
  Single-Employer Primary Defined Contribution Pension Plans by
  Type of Vesting for Matching and Nonmatching Contributions
  and Employer Size
Table II.10: Number and Percent of Employers That Sponsor Only            52
  Single-Employer Primary Defined Contribution Pension Plans by
  Number of Years to Full Vesting for Matching and Nonmatching
  Contributions and Employer Size
Table II.11: Number and Percent of Employers That Sponsor Only            53
  Single-Employer Primary Defined Contribution Pension Plans by
  Number of Investment Options for Each Type of Contribution
  and Employer Size
Table II.12: Number and Percent of Employers That Sponsor Only            54
  Single-Employer Primary Defined Contribution Pension Plans by
  Type of Investment Options for Participant and Employer
  Contributions and Employer Size
Table II.13: Number and Percent of Employers That Sponsor Only            55
  Single-Employer Primary Defined Contribution Pension Plans by
  Type of Participant Access to Account Assets and Employer Size




Page 35                               GAO/GGD-98-23 Private Pensions DC Plans
          Contents




          Table II.14: Number and Percent of Employers That Sponsor Only            56
            Single-Employer Primary Defined Contribution Pension Plans by
            Withdrawal Options Available Upon Retirement and Employer
            Size
          Table III.1: Number of Private Sector Employers That Sponsor              57
            Only Single-Employer Defined Contribution Pension Plans, by
            Type of Pension Plan Offered and Employer Size
          Table III.2: Number of Private Sector Employers That Sponsor              58
            Only Single-Employer Defined Contribution Pension Plans, by
            Type of Pension Plan Offered and Industry Group

Figures   Figure 1: Percentage of Employers Using Various Eligibility               10
            Requirements, by Employer Size
          Figure 2: Percentage of Employers That Provide for Various                13
            Types of Contributions, by Employer Size
          Figure 3: Percentage of Employers That Provide for Various                17
            Levels of Participant Pretax Contributions
          Figure 4: Percentage of Employers That Require Various Lengths            20
            of Service for Full Vesting in Matching and Nonmatching
            Contributions, by Employer Size
          Figure 5: Percentage of Employers That Specified Participant              22
            Versus Employer-Directed Investment, by Contribution Type and
            Employer Size
          Figure 6: Percentage of Employers That Provide Various Types of           25
            Access to Participant Accounts, by Employer Size
          Figure 7: Percentage of Employers That Provide for Various                29
            Combinations of Withdrawal Options at Retirement, by Employer
            Size



          Abbreviations

          CSRS       Civil Service Retirement System
          DB         defined benefit
          DC         defined contribution
          DOL        Department of Labor
          ERISA      Employee Retirement Income Security Act of 1994
          ESOP       employee stock option plan
          FERS       Federal Employees Retirement System
          IRS        Internal Revenue Service
          SPD        summary plan description
          TSP        Thrift Savings Plan


          Page 36                               GAO/GGD-98-23 Private Pensions DC Plans
Page 37   GAO/GGD-98-23 Private Pensions DC Plans
Appendix I

Objectives, Scope, and Methodology


                 The Chairman, Subcommittee on Civil Service, House Committee on
                 Government Reform and Oversight, asked us to provide information on
                 the use of defined contribution (DC) plans in the private sector.1 He said
                 that such information would assist congressional decisionmakers as they
                 consider whether to design a retirement system for new federal hires.
                 Among the information requested was an analysis of the features of
                 private sector DC plans. This review was undertaken in response to that
                 part of the request. The objective of our review was to determine, for
                 employers that sponsored only DC plans, the

             •   eligibility requirements for employee participation,
             •   arrangements for employer and participant contributions,
             •   eligibility requirements for employee rights to accrued benefits,
             •   employee investment options,
             •   loan and other provisions for participant access to plan assets while still
                 employed, and
             •   options for withdrawal of benefits upon separation or retirement.

                 To address an additional interest of the requester, we also determined the
                 number of employers that sponsored more than one DC plan to provide
                 retirement benefits to the same groups of employees, and their potential
                 reasons for doing so.

                 To accomplish the first objective, we reviewed Summary Plan
                 Descriptions (SPD)—documents describing the terms and conditions of
                 pension plans that all private employers were to file with the Department
                 of Labor (DOL) for each pension plan they sponsored—for a random
                 stratified sample of private sector employers that sponsored only DC plans
                 to supplement their employees’ Social Security. We also included
                 additional plan information that was available from the DOL research
                 database, which we used to draw our sample of employers.

                 During our early design work, DOL officials told us that the Department did
                 not monitor or enforce employer compliance with the SPD filing
                 requirement because of limited resources and other competing priorities.2
                 For this reason, we identified a preliminary sample of employers and
                 mailed written requests for the employers’ SPDs. On the basis of this initial
                 request, we determined that it would be difficult to obtain SPDs from

                 1
                  A DC plan is one in which retirement benefits depend upon the amounts contributed to individual
                 employee accounts and the investment experience of that account up to the time of retirement.
                 2
                  Effective August 5, 1997, with the passage of the Taxpayer Relief Act of 1997, private employers
                 subject to ERISA are required to file copies of their SPDs with DOL only upon request.



                 Page 38                                                GAO/GGD-98-23 Private Pensions DC Plans
                   Appendix I
                   Objectives, Scope, and Methodology




                   employers with less than 100 employees, because these employers had a
                   very high nonresponse rate to our request. Moreover, DOL officials told us
                   that smaller employers were also much less likely to file an SPD with DOL,
                   compared with larger employers. Therefore, as agreed with the
                   Subcommittee, we limited the review of SPDs to employers with 100 or
                   more employees.

                   It is important to note that the data shown in this report may reflect only
                   part of each sampled employer’s retirement benefits program, because it
                   does not include information on (1) additional DC plans that some
                   employers offer or (2) Social Security benefits that most workers will
                   qualify for upon retirement.


Sample Selection   To select our nationwide sample from employers with 100 or more
                   employees that sponsored only single-employer DC plans, we used the 1993
                   research database of computerized Internal Revenue Service (IRS) Form
                   5500 reports maintained by the Pension and Welfare Benefits
                   Administration of the Department of Labor (DOL)—the most recent data
                   available when we designed our review. Under the Employee Retirement
                   Income Security Act of 1974, private employers must annually file a
                   separate Form 5500 report with the IRS for each of their pension plans.
                   Each report is to contain financial, participant, and actuarial data.

                   We did not independently verify the accuracy of the DOL research database.
                   However, IRS edits the reports by checking addition and consistency on
                   financial and other record items and corresponds with filers to obtain
                   corrected data before providing the computerized data to DOL. DOL further
                   edits the Form 5500 data to identify problems, such as truncated or
                   incorrect entries, before constructing its research database, which
                   consists of (1) all plans with 100 or more participants for which a Form
                   5500 was filed and (2) a 10-percent sample that is weighted to represent
                   the universe of all plans with less than 100 participants.

                   According to the DOL research database, approximately 490,000 employers
                   with 2 or more employees sponsored only single-employer DC plans in
                   1993. We excluded employers that (1) had fewer than 100 employees,
                   (2) sponsored only multiemployer DC plans, because of incomplete data,3
                   or (3) sponsored only DC plans that were either terminated or consolidated

                   3
                    A multiemployer plan is one to which more than one employer is required to contribute pursuant to
                   one or more collective bargaining agreements. Only one Form 5500 is filed for each multiemployer
                   plan, using one of the sponsoring employers’ identification numbers. Therefore, we could not identify
                   all of the participating employers.



                   Page 39                                                GAO/GGD-98-23 Private Pensions DC Plans
                                     Appendix I
                                     Objectives, Scope, and Methodology




                                     with another plan during 1993, because we wanted to review plans that
                                     had the greatest probability of still being in existence at the time we issued
                                     a report. Finally, we excluded those employers that offered only DC plans
                                     for which we could not determine the number of employees from the 5500
                                     reports. We selected a sample of 419 employers from the remaining
                                     universe of 3,297 employers.4

                                     Because we randomly selected the sample of private employers that
                                     sponsor only DC plans, the results are subject to some uncertainty or
                                     sampling error. The sampling error consists of two parts: confidence levels
                                     and ranges. The confidence level indicates the degree of confidence that
                                     can be placed in the estimates derived from the sample. The range is the
                                     upper and lower limits between which the actual universe estimates may
                                     be found. Our sample was designed so that the sampling error would not
                                     be greater than 10 percent at the 95-percent confidence level; however,
                                     where we further subdivided the sample along particular groups (e.g.,
                                     employers that provided for matching contributions), the resulting number
                                     of employers was too small to meet this criteria. In the letter portion of
                                     this report, we indicate when the sampling errors are greater than
                                     10 percent; these sampling errors are also at the 95-percent confidence
                                     level. In appendix II, which provides the detailed results of our analyses,
                                     we do not provide individual sample errors, because the number of such
                                     individual estimates would be prohibitive.

                                     We stratified our sample according to employer size using 3
                                     categories—100 to 999; 1,000 to 9,999; and 10,000 or more employees. We
                                     included in our sample all the employers that had 10,000 or more
                                     employees, because these employers may provide a more relevant
                                     comparison with the federal government. Table I.1 shows the distribution
                                     of the employers from which we selected our sample and the 419
                                     employers selected according to employer size.

Table I.1: Distribution of the 419
Employers by Employer Size                                                Number of employers in            Number of employers in
                                     Number of employees                        sample universe                            sample
                                     100-999                                                     2,498                              158
                                     1,000-9,999                                                   699                              161
                                     10,000 or more                                                100                              100
                                     Total                                                       3,297                              419
                                     Source: GAO analysis of data obtained from DOL.



                                     4
                                      We originally selected a sample of 430 employers; however, we excluded 11 of these employers from
                                     our study because of incorrect codes in the DOL research database.



                                     Page 40                                              GAO/GGD-98-23 Private Pensions DC Plans
                                         Appendix I
                                         Objectives, Scope, and Methodology




Response Rate Calculation                For the 419 employers in our sample, we (1) identified the unique plan
                                         number for each employer’s primary DC plan using the DOL research
                                         database and (2) sent each employer a letter requesting that an SPD for the
                                         identified plan be provided to us. For those employers that sponsored
                                         more than one such plan (each covering different groups of employees),
                                         we requested information on the employer’s largest primary plan.5 For 50
                                         of the employers, our letters were returned as nondeliverable. From the
                                         remaining 369 employers, we received 138 SPDs. Forty-four employers
                                         provided us with a different plan than the one we requested; however, the
                                         plans provided appeared to be a primary DC plan and were included in our
                                         review.

                                         To obtain the 281 SPDs that we did not receive directly from employers, we
                                         requested that DOL provide us copies from its files. DOL provided 143 of the
                                         requested SPDs and told us that 138 of the SPDs were not available, because
                                         the employer never filed a copy as required by law.

                                         Overall, we were able to obtain SPDs for 281 of the 419 employers in our
                                         sample, for a response rate of 67 percent. We were unable to determine if
                                         the SPDs provided by employers or DOL reflected the most current
                                         information available. Table I.2 shows the disposition of each of the 419
                                         employers in our sample by employer size.

Table I.2: Disposition of Employers in
the Sample by Employer Size                                                                   Number of employees
                                                                                                                 10,000 or
                                         Employers in sample                     100-999      1,000-9,999            more             Total
                                         SPD provided by employer                       47              60               31                138
                                         SPD provided by DOL                            60              49               34                143
                                         Subtotal                                     107              109               65                281
                                         SPD not provided by                            51              52               35                138
                                         employer or DOL
                                         Total                                        158              161             100                 419

                                         To examine the extent to which our results were generalizable, we
                                         compared the 281 employers for which we obtained an SPD to the universe
                                         of employers with 100 or more employees that offered only
                                         single-employer DC plans on the basis of employer size, industry type, and
                                         geographic region. The results of these analyses showed that the sample
                                         respondents were generally comparable to employers in our universe for
                                         these characteristics.

                                         5
                                          Approximately 6 percent of the employers in our universe sponsored more than one primary plan.



                                         Page 41                                              GAO/GGD-98-23 Private Pensions DC Plans
                           Appendix I
                           Objectives, Scope, and Methodology




Analysis of SPD Data       To identify and summarize the general characteristics of the 281 DC plans
                           for which we obtained an SPD, we developed a detailed data collection
                           instrument to allow information from each SPD to be recorded in a
                           consistent and standardized way. Each SPD was reviewed twice—the
                           second review was completed by a more experienced analyst to provide
                           100 percent verification of the information collected. We did not
                           independently verify the accuracy of the information described in the SPDs.

                           We entered the information from the data collection instruments into a
                           database to determine the frequency of the data elements and reviewed
                           our results for patterns and relationships.


Review of Thrift Savings   To identify information on the federal Thrift Savings Plan (TSP), we
Plan Provisions            reviewed various publications that we obtained from the Federal
                           Retirement Thrift Investment Board. We included this information in our
                           report to provide a general basis for comparison between the
                           government’s existing DC plan and those plans sponsored in the private
                           sector.


Analysis of Research       To supplement the data available from the SPDs, we pulled additional plan
Database                   information from DOL’s research database—the same database from which
                           we selected our sample. We used this information to analyze the rate at
                           which eligible employees chose to participate in the plans, the employers’
                           methods of managing accounts, the proportion of participants that were
                           fully vested, and the percentage of plan assets invested in employer
                           stocks, stocks, bonds, and outstanding participant loans. We were able to
                           supplement only those SPDs that described plans included in the 1993
                           research database.


Review of Multiple Plans   To address part of the second objective, which was to identify the number
                           of employers that sponsored more than one DC plan covering the same
                           groups of employees, we used the 1993 DOL research database and
                           included employers with two or more employees. To determine why
                           employers might decide to sponsor multiple plans, the remainder of the
                           second objective, we (1) reviewed retirement-related literature that we
                           identified using an on-line business periodical system and (2) consulted
                           with experts in the field of pensions. The experts with whom we consulted
                           were Mr. Ray Schmitt, Specialist, and Ms. Carolyn Merck, Specialist, the
                           Congressional Research Service; Mr. Dallas Salisbury, President, the



                           Page 42                                 GAO/GGD-98-23 Private Pensions DC Plans
Appendix I
Objectives, Scope, and Methodology




Employee Benefit Research Institute; Mr. Richard R. Joss, Resource
Actuary, Watson Wyatt Worldwide; and Ms. Martha Priddy Patterson,
Director of Employee Benefits, Policy and Analysis, KPMG Peat Marwick.
We selected these individuals because we had identified them as experts
during prior work we had done on private sector pension issues.

To identify whether plans in its research database provided primary versus
supplementary benefits, DOL used a set of assumptions, which it validated
for a small sample of plans. Employers that sponsored only one plan, by
definition, sponsored a primary plan. For employers that sponsored more
than one plan, DOL’s assumptions identified (1) multiple DC plans of the
same type as primary plans covering different groups of employees and
(2) multiple DC plans of different types as primary and supplementary
plans covering the same group of employees, with the largest one being
the primary plan. We did not independently verify the accuracy of DOL’s
criteria for identifying the primary versus supplementary status of plans.
According to DOL officials, their validation analyses indicated that their
assumptions were not accurate in all cases; however, they appeared to be
valid for the large majority of situations where employers sponsor more
than one pension plan.

We obtained and analyzed the sample of SPDs and completed the review of
multiple plans between October 1996 and July 1997 in accordance with
generally accepted government auditing standards.




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Appendix II

Summary Plan Description Analysis Results



Table II.1: Number and Percent of Employers That Sponsor Only Single-Employer Primary Defined Contribution Pension
Plans by Participation Requirement and Employer Size (1993)
                                                                       Number of employees

Participation                                              100 or more                                   10,000 or morea
requirement                                             Number                   Percent                 Number                  Percent
Age (in years)         18                                     254                       8                       8                         8
                       19                                      47                       1                       0                         0
                       20                                      60                       2                       0                         0
                       20.5                                    85                       3                       2                         2
                       21                                   1,564                      47                      34                        34
                       Noneb                                1,232                      37                      54                        54
                       Not specified                           56                       2                       3                         3
                       Total                                3,297                     100                     100                        100
Length of service      1 month                                 33                       1                       3                         3
                       3 months                                97                       3                       2                         2
                       4 months                                23                       1                       0                         0
                       6 months                               460                      14                       8                         8
                       9 months                                 6                       0                       0                         0
                       1 year                               2,159                      65                      69                        69
                       1.25 years                               6                       0                       0                         0
                       2 years                                 91                       3                       2                         2
                               c
                       None                                   365                      11                      14                        14
                       Not specified                           56                       2                       3                         3
                       Total                                3,297                     100                     100                        100
                                         Note: Due to rounding, numbers and percentages do not always add to the total.
                                         a
                                          Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                         employees.
                                         b
                                          Because 1,093 employers with 100 or more employees (and 51 employers with 10,000 or more
                                         employees) were silent regarding an age requirement but explicitly specified that employees
                                         must meet a particular length-of-service requirement—we included these employers under the
                                         “none” rather than “not specified” category.
                                         c
                                          Because 47 employers with 100 or more employees were silent regarding a length-of-service
                                         requirement but explicitly specified that employees must meet a particular age requirement—we
                                         included these employers under the “none” rather than “not specified” category.

                                         Source: GAO analysis of summary plan description data.




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                                          Summary Plan Description Analysis Results




Table II.2: Number and Percent of Employers That Sponsor Only Single-Employer Primary Defined Contribution Pension
Plans by Contribution Source and Type and Employer Size (1993)
                   Contribution source and type                                   Number of employees
                Participant                   Employer                          100 or more                       10,000 or morea
Pretax                        After-tax   Matching Nonmatching               Number             Percent          Number            Percent
•                                                                                   42                 1                   6                 6
•                                    •           •                                 107                 3                   5                 5
•                                    •           •                 •               165                 5                   3                 3
•                                    •                             •                63                 2                   3                 3
•                                                •                                 265                 8                18                  18
•                                                •                 •               819                25                26                  26
•                                                                  •               196                 6                11                  11
                                     •           •                                  23                 1                   0                 0
                                     •                             •               183                 6                   0                 0
                                                 •b                                 23                 1                   0                 0
                                                    b
                                                 •                 •                 8                 0                   2                 2
                                                                   •             1,354                41                23                  23
Not specified                                                                       50                 2                   3                 3
Total                                                                            3,297               100              100               100
                                          Note: Due to rounding, numbers and percentages do not always add to the total.
                                          a
                                           Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                          employees.
                                          b
                                          These employers provided matching contributions on the basis of contributions that participants
                                          made to a separate pension plan.

                                          Source: GAO analysis of summary plan description data.




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                                       Appendix II
                                       Summary Plan Description Analysis Results




Table II.3: Number and Percent of
Employers That Sponsor Only                                                                Number of employees
Single-Employer Primary Defined                                                  100 or more                   10,000 or morea
Contribution Pension Plans by Basis    Basis for making
                                       nonmatching contributions              Number            Percent       Number          Percent
for Making Nonmatching Contributions
and Employer Size (1993)               Some percent of profits,                  1,238               44                 26             38
                                       allocated by participant
                                       compensation
                                       Participant compensation                  1,251               45                 25             37
                                       Profits and participant                      24                1                  5              7
                                       compensation
                                       Some percent of profits,                     11                0                  5              7
                                       allocated by participant
                                       contributions
                                       Other                                       107                4                  5              7
                                       Not specified                               156                6                  3              4
                                       Total                                     2,786             100                  68         100
                                       Note: Due to rounding, numbers and percentages do not always add to the total.
                                       a
                                        Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                       employees.

                                       Source: GAO analysis of summary plan description data.



Table II.4: Number and Percent of
Employers That Sponsor Only            Maximum employer                                    Number of employees
Single-Employer Primary Defined        nonmatching contributions
                                       expressed (as a percent of                100 or more                   10,000 or morea
Contribution Pension Plans by
Maximum Employer Nonmatching           participant salary)                    Number            Percent       Number          Percent
Contributions and Employer Size        5 percent or less                           223                8                 17             25
(1993)                                 6 to 10 percent                             196                7                  5              7
                                       More than 10 percent                        154                6                  2              3
                                       Not specified                             2,212               79                 45             66
                                       Total                                     2,786             100                  68         100
                                       Note: Due to rounding, numbers and percentages do not always add to the total.
                                       a
                                        Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                       employees.

                                       Source: GAO analysis of summary plan description data.




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                                      Appendix II
                                      Summary Plan Description Analysis Results




Table II.5: Number and Percent of
Employers That Sponsor Only           Maximum participant                                     Number of employees
Single-Employer Primary Defined       contribution eligible for
                                      employer matchinga                           100 or more                     10,000 or moreb
Contribution Pension Plans by
Maximum Level of Participant          (percent of salary)                       Number           Percent          Number            Percent
Contributions Eligible for Employer   1 percent                                         0                 0                0                   0
Matching and Employer Size (1993)     2 percent                                        93               11                 0                   0
                                      3 percent                                        78               10                 6                  18
                                      4 percent                                      222                27                 8                  23
                                      5 percent                                        97               12                 2                   5
                                      6 percent                                      231                28               14                   41
                                      7 percent                                        48                 6                2                   5
                                      8 percent                                        23                 3                0                   0
                                      9 percent                                         0                 0                0                   0
                                      10 percent                                        8                 1                2                   5
                                      More than 10 percent                             14                 2                2                   5
                                      Total                                          816               100               34              100
                                      Note 1: Of the 3,297 employers with 100 or more employees in our study, 1,410 employers
                                      provided matching contributions to the primary plan. We could only determine the maximum
                                      participant contributions eligible for employer matching contributions for 816 of these 1,410
                                      employers, because the summary plan descriptions for the remaining 594 employers did not
                                      contain this information.

                                      Note 2: Due to rounding, numbers and percentages do not always add to the total.
                                      a
                                       This column represents the maximum participant contribution, expressed as a percent of salary,
                                      for which employers will provide some level of matching contributions. However, participants are
                                      frequently allowed to contribute a greater percent of salary than that which is eligible for matching
                                      contributions. For example, an employer may allow participants to contribute up to 10 percent of
                                      their salary to a plan but provide matching contributions for only the first 6 percent contributed.
                                      b
                                       Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                      employees.

                                      Source: GAO analysis of summary plan description data.




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                                     Appendix II
                                     Summary Plan Description Analysis Results




Table II.6: Number and Percent of
Employers That Sponsor Only                                                                  Number of employees
Single-Employer Primary Defined      Maximum level of employer
                                     matching of eligible                         100 or more                     10,000 or moreb
Contribution Pension Plans by the
                                     participant contributionsa                Number           Percent          Number            Percent
Maximum Level of Employer Matching
Contributions and Employer Size      Less than 25 percent                             43                 5                0                   0
(1993)                               25 percent                                     162                20                 3                   9
                                     26 to 49 percent                                 19                 2                0                   0
                                     50 percent                                     248                30                 8                  25
                                     51 to 74 percent                                 38                 5                2                   6
                                     75 percent                                       23                 3                0                   0
                                     76 to 99 percent                                  0                 0                0                   0
                                     100 percent                                    249                31               17                   53
                                     More than 100 percent                            33                 4                3                   9
                                     Total                                          815               100               32              100
                                     Note 1: Of the 3,297 employers with 100 or more employees in our study, 1,410 employers
                                     provided matching contributions to the primary plan. We could only determine the maximum level
                                     of employer matching of eligible participant contributions for 815 of these 1,410 employers,
                                     because the summary plan descriptions for the remaining 595 employers did not contain this
                                     information.

                                     Note 2: Due to rounding, numbers and percentages do not always add to the total.
                                     a
                                      This column represents the overall level of matching contributions that employers provided for
                                     eligible participant contributions. For example, if an employer provided $1 dollar for each dollar of
                                     a participant’s contribution that was eligible for employer matching, then the overall level of
                                     matching contributions would be 100 percent. If an employer provided 50 cents for each dollar of
                                     a participant’s contribution that was eligible for employer matching, then the overall level of
                                     matching contributions would be 50 percent.
                                     b
                                      Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                     employees.

                                     Source: GAO analysis of summary plan description data.




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                                     Appendix II
                                     Summary Plan Description Analysis Results




Table II.7: Number and Percent of
Employers That Sponsor Only          Maximum potential                                   Number of employees
Single-Employer Primary Defined      employer cost of
                                     contributionsa (percent of                100 or more                    10,000 or moreb
Contribution Pension Plans by the
Maximum Potential Employer Cost of   salary)                                Number            Percent        Number          Percent
Contributions and Employer Size      Employer does not contribute
(1993)                               to plan                                       42               5                6                16
                                     1 percent                                     31               4                2                 4
                                     2 percent                                   120               14                5                12
                                     3 percent                                   120               14                5                12
                                     4 percent                                   138               16                6                16
                                     5 percent                                     72               8                6                16
                                     6 percent                                     46               5                3                 8
                                     7 percent                                     55               6                2                 4
                                     8 percent                                     13               1                0                 0
                                     9 percent                                      2               0                2                 4
                                     10 percent                                  114               13                2                 4
                                     11 to 15 percent                            106               12                0                 0
                                     16 to 18 percent                              25               3                2                 4
                                     Total                                       883              100              38             100
                                     Note 1: Of the 3,297 employers with 100 or more employees in our study, 3,205 employers
                                     specified that they made matching and/or nonmatching contributions to the primary plan. Of
                                     these 3,205 employers, we could only determine the maximum potential employer cost of
                                     contributions for 883 employers, because the summary plan descriptions for the remaining 2,322
                                     employers did not contain this information.

                                     Note 2: Due to rounding, numbers and percentages do not always add to the total.
                                     a
                                      This column represents the maximum potential employer cost of making contributions to the
                                     primary plan. An employer’s actual cost of contributions may be less than this maximum. For
                                     example, participants might not contribute enough to maximize employer matching contributions
                                     or the employer might elect to contribute less than the maximum allowable nonmatching
                                     contribution in any given year.
                                     b
                                      Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                     employees.

                                     Source: GAO analysis of summary plan description data.




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                                         Appendix II
                                         Summary Plan Description Analysis Results




Table II.8: Number and Percent of Employers That Sponsor Only Single-Employer Primary Defined Contribution Pension
Plans by the Maximum Participant Contributions Allowed and Employer Size (1993)
                                                                                Number of employees
                               Maximum rate of participant
Type of participant            contribution allowed                  100 or more                  10,000 or morea
contributions allowed          (percent of salary)                Number          Percent        Number           Percent
Pretax only                  1 to 5 percent                                  38                   3                  2                    3
                             6 to 10 percent                               292                    22                14                   23
                             11 to 15 percent                              622                    47                35                   56
                             16 to 20 percent                              119                    9                  6                   10
                             21 to 25 percent                                23                   2                  0                    0
                             Not specified                                 228                    17                 5                    8
                             Total                                       1,322                 100                  62               100
After-tax only               1 to 5 percent                                   0                   0                  0                    0
                             6 to 10 percent                                 83                   40                 0                    0
                             11 to 15 percent                                 0                   0                  0                    0
                             16 to 20 percent                                 0                   0                  0                    0
                             21 to 25 percent                                 0                   0                  0                    0
                             Not specified                                 123                    60                 0                    0
                             Total                                         206                 100                   0                    0
Pretax and after-tax         1 to 5 percent                                   0                   0                  0                    0
                             6 to 10 percent                                 54                   16                 5                   45
                             11 to 15 percent                                66                   20                 0                    0
                             16 to 20 percent                                 9                   3                  3                   27
                             21 to 25 percent                                 6                   2                  0                    0
                             Not specified                                 199                    60                 3                   27
                             Total                                         334                 100                  11               100
                                         Note: Due to rounding, numbers and percentages do not always add to the total.
                                         a
                                          Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                         employees.

                                         Source: GAO analysis of summary plan description data.




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                                         Summary Plan Description Analysis Results




Table II.9: Number and Percent of Employers That Sponsor Only Single-Employer Primary Defined Contribution Pension
Plans by Type of Vesting for Matching and Nonmatching Contributions and Employer Size (1993)
                                                                               Number of employees

Type of employer                                                            100 or more                            10,000 or moreb
                                             a
contribution                 Type of vesting                            Number               Percent              Number               Percent
Matching                     Immediate                                        478                   34                   28                      52
                             Cliff                                            127                     9                  12                      22
                             Graduated                                        768                   54                   14                      26
                             Not specified                                     36                     3                   0                       0
                             Total                                          1,410                  100                   54                  100
Nonmatching                  Immediate                                        356                   13                   15                      22
                             Cliff                                            483                   17                   17                      25
                             Graduated                                      1,917                   69                   34                      50
                             Not specified                                     31                     1                   2                       3
                             Total                                          2,786                  100                   68                  100
                                         Note 1: For defined contribution plans, the term “vesting” refers to a participant’s ownership rights
                                         to employer contributions made to his or her individual plan account (and the earnings that
                                         accrue from those contributions) even if the participant separates from the employer. Participants
                                         are always fully vested in any pretax or after-tax contributions that they make to the plan.

                                         Note 2: Due to rounding, numbers and percentages do not always add to the total.
                                         a
                                          Three common forms of vesting include immediate, cliff, and graduated vested. Under
                                         immediate vesting, participants are fully vested in employer contributions at the time they are
                                         made. Under cliff vesting, participants become fully vested after a specified number of years of
                                         service, with no vesting prior to that number of years. Under graduated vesting, participants are
                                         partially vested over a period of years according to an increasing schedule until full vesting is
                                         achieved.
                                         b
                                          Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                         employees.

                                         Source: GAO analysis of summary plan description data.




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                                         Summary Plan Description Analysis Results




Table II.10: Number and Percent of Employers That Sponsor Only Single-Employer Primary Defined Contribution Pension
Plans by Number of Years to Full Vesting for Matching and Nonmatching Contributions and Employer Size (1993)
                                                                                Number of employees

Type of employer             Number of years to full                        100 or more                            10,000 or morea
contribution                 vesting                                    Number               Percent              Number               Percent
Matching                     Immediate                                        478                   34                   28                      52
                             1 year                                              0                    0                   0                       0
                             2 years                                             6                    0                   0                       0
                             3 years                                           84                     6                   2                       4
                             4 years                                           44                     3                   2                       4
                             5 years                                          256                   18                   16                      30
                             6 years                                          136                   10                    6                      11
                             7 years                                          369                   26                    2                       4
                             Not specified                                     36                     3                   0                       0
                             Total                                          1,410                  100                   54                 100
Nonmatching                  Immediate                                        356                   13                   15                      22
                             1 year                                              6                    0                   0                       0
                             2 years                                             6                    0                   0                       0
                             3 years                                          154                     6                   2                       3
                             4 years                                           96                     3                   0                       0
                             5 years                                          716                   26                   23                      34
                             6 years                                          449                   16                    3                       4
                             7 years                                          995                   36                   23                      34
                             Not specified                                       8                    0                   2                       3
                             Total                                          2,786                  100                   68                 100
                                         Note 1: For defined contribution plans, the term “vesting” refers to a participant’s ownership rights
                                         to employer contributions made to his or her individual plan account (and the earnings that
                                         accrue from those contributions) even if the participant separates from the employer. Participants
                                         are always fully vested in any pretax or after-tax contributions that they make to the plan.

                                         Note 2: Due to rounding, numbers and percentages do not always add to the total.
                                         a
                                          Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                         employees.

                                         Source: GAO analysis of summary plan description data.




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                                          Summary Plan Description Analysis Results




Table II.11: Number and Percent of Employers That Sponsor Only Single-Employer Primary Defined Contribution Pension
Plans by Number of Investment Options for Each Type of Contribution and Employer Size (1993)
                                                                               Number of employees

                             Number of investment                         100 or more                          10,000 or morea
Type of contribution         options                                   Number              Percent            Number             Percent
Pretax                       None—employer directs                          248                    15                 6                    8
                             investments
                             2 to 3 options                                   75                   5                  9                   13
                             4 to 9 options                                 467                    28                35                   49
                             10 or more options                               88                   5                  3                    4
                             Not specified                                  777                    47                19                   26
                             Total                                        1,656                 100                  72               100
After-tax                    None—employer directs                          123                    23                 0                    0
                             investments
                             2 to 3 options                                   38                   7                  2                   18
                             4 to 9 options                                 138                    26                 6                   55
                             10 or more options                               13                   2                  0                    0
                             Not specified                                  228                    42                 3                   27
                             Total                                          540                 100                  11               100
Matching                     None—employer directs                          232                    16                11                   20
                             investments
                             2 to 3 options                                   50                   4                  8                   15
                             4 to 9 options                                 377                    27                20                   37
                             10 or more options                               75                   5                  3                    6
                             Not specified                                  675                    48                13                   24
                             Total                                        1,410                 100                  54               100
Nonmatching                  None—employer directs                        1,253                    45                31                   46
                             investments
                             2 to 3 options                                 111                    4                  5                    7
                             4 to 9 options                                 434                    16                15                   22
                             10 or more options                               61                   2                  2                    3
                             Not specified                                  927                    33                16                   24
                             Total                                        2,786                 100                  68               100
                                          Note: Due to rounding, numbers and percentages do not always add to the total.
                                          a
                                           Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                          employees.

                                          Source: GAO analysis of summary plan description data.




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                                           Summary Plan Description Analysis Results




Table II.12: Number and Percent of Employers That Sponsor Only Single-Employer Primary Defined Contribution Pension
Plans by Type of Investment Options for Participant and Employer Contributions and Employer Size (1993)
                                                                                 Number of employees
                                                                            100 or more                           10,000 or moreb
                                                           a                                         c
Type of contribution         Type of investment option                   Number             Percent              Number             Percentc
Participant                  Employer stock                                   129                    4                 18                     18
                             Stock funds                                      604                   18                 45                     45
                             Bond funds                                       343                   10                 20                     20
                             Balanced funds                                   397                   12                 29                     29
                             Guaranteed investment                            469                   14                 25                     25
                             contract
                             U.S. government securities                       172                    5                   6                     6
                             Money market                                     337                   10                 31                     31
Employer                     Employer stock                                   605                   18                 31                     31
                             Stock funds                                      745                   23                 43                     43
                             Bond funds                                       451                   14                 26                     26
                             Balanced funds                                   565                   17                 31                     31
                             Guaranteed investment                            625                   19                 28                     28
                             contract
                             U.S. government securities                       217                    7                   5                     5
                             Money market                                     446                   14                 31                     31
                                           a
                                            Employers can provide participants with a variety of options for investing participant and/or
                                           employer contributions. Some common investment options include shares of the employer’s
                                           stock; shares of stock in other companies; bonds offered by other companies; balanced funds,
                                           which invest in both stocks and bonds; guaranteed investment contracts, which are offered by
                                           insurance companies and provide a guaranteed rate of return for a specified period of time; U.S.
                                           government securities; and money market funds, which are invested in short-term securities such
                                           as Treasury bills and bank certificates of deposit.
                                           b
                                            Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                           employees.
                                           c
                                            Because some employers offered more than one of these investment options, percentages will
                                           not add to 100 percent.

                                           Source: GAO analysis of summary plan description data.




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Table II.13: Number and Percent of Employers That Sponsor Only Single-Employer Primary Defined Contribution Pension
Plans by Type of Participant Access to Account Assets and Employer Size (1993)
 Type of participant access to vested account assets                          Number of employees

Hardship                                   Voluntary                   100 or more                                10,000 or morea
withdrawalsb                 Loansb
                                        withdrawalsc                Number                 Percent               Number                 Percent
•                                                                         283                      9                      9                     9
•                                 •                                       759                     23                    34                     34
•                                 •                   •                   269                      8                      9                     9
•                                                     •                   108                      3                      6                     6
                                  •                                       403                     12                    14                     14
                                  •                   •                   100                      3                      0                     0
                                                      •                   232                      7                      0                     0
Not specified                                                           1,144                     35                    28                     28
                                         Note: Employers can design defined contribution plans to allow participants access to a portion
                                         of their vested account balance before retirement using a variety of plan features, including
                                         hardship withdrawals, loans, and voluntary withdrawals. Participants who use a withdrawal option
                                         may be subject to various IRS and/or employer limits and penalties.
                                         a
                                          Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                         employees.
                                         b
                                          Hardship withdrawal provisions allow participants to withdraw a portion of their own contributions
                                         to the plan if they suffer a financial hardship, as defined by the IRS.
                                         c
                                          Loan provisions allow participants to withdraw a portion of their account, subject to IRS limits,
                                         and repay their account within a specified period at a specified rate of interest.
                                         d
                                          Voluntary withdrawal provisions allow participants to withdraw a portion of their after-tax
                                         contributions and/or employer contributions for any reason and without having to repay their
                                         accounts.

                                         Source: GAO analysis of summary plan description data.




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                                      Summary Plan Description Analysis Results




Table II.14: Number and Percent of
Employers That Sponsor Only                                                               Number of employees
Single-Employer Primary Defined                                                100 or more                   10,000 or morea
Contribution Pension Plans by         Withdrawal options
                                      available upon retirement              Number            Percent       Number          Percent
Withdrawal Options Available Upon
Retirement and Employer Size (1993)   Lump-sum distribution                     3,022              92              97                 97
                                      Annuity                                   1,537              47              32                 32
                                      Installment payments                      2,216              67              52                 52
                                      Access to account balance                    14               0               2                  2
                                      as needed
                                      Other                                        78               2               2                  2
                                      Not specified                               175               5               3                  3
                                      Note: Because some employers offer more than one withdrawal option, percentages do not add
                                      to 100 percent.
                                      a
                                       Employers with 10,000 or more employees represent a subset of the employers with 100 or more
                                      employees.

                                      Source: GAO analysis of summary plan description data.




                                      Page 56                                            GAO/GGD-98-23 Private Pensions DC Plans
Appendix III

IRS Form 5500 Analysis Results


Table III.1: Number of Private Sector
Employers That Sponsor Only                                                                           Number of             Proportion of
Single-Employer Defined Contribution                                       Number of              employers that           employers that
Pension Plans, by Type of Pension                                      employers that                sponsored                sponsored
Plan Offered and Employer Size (1993)   Number of                   sponsored primary             supplementary            supplementary
                                        employees                               plans                     plans                    plans
                                        2-9                                       173,762                   28,938                    0.167
                                        10-24                                     110,089                   11,093                    0.101
                                        25-49                                      62,107                    4,441                    0.072
                                        50-99                                      39,556                    2,579                    0.065
                                        100-249                                    29,073                    2,288                    0.079
                                        250-499                                     9,455                      874                    0.092
                                        500-999                                     4,960                      506                    0.102
                                        1,000-2,499                                 2,622                      290                    0.111
                                        2,500-4,999                                   969                      162                    0.167
                                        5,000-9,999                                   427                        65                   0.152
                                        10,000-19,999                                 261                        40                   0.153
                                        20,000-49,999                                 143                        19                   0.133
                                        50,000 or more                                145                        19                   0.131
                                        Not reported                               56,689                    5,711                    0.101
                                        Total                                     490,258                   57,025                    0.116
                                        Note 1: This table includes those employers that sponsored only single-employer DC pension
                                        plans covering two or more participants.

                                        Note 2: The database that we analyzed categorizes pension plans as primary or supplementary
                                        using a set of criteria established by DOL. According to these criteria, employers that sponsored
                                        only one plan, by definition, sponsored a primary plan. For employers that sponsored more than
                                        one plan, DOL’s assumptions identified (1) multiple DC plans of the same type as primary plans
                                        covering different groups of employees and (2) multiple DC plans of different types as primary
                                        and supplementary plans covering the same group of employees, with the largest one being the
                                        primary plan.

                                        Source: GAO analysis of IRS Form 5500 data.




                                        Page 57                                               GAO/GGD-98-23 Private Pensions DC Plans
                                         Appendix III
                                         IRS Form 5500 Analysis Results




Table III.2: Number of Private Sector Employers That Sponsor Only Single-Employer Defined Contribution Pension Plans,
by Type of Pension Plan Offered and Industry Group (1993)
                                                                       Number of employers that     Proportion of employers
                                            Number of employers that sponsored supplementary                 that sponsored
Industry group                               sponsored primary plans                      plans        supplementary plans
Agriculture                                                        8,285                              687                              0.083
Mining                                                             2,455                              136                              0.055
Construction                                                     33,147                             3,415                              0.103
Manufacturing                                                    56,348                             4,193                              0.074
Transportation                                                     6,665                              512                              0.077
Communications and utilities                                       3,987                              240                              0.060
Wholesale trade                                                  36,899                             3,316                              0.090
Retail trade                                                     47,273                             3,373                              0.071
Finance, insurance, and real estate                              34,786                             3,064                              0.088
Services                                                        247,056                            37,692                              0.153
Tax-exempt organizations                                         15,363                               612                              0.040
Not reported                                                         703                                61                             0.087
Total                                                           492,967                            57,301                              0.116
                                         Note 1: This table includes those employers that only sponsored single-employer DC pension
                                         plans.

                                         Note 2: The database that we analyzed categorizes pension plans as primary or supplementary
                                         using a set of criteria established by DOL. According to these criteria, employers that sponsored
                                         only one plan, by definition, sponsored a primary plan. For employers that sponsored more than
                                         one plan, DOL’s assumptions identified (1) multiple DC plans of the same type as primary plans
                                         covering different groups of employees, and (2) multiple DC plans of different types as primary
                                         and supplementary plans covering the same group of employees, with the largest one being the
                                         primary plan.

                                         Source: GAO analysis of IRS Form 5500 data.




                                         Page 58                                               GAO/GGD-98-23 Private Pensions DC Plans
Appendix IV

Comments From the Department of Labor




              Page 59       GAO/GGD-98-23 Private Pensions DC Plans
Appendix V

Major Contributors to This Report


                        Margaret T. Wrightson, Assistant Director, Federal Management and
General Government        Workforce Issues
Division, Washington,   James A. Bell, Assistant Director
D.C.                    Jennifer S. Cruise, Evaluator-in-Charge
                        Gregory H. Wilmoth, Senior Social Science Analyst
                        George H. Quinn, Jr., Computer Specialist
                        Ernestine B. Burt, Issue Area Assistant
                        Carol B. Quick, Intern




(410080)                Page 60                               GAO/GGD-98-23 Private Pensions DC Plans
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