oversight

401(k) Pension Plans: Extent of Plans' Investments in Employer Securities and Real Property

Published by the Government Accountability Office on 1997-11-28.

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

                 United States General Accounting Office

GAO              Report to the Chairman, Committee on
                 Ways and Means, House of
                 Representatives


November 1997
                 401(k) PENSION
                 PLANS
                 Extent of Plans’
                 Investments in
                 Employer Securities
                 and Real Property




GAO/HEHS-98-28
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-276106

      November 28, 1997

      The Honorable Bill Archer
      Chairman, Committee on Ways and Means
      House of Representatives

      Dear Mr. Chairman:

      Policymakers and the pension community are concerned about 401(k)
      plans—tax-deferred individual retirement benefit accounts—in which
      decisions regarding how to invest plan assets, particularly employee
      contributions, are made exclusively by employers. This concern was
      prompted mainly by two cases in which employers invested a large portion
      of the 401(k) plan assets in their companys’ securities or real property.1
      Subsequent business reversals then forced the employers into bankruptcy
      reorganization or liquidation. In one case, employees lost their jobs and
      almost all their pension benefits because the value of the employer’s
      securities decreased significantly. The other case, involving real property,
      is still in bankruptcy liquidation, and the final effect on pension benefits is
      unknown.

      Concerns about the loss of jobs and retirement benefits prompted your
      office to ask us to (1) provide information on the extent to which 401(k)
      plan assets are invested in employer securities and real property,
      (2) examine the protection and any possible problems associated with the
      recent amendments to title I of the Employee Retirement Income Security
      Act of 1974 (ERISA), and (3) identify alternate mechanisms that might
      safeguard the retirement benefits of participants in 401(k) plans in which
      the employer decides how to invest assets.

      To determine the extent to which the assets of 401(k) plans were invested
      in employer securities and real property, we analyzed the Form 5500
      database maintained by the Department of Labor’s Pension and Welfare
      Benefits Administration (PWBA). Under ERISA, employers have to file a
      Form 5500 annually to report certain financial, participant, and actuarial
      data for each of their pension plans. We analyzed data for plan year 1993,2
      which was the most recent year for which final plan-specific data were
      available for our review. To examine the protections provided by and any

      1
       Real property acquired by the plan and leased to an employer of employees covered by the plan or to
      an affiliate of such employer.
      2
       Plan year refers to the calendar, policy, or fiscal year for which the records of the plan are kept. All
      years cited in this report are plan years; 1993 forms were filed for plan years beginning in calendar year
      1993.



      Page 1                                                   GAO/HEHS-98-28 401(k) Plan Investments
                   B-276106




                   possible problems associated with the recent amendments to ERISA, we
                   discussed the amendments with officials of the Departments of Labor and
                   the Treasury developed a model to measure the extent of protection
                   offered by a 10-percent limitation on the use of employee contributions to
                   purchase employer securities and real property, and examined Form 5500
                   data. To determine what alternate mechanisms could be considered to
                   safeguard plan participants in employer-directed 401(k) plans, we
                   identified strategies that already are authorized by federal law and
                   identified mechanisms that experts suggested. We performed our review in
                   Washington, D.C., from November 1996 through September 1997 in
                   accordance with generally accepted government auditing standards. (See
                   app. I for details on our scope and methodology.)


                   Only 2,449 of about 160,000 401(k) plans owned employer securities or
Results in Brief   real property in 1993. Collectively, these plans owned $53 billion of
                   employer securities and real property and covered 5.3 million plan
                   participants. In most of these plans, plan participants directed the
                   investment of their own contributions. Plans for which the employer solely
                   decided how to invest assets totaled 756. In these plans, employees
                   exercised no control over how their 401(k) plan assets were invested; the
                   employer made all the investment decisions. These plans covered
                   1.4 million participants and had $12.3 billion invested in employer
                   securities and real property.

                   In August 1997, the Congress amended title I of ERISA to provide that not
                   more than 10 percent of employee contributions be invested in employer
                   securities and real property by defined contribution 401(k) plans requiring
                   that employee contributions be invested in this way.3 This change
                   increases protection for 401(k) plan participants. The 10-percent limitation
                   rule alone does not, however, prevent plans from investing employee
                   contributions in employer securities and real property whose value is
                   declining. In addition, some of the information needed to implement and
                   enforce the new legislation is not readily available. Proposed changes to
                   the Form 5500, if implemented, may remedy some of the data deficiencies.

                   Other mechanisms are available to policymakers if alternate safeguards
                   are needed in the future. These mechanisms include enhanced reporting
                   and disclosure, prescribed education programs, adoption of the

                   3
                    The amendment provides that unless one of three exemptions is met, not more than 10 percent of
                   employees’ contributions and the earnings thereon may be invested in employer securities and real
                   property. The ERISA 10-percent limitation rule for employer-directed 401(k) plans becomes effective
                   in 1999.



                   Page 2                                                GAO/HEHS-98-28 401(k) Plan Investments
             B-276106




             diversification requirement used for employee stock ownership plans
             (ESOP), and use of independent fiduciaries to examine investment
             decisions.


             Employers provide retirement benefits using two basic types of plans—
Background   defined benefit plans and defined contribution plans. In a defined benefit
             plan, the employer determines the employee’s retirement benefit amount
             using specific formulas that consider factors such as age at retirement,
             years of service, and salary levels. Employers are responsible for ensuring
             that sufficient funds are available to pay promised benefits. The amount an
             employer must contribute to a defined benefit plan varies from year to
             year depending on changes in factors such as workforce demographics or
             investment earnings. Employees covered by a defined benefit plan are also
             protected by a federal plan termination insurance program administered
             by the Pension Benefit Guaranty Corporation (PBGC).

             In a defined contribution plan (also known as an individual account 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 sometimes allowed or required.
             Each defined contribution plan specifies whether the plan participants, the
             employer, or both will make decisions about how the funds in the
             accounts are invested. Regardless of who makes the investment decisions
             in a defined contribution plan, the employer is not responsible for
             ensuring that a specified amount is available upon an employee’s
             retirement. An employee’s retirement benefit from such a plan depends on
             the total employer and employee contributions to the account as well as
             the investment returns that have accumulated in the account by the time
             the employee retires. In a defined contribution plan, the employee
             assumes the risk for the investments.

             Defined contribution plans include thrift savings plans, profit-sharing
             plans, and ESOPs. Such plans that allow employees to choose to contribute
             a portion of their pre-tax compensation to the plan under section 401(k) of
             the Internal Revenue Code are generally referred to as 401(k) plans.
             Investment income earned on a 401(k) plan accumulates tax free until an
             individual withdraws the funds.

             Table 1 shows the number of plans, plan assets, and plan participants for
             1993 for single-employer defined benefit and defined contribution plans.




             Page 3                                  GAO/HEHS-98-28 401(k) Plan Investments
                                   B-276106




Table 1: Single-Employer Defined
Benefit and Defined Contribution                                                                          Assets       Participants
Plans, 1993                        Type of plan                        Number of plans                  (billions)      (millions)a
                                   Defined benefit plans                           69,888                $1,017.0             31.7
                                   Defined contribution plans
                                        ESOP                                         8,054                   199.6              7.0
                                        401(k)                                    159,196                    492.1            20.4
                                        Other                                     397,142                    296.2              9.2
                                   Totalb                                         634,280                $2,005.0             68.4
                                   a
                                   Includes double counting of participants who are in more than one plan.
                                   b
                                       Because of rounding, sums of individual items may not equal totals.



                                   ERISA imposes certain requirements and restrictions on those who manage
                                   and administer private pension plans. These fiduciary rules apply to both
                                   defined benefit and defined contribution plans and require, among other
                                   things, that plans diversify their investments and, more specifically, invest
                                   no more than 10 percent of total plan assets in employer securities and
                                   real property. Currently, ERISA exempts 401(k) plans from the
                                   diversification requirement and the 10-percent limitation rule. Accordingly,
                                   401(k) plans can invest in employer securities and real property generally
                                   without restriction. (See app. II for more details on federal fiduciary rules
                                   on investment of plan assets.)

                                   In August 1997, the Congress amended title I of ERISA to protect plan
                                   participants in 401(k) plans that require that employee contributions be
                                   invested in employer securities and real property. Section 1524 of the
                                   Taxpayer Relief Act of 1997, which takes effect in 1999, will extend the
                                   ERISA 10-percent limitation rule on investments in employer securities and
                                   real property to that portion of these 401(k) plans consisting of employee
                                   contributions and the earnings thereon unless they meet one of three
                                   exemptions. A 401(k) plan is exempt if the fair market value of the assets
                                   of all the defined contribution plans the employer maintains is no more
                                   than 10 percent of the fair market value of the assets of all the employer’s
                                   pension plans. A 401(k) plan is also exempt if it requires that not more
                                   than 1 percent of an employee’s compensation be invested in employer
                                   securities and real property. Finally, ESOPs are exempt.




                                   Page 4                                                    GAO/HEHS-98-28 401(k) Plan Investments
                                           B-276106




                                           Less than 2 percent of 401(k) plans invested in employer securities and
Relatively Few 401(k)                      real property in 1993. Because many of the 401(k) plans that owned
Plans Invested in                          employer securities and real property were large plans, however, the
Employer Securities                        number of participants covered and the value of employer securities and
                                           real property were substantial. Participant-directed plans had about
and Real Property                          3.9 million participants and about $40.7 billion in employer securities and
                                           real property. Employer-directed plans covered 1.4 million participants
                                           and had $12.3 billion invested in employer securities and real property.


Large 401(k) Plans Owned                   Only 2,449 of the 159,196 401(k) plans that filed a Form 5500 for 1993
Most of the Employer                       reported that they had invested in employer securities or real property. As
Securities and Real                        shown in table 2, a relatively few large 401(k) plans owned most of the
                                           employer securities and real property. In this regard, 109 plans with 10,000
Property                                   or more participants owned over $34 billion (nearly 65 percent) of the
                                           $53 billion of employer securities and real property owned by all 401(k)
                                           plans. These large plans also covered most of the participants in 401(k)
                                           plans that owned any employer securities or real property. Plans with
                                           more than 10,000 participants covered 57 percent of participants. Plans
                                           with 1,000 or more participants covered 92 percent of the participants and
                                           owned 95 percent of employer securities and real property.


Table 2: 401(k) Plan Investments in Employer Securities and Real Property by Plan Size, 1993
                                                                       Assets of 401(k)
                                                  Number of 401(k) plans that owned             Amount of                      Participants in
                                                  plans that owned            employer            employer                   401(k) plans that
                                                           employer      securities and      securities and                  owned employer
Plan size (based on number     Number of 401(k)       securities and      real property       real property                    securities and
of participants)                          plans        real property           (billions)  owned (billions)                     real property
Less than 100                            135,324                    726                    $1.0                        $.3             32,242
100-249                                   13,900                    428                     1.7                         .4             71,882
250-499                                    4,843                    292                     2.1                         .6            106,696
500-999                                    2,410                    281                     4.9                        1.3            201,141
1,000-4,999                                2,236                    509                    28.6                        8.7          1,120,657
5,000-9,999                                  277                    104                    24.1                        7.4            746,617
10,000 or more                               206                    109                   113.4                   34.2              2,989,124
Total                                    159,196                  2,449                 $175.8                   $53.0              5,268,359
                                           Note: Because of rounding, sums of individual items may not equal totals.



                                           Because of the influence of large plans, the $53 billion of employer
                                           securities and real property owned represented about 11 percent of all



                                           Page 5                                                 GAO/HEHS-98-28 401(k) Plan Investments
B-276106




401(k) plan assets, and the 5.3 million participants represented almost
26 percent of the participants in all 401(k) plans. (See fig. 1.)




Page 6                                   GAO/HEHS-98-28 401(k) Plan Investments
                                        B-276106




Figure 1: Investments by 401(k) Plans
in Employer Securities and Real
Property, 1993




                                        Page 7     GAO/HEHS-98-28 401(k) Plan Investments
                          B-276106




                          Employer real property investments represented only $381 million (less
                          than 1 percent) of the $53 billion in employer securities and real property
                          owned by 401(k) plans. Eleven large 401(k) plans4 owned employer real
                          property in 1993. Individual plan holdings ranged from a low of about
                          $4,000 to approximately $340 million; however, two plans owned 96
                          percent of the employer real property. These two plans collectively owned
                          about $365 million of employer real property, with separate holdings of
                          $340 million and $25 million. For these two plans, employer real property
                          represented 56 and 87 percent of their plan assets, respectively. For the
                          other nine plans, employer real property generally represented 15 percent
                          or less of total plan assets.

                          One possible reason for the relatively low number of 401(k) plans that
                          owned employer securities and real property is that many plans may not
                          allow such investments. Periodically, the Bureau of Labor Statistics (BLS)
                          conducts a survey of private nonfarm establishments with 100 or more
                          workers and develops information on the types of investments that
                          pension plans may make. BLS estimates that 49 percent of employees in
                          thrift savings plans (which BLS officials said are a proxy for 401(k) plans)
                          were in plans in 1993 that permitted ownership of employer securities.5
                          Another reason may be that many employers sponsoring 401(k) plans are
                          too small to issue their own company securities.


Most 401(k) Plan          Important to the issue of the need for protections for 401(k) plan
Participants Directed     investments are the number of 401(k) plans that are employer directed and
Investment of Their Own   the number of participants in those plans. In an employer-directed plan,
                          the employer—rather than the plan participant—decides how to invest
Contributions             participant contributions as well as the company’s own matching
                          contributions, if any. In a participant-directed plan, the participant
                          determines how to invest his or her contributions and may also determine
                          how to invest the employer’s matching contributions. Information on
                          employer-directed plans is important because it indicates the maximum
                          number of individuals with no control over the investment decisions
                          affecting their 401(k) plan assets. These individuals may be vulnerable to
                          their employers’ investing significant amounts of their 401(k) plan assets
                          in employer securities or real property.



                          4
                           These are plans with 100 or more participants. Plans with fewer than 100 participants do not report
                          employer security and real property investments separately.
                          5
                            Employee Benefits in Medium and Large Private Establishment, U.S. Department of Labor, BLS,
                          (Washington, D.C.: Nov. 1994).



                          Page 8                                                 GAO/HEHS-98-28 401(k) Plan Investments
                                          B-276106




                                          Form 5500 filings for 1993 indicate that about 35 percent of the 159,196
                                          401(k) plans were employer directed. These plans, which totaled 55,411,
                                          accounted for about 27 percent of the participants and 27 percent of the
                                          assets of all 401(k) plans. The remaining 103,785 plans were participant
                                          directed and accounted for 73 percent of the participants and 73 percent
                                          of the assets of all 401(k) plans.6,7 (See table 3.)

Table 3: Number of Participants and
Assets in Employer-Directed and                                                                           Participants                  Assets
Participant-Directed 401(k) Plans, 1993   Type of 401(k) plan               Number of plans                 (millions)                (billions)
                                          Employer-directed                              55,411                      5.6                 $133.8
                                          Participant-directed                         103,785                      14.8                  358.3
                                          Total                                        159,196                      20.4                 $492.1

                                          Although each of the employer-directed plans could theoretically have
                                          invested in employer securities and real property in 1993, only 756 plans
                                          (1.4 percent) actually did so. Because some of these 756 plans were large
                                          plans, they covered a disproportionately high percentage (25 percent) of
                                          all participants in employer-directed plans. In total, these plans had
                                          1.4 million participants and $12.3 billion invested in employer securities
                                          and real property.

                                          About the same proportion of participant-directed plans invested in
                                          employer securities and real property. In total, 1,693 of 103,785
                                          participant-directed plans (1.6 percent) owned this type of asset. Again,
                                          because some of these plans were large, they represented a much larger
                                          percentage (26 percent) of participants in participant-directed plans.
                                          These plans had 3.9 million participants and $40.7 billion invested in
                                          employer securities and real property. (See table 4.)




                                          6
                                           The number of participants in participant-directed plans may have been larger than that reported by
                                          filers of the Form 5500. A BLS survey of employee benefit plans indicates that in 1993 86 percent of
                                          employees were at establishments that have participant-directed plans, a somewhat higher percentage
                                          than the 73 percent indicated by filers of the Form 5500.
                                          7
                                           As part of this review, we also obtained information from IRS on 401(k) plans that became effective in
                                          1994 and 1995. An analysis of these data shows that most 401(k) plans established in those years were
                                          participant-directed plans. Of the 45,993 401(k) plans established in 1994 and 1995, 33,951 (or
                                          74 percent) were participant directed.



                                          Page 9                                                  GAO/HEHS-98-28 401(k) Plan Investments
                                       B-276106




Table 4: Employer-Directed and
Participant-Directed 401(k) Plans                                  Number of                                  Amount of
Investing in Employer Securities and                                plans that                                  employer
Real Property, 1993                                                     owned                              securities and
                                                                     employer                               real property
                                       Type of 401(k)           securities and          Participants               owned
                                       plan                      real property            (millions)             (billions) Median amount
                                       Employer-
                                       directed                              756                    1.4               $12.3            $599,612
                                       Participant-
                                       directed                            1,693                    3.9                 40.7             873,231
                                       Total                               2,449                    5.3               $53.0     Not applicable



Most Employer-Related                  Also important to the issue of the need for additional protections for
Investments Associated                 401(k) investments is whether a plan is the primary retirement plan or a
With Supplemental 401(k)               supplemental one offered by the employer to eligible employees.8 A
                                       supplemental plan provides income in addition to that provided by a
Plans                                  primary plan but may nonetheless represent a significant portion of an
                                       individual’s total retirement income.

                                       Form 5500 filings for 1993 indicate that the number of primary and
                                       supplemental 401(k) plans that actually owned employer securities and
                                       real property was roughly the same. Of the total of 2,449 401(k) plans,
                                       1,302 (or 53 percent) were primary plans and the remaining 1,147 (or
                                       47 percent) were supplemental plans. The 1,147 supplemental plans,
                                       however, owned 90 percent of all employer securities and real property
                                       and covered 81 percent of the participants in 401(k) plans that owned this
                                       type of asset. (See table 5.)




                                       8
                                        PWBA uses a computer program to analyze and classify pension plans as either primary or
                                       supplemental. A 401(k) plan is primary if (1) it is the only plan provided by the sponsor; (2) it is one of
                                       two or more identical 401(k) plans provided by the sponsor and 401(k) plans are the only type of plan
                                       provided; (3) the sponsor provides a 401(k) plan and other defined contribution plans, but the 401(k)
                                       plan covers more participants than any of the others; or (4) the sponsor provides a 401(k) plan and a
                                       defined benefit plan, but the name of the defined benefit plan indicates it is a supplemental or past
                                       service plan. PWBA classifies a 401(k) plan as a supplemental plan if the employer provides another
                                       defined contribution plan covering more participants or the sponsor provides a defined benefit plan
                                       whose name does not indicate a supplemental or past service plan.



                                       Page 10                                                   GAO/HEHS-98-28 401(k) Plan Investments
                                          B-276106




Table 5: Primary and Supplemental 401(k) Plan Investments in Employer Securities and Real Property, 1993
                                                                       Participants in
                                                  Number of plans plans that owned            Amount of
                                                        that owned          employer            employer
                                                          employer     securities and      securities and
                                                     securities and     real property       real property                    Median amount
Type of 401(k) plan           Number of plans         real property         (millions)   owned (billions)                            owned
Primary                                 137,152                  1,302                     1.0                   $5.4               $320,861
Supplemental                             22,044                  1,147                     4.3                   47.5               2,615,086
Total                                   159,196                  2,449                     5.3                  $53.0         Not applicable
                                          Note: Because of rounding, sums of individual items may not equal totals.




Investment in Employer                    Of the 2,449 plans that invested in employer securities and real property in
Securities and Real                       1993, 1,679 (69 percent) had 10 percent or more of their assets invested in
Property Generally                        this type of asset. These 1,679 plans included 1,211 that had between 10
                                          and 50 percent of assets invested in employer securities and real property
10 Percent or More of                     and 468 that had 50 percent or more invested this way. (See table 6.)
Plan Assets
Table 6: 401(k) Plan Investments in
Employer Securities and Real Property                                                                                       Total invested in
by Percentage of Plan Assets Invested     Percentage of plan                                                                        employer
in Such Assets, 1993                      assets invested in                                                                  securities and
                                          employer securities and                                       Participants           real property
                                          real property                    Number of plans                (millions)                 (billions)
                                          Less than 10                                     770                        1.3                 $2.5
                                          10-29                                            746                        1.8                 10.7
                                          30-49                                            465                        1.1                 16.9
                                          50-69                                            217                         .5                 11.5
                                          70-89                                            156                         .4                  9.6
                                          90-100                                            95                         .1                  1.8
                                          Total                                          2,449                        5.3               $53.0
                                          Note: Because of rounding, sums of individual items may not equal totals.



                                          As table 6 illustrates, plans that had smaller percentages of assets invested
                                          in employer securities and real property had the most participants.
                                          Fifty-nine percent of the participants were in 401(k) plans that had less
                                          than 30 percent of their assets invested in employer securities and real
                                          property; almost 81 percent were in plans that had less than 50 percent
                                          invested this way.




                                          Page 11                                                GAO/HEHS-98-28 401(k) Plan Investments
                            B-276106




                            Plan size appeared to relate somewhat to the percentage of plan assets
                            invested in employer securities and real property. Plans with fewer than
                            100 participants and plans with over 5,000 participants tended to invest a
                            higher percentage of their total assets in employer securities and real
                            property. The percentage of the plans’ assets invested in employer-related
                            assets, however, generally did not exceed 30 percent of total plan assets.
                            (See app. III for more information on investment in employer securities
                            and real property by different sized plans.)


Many Participants Have No   Despite the concentration of participants and employer securities and real
Control Over Investments    property in participant-directed supplemental plans, 756 employer-
in Employer-Directed        directed plans in 1993 had almost 1.4 million participants and about
                            $12.3 billion invested in employer securities and real property. Participants
Plans                       in these plans reportedly had no choice in how the assets of their 401(k)
                            plans, including their own contributions, were invested. Over 932,000 of
                            these individuals had 10 percent or more of their 401(k) plan assets
                            invested in employer securities or real property. (See fig. 2.)




                            Page 12                                  GAO/HEHS-98-28 401(k) Plan Investments
                                           B-276106




Figure 2: Characteristics of 401(k) Plan Investments in Employer Securities and Real Property, 1993




                                           Page 13                                      GAO/HEHS-98-28 401(k) Plan Investments
                         B-276106




                         Enacting section 1524 of the Taxpayer Relief Act of 1997 was one of
New Legislation Will     several actions that the Congress could have chosen to help safeguard the
Provide Additional       assets of participants in 401(k) plans requiring employee contributions to
Protection, but          be invested in employer securities and real property. With enactment of
                         this legislation, beginning in 1999, the provisions of the ERISA 10-percent
Administrative           limitation rule (which, before the Congress passed section 1524, applied
Problems Exist           only to defined benefit plans) will be applied to that portion of employer-
                         directed 401(k) plans consisting of employee contributions and the
                         earnings thereon unless the plans meet one of three exemptions. The new
                         legislation will prevent employer-directed plans that have more than
                         10 percent of employee contributions invested in employer securities and
                         real property from investing more employee contributions in assets of this
                         type.

                         The 10-percent limitation rule alone, however, cannot prevent a plan from
                         investing employee contributions in employer securities and real property
                         whose value is declining. In addition, certain information needed to
                         implement and enforce the section 1524 provisions is not readily available.
                         Changes have been proposed to the Form 5500,9 which, if implemented,
                         may remedy some of the data deficiencies we identified before section
                         1524 goes into effect in 1999.


ERISA 10-Percent         As has always been the case with defined benefit plans, the 10-percent
Limitation Rule Cannot   limitation rule alone cannot always protect plan participants. All defined
Always Protect           benefit plans that rely on the 10-percent limitation rule for protection also
                         have to use other federal ERISA fiduciary rules, such as the diversification,
Participants             prudent man, and exclusive benefit rules to protect plan participants. (See
                         app. II.)

                         Participants in employer-directed 401(k) plans with employer securities
                         and real property investments at or near 10 percent of employee
                         contributions and the earnings thereon are theoretically vulnerable to
                         employers’ further investment in such assets. For illustrative purposes,
                         assume that a plan in which the employer directs the investment of both
                         the employee and employer contributions has 10 percent of employee
                         contributions invested in employer securities. If the value of those
                         employer securities declines to less than 10 percent of employee
                         contributions, the employer may use employee contributions to buy
                         additional employer securities until the 10-percent limit is once again
                         reached.

                         9
                          Federal Register, Sept. 3, 1997.



                         Page 14                                   GAO/HEHS-98-28 401(k) Plan Investments
                            B-276106




                            This situation occurs when employer securities underperform compared
                            with other assets in which employee contributions are invested. More
                            specifically, additional employee contributions can be invested in
                            employer securities when (1) the value of employer securities declines and
                            other plan investments increase or remain constant, (2) the value of other
                            plan investments appreciates and the value of employer securities
                            appreciates less or does not change, or (3) other investments decline and
                            the value of employer securities and real property declines more.

                            In each of these cases, if the value of employer securities falls significantly
                            below 10 percent of employee contributions, all new employee
                            contributions could be invested in declining, nonperforming, or
                            underperforming employer securities or real property. When the value of
                            employer securities declines significantly compared with other
                            nonemployer securities and real property plan investments, other
                            securities in which employee contributions are invested could be sold to
                            generate funds to buy employer securities. In such instances, however,
                            these actions may be subject to review under the exclusive benefit or
                            prudent man fiduciary rules.


Employer-Directed Plans     Section 1524 provisions apply to plans in which the employer requires
Cannot Be Identified With   employee contributions to be invested in employer securities or real
Certainty                   property. The information currently provided on the Form 5500, however,
                            is not reliable enough to identify such plans with certainty.

                            The current Form 5500 has a section in which the filer enters a code to
                            indicate that the plan is participant directed. If a filer does not enter the
                            code, the plan is considered to be an employer-directed plan. According to
                            the Form 5500 instructions, a participant-directed plan is “a pension plan
                            that provides for individual accounts and permits a participant or
                            beneficiary to exercise independent control over the assets in his or her
                            account (see ERISA section 404(c).”10 PWBA officials told us that they believe
                            some filers were not completing this section because the filers were
                            misinterpreting the Form 5500 instructions. That is, filers of plans other
                            than 404(c) plans were not sure if they should complete this section.
                            Therefore, some participant-directed plans were incorrectly classified as
                            employer directed (the default if the section is not completed). Even when

                            10
                              Section 404(c) of title I of ERISA and 29 CFR subsection 2550.404c-1 prescribe certain requirements
                            for an individual account plan in which the plan participant or beneficiary exercises investment
                            control over the account’s assets. The regulation mandates disclosure of such items as a description of
                            investment alternatives, designated investment managers, a description of transaction fees, and other
                            information.



                            Page 15                                                 GAO/HEHS-98-28 401(k) Plan Investments
                       B-276106




                       the filer completes the section, the form provides no way of indicating
                       whether the participants direct the investment of employee contributions,
                       employer contributions, or both.

                       Revisions proposed to Form 5500 by officials of the Departments of Labor
                       and the Treasury and of PBGC have three “feature codes” to better identify
                       participant- and employer-directed 401(k) plans. These three codes will
                       allow PWBA to more accurately determine which plans are employer
                       directed or participant directed and what portion of the account the
                       participants control.


Exemptions Cannot Be   An employer-directed 401(k) plan is exempt from the section 1524
Verified               amendments if the fair market value of all the assets of the individual
                       account plans the employer maintains is not more than 10 percent of the
                       fair market value of the assets of all the employer’s pension plans. Under
                       ERISA, the term “employer” means the employer sponsoring the plan and all
                       the members of any controlled group of corporations to which the
                       employer belongs. ERISA defines a controlled group as a group of
                       corporations under common control (for example, a parent corporation
                       and subsidiaries) in which the parent owns at least 50 percent of the
                       voting stock.

                       A plan filing a Form 5500 is not required to indicate its membership in a
                       controlled group or identify the members of any controlled group to which
                       it belongs. Likewise, information on controlled group composition is not
                       currently available from the Department of Labor or the Internal Revenue
                       Service (IRS). Therefore, it is not possible to assign individual plans to their
                       respective controlled groups and determine if the individual account plans
                       of the controlled group represent more than 10 percent of the assets of all
                       the pension plans of that controlled group. Moreover, none of the
                       proposed changes to the Form 5500 will identify members of a controlled
                       group of corporations.


Extent of Employer     Although the section 1524 provisions apply to 401(k) plans that require
Securities and Real    that employee contributions be invested in employer securities and real
Property Investments   property, it may be difficult to determine the amount of employer
                       securities and real property owned by these plans. This is because a 401(k)
Cannot Be Readily      plan that pools its assets with those of other plans for investment purposes
Identified             reports only one asset amount on the Form 5500. This amount represents
                       its interest in the pooled arrangement but provides no information about



                       Page 16                                    GAO/HEHS-98-28 401(k) Plan Investments
                         B-276106




                         separate investments, such as employer securities and real property.
                         Although PWBA contracts with a private firm to spread these single
                         amounts into separate investments, including employer securities and real
                         property, some cannot be spread. Some of the plans whose assets are not
                         spread may be 401(k) plans and may own employer securities or real
                         property.

                         The new Form 5500 will provide more information on the type and amount
                         of assets a plan owns through a pooled investment arrangement. Under the
                         proposal, a plan will continue to file its own Form 5500. In addition,
                         reports for each pooled arrangement to which it belongs will be made in
                         separate Form 5500 reports to PWBA. The Form 5500 for each pooled
                         arrangement will show investments in stocks, bonds, employer securities,
                         and the like. Attachments to the Form 5500 will provide the name,
                         employer identification number, plan number, and monetary interest of
                         each plan or other entity belonging to the pooled arrangement.


                         We identified other mechanisms that would be available to policymakers if
Other Mechanisms         additional safeguards are needed in the future. Two mechanisms—
Available to Safeguard   enhanced reporting and disclosure and prescribed education programs—
Participants in          identified during our review could be administratively implemented under
                         existing authority provided in title I of ERISA. Two other mechanisms—
Employer-Directed        adoption of the diversification requirement used for ESOPs and use of
401(k) Plans             independent fiduciaries to examine investment decisions—would require
                         the Congress to add or amend statutory requirements.


Enhanced Reporting and   One such mechanism would use authority already granted to the Secretary
Disclosure               of Labor to require that 401(k) plans provide information on the plan’s
                         investment in employer securities and real property to plan participants.
                         Although this mechanism could be applied only to employer-directed
                         401(k) plans requiring that employee contributions be invested in
                         employer securities and real property, the same mechanism could also
                         benefit participants in all 401(k) plans.

                         ERISA requires that the plan administrator provide each plan participant
                         with a summary of the pension plan information reported to the
                         Department of Labor on the Form 5500. The summary annual report (SAR)
                         must contain the information and be in the format prescribed by the
                         Secretary of Labor. Currently, the Secretary does not require that the SAR
                         contain information about employer securities and employer real property



                         Page 17                                 GAO/HEHS-98-28 401(k) Plan Investments
                     B-276106




                     that the plan owns. The Secretary could require a revised and expanded
                     SAR that would disclose the amount of employer securities owned by the
                     plan, its current or fair market value, the percentage of the plan assets it
                     represents, and whether the employer securities are publicly traded on a
                     national exchange or privately held. Finally, plan participants could be
                     provided some statement about the employer’s financial condition and
                     other information to be more fully informed about their holdings and any
                     potential risk associated with them.

                     If needed, plans with a specified threshold of employer securities and real
                     property could provide additional reports to PWBA officials. In this regard,
                     additional reporting might focus on the specific nature, scope, and
                     percentage of investment in those securities or real property; whether the
                     securities are publicly traded or privately held; and whether they are
                     valued at share or par value. Plans exceeding the threshold could also be
                     required to report to PWBA if the shares of employer securities or the value
                     of employer real property held by the 401(k) plan would decline
                     precipitously within some specified time period. Reporting of this
                     information to PWBA could enable the agency to more strictly scrutinize the
                     plans and seek earlier enforcement efforts when appropriate to preserve a
                     plan’s assets and secure the retirement income of plan participants. The
                     enhanced reporting to PWBA would be similar to that currently provided to
                     the PBGC under certain situations.11


Education Programs   Another mechanism would be to require an educational program for plan
                     participants in 401(k) plans that hold any or a prescribed threshold of
                     qualifying employer securities and real property. The educational
                     requirements for 401(k) plans with employer securities and real property
                     might require that participants in the affected plans be told about or given
                     materials informing them about (1) investment concepts, such as risk and
                     return, diversification, dollar cost averaging, and compounded return;
                     (2) historic differences in rates of return among different asset classes (for
                     example, stocks, bonds, employer securities, or cash); (3) estimating
                     future retirement income needs; (4) determining investment time horizons,
                     including models involving hypothetical individuals with different time
                     horizons and risk profiles; and (5) assessing risk tolerance. Participants


                     11
                       Under section 4043 of title IV of ERISA, within 30 days after a plan administrator or contributing
                     sponsor for a defined benefit plan knows or has reason to know that a reportable event has occurred,
                     he or she must notify the PBGC that such an event has taken place. The reportable event in this
                     instance could conceivably be the plan’s acquisition of a percent of employer securities or real
                     property above a certain threshold or a precipitous decline in the value of the employer’s stock or real
                     property.



                     Page 18                                                 GAO/HEHS-98-28 401(k) Plan Investments
                            B-276106




                            could also be provided questionnaires, worksheets, software, and similar
                            materials to give them a way to estimate future retirement income needs
                            and assess the impact of different asset allocations on retirement income.

                            Even with the benefits of increased participant knowledge, enrolling plan
                            participants in educational programs would have little or no impact on the
                            level of employer securities and real property investments if such
                            investments are typically controlled by the employer. Nevertheless, such a
                            program might broaden plan participants’ perspective and enable them to
                            make better judgments about their retirement income security.


Use of ESOP                 A third approach would extend the ESOP diversification requirements to
Diversification             employer-directed 401(k) plans requiring employer securities and real
Requirements                property investments. The Internal Revenue Code requires ESOPs to
                            provide the means for “qualified participants” nearing retirement to
                            diversify part of their ESOP account balance for stocks acquired after 1986.
                            In general, beginning with the plan year following the participant’s
                            reaching both age 55 and completing 10 years of plan participation, the
                            plan must allow the participant to diversify at least 25 percent of the total
                            account. Five years later, the participant must be allowed to diversify at
                            least 50 percent of the account. Alternatively, the ESOP may distribute to
                            the participant the amount that could be diversified.

                            In all likelihood, this provision’s effectiveness in protecting participants
                            whose employer’s stock or real property is declining in value would be
                            minimal because the provision would not protect plan participants who
                            had not reached age 55 and completed 10 years of plan participation. This
                            latter impediment could be overcome by requiring periodic “open seasons”
                            in which plan participants could diversify investments.


Examination of Investment   A final option would be to require an independent fiduciary to examine
Decisions by Independent    and make decisions about whether and to what extent amounts of
Fiduciaries                 employer securities and real property could be contributed by the plan
                            sponsor. Such a mechanism has been used frequently by PWBA to better
                            protect plans in possible conflict-of-interest situations. An independent
                            fiduciary could more discreetly and expertly examine whether or not the
                            plan would be inordinately subjected to financial loss by certain levels of
                            investment in employer securities and real property.




                            Page 19                                   GAO/HEHS-98-28 401(k) Plan Investments
                     B-276106




                     The independent fiduciary would have broad authority to limit, remove, or
                     conceivably add employer securities and real property to the mix of
                     investments for that plan to better protect plan participants’ retirement
                     income. In essence, the independent fiduciary would be an unaligned third
                     party who could review the plan’s holdings and transactions to better
                     ensure the proper diversification of plan assets and the value of holdings
                     to improve the financial security of plan participants in such
                     arrangements. The independent fiduciary would act as an honest broker
                     seeking to minimize plan losses, maximize its profits, and eliminate
                     instances of self-dealing which might otherwise threaten the plan’s
                     financial security.

                     Although using this approach would minimize the possibility of self-
                     dealing by the employer or the employer’s representative, it might add
                     administrative cost otherwise not incurred by employer-directed plans.


                     In commenting on a draft of this report, the Assistant Secretary for
Agency Comments      Pension and Welfare Benefits expressed overall agreement with our report
and Our Evaluation   findings. Our findings on the scope of employer securities and real
                     property investments by 401(k) plans were considered to be “generally
                     consistent with PWBA’s own, albeit less comprehensive, analysis of the
                     Form 5500 Series data in this area.”

                     The Assistant Secretary also indicated that the mechanisms we identified
                     for consideration by policymakers if future alternatives to the enactment
                     of the section 1524 provisions are needed to protect participants in
                     employer-directed 401(k) plans merit further consideration. In this regard,
                     the mechanisms discussed in our report will be studied when the
                     Department of Labor’s Advisory Council on Employee Welfare and
                     Pension Benefit Plans, which is also conducting a review of 401(k) plan
                     investments in employer securities and real property, completes its study
                     and makes recommendations to the Secretary of Labor. Our report
                     findings and the Advisory Council’s recommendations will be used to
                     determine what further action may be appropriate regarding employer
                     securities and real property investments by 401(k) plans.

                     The Assistant Secretary also had technical comments about our report.
                     These focused on our discussion of (1) the PWBA contractor’s ability to
                     fully identify the extent of employer securities and real property owned by
                     401(k) plans in 1993 and (2) the improvements proposed in the ongoing
                     revision of the Form 5500 to provide more information on the type and



                     Page 20                                  GAO/HEHS-98-28 401(k) Plan Investments
               B-276106




               amount of assets owned by plans through pooled investment
               arrangements. We made changes to the final report, where appropriate,
               after further discussions with PWBA officials about these issues. (See app.
               IV.)


               Although it is always possible for some employers sponsoring 401(k) plans
Observations   to go bankrupt in the future, the potential for a large number of workers to
               lose benefits because their 401(k) plan is invested in a bankrupt
               employer’s securities or real property is not widespread. For the latest
               year for which data are available, fewer than 2,500 of the nearly 160,000
               401(k) plans that filed Form 5500s reported that they owned employer
               securities and real property. In addition, most participants in 401(k) plans
               that owned employer securities and real property had participant-directed
               401(k) plans that PWBA identified as supplemental to other pension plans
               the employer offered.

               Nonetheless, 756 401(k) plans had 1.4 million participants in 1993 in which
               the employer directed the investment of all plan assets. Participants in
               employer-directed 401(k) plans will always be somewhat vulnerable to
               investment decisions over which they have no control. However,
               beginning in 1999, the recently enacted section 1524 provisions in title I
               will prevent employer-directed plans that have more than 10 percent of
               employee contributions invested in employer securities and real property
               from investing more employee contributions in assets of this type.


               As agreed with your office, unless you publicly announce its contents
               earlier, we plan no further distribution of this report until 30 days from the
               date of this letter. At that time, we will send copies of this report to the
               Secretary of Labor, the Secretary of the Treasury, the Commissioner of the
               Internal Revenue Service, the Director of the Office of Management and
               Budget, and other interested parties.




               Page 21                                   GAO/HEHS-98-28 401(k) Plan Investments
B-276106




Please contact me on (202) 512-7215 or Fred E. Yohey, Jr., Assistant
Director, on (202) 512-7218 if you have any questions about this report.
Major contributors to this report are listed in appendix V.

Sincerely yours,




Jane L. Ross
Director, Income Security Issues




Page 22                                  GAO/HEHS-98-28 401(k) Plan Investments
Page 23   GAO/HEHS-98-28 401(k) Plan Investments
Contents



Letter                                                                                             1


Appendix I                                                                                        26

Scope and
Methodology
Appendix II                                                                                       28
                        ERISA Fiduciary Investment Rules Apply to Defined Benefit and             28
Federal Fiduciary          Defined Contribution Plans
Rules on Investing      Eligible Defined Contribution Plans Are Exempt                            29
Pension Plan Assets
Appendix III                                                                                      30
                        Overall Investment in Employer Securities and Real Property               30
Additional Data on      Percentage of 401(k) Plan Assets Invested in Employer Securities          31
Pension Plans’            and Real Property by Plan Size
Investments in
Employer Securities
and Real Property
Appendix IV                                                                                       33

Comments From the
Department of Labor
Appendix V                                                                                        35

Major Contributors to
This Report
Tables                  Table 1: Single-Employer Defined Benefit and Defined                       4
                          Contribution Plans, 1993
                        Table 2: 401(k) Plan Investments in Employer Securities and Real           5
                          Property by Plan Size, 1993
                        Table 3: Number of Participants and Assets in Employer-Directed            9
                          and Participant-Directed 401(k) Plans, 1993
                        Table 4: Employer-Directed and Participant-Directed 401(k)                10
                          Plans Investing in Employer Securities and Real Property, 1993




                        Page 24                                GAO/HEHS-98-28 401(k) Plan Investments
          Contents




          Table 5: Primary and Supplemental 401(k) Plan Investments in              11
            Employer Securities and Real Property, 1993
          Table 6: 401(k) Plan Investments in Employer Securities and Real          11
            Property by Percentage of Plan Assets Invested in Such Assets,
            1993
          Table III.1: Summary Schedule of Pension Plan Investments in              31
            Employer Securities and Real Property by Plan Type, 1993
          Table III.2: Percentage of Plan Assets Invested in Employer               32
            Securities and Real Property by Plan Size, 1993

Figures   Figure 1: Investments by 401(k) Plans in Employer Securities and           7
            Real Property, 1993
          Figure 2: Characteristics of 401(k) Plan Investments in Employer          13
            Securities and Real Property, 1993




          Abbreviations

          BLS        Bureau of Labor Statistics
          ERISA      Employee Retirement Income Security Act of 1974
          ESOP       employee stock ownership plan
          IRS        Internal Revenue Service
          PBGC       Pension Benefit Guaranty Corporation
          PWBA       Pension and Welfare Benefits Administration
          SAR        summary annual report


          Page 25                                GAO/HEHS-98-28 401(k) Plan Investments
Appendix I

Scope and Methodology


             The Chairman of the House Ways and Means Committee asked us for
             information on the Employee Retirement Income Security Act of 1974
             (ERISA) rules governing investments by 401(k) plans. After subsequent
             discussions with the chairman’s office, we agreed to address the following
             questions: (1) To what extent are 401(k) pension plan assets invested in
             employer securities and real property? (2) What potential problems may
             be associated with implementing and enforcing the title I amendments?
             and (3) What mechanisms could safeguard the retirement benefits of
             participants in employer-directed 401(k) plans that invest in employer
             securities and real property?

             To determine the extent to which the assets of single-employer defined
             benefit and defined contribution plans were invested in employer
             securities and real property, we analyzed the Internal Revenue Service
             (IRS) Form 5500 computerized database maintained by the Department of
             Labor’s Pension and Welfare Benefits Administration (PWBA). Under ERISA,
             all private employers are required to annually report certain financial,
             participant, and actuarial data for each of their defined benefit and defined
             contribution plans. Our data analysis was limited to the most recent plan
             year (plan year 1993) for which final plan-specific data were available.

             The data we developed differ from that produced by PWBA and published in
             its Abstract of 1993 Form 5500 Annual Reports. Although PWBA’s data are
             based on analyses of all large plans with 100 participants or more
             combined with a representative sample of 5 percent of small plan (fewer
             than 100 participants) filers, our report data are based on the analyses of
             data submitted by each large and small pension plan contained in the
             databases that PWBA provided for our review. In addition, we worked
             extensively with IRS to identify all known 401(k) plans in the Form 5500
             database.

             We did not independently verify the accuracy of the research databases
             because IRS and PWBA check the data for accuracy and consistency.
             Importantly, the data we analyzed were accurate only to the extent that
             employers exercised appropriate care in completing their annual Form
             5500 reports.

             To examine the protections provided by and any potential problems
             associated with the recent amendments to ERISA, we discussed the
             amendments with officials of the Departments of Labor and Treasury. We
             also developed a model to show the amount of employee contributions
             that could be invested in employer securities and real property assuming a



             Page 26                                  GAO/HEHS-98-28 401(k) Plan Investments
Appendix I
Scope and Methodology




10-percent limitation on such investments and various changes in the
value of employer securities and other investments. Finally, we
determined whether available Form 5500 data were adequate to implement
and enforce the new amendments.

To determine what rules and other mechanisms could be considered to
better protect plan participants in employer-directed 401(k) plans, we
identified alternative strategies already authorized by federal law. In
addition, we identified or learned about mechanisms suggested by experts
that could be considered to protect pension plan assets—and ultimately
future retirement benefits—of plan participants and their families. The
organizations with whom we discussed these strategies are the American
Association of Retired Persons; 401(k) Association; Profit Sharing/401(k)
Council; ERISA Industry Committee; Association of Private Pension and
Welfare Plans; American Institute of Certified Public Accountants;
Investment Company Institute; Employee Benefit Research Institute; and
Financial Executives Institute as well as officials from the Department of
the Treasury, IRS, and PWBA. We also spoke with a former Minority Counsel
for the Senate Committee on Labor and Public Welfare (1970 to 1975), who
is a nationally recognized expert on private pension plan issues.

We performed our review in Washington, D.C., from November 1996
through September 1997 in accordance with generally accepted
government auditing standards.




Page 27                                 GAO/HEHS-98-28 401(k) Plan Investments
Appendix II

Federal Fiduciary Rules on Investing
Pension Plan Assets

                          The Employee Retirement Income Security Act of 1974 (ERISA) imposes
                          fiduciary rules on the conduct of those charged with managing or
                          administering a pension plan, including investing plan assets. All pension
                          plans are subject to these rules; however, significant exemptions exist for
                          defined contribution plans, including 401(k) plans.


                          According to title I of ERISA, pension plan fiduciaries—people exercising
ERISA Fiduciary           discretionary authority or control for managing pension plans or disposing
Investment Rules          of their assets—have a duty to act solely in the interest of plan participants
Apply to Defined          and beneficiaries regarding the pension plans they manage or administer.
                          Under this broad general requirement, ERISA requires a fiduciary to observe
Benefit and Defined       the following rules:
Contribution Plans
                      •   The “exclusive purpose” rule. The fiduciary must have an individual loyalty
                          to participants and beneficiaries to provide benefits and defray reasonable
                          expenses in administering the plan.
                      •   The “prudent man” rule. The fiduciary must act with the care, skill,
                          prudence, and diligence under the prevailing circumstances that a prudent
                          person, acting in a like capacity and familiar with such matters, would use
                          in the same sort of situation.
                      •   The “diversification” rule. The fiduciary must diversify the plan’s
                          investments by type, geographic area, dates of maturity, and industrial
                          classification to minimize the risk of large losses. The diversification rule
                          attempts to minimize the risk of large losses that might occur from an
                          overconcentration of plan assets in any of these four areas.
                      •   The fiduciary must observe the requirements of, and act in accordance
                          with, the documents and instructions governing the plan.

                          In addition to the fiduciary rules, ERISA also specifies a number of
                          prohibited transactions. A fiduciary is barred from engaging in such
                          transactions if he or she knows or should know that ERISA prohibits them.
                          The types of transactions prohibited by ERISA are those involving an
                          inherent conflict of interest between the plan and people associated with
                          the plan (“parties-in-interest”).

                          For example, ERISA prohibits fiduciaries from allowing a plan to engage in
                          a transaction for selling or leasing any property; lending money or
                          extending credit; furnishing goods, services, or facilities between the plan
                          and a party-in-interest; or transferring any plan assets to a party-in-interest.
                          ERISA also prohibits fiduciaries from dealing with a plan’s assets for their




                          Page 28                                    GAO/HEHS-98-28 401(k) Plan Investments
                     Appendix II
                     Federal Fiduciary Rules on Investing
                     Pension Plan Assets




                     own personal interest and involving the plan in transactions with parties
                     whose interests are adverse to the plan’s participants or beneficiaries.

                     Finally, ERISA has a rule that places a 10-percent limitation (10-percent
                     limitation rule) on acquiring and holding qualified employer securities and
                     qualified employer real property. The 10-percent limitation rule states that
                     a plan may not acquire any qualified employer securities or real property if
                     immediately after the acquisition the aggregate fair market value of such
                     assets exceeds 10 percent of the fair market value of the plan’s total
                     assets. Employer securities and real property that appreciate in value after
                     acquisition to 10 percent or more of total plan assets do not have to be
                     sold.


                     Although the fiduciary rules discussed above apply to both defined benefit
Eligible Defined     and defined contribution plans, specific exemptions do exist for eligible
Contribution Plans   defined contribution plans. Such plans may include profit-sharing plans,
Are Exempt           thrift savings plans, money purchase plans, and employee stock ownership
                     plans as well as 401(k) plans with some restrictions after the passage of
                     the Taxpayer Relief Act of 1997. The Congress’ decision to exempt these
                     defined contribution plans may reflect recognition that certain defined
                     contribution plans have always invested in employer securities or real
                     property.

                     Concerning acquiring and holding employer securities and real property,
                     defined contribution plans are specifically exempt from the general
                     diversification requirement and from the prudence requirement to the
                     extent that the prudence requirement would require diversification.
                     Accordingly, fiduciary rules do not require defined contribution plans to
                     diversify plan assets. Nor are defined contribution plans required to follow
                     ERISA’s 10-percent limitation rule on investments in employer securities
                     and real property as long as the transactions are for adequate
                     consideration and no commissions are charged. So, qualifying defined
                     contribution plans may currently acquire or hold as much employer
                     securities and real property as they want.




                     Page 29                                  GAO/HEHS-98-28 401(k) Plan Investments
Appendix III

Additional Data on Pension Plans’
Investments in Employer Securities and
Real Property
                        This appendix contains additional information on pension plans’
                        investments in employer securities and real property. Table III.1 shows
                        plan year 1993 data on investments in employer securities and real
                        property among defined benefit, employee stock ownership plans (ESOP),
                        other defined contribution plans, and 401(k) plans. Table III.2 shows the
                        percentage of 401(k) plan assets invested in employer securities and real
                        property by plan size.


                        Only 10,191 of the 634,280 single-employer defined benefit and defined
Overall Investment in   contribution pension plans that filed a Form 5500 for plan year 1993
Employer Securities     owned employer securities or real property. Total value of these
and Real Property       employer-related investments, including both securities and real property,
                        was approximately $162 billion. ESOPs, which are required by law to
                        purchase and hold employer stock, were the main owners of this type of
                        asset. In fact, ESOPs owned about $91 billion of employer stock, which
                        amounted to more than all other types of plans combined. The second
                        largest owners were 401(k) plans, with 2,449 plans owning about
                        $53 billion. Defined benefit plans and defined contribution plans (other
                        than ESOPs and 401(k) plans) owned considerably less. (See table III.1.)

                        Employer-related investments consisted almost exclusively of employer
                        securities. Of the $162 billion of employer securities and real property
                        owned, only $598 million was identified as employer real property. Overall,
                        we identified only 86 large plans that owned employer real property,
                        including 9 ESOPs, 11 401(k) plans, 44 defined benefit plans, and 22 other
                        types of defined contribution plans.

                        The 10,191 plans that invested in employer securities and real property
                        covered about 16.6 million workers. This included approximately
                        5.4 million in ESOPs, 5.3 million in 401(k) plans, 4.9 million in defined
                        benefit plans, and about 1 million in other defined contribution plans.12




                        12
                         Some double counting may have occurred. A worker may be covered by more than one plan (for
                        example, a defined benefit plan and a 401(k) plan).



                        Page 30                                             GAO/HEHS-98-28 401(k) Plan Investments
                                          Appendix III
                                          Additional Data on Pension Plans’
                                          Investments in Employer Securities and
                                          Real Property




Table III.1: Summary Schedule of Pension Plan Investments in Employer Securities and Real Property by Plan Type, 1993
                               Number of plans
                                    that owned                                                               Total employer
                                       employer           Employer      Employer real                         securities and
                               securities or real securities owned    property owned         Combineda         real property
Plan type                               property           (billions)        (billions)         (billions)  owned (billions)
Defined benefit                               826                   $7.3                      $.1                      $.1                     $7.5
Defined contribution
  ESOPb                                   5,576                     87.8                      <.1                      3.6                     91.4
  401(k)                                  2,449                     52.3                        .4                      .3                     53.0
  Other                                   1,340                       9.7                     <.1                       .3                     10.1
Total                                    10,191                  $157.1                       $.6                    $4.4                  $162.0
                                          Note: Because of rounding, sums of individual items may not equal totals.
                                          a
                                           This is a combined total of employer securities and real property owned by small plans. Plans
                                          with fewer than 100 participants do not report amounts of employer securities and real property
                                          separately.
                                          b
                                           Includes 613 ESOPs with a 401(k) feature. In total, these 613 ESOPs had approximately
                                          2.1 million participants and $54 billion of their $100 billion of plan assets invested in employer
                                          securities and real property in 1993.




                                          The size of 401(k) plans appeared to relate somewhat to the percentage of
Percentage of 401(k)                      plan assets invested in employer securities and real property. In this
Plan Assets Invested                      regard, plans with less than 100 participants and plans with over 5,000
in Employer                               participants tended in 1993 to invest a higher percentage of their total plan
                                          assets in employer securities and real property.
Securities and Real
Property by Plan Size                     The entries in each cell in table III.2 represent the percentage of plans of
                                          the size shown in column one that have the percentage of plan assets
                                          shown at the top of the column invested in employer securities and real
                                          property. For example, the first cell shows that 28 percent of the plans
                                          with less than 100 participants have up to 9 percent of plan assets invested
                                          in employer securities or real property.




                                          Page 31                                                    GAO/HEHS-98-28 401(k) Plan Investments
                                           Appendix III
                                           Additional Data on Pension Plans’
                                           Investments in Employer Securities and
                                           Real Property




Table III.2: Percentage of Plan Assets Invested in Employer Securities and Real Property by Plan Size, 1993
                                                        Percentage range
Plan size (participants)   >0-9   10-19   20-29      30-39   40-49     50-59     60-69     70-79     80-89 90-100          Number of plans
Less than 100               28      15       12        12         8         6         3         5         4            8              726
100-249                     37      17       14        10         8         3         4         3         1            2              428
250-499                     36      19       13         8        10         5         4         3         1            2              292
500-999                     36      16       15         9         8         4         4         4         1            3              281
1,000-4,999                 32      18       13         9         9         6         4         4         2            2              509
5,000-9,999                 23      20       15        11        10         7         5         6         1            3              104
10,000 or more              17      20       20        13         9         6         6         4         5            1              109
                                           Note: Because of rounding, sums of individual items may not equal totals.




                                           Page 32                                               GAO/HEHS-98-28 401(k) Plan Investments
Appendix IV

Comments From the Department of Labor




              Page 33       GAO/HEHS-98-28 401(k) Plan Investments
Appendix IV
Comments From the Department of Labor




Page 34                                 GAO/HEHS-98-28 401(k) Plan Investments
Appendix V

Major Contributors to This Report


               Fred E. Yohey, Jr., Assistant Director, (202) 512-7218
               Harry A. Johnson, Evaluator-in-Charge
               Dennis M. Gehley, Senior Evaluator
               Paula J. Bonin, Program Analyst




(207445)       Page 35                                  GAO/HEHS-98-28 401(k) Plan Investments
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested