oversight

Private Pensions: Impact of New Vesting Rules Similar for Women and Men

Published by the Government Accountability Office on 1990-08-21.

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

               Report t,o Congressional Committees
GAO

--
Au#rst   IWO
               PRIVATE PENSIONS
               Impact of New Vesting
               Rules Similar for
               Women and Men



                                                       Th
                                           IllIIIII
                                              142052
    -----
1
 .

      United States
GAO   General Accounting  Office
      Washington, D.C. 20648

      Human Resources Division

      B-239063

      August 21,199O

      The Honorable Lloyd Bentsen
      Chairman, Joint Committee on Taxation
      Congress of the United States

      The Honorable Lloyd Bentsen
      Chairman, Committee on Finance
      United States Senate

      The Honorable Edward M. Kennedy
      Chairman, Committee on Labor and Human
        Resources
      United States Senate

      The Honorable Dan Rostenkowski
      Chairman, Committee on Ways and Means
      House of Representatives

      The Honorable Augustus F. Hawkins
      Chairman, Committee on Education and Labor
      House of Representatives

      For workers who change jobs, vesting in pension benefits can add to
      retirement income. Vesting-gaining     the nonforfeitable right or entitle-
      ment to employer-provided pension benefits-is largely dependent on
      years of employment with the company sponsoring the pension plan.’
      Federal rules limit how long a participant in a qualified plan must wait
      to vest in pension benefits.” The Tax Reform Act of 1986 (TRA) cut the
      maximum allowable vesting period in half for most workers in qualified
      private pension plans. TRA targeted plans that were not “top-heavy.”
      Top-heavy plans are those in which over 60 percent of the benefits or
      contributions go to company owners or other key employees.”




      ‘A worker is always fully vested in any benefits derived from his or her own contributions to the
      plan. This report only deals with participants’ vesting in employer-provided benefits,

      ‘Employer-sponsored plans that qualify for preferential tax treatment must comply with a variety of
      federal rules, including vesting rules, designed to improve the equity and security of benefits.

      “Top-heavy plans must vest workers more quickly than those under TFL4and observe other special
      rules. Generally, the smaller the plan, the more likely it is top-heavy.



      Page 1                                GAO/HRD-90-101 Impact of TRA Vesting Rules on Workers
                        Prior vesting rules do not meet the needs of many workers who change
                       jobs frequently and so do not vest in their pension plans, the Joint Com-
                        mittee on Taxation stated in describing the need for TRA.Women com-
                       prise one group singled out aa being disadvantaged by these rules; they
                       tend to be more mobile employees who are less likely to vest in pension
                       benefits. TRA’S more rapid vesting would enhance the retirement income
                       security of shorter-tenured workers, the Committee concluded, by enti-
                       tling them to some pension benefits. Under the old rules, these workers,
                       some of whom changed jobs voluntarily or lost jobs due to layoffs or
                       plant closings, probably would not have been entitled to pension bene-
                       fits. Longer-tenured workers would be entitled to pension benefits at
                       retirement under either set of rules.

                       This report estimates the impact of TRA vesting rules on participants in
                       plans not considered top-heavy. We prepared it pursuant to a require-
                       ment in the Retirement Equity Act of 1984 (REA) that we study the
                       effect of federal pension rules, including vesting rules, on women.4 To do
                       so, we examined a sample of pension plans and compared

                   . the proportion of women and men vested under the old and the new
                     rules and
                   l the change in vested benefits due to TRAfor women and men.

                       In addition, to gauge the impact that further reductions in vesting stan-
                       dards might have, we estimated the effect on both women and men of
                       applying rules for shorter vesting than under TRA.


                       The vesting changes in the Tax Reform Act of 1986 will improve the
Results in Brief       vesting status of shorter-tenured workers with a similar effect on
                       women and men. Judging by our sample, about three-fourths of all pen-
                       sion participants in 1986 would have been vested in their pension bene-
                       fits had the TRA rules been in effect then, In comparison, about half the
                       participants were vested under the rules then in effect. In defined ben-
                       efit plans, which contained most participants in our analysis, about 4 in
                       10 participants would be affected by TRA.” Among participants not
                       vested under TRA,an estimated 1 in 3 would be vested if plans were


                       4!3eeRelated GAO Products for other reports prepared under the REA requirement.
                       “In a defined benefit plan, the employer promises a specific retirement benefit that is generally based
                       on a worker’s years of service, earn@s, or both. The employer is responsible for fundii the plan
                       sufficiently to pay promised benefits.



                       Page 2                                 GAO/HRD-90-101 Impact of TRA Vesting Rules on Workere
                 R-239063




                 required to use the faster top-heavy rules instead of the                      TM    rules. (See
                 wp. I.1

                 If the defined benefit participants with increased vested benefits under
                 TRA  (4 in 10 in our analysis) left their plans tomorrow, they would be
                 entitled to additional vested benefits equal to an average of 5 percent of
                 their compensation. The median annual gain in the dollar value of
                 vested benefits for those affected by TRA is about $1,240 (in 1990
                 dollars).


                 Vesting standards first were established for all qualified private pension
Background       plans by the Employee Retirement Income Security Act of 1974 (ERISA).
                 These standards limit the waiting periods for participants to vest in
                 employer-provided pension benefits. Plans may use any vesting method,
                 as long as the waiting period does not exceed ERISA’S standards. Two
                 common methods are “cliff” and “graded.”

             l Under cliff vesting, a participant does not secure the right to future ben-
               efits until employed a specified number of years, at which time the par-
               ticipant becomes fully vested. For a cliff schedule, ERISA required that
               participants not be made to wait more than 10 years to move from
               nonvested to fully vested status. About 20 percent of the plans we ana-
               lyzed used the cliff method. They tended to be defined benefit plans
               sponsored by employers with 100 or more employees (large employers)
               that contained over 800 participants on average.
             . Under graded vesting, a participant gains partial vesting rights after a
               specified length of service and the percentage periodically increases
               until the participant is fully vested. ERISA’S standard for a graded
               schedule required that, at a minimum, a participant be partially vested
               after 5 years of service and his or her vesting rights increase by a fixed
               percentage each year until full vesting is reached after 16 years. About
               70 percent of the plans in our analysis used the graded method of
               vesting. Most were defined contribution plans sponsored by employers
               with less than 100 employees (small employers) that contained fewer
               than 20 participants on average.”

                 T&4provisions accelerated vesting for many pension plans, effective in
                 1989. Specifically, TRA reduced the maximum years workers must wait

                 “In a defined contribution plan, a formula specifies the rate at which the employer makes contribu-
                 tions to each participant’s account. The retirement benefit will depend on the amount of contributions
                 and the investment experience of the account.



                 Page 3                                 GAO/HRD-90-101 Impact of TR.A Vesting Rules on Workers
              IL233333
                                                                                                                  L




              for full vesting from 10 to 5 for cliff vesting.7 For graded vesting,                        TRA
              lowered the 5 to E-year standard to 3-to-7 years.

              Nine of 10 plans sponsored by large employers will need to provide
              more rapid vesting to comply with TRA, compared with about half the
              plans sponsored by small employers. The remainder would not have to
              change because they already used shorter time limits for vesting than
              TRA requires.



              To estimate the effect of TRA vesting changes on participants in private
Scopeand      pension plans that were not top-heavy, we used nationally representa-
Methodology   tive data already gathered in response to REA. These data were from
              surveys of two samples of private pension plans operating in 1984 and
              1986. (See app. II.) The plan and participant data covered the most
              recently completed plan year for which information was available, usu-
              ally ending in 1986, before TRAbecame effective.

              Our estimates of the effect of the TRA vesting changes on the proportion
              of women and men vested are representative of approximately 6.1 mil-
              lion participants in about 26,100 pension plans (see app. II).* We used
              participant tenure data and plan vesting schedules to simulate the TRA
              vesting changes for women and men separate1y.OWe also simulated
              vesting changes assuming that the faster vesting rules that apply to top-
              heavy plans-3-year cliff vesting and 2- to 6-year graded vesting-
              applied to this universe of plans.

              Our estimates about the effect of TRA on the dollar value of vested bene-
              fits were limited to defined benefit plans in our universe.lO These plans
              comprised about 30 percent of our universe but contained about 60 per-
              cent of the participants, an estimated 3.8 million people.

              Where we have reported differences between women and men or types
              of plans, these differences are significant at the 96-percent confidence

              ‘Multiemployer plans satisfy TRA’s vesting requirements if employees covered by collective bar-
              gaining agreements are fully vested after 10 years.
              HOfthe 26,100 plans represented, small employers sponsored about 16,700 with about 270,000 par-
              ticipants, and large employers sponsored about 9,400 with about 6.8 million participants.

              “Evaluating whether women’s and men’s tenure and mobility patterns would be affected differently
              by TRA was outside the scope of our work.
              loWe did not have the information required for these calculations for participants in defined contri-
              bution plans.



              Page 4                                 GAO/HRDQO-101 Impact of TRA Vesting Rules on Workem
                    R-239063




                    level. This means that there is less than a S-percent chance that we
                    would have identified differences from our sample that do not exist in
                    the universe (see app. III).

                    We were unsure if any employer-sponsors would change their plans’
                    vesting methods (that is, from graded to cliff or cliff to graded). Hence,
                    we assumed that plans would use the same method after TRA as before.
                    This assumption was reasonable because employer-sponsors’ choice of
                    particular vesting methods under the old rules was based on considera-
                    tions specific to the plan and company. These include workforce
                    demographics, administrative burden, and plan costs. We had no reason
                    to expect the sponsors’ rationale to change under TM. But to the extent
                    that companies change methods to comply with TRA, actual vesting
                    changes might differ from our estimates.


                    More participants (an estimated 76 percent) will be vested in their pen-
More Participants   sion benefits under TRA than under the old rules (63 percent). TRA’S
Vested Under TRA    effect will be similar for women and men (see fig. 1). This is because
Rules               similar proportions of women and men were in the range of service
                    where they were not vested under the old rules but were vested under
                    the TFU rules, for example, from 6 to 9 years of service in a lo-year cliff
                    vesting plan.” If the plans are required to use the faster vesting sched-
                    ules that apply to top-heavy plans, about 86 percent of participants will
                    be vested (see app. I).




                    ’ ‘Women and men in our sample had similar average years of tenure --the mean tenure for both was
                    8, the median, 6.



                    Page IS                              GAO/HRD9O-101 Impact of TRA Vesting Rules on Workers
                                          IS239063
                                                                                                                                           ,




Flgure 1: Impact of TRA on Vesting game
for Women and Men
                                          100    Psrcsnt ot Participants Vsstod




                                                 All                   Womon              Man
                                                 Paftlcipant oroupa

                                                          Old Rules
                                                          TRA Rules

                                          NP6.1 million participants in total.

                                          N=2.Q million women.

                                          N&3.2 million men.


                                          TRA  will have a greater impact on participants in plans using the “all-or-
                                          nothing” cliff vesting method than on those in plans using graded
                                          vesting (see fig. 2). Under the old rules, many participants in cliff plans
                                          did not work long enough to become vested but would be fully vested
                                          (100 percent) under TRA.12 Participants in graded plans are more likely
                                          to be at least partially vested under the old rules. The TRA rules tend to
                                          increase these participants’ level of vesting incrementally rather than
                                          from 0- to loo-percent. In either case, participants who were fully
                                          vested under the old rules would remain fully vested under TRA.




                                          “Almost 90 percent of cliff vesting plans used 10 years as the waiting period under the old rules.



                                          Page 6                                  GAO/HRD-90-101 Impact of TR.A Vesting Rules on Workers
Figure 2: Impact of TRA on Vesting
&eater in Plans Using Cliff Method
                                     loo   Pemenfof Particlpnt~~ Vastod




                                            cliff              Graded
                                            Vostlng Method Uaod

                                            I        Old Rules
                                                     TRA Rules

                                     N9.1 million participants in cliff vesting plans.

                                     N~2.7 million participants in graded vesting plans.


                                     For 4 in 10 participants in defined benefit plans, TRA will increase the
Vested Benefit                       value of vested benefits (see fig. 3). If these participants left their plans
Increases Under TIXA                 tomorrow, they would be entitled to more benefits every year in retire-
Large for Some,                      ment than they were entitled to under the old rules. For 1 in 10 partici-
                                     pants, the increase would be over $2,208.13 Increases would range from
Nonexistent for Many                 $2 to $76,217. The median gain would be $1,242 or 5 percent of compen-
                                     sation (see table 1).




                                     ‘“Plans usually reported dollar benefit data for the plan year ending in 1986. We adjusted these data
                                     for inflation to represent 1990 dollars, using the Consumer Price Index.



                                     Page 7                                   GAO/HRD-@MO1 Impact of TRA Vesting Rules on Workers
                                       B288063




Figure 3: TRA Will Increase Verted
Benefits for 4 in 10 Participant8 In
Deflned Benefit Plans                                                                              Increased vested benefits under TRA




                                                                                                   Fully vested under old rules and TRA




                                                                                                   Not vested under old rules and TRA




                                       3.8 million participants in defined benefit plans.


Table 1: Impact of TRA on Dollars of
Vested Benefits                                                                                               Median increase
                                                                         No. of participants           Annual amount          Percent of
                                       Type of plan                             (in millions)           (1990 dollars)     compensation
                                       All                                                   1.5                $1,242                    5.4
                                       Women                                                 0.8                   980                    5.1
                                                          ~-
                                       Men                                                   0.7                 1,987                    5.9

                                       Cliff vesting                                         1.2                 1,546                    5.9
                                       Women                                                 0.6                 1,118                    5.6
                                       Men                                                   0.6                 2,263                    7.0

                                       Graded vesting                                        0.3                   223                    1.0
                                       Women                                                0.16                   160                    1.1
                                       Men                                                  0.16                   297                    1.0


                                       The stream of additional benefits that participants would receive in
                                       retirement (each year from normal retirement age until death) as a
                                       result of TRA can be expressed as a present value. This “present value”
                                       represents the value to participants in 1990 of the stream of additional
                                       benefits in retirement. It is the amount that, if invested today at a given
                                       rate of compound interest, would generate annual benefits during retire-
                                       ment equal to the additional vested benefits under TRA (see app. II).



                                       Page 8                                   GAO/HRD-90-101 Impact of TRA Vesting Rules on Workers
R-239033




The gain in annual benefits under TRA for women is about half that for
men, though the gain is a similar percentage of compensation. The pre-
sent value of the increase for women is less than half that for men and is
a smaller percentage of compensation.14 Under the TRA rules, men would
receive about $2,000 more annually in retirement on average, based on
our analysis. The present value of this increase in benefits during retire-
ment is $3,011, or about 9.6 percent of compensation. Women would
receive about $1,000 more annually in retirement as a result of TM. The
present value of this increase is about $1,169, or 6.1 percent of
compensation.

The difference in present values for women and men is greater than the
difference in the annual increase in vested benefits because women in
our analysis are younger than men and women usually start receiving
retirement benefits later than men. If the stream of benefits in retire-
ment for men and women were the same, the present value for women
still would be less than for men because of these differences in ages and
retirement times.

Participants in plans with cliff vesting schedules, where the participant
is either not vested or is fully vested, will have substantially larger
increases in vested benefits than participants under graded schedules
(see table 1). This is true for both dollar increases and increases relative
to compensation.

For employers, the effect of increased vesting under TRA on annual pen-
sion plan costs probably will be relatively small. It will vary with the
type of plan and its actuarial profile. An employer who experiences
little turnover in employees will have few additional pension costs
because plan participants eventually would have the same amounts
vested under the old rules, Conversely, an employer with a higher turn-
over rate could have added costs, but only to the extent that the new
rules add to the amount of vested benefits terminated employees would
have under the old rules. The additional cost of 5-year cliff vesting
(TRA’S standard) was estimated by the Employee Benefit Research Insti-
tute (EBRI) at 2 to 7 percent of private pension plan contributions to the
system as a whole.‘”




‘“See app. III for sampling errors associated with these estimates.

“EBRI, “Pension Vesting Standards: ERISA and Beyond,” Issue Brief, Feb. 1986.



Page 9                                 GAO/HRD@O-101 Impact of TRA Vesting Rules on Workers
B233003                                                                                       L




The effect on the federal treasury in terms of additional tax expendi-
tures for qualified pension plans due to increased vested benefits prob-
ably will be small also. The Joint Committee on Taxation estimated in
1987 that the TRA vesting changes would have a “negligible effect” on
tax receipts because of their effect on employers’ costs and employees’
tax-deferred inc0me.l” These are the main sources of the revenue for-
gone through the preferential tax treatment granted qualified pension
plans. Nothing in our analysis leads us to expect otherwise.


We did not obtain written comments on this report because we were not
reviewing specific agency functions or programs. However, we discussed
the contents of the report with representatives of the Department of
Labor and the Internal Revenue Service and incorporated their com-
ments where appropriate.

Copies of this report are being sent to other interested congressional
committees, the Secretary of Labor, and the Commissioner of the
Internal Revenue Service, and will be available to others upon request.
If you have questions about information in the report, please call me at
(202) 2756193. Other major contributors are listed in appendix IV.




Joseph F. Delfico             v
Director, Income Security Issues




‘“Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986,OQth
Gong., 2nd Sess., 1987.



Page 10                              GAO/HRD9@1O1 Impact of TRA Vesting Rules on Workers
Y




    Page 11   GAO/HRDBO-101 Impact of TRA Vesting Rules on Workers



                                                             --.
                                                                                                      7
Contents


Letter                                                                                                    1

Appendix I                                                                                              14
Top-Heavy Rules
Result in Some
Additional Increases
in Vesting
Appendix II                                                                                             17
Further Details on      Plans Sponsored by Small Employers                                              17
                        Plans Sponsored by Large Employers                                              19
GAO’s Scopeand          Scope of GAO’s Analysis of TRA’s Vesting Changes                                21
Methodology             Calculating the Present Value of the Dollar Change in                           21
                            Vested Benefits

Appendix III                                                                                            23
Sampling Errors for
Estimates
Appendix IV                                                                                             26
Major Contributors to
This Report
Related GAO Products                                                                                    28

Tables                  Table 1: Impact of TRA on Dollars of Vested Benefits                             8
                        Table II. 1: GAO’s Universe and Sample of Plans                                 18
                            Sponsored by Small Employers
                        Table 11.2:GAO’s Universe and Sample of Plans                                   20
                            Sponsored by Large Employers
                        Table 111.1:Sampling Errors for Figure 1 and Figure I. 1                        23
                        Table 111.2:Sampling Errors for Figure 2                                        24
                        Table 111.3:Sampling Errors for Figure 3                                        24
                        Table 111.4:Sampling Errors for Figures I.2 and I.3                             24
                        Table 111.6:Sampling Errors for Table 1                                         25




                        Page 12                     GAO/HRD-MI-101 Impact of TRA Vesting Rules on Workera



                                                                                      _      _ ,_ . __ .._.__..
          Contents




Figures   Figure 1: Impact of TRA on Vesting Same for Women and                         6
               Men
          Figure 2: Impact of TRA on Vesting Greater in Plans                           7
               Using Cliff Method
          Figure 3: TRA Will Increase Vested Benefits for 4 in 10                       8
               Participants in Defined Benefit Plans
          Figure I. 1: Top-Heavy Rules Improve Vesting of Some                         14
               Participants
          Figure 1.2: Many Participants Not Affected by Top-Heavy                      16
               Vesting Rules
          Figure 1.3: Impact of Top-Heavy Rules on Vesting Greater                     16
               in Defined Benefit Plans Using Graded Method




          Abbreviations

          EBRI       Employee Benefit Research Institute
          ERISA      Employee Retirement Income Security Act of 1974
          REX        Retirement Equity Act of 1984
          TRA        Tax Reform Act of 1986


          Page 13                    GAO/HRD9O-101 Impact of TRA Vesting Rules on Workers
                                                                                                                        ,
Appendix I

Top-Heavy RulesResult in SomeAdditional                                                                                      *
Increasesin Vesting

                                     We applied the top-heavy standards to gauge the impact that these
                                     faster vesting standards might have compared to the TRA rules. This
                                     appendix contains the results of the top-heavy vesting simulation.

                                     Some participants who were not vested under the TRA rules would be
                                     vested under the standards that apply to top-heavy plans. Under the
                                     top-heavy rules, 85 percent of participants would be vested compared
                                     with 76 percent under TRA (see fig. 1.1). The top-heavy rules would
                                     improve vesting for about the same proportion of men and women, as
                                     was the case with the TRA rules.


Figure 1.1:Top-Heavy Rules Improve
Verting of Some Participants
                                     100   Percent of Participants Vested




                                            All                   Women           Men
                                            Participant Groups

                                                     Old Rules
                                                     TRA Rules
                                                     Top-HeavyRules

                                     N-6.1 million participants in total.

                                     N-G.9 million women.

                                     Nd.2 million men.




                                     Page 14                                GAO/HRD-90-101 Impact of TRA Vesting Rules on Workers
                                      Appendix I
                                      Top-Heavy Rules Result in Some Additional
                                      Increases in vesttng




                                      Most participants in defined benefit plans would be fully vested under
                                      the TRA rules and would remain so under the top-heavy rules (see
                                      fig. 1.2). An estimated 18 percent of participants in defined benefit plans
                                      will have increased vested benefits under the top-heavy rules.


Figure 1.2:Many Pnrticlpants Not
Affected by Top-Heavy Vesting Rules


                                                                                            Increased Vested Benefits Under
                                                                                            Top-Heavy Rules




                                                                                            Keested    Under TRA and Top-Heavy




                                                                                            Fu;,lisVested Under TRA and Top-Heavy


                                      Nd.8 million participants in defined benefit plans.



                                      The effect of the top-heavy rules would be similar for women and men,
                                      but participants in graded vesting plans would be more likely to be
                                      vested under the top-heavy rules but not the TRA rules (see fig. 1.3). This
                                      is because participants in graded vesting plans tend to have shorter
                                      tenure than participants in cliff vesting plans. In fact, participants in
                                      defined benefit plans with graded vesting had an average tenure of
                                      about 6 years, compared to almost 9 years for participants in defined
                                      benefit plans with cliff vesting.




                                      Page 15                               GAO/HRD-90-101 Impact of TRA Vesting Rules on Workers
                                           Appendix I
                                           Top-Heavy Rules Result in Some Additional
                                           Increases In Vesting




Figure 1.3: Impact of Top-Heavy Rules on
Vesting Qreater in Defined Benefit Plans
Using Qraded Method                        Porcont ot Pattlclpants
                                           100




                                                  Qmded Cliff
                                                  Typa of Vntlng

                                                           VestedBenefit8IncreasedUnderTop-HeavyRules
                                                           Not Vested Under TRA and Top-Heavy Rules
                                                           Fully Vested Under TRA and Top-Heavy Rules

                                           N10.7 million participants in defined benefit plans with gradad vesting.

                                           N4.1 million participants in defined benefit plans with cliff vesting.


                                           Among the almost 20 percent of participants who would have increased
                                           vested benefits using the top-heavy rules, the median annual increase
                                           for women and men is similar, both in terms of the dollar amount and as
                                           a percent of compensation. The median increase for women is an esti-
                                           mated $306, about 2 percent of compensation. The present value of this
                                           increase is $341, or 1.8 percent of compensation. The median increase
                                           for men is about $290, or 1 percent of compensation. The present value
                                           of this increase is about $344, or 1.3 percent of compensation.




                                           Page 16                                  GAO/HR.D-@O-101Impact of TRA Vesting Rules on Workers
Appendix II

Fbrther Details on GAO’sScope
and Methodology

                     We analyzed the effects of TRA vesting rule changes using data we had
                     already gathered in response to a requirement in the Retirement Equity
                     Act of 1984 that we study the effect of federal pension rules on women.
                     This appendix provides details about our samples of plans and our
                     methodology.

                     From ERISA reports for employee benefit plans filed for the plan year
                     beginning during 1984,’ we drew two samples of private pension plans
                     operating in both 1984 and 1985. One sample contained plans sponsored
                     by employers with fewer than 100 employees (small employers); the
                     other contained plans sponsored by employers with 100 or more
                     employees (large employers). The reports maintained by IRS were the
                     most up-to-date information available on pension plans operating in
                     1984 and 1985 at the time we drew our samples. The reports did not,
                     however, include plans that began operating in 1986. Consequently,
                     both samples include only plans that started before 1986.

                     We estimated that about 202,300 plans sponsored by small employers
Plans Sponsored by   met our sampling criteria (see table II. 1). The plans met all of the fol-
Small Employers      lowing criteria:

                     1. They were ongoing plans of the four most prevalent types-fixed
                     benefit and unit benefit defined benefit plans, and profit-sharing and
                     money purchase defined contribution plans.’

                     2. They were in one of the five industry groups with the most of these
                     types of plans: wholesale trade; retail trade; finance, insurance, and real
                     estate; legal, medical, and health services; and other services.

                     3. They were sponsored by a single employer with fewer than 100
                     employees.



                     ‘Form 6600 for plans with 100 or more participants and Form 6600-C for plans with fewer than 100
                     participants.
                     “A fixed benefit plan provides a retirement benefit that is not related to the years of service of the
                     plan participant. An example is a specified percentage of compensation, such as 60 percent of the
                     participant’s final pay. A unit benefit plan uses a formula that provides an explicit unit of benefit for
                     each recognized year of service with the employer; for example, 1 percent of compensation per year
                     of service. In contrast, rather than fixing benefits by a formula, profit-sharing and money purchase
                     plans fix the amount of the employer’s contribution to each participant’s account. In a profit-sharing
                     plan, the total employer contribution is a function of profits and the amount contributed to each
                     participant is generally in proportion to the participant’s share of total compensation paid to all par-
                     ticipants. In a money purchase plan, the employer is committed to periodic contributions according to
                     a specific formula, usually a percentage of salary.



                     Page 17                                 GAO/HRD-90-101 Impact of TRA Vesting Rules on Workers



                                                                                                                                 .-
                                                                                                                                                                  .-
                                                              Appendix II                                                                                               *
                                                              Further Details on GAO’s Scope
                                                              and Methodology




                                                              4. They had more than one participant.

                                                              6. They were not Keogh plans for self-employed individuals.


Table 11.1:GAO’s Universe and Sample of Plans Sponsored by Small Employers
                                                                                                                                              Response
                                                                           Original        Original          Eligiblea        Adjusted              rate     Population
Type    of,.._
 ._..._..-   plan/   industry ~-.
              .._.__.-..--_-       group                                  universe         sample             sample          universe         (percent)       estimate
Fixed benefit
            -        plans..-           -                       -
        __... trade
Wholesale         .-____.__.  __.___.-.
                __._.-_-.._...-_.-                                            3,855               31                20             2,487              85               2,114
Retarl trade                                                                  3,356               17                10             1,974              80               1,579
Finance, insurance,     and--.~-_--~.-
               _ ___-....-.   real estate                                     4,416               25                10             1,766              60               1,060
Legal, medical,
         _....     and   health
                  ._.- -~_       services                    --.             17,641              119                78           11,566               59               6,821
Other servrces
             . “._ .._._.       .._-.-.-- ._.._-              ...~           11,054             -?I                 39             6,072              54               3,270

Unit benefit plans                                 ~---
Wholesale trade         -                                                        478              34                27               380              78                296
Retail trade                                                   -----             430              28                24               369              71                261
Finance: insurance, and real estate                                              984              53                39               724              72                520
Legal, medical, and health services                                           1,659
                                                                              --                  82                51             1,032              61                627
Other services --         ..-- _...-. ...- -              -.- ...-.. --          936              56                34               568              65                368

Profit-sharing plans
Wholesale-trade                                                             10,942                33                23            7,626               61           4,642
Retarl trade                                                                11,254                20                15            8,441               80           6,753
Finance, insurance, -and
                      .~ ~_real estate
                                   ~---.-.. .-.- .___. -.-~~---              9,902
                                                                              --                  21                 9            4,244               78           3,301
Legal, medical, and health services                                         44,633                94                61           28,964               70          20,417
Other services                                                              25,605                81                37           11,696               41           4,742

Money purchase
       .,.....I .” _...plans
                        _.____-..--
Wholesale trade                                                               3,431               16                11            2,359               64               1,501
Retail trade                                                                  3,254               15                10            2,169              100               2,169
Frnance, insurance, and real estate                                           4,881               24                12            2,441               67               1,627
Legal,~medical;and
          _      -.. health
                      - ._--- services
                                .__-_._.- ---           --3ij%-
                                                            ---                                  153                98           20,303               65           13,112
Other services                                        --___..                11,885               50                22            5,229               55            2,852
Totals                                                                    202,299             1,023                630         120,410                6!jb        70,031=
                                                              “Origrnally sampled plans were ineligible if they were (1) Keogh plans for self-employed persons,
                                                              (2) plans with only one participant, (3) sponsored by employers with 100 or more employees, or
                                                              (4) terminated during the 1984 plan year.
                                                              “The response rate is weighted to represent industry and plan types in proportion to their representa-
                                                              tion in the universe.

                                                             ‘Population      estimate has total precision of + 5,471 plans (It 7 percent).




                                                              Page 18                                     GAO/HRD-90-101 Impact of TRA Vesting Rules on Workers
    .

                     Appendix II
                     Further Details on GAO’s Scope
                     and Methodology




                     Our original stratified sample included a total of 1,023 plans selected
                     from each of the four plan types. Within each plan type, we allocated
                     the sample across selected industry groups generally in proportion to
                     each group’s representation in the universe. We determined the final
                     sample size of 630 and adjusted our universe estimates after we identi-
                     fied 393 cases in the original sample that did not meet our sampling cri-
                     teria. The adjusted universe included an estimated 120,440 plans
                     (& 7,400).

                     Among these 630 sampled plans, 66 percent (407) responded across all
                     the sampled plan types and industries. We compared respondents and
                     nonrespondents on several characteristics-plan     size, top-heavy status,
                     integration with social security, vesting method, industry, and plan
                     type-and found some significant differences. For example, defined
                     contribution plans that did not respond tended to be smaller than those
                     that did respond. Because of these differences, our estimates apply only
                     to that proportion of the adjusted universe that responded to our
                     survey. As indicated in the final column of table I. 1, our respondents
                     represent an estimated 78,000 plans (f. 6,600). These plans contained an
                     estimated 700,000 participants (-& 100,000).

                     In our sample, only small employers’ plans that were not top-heavy
                     plans were eligible for inclusion in our analysis of the effects of TRA.
                     About one-fourth of the plans (18,900 f. 3,600) in our universe of small
                     employers’ plans were not top-heavy.


                     We estimated that 19,600 plans sponsored by large employers met our
Plans Sponsored by   sampling criteria (see table 11.2). These were ongoing plans in one of the
Large Employers      three most prevalent plan types- fixed benefit, unit benefit, or profit-
                     sharing-in one of six industry groups containing most of these types of
                     plans. The six were nondurable manufacturing; durable manufacturing;
                     wholesale trade; retail trade; finance, insurance, and real estate; and
                     legal, medical, and health services. In addition, sampled plans were
                     sponsored by a single employer or a controlled group (in which all the
                     business entities are under common control) with 100 or more
                     employees and contained more than one participant.




                     Page 19                          GAO/IiRD-90-101 Impact of TRA Vesting Rules on Worker6
                                                       Appendix II
                                                       Purther Detalis on GAO’s Scope
                                                       and Methodology




Table 11.2:QAO’r Unlverre and Sample of Plans Sponsored by Large Employers
                                                                                                                                      Response
                                                                Original        Original         Eligible’        Adjusted                  rate    Population
Type
-~ of plan/ Industry group                                     universe         sample            sample          universe             (percent)     estimate
Fixed benefit plans                                                                                                                                  -__
iondurable manufacturing                                             526                4                 4               526                 25                132
--l_l_
Durable manufacturing                                                587               10                 8               470                 50                235
.--_--.l--           ---..--____--
Wholesale trade                                                      187                3                 1                62                  0                  0
                   _--_---                 ~__
Retail trade                                                         151                2                 1                76                  0                  0
Finance. insurance. and real estate                                  295                4                 4               295                 50                148
.-_.
Legal, medical, and health services                                  235                4                 3               176                 33                 59

Unlt
----~ beneflt plans                                       _-
Nondurable manufacturing                                           2,796               31                29             2,616                 83            2,165
--.-~
Durable manufacturing                                              4,251               50                39             3,316                 46            1,530
I--
Wholesale trade                                                      429                5                 4               343                 50              172
-.--..
Retail trade                                                         426                5                 3               256                100              256
Finance, insurance, and real estate                                1,169               13                11               989                 73              719
---_._I_-
Legal, medical, and health services                                1,278               15                14             1,193                 79              937
__--.._.-“_.~-..-    -----_-

Protlt-sharlna -- Iplans
--.-.                             ~_____         ~--
Nondurable manufacturing                                           1,735               28                25             1,549                 76             1,177
--_-.--~
Durable manufacturing         -       ~-_____--
                                                                   2,244               29                25             1,934                 64             1,238
--_-.--
Wholesale trade                                                      824               11                11               824                 45               375
-..---._-
Retail trade                                                                            4                13               921                 69               638
Finance, insurance, and real estate                                1,056               14                12               905                 67               603
---_-.
Legal, medical, and health services                                  372                6                 4               248                 50               124
-.z- --_-
Totals                                                           19.553               248              211            16,099                  63b          10,507c
                                                       aOriginally sampled plans were ineligible if they were (1) sponsored by employers with less than 100
                                                       employees or (2) terminated during the 1984 plan year.
                                                       hThe response rate is weighted to represent industry and plan types in proportion to their representa-
                                                       tion in the universe.
                                                       CPopulation estimate has total precision of + 1,019 plans (f   9.7 percent).


                                                       The original sample included 248 plans allocated across the selected
                                                       plan types and industry groups generally in proportion to each plan
                                                       type’s and group’s representation in the universe. We determined the
                                                       final sample size of 211 plans and adjusted the universe estimates after
                                                       identifying 37 cases in the original sample that did not meet our sam-
                                                       pling criteria. The adjusted universe included an estimated 16,700 plans
                                                       (& 800).




                                                       Page 20                                 GAO/HRD9O-101 Impact of TRA Vesting Rules on Workers
                       Appendix II
                       Further Detab on GAO’s Scope
                       and Methodology




                       Among these 211 sampled plans, 63 percent responded across all the
                       included plan types and industry groups. We compared respondents and
                       nonrespondents on several characteristics-plan     size, age of the plan,
                       integration with social security, industry, and plan type. We found one
                       significant difference. As with the sample of plans sponsored by small
                       employers, defined contribution plans that did not respond tended to be
                       smaller than those that did. Consequently, the estimates in this report
                       apply only to that proportion of the adjusted universe that responded to
                       our survey. As indicated in the final column of table 11.2,our respon-
                       dents represent an estimated 10,500 plans (+ 1,000). These plans
                       include an estimated 6.2 million participants (f. 1.9 million).

                       None of the sampled plans sponsored by large employers was top-heavy.
                       Consequently, all these large employers’ plans were eligible for our anal-
                       ysis of the effects of TR.A vesting changes.


                       Combining plans sponsored by small employers and plans sponsored by
Scopeof GAO’s          large employers, our analysis of the effect of TRA’S vesting changes rep-
Analysis of TRA’s      resents an estimated 6.1 million participants in about 25,100 plans. Our
Vesting Changes        analysis of TM’S effect on dollars of vested benefits focused on the esti-
                       mated 3.8 million participants in defined benefit plans. We excluded par-
                       ticipants in defined contribution plans because we did not know the
                       account balances for participants who were not vested. Consequently,
                       we could not determine the dollar changes under the new rules for these
                       participants.


                       The estimated changes in the value of vested benefits under TM and the
Calculating the        top-heavy simulation are expressed as present values. Present values
Present Value of the   are sums of money that, if invested now at a given rate of compound
Dollar Change in       interest, will accumulate to specified amounts at specified future dates.
                       To convert the additional vested benefits under TRA to present values we
Vested Benefits        chose a 7-percent interest rate.” Using Department of Labor data on
                       retirement ages, we assumed benefit payments would begin at age 61 for
                       men and 63 for women4


                       “We performed a sensitivity analysis using alternative interest rate assumptions. A one-percent
                       change in the rate changed the present value by about 6 percent, though the choice of interest rates
                       did not affect the comparisons discussed in the report.

                       4Department of Labor, Office of Pension and Welfare Benefit Programs, Findings from the Survey of
                       Private Pension Plan Benefit Amounts, 1985.



                       Page 21                                GAO/HRD-90-101 Impact of TRA Vesting Rules on Workers
Appendix II
Further Details on GAO’sScope
and Methodology




We also made certain life expectancy assumptions for men and women.
At age 34, the median age of men with increased vested benefits under
TRA in our analysis, men had a life expectancy of 41 years. At age 31,
the median age for women with increased vested benefits under TRA in
our analysis, women had a life expectancy of 49 years.” For the subset
of participants with increased vested benefits in our top-heavy simula-
tion, men had a median age of 31 and a life expectancy of 43 years;
women had a median age of 30 and a life expectancy of 50 years. Were
alternate assumptions of interest rates, life expectancies, or benefit com-
mencement used, a different present value would result.




“Data for 1986 reported in Department of Commerce, Bureau of the Census, Statistical Abstract of
the United States, 1989, based on data from U.S. National Center for Health Statistics, Vital Statistics
of the United States.



Page 22                                 GAO/HRD-00-101 Impact of TRA Vesting Rules on Workers
f&p&%x      III

SamplingErrors for Estimaks


                                           Because our estimates about participants are based on a sample of pen-
                                           sion plans and their participants rather than the universe of plan par-
                                           ticipants, each reported estimate has a sampling error associated with it.
                                           The size of the error reflects the precisionsf the estimate-the smaller
                                           the error, the more precise the estimate. We calculated sampling errors
                                           for estimates in this report at the 95-percent confidence level. This
                                           means that the chances are 19 out of 20 that the actual number or per-
                                           centage being estimated falls within the range of our estimate, plus or
                                           minus the sampling error. For example, if we have estimated that
                                           30 percent of a group has a characteristic and the sampling error
                                           is 6 percentage points, there is a 95-percent chance that the actual per-
                                           centage is between 24 and 36.

                                           Tables III. 1,111.2, and III.3 include sampling errors for participant esti-
                                           mates in figures 1, 2, and 3, respectivel.y. Sampling errors for the esti-
                                           mates from the top-heavy rules simulation appear in tables III.1 and
                                           111.4.Sampling errors for the change in dollars of vested benefits under
                                           TRA are included in table 111.5.

Table 111.1:Sampling Errors for Figure 1
and Flguro I.1                                                                                 No. of participants               Sampling
                                                                                                      (in millions)   Estimate      error
                                           All oarticloants                                                     6.1
                                           Old rules                                                                        53           10
                                           TRA  rules
                                           --____-.                                                                         76            7
                                           Top-heavy rules                                                                  85           5

                                           Women                                                                2.9
                                           Old rules
                                           -______-                                   -                                     52           11
                                           TRA rules
                                           _--                                                                              76    -__    10
                                           Top-heavy rules                                                                  86   .__--    6

                                           Men
                                           .___                                                                 3.2
                                           Old rules                                                                        54           6
                                           TRA rules                                                                        75           6
                                           Top-heavy rules                                                                  85           5
                                           Figures are percentages   of participants vested




                                           Page 23                                  GAO/HRD90-101 Impact of TRA Vesting Rules on Workers
                                           Appendix Ill
                                           Sampling Errors for Estlmatem




fable 111.2:Sampling Errors for Figure 2
                                                                                               No. of participants                      Sampling
                                                                                                      (in millions)          Estimate      error
                                           Cliff vestina Plans                                                    3.1
                                           Old rules                                                                                      32       2
                                           TRA rules                                                                                      69       3

                                           Waded vesting plans                                                    2.7
                                           Old rules                                                                                      73       6
                                           TRA rules                                                                                      80       5
                                           Figures are percentages of participants vested

Table 111.3:Sampling Errors for Figure 3
                                                                                                                                        Sampling
                                                                                                                             Estimate      error
                                           Fully vested under old rules and TRA                                                    30              5
                                           Not vested under old rules and TRA                                                      31              5
                                           Increased vested benefits under TRA                                                     39              5
                                           Figures are percentages of participants vested. Total participants, 3.8 million

Table 111.4:Sampling Errors for Figures
1.2and 1.3                                                                                     No. of participants                      Sampling
                                                                                                      (in millions)          Estimate      error
                                           All dens                                                               3.8
                                           Fu;:yl;;sted   under TRA and top-heavy
                                                                                                                                   63              7
                                           No;u;zssted under TRA and top-heavy
                                           ----___                                                                                 19              4
                                           Increased vested benefits under top-
                                                                                                                                   18              4
                                           -. heavy rules
                                           Cliff vesting plans                                                    3.1
                                           Fully vested under TRA and top-heavy
                                              rules                                                                                70              4
                                           -______---
                                           Nc$;e;ted under TRA and top-heavy
                                                                                                                                   19          2
                                           i&eased vested benefits under top-
                                                                                                                                   11              2
                                           ---.-heavy rules

                                           Graded vesting plans                                                   0.7
                                           Fully vested under TRA and top-heavy
                                               rules
                                           -.----..--                                                                              36              8
                                           Nort$.e;ted under TRA and top-heavy
                                                                                                                                   19              5
                                           Increased vested benefits under top-
                                              heavy rules                                                                          45              6
                                           Figures are percentages of participants vested.



                                           Page 24                                 GAO/HRD-99-101 Impact of TRA Vesting Rules on Workers
        .

                                          Appendix To
                                          Sampling Errora for Estimates




Table 111.5:Sampling Error8 for Table 1
                                                                                    No. of participants         Estimate (1988 Sampling
                                                                                           (in milliona)              dollarsa)   error
                                          All plans                                                  1.5                 $1,080       $372
                                          Women                                                      0.7                    852        227
                                          Men                                                        0.8                  1,728        470

                                          Cliff vesting plans                                        1.2                  1,344         282
                                          Women                                                      0.6                    972         195
                                          Men                                                        0.6                  1,968         280

                                          Qraded vesting plans                                       0.3                    194         170
                                          Women                                                     0.16                    139         161
                                          Men                                                       0.16                    258         289
                                          aDollars in body of report are adjusted to 1990 dollars




                       Y




                                          Page 26                                  GAO/HRDM-101      Impact of TRA Vesting Rules on Workers
Appendix IV

Major Contributors to This Report


Human Resources            Sharon A. Ward, Assignment Manager
Division,
Washington, DC.
                           Kenneth Wachner, Evaluator-in-Charge
Detroit   Re@ona1 Office   EdnaMeSaltzma,nEvaluator
                           Edmund 0, Price, bomputer Programmer/Analyst




                           Page 26                    GA0/IiRD.90.101 Impact of TRA Vestine Rules on WOrkem
Page 27   GAO/HRLMN-101 Impact of TRA Vesting Rules on Workera
RelatedGAO products


               Private Pensions: Impact of Vesting and Minimum Benefits and Contri-
               bution Rules in Top-Heavy Plans (GAO/HRD-90-4BR, Oct. 23, 1989)

               Private Pensions: Plan Provisions Differ Between Large and Small
               Employers (GAOIHRD-89-105BR,Sept.  26, 1989)

               401(k) Plans: Participation and Deferral Rates by Plan Features and
               Other Information (GAOIPEMD-88-ZOFS, Apr. 29, 1988).

               401(k) Plans: Incidence, Provisions and Benefits    (GAO/PEMD-88-15BR,
               Mar. 29, 1988).

               Pension Plans: Vesting Status of Participants in Selected Small Plans
               (GAO/HRD-88-31,&t. 30, 1987).

               Pension Integration: How Large Defined Benefits Plans Coordinate Bene-
               fits With Social Security (GAO/HRD-86-118BR, July 21, 1986).




           Y




(106617)       Page 28                    GAO/HRD-90-101 Impact of TRA Vesting Rules on Workers
E   --




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