Private Pensions

Plan Features Provided By Employers That Sponsor Only Defined Contribution Plans Gao ID: GGD-98-23 December 1, 1997

This report identifies the general features of defined contribution plans in the private sector. Defined contribution plans provide retirement benefits that are based on employer and employee contributions to individual employee accounts and the investment experience of those accounts. GAO describes patterns in the plans' (1) eligibility requirements for employee participation, (2) arrangements for employer and participant contributions, (3) eligibility requirements for employee rights to accrued benefits, (4) employee investment options, (5) loan and other provisions for participant access to a plan's assets while still employed, and (6) options for withdrawal of benefits upon separation or retirement. GAO also presents information on the six features of the Thrift Savings Plan--the defined contribution plan component of the Federal Employees Retirement System--for comparison. GAO also summarizes the explanations provided in retirement literature and by pension experts with whom GAO consulted on why employers might decide to sponsor more than one pension plan for the same groups of workers.

GAO noted that: (1) the designs of DC plans for the 3,297 employers with 100 or more employees that sponsored only single-employer plans in 1993 varied greatly with respect to eligibility requirements, contribution arrangements, accrual of benefits, investment options, loan provisions, and withdrawal options so that no single plan design could be identified as representing a typical DC plan; (2) the employers reported that they generally established eligibility requirements that their employees must satisfy to participate in their plans; (3) ninety-seven percent of the 3,297 employers provided for employer contributions to the plan rather than requiring participants to fully fund their own pensions; (4) employers generally did not include enough information in their summary plan descriptions to allow GAO to determine the maximum potential cost, or liability, of making employer contributions, expressed as a percentage of compensation; (5) although by law participants have always owned their own contributions (and earnings on those contributions) to DC plans, employers have often established minimum service requirements that participants were required to meet before they could own, or become vested in, employer contributions to the plan; (6) the employers used vesting requirements that generally required fewer years of service for employees to own matching contributions, as compared with non-matching contributions; (7) a significant portion of the employers did not specify in their summary plan descriptions whether participants could direct how the contributions made to their accounts were invested, although the subset of larger employers were more likely to so specify; (8) nearly two-thirds of the employers reported providing plan participants access to a portion of their account balances prior to separation from employment; (9) nearly all the employers allowed participants to take their account balances as a lump-sum distribution when they retired; while two thirds allowed participants to withdraw their accounts in even installment payments over a specified period of time, and nearly half provided for an annuity that would produce a regular monthly payment for the rest of the participant's life; and (10) according to pension experts, and pension-related literature, private employers design their pension programs principally to control costs, maximize federal tax incentives, and comply with the Employee Retirement Income Security Act of 1994, as amended, while at the same time structuring their compensation and benefits to support their overall business and financial goals.

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