Private Pensions

Pursuant to a legislative requirement, GAO studied private pension plans, focusing on the: (1) differing pension plan options that employers chose within the limits of the law in 1985; and (2) effects of Tax Reform Act of 1986 rule changes on plans and participants.

GAO found that: (1) four out of five pension plans used some combination of age and service to determine worker eligibility for plan participation, with small businesses more likely to use a combination than large businesses; (2) under federal rules, a plan may exclude from participation any worker that is not at least 21 years old or does not have 1 year of service; (3) large employers' plans often allowed earlier participation and were more advantageous to participants; (4) about 43 percent of all plans allowed participation earlier than the legal limits; and (5) the act's change in participation requirements, which lowered the maximum service requirement for plans with immediate vesting from 3 to 2 years, would only affect a few plans. GAO also found that: (1) small employers' plans tended to vest participants sooner than larger employers' plans because of special rules that called for full vesting in less than 10 years; (2) 68 percent of the participants were in large employers' plans that fully vested participants with 10 years of service; (3) the act shortened the length of service participants needed to be fully vested from 2 to 7 years, rather than 2 to 15 years; (4) 42 percent of the plans used integrated benefit formulas that provided lower pension benefits as a percentage of preretirement earnings for lower-paid workers than for higher-paid workers; (5) the act eliminated the pure excess method of integration, which provided participants with income below a certain level with no benefits; (6) about two-thirds of the plans used age as the only criteria for retirement with full benefits; and (7) while federal rules allowed participants to retire with full benefits no later than 65 with 10 years of service, about 83 percent of the plans allowed normal retirement sooner than the legal limits.