Eligibility Requirements

Employers that sponsor DC plans generally establish certain minimum age and/or service requirements that employees must meet before they are allowed to participate in these plans. Most Employers Did Not Specify Their Liability for Contributions in Their SPDs

Of the 3,297 employers included in our review, 883 (or 27 percent) of the employers included enough information in their SPDs to allow us to calculate the maximum potential cost, or liability, of making employer contributions—matching, nonmatching, or both—to their plans. Similarly, 57 percent of the subset of larger employers provided for employees to become fully vested in any matching contributions within 4 years, compared with 25 percent for nonmatching contributions within the same time period. A considerable portion of the employers with 100 or more employees that sponsored only single-employer DC plans in 1993 did not specify in their SPDs whether participants could direct the investment of contributions made to their accounts, as shown in figure 5. The larger employers were more likely to allow participants to direct the investment of all types of contributions made to their accounts. Nearly two-thirds of the 3,297 employers reported providing plan participants access to a portion of their account balances prior to separation from employment. The federal TSP includes a loan program, which allows participants to borrow from their own contributions (and earnings on those contributions) for any reason. For an annuity, the participant receives regular payments for the participant’s remaining lifetime. Although the majority of employers provided more than one withdrawal option in their plans, less than one-third of the plans specified that participants could opt to withdraw their accounts using a combination of withdrawal options—for example, by taking a portion of their account as a lump-sum withdrawal and purchasing an annuity with the remainder of their account balance. According to these sources, employers that sponsor pension plans are primarily concerned with controlling benefit costs, maximizing the federal tax incentives for providing pensions, and meeting the legal requirements of ERISA, as amended. Employers must also design their compensation and benefit packages to support their overall business and financial goals. Among the information requested was an analysis of the features of private sector DC plans. The objective of our review was to determine, for employers that sponsored only DC plans, the eligibility requirements for employee participation, arrangements for employer and participant contributions, eligibility requirements for employee rights to accrued benefits, employee investment options, loan and other provisions for participant access to plan assets while still employed, and options for withdrawal of benefits upon separation or retirement. Under the Employee Retirement Income Security Act of 1974, private employers must annually file a separate Form 5500 report with the IRS for each of their pension plans. Table II.2: Number and Percent of Employers That Sponsor Only Single-Employer Primary Defined Contribution Pension Plans by Contribution Source and Type and Employer Size (1993)

Table II.3: Number and Percent of Employers That Sponsor Only Single-Employer Primary Defined Contribution Pension Plans by Basis for Making Nonmatching Contributions and Employer Size (1993)
Basis for making nonmatching contributions Some percent of profits, allocated by participant compensation Some percent of profits, allocated by participant contributions Maximum employer nonmatching contributions expressed (as a percent of participant salary)
Maximum participant contribution eligible for employer matching(percent of salary)
Note 1: Of the 3,297 employers with 100 or more employees in our study, 1,410 employers provided matching contributions to the primary plan.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the general features of defined contribution (DC) plans in the private sector, focusing on: (1) eligibility requirements for employee participation; (2) arrangements for employer and participant contributions; (3) eligibility requirements for employee rights to accrued benefits; (4) employee investment options; (5) loan and other provisions for participant access to plan assets while still employed; (6) options for withdrawal of benefits upon separation or retirement; (7) the six features for the Thrift Savings Plan; and (8) a summary of the explanations provided in retirement literature and by pension experts on why employers might decide to sponsor more than one pension plan for the same groups of employees.

What GAO Found

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.