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. 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. Employer-directed plans covered 1.4 million participants and had $12.3 billion invested in employer securities and real property. 1.) Most 401(k) Plan Participants Directed Investment of Their Own Contributions

Important to the issue of the need for protections for 401(k) plan investments are the number of 401(k) plans that are employer directed and the number of participants in those plans. Many Participants Have No Control Over Investments in Employer-Directed Plans

Despite the concentration of participants and employer securities and real property in participant-directed supplemental plans, 756 employer- directed plans in 1993 had almost 1.4 million participants and about $12.3 billion invested in employer securities and real property. 2.) 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, which, if implemented, may remedy some of the data deficiencies we identified before section 1524 goes into effect in 1999. Extent of Employer Securities and Real Property Investments Cannot Be Readily Identified

Although the section 1524 provisions apply to 401(k) plans that require that employee contributions be invested in employer securities and real property, it may be difficult to determine the amount of employer securities and real property owned by these plans. Two mechanisms— enhanced reporting and disclosure and prescribed education programs— identified during our review could be administratively implemented under existing authority provided in title I of ERISA. Two other mechanisms— adoption of the diversification requirement used for ESOPs and use of independent fiduciaries to examine investment decisions—would require the Congress to add or amend statutory requirements. 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. A recorded menu will provide information on how to obtain these lists.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on: (1) the extent to which 401(k) plan assets are invested in employer securities and real property; (2) 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) alternate mechanisms that might safeguard the retirement benefits of participants in 401(k) plans in which the employer decides how to invest assets.

What GAO Found

GAO noted that: (1) only 2,449 of about 160,000 401(k) plans owned employer securities or real property in 1993; (2) these plans owned $53 billion of employer securities and real property and covered 5.3 million plan participants; (3) in most of these plans, plan participants directed the investment of their own contributions; (4) plans for which the employer solely decided how to invest assets totalled 756; (5) in these plans, employees exercised no control over how their 401(k) plan assets were invested and the employer made all the investment decisions; (6) these plans covered 1.4 million participants and had $12.3 billion invested in employer securities and real property; (7) 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; (8) this change increases protection for 401(k) plan participants; (9) 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; (10) some of the information needed to implement and enforce the new legislation is not readily available; (11) proposed changes to the Department of Labor's Form 5500, if implemented, may remedy some of the data deficiencies; (12) other mechanisms are available to policymakers if alternate safeguards are needed in the future; and (13) these mechanisms include enhanced reporting and disclosure, prescribed education programs, adoption of the diversification requirement used for employee stock option ownership plans, and use of independent fiduciaries to examine investment decisions.