The federal government encourages employers to sponsor and maintain private pension plans for their employees and provides tax incentives offered under the Internal Revenue Code to those who do. In 1987, Congress limited the use of such plans significantly invested in employer securities. More Than Half of the Fortune 1,000 Companies Hold Employer Securities in Their Defined Contribution and Defined Benefit Plans

About 550 of the Fortune 1,000 firms in 1998 held employer securities in their defined contribution or defined benefit plans. Investing in Employer Securities Can Present Significant Risks for Employees’ Retirement Savings

Investment in employer securities through employer-sponsored retirement plans can present significant risks for employees. If the employees’ retirement savings is largely in employer securities or other employer assets, employees risk losing not only their jobs should the company go out of business, but also a significant portion of their savings. Even if Companies Do Not Declare Bankruptcy, Employees Are Still Subject to Certain Risks

Even without bankruptcy, employees are still subject to the dual risk of loss of job and retirement savings because corporate losses and stock price declines can result in companies significantly reducing their operations. The largest of these plans covered about 20,000 participants. Current Laws Provide for Disclosures to Plan Participants, but Information about Investment Diversification and Risk Is Not Required

ERISA and the Securities Act of 1933 require DOL and SEC to ensure that appropriate disclosures are made to plan participants and investors regarding their investments. The Securities Act of 1933 requires companies with defined contribution plans that offer employer stock to employees to register and disclose to SEC specific information about those plans. SEC generally makes the companies’ Form S-8 publicly available, but does not routinely review these forms. In addition, providing plan participants with disclosures on the risks of holding employer securities and the benefits of diversification in mitigating employees’ losses may help employees make more informed decisions regarding the amount of employer securities they hold in their retirement plans. Appendix IV: Comments from the Department of Labor
What GAO Found

The financial collapse of large firms and the effects on workers and retirees has raised questions about retirement funds being invested in employer securities and the laws governing such investments. Pensions are important source of income of many retirees, and the federal government has encouraged employers to sponsor and maintain pension and savings plans for their employees. The continued growth in these plans and their vulnerabilities has caused Congress to focus on issues related to participants investing in employer securities through employer-sponsored retirement plans. GAO's analysis of the 1998 plan data for the Fortune 1,000 firms showed that 550 of those companies held employer securities in their defined benefit plans or defined contribution plans, covering 13 million participants. Investment in employer securities through employer-sponsored retirement plans can present significant risks for employees. If the employees' retirement savings is largely in employer securities in these plans, employees risk losing not only their jobs should the company go out of business, but also a significant portion of their savings. Even if employers do not declare bankruptcy, employees are still subject to the dual risk of loss of job and loss of retirement savings because corporate losses and stock price declines can result in companies significantly reducing their operations. Under the Employee Retirement Income Security Act and the Securities Acts, the Department of Labor and Securities and Exchange Commission (SEC) are responsible for ensuring that certain disclosures are made to plan participants regarding their investments. Although employees in plans where they control their investments receive disclosures under the act regarding their investments, such regulations do not require companies to disclose the importance of diversification or warn employees about the potential risks of owning employer securities. SEC requires companies with defined contribution plans that offer employees an opportunity to invest in employer stock to register and disclose to SEC specific information about those plans. In addition, in most cases the underlying securities of those plans must be registered with SEC. However, SEC does not routinely review these company plan filings because pension plans generally fall under other federal regulation.