Summary

Policymakers and the pension community are concerned about 401(k) plans in which decisions on how to invest plan assets, particularly employee contributions, are made exclusively by employers. This concern was prompted mainly by two cases in which employers invested a large part of the 401(k) plan assets in their company's securities or real property. Later business reversals then forced the employers into bankruptcy, reorganization, or liquidation. In one case, employees lost their jobs and almost all of their pension benefits because the value of the employer's securities decreased significantly. The other case, involving real property, is still in bankruptcy liquidation. This report (1) provides information on the extent to which 401(k) plan assets are invested in employers' securities and real property, (2) examines the protection and any possible problems associated with recent amendments to title I of the Employee Retirement Income Security Act of 1974, and (3) identifies alternative mechanisms that might safeguard the retirement benefits of participants in 401(k) plans in which the employer decides how to invest assets.

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.