Private Pensions:

Participants Need Information on the Risks of Investing in Employer Securities and the Benefits of Diversification

GAO-02-943: Published: Sep 6, 2002. Publicly Released: Oct 7, 2002.

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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.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matter for Congressional Consideration

    Matter: To address the lack of investment education and information provided to participants, Congress may wish to consider amending the Employee Retirement Income Security Act so that it specifically requires plan sponsors to provide participants in defined contribution plans with an investment education notice that includes information on the risks of certain investments such as employer securities and the benefits of diversification.

    Status: Closed - Implemented

    Comments: The House and Senate have both passed bills on pension reform legislation to amend ERISA that would, among other things, require plan administrators to provide defined contribution plan participants an investment education form at least annually. The form would include information on the benefits of diversification as well as the potential risk and return of various plan investments. For example, the Senate bill S.1783 requires plan sponsors to provide participants with forms relating to: the benefits of diversification, information on the essential differences/risks of pension plan investments (stocks, bonds, mutual funds, etc.), information on how an individual's pension plan investment allocations may differ depending on age and years to retirement, and sources of information where individuals may learn more about pension rights, investing, and advice. The bills are now in conference.

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