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United States General Accounting Office: 
GAO: 

Report to the Chairman, Committee on Banking, Housing, and Urban 
Affairs, U.S. Senate: 

September 2002: 

Private Pensions: 

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

GAO-02-943: 

Contents: 

Results in Brief: 

Background: 

More Than Half of the Fortune 1,000 Companies Hold Employer Securities 
in Their Defined Contribution and Defined Benefit Plans: 

Investing in Employer Securities Can Present Significant Risks for
Employees’ Retirement Savings: 

Current Laws Provide for Disclosures To Plan Participants, but 
Information About Investment Diversification and Risk Is Not Required: 

Conclusion: 

Matter for Consideration: 

Agency Comments: 

Appendix I: Scope and Methodology: 

Review of Form 5500 Data: 

Implications of Investing in Employer Securities: 

Regulatory Provisions for Disclosures: 

Appendix II: Bankruptcy and Legal Proceedings of Companies Whose 
Employees Participated in Employer-Sponsored Plans: 

Enron: 

Color Tile: 

Southland: 

Lucent: 

Appendix III: SEC’s Application of the Securities Laws to Retirement 
Plans: 

Registration Requirements Under the Securities Act and the Exchange 
Act: 

Registration and Reporting Requirements Under the Securities Exchange 
Act: 

Conclusion: 

Appendix IV: Comments from the Department of Labor: 

Table: 

Table 1: Pension Plan Assets for Fortune 1,000 Companies by Industry: 

Figures: 

Figure 1: Employer Securities Held by Defined Benefit and Defined 
Contribution Plans: 

Figure 2: Holdings of Fortune 1,000 Companies’ Pension Plans: 

Abbreviations: 

DOL: Department of Labor: 

EIN: Employer Identification Number: 

ERISA: Employee Retirement Income Security Act: 

ESOP: employee stock ownership plans: 

IRS: Internal Revenue Service: 

PBGC: Pension Benefit Guaranty Corporation: 

PWBA: Pension and Welfare Benefits Administration: 

SAR: summary annual report: 

SEC: Securities and Exchange Commission: 

SMM: summary of material modifications: 

SPD: summary plan description: 

[End of section] 

United States General Accounting Office: 
Washington, DC 20548: 

September 6, 2002: 

The Honorable Paul S. Sarbanes: 
Chairman: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

Dear Mr. Chairman: 

The financial collapse of the Enron Corporation and other 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 an important source of income 
for many retirees, and the federal government has encouraged employers 
to sponsor and maintain pension and savings plans for their employees. 
Over 70 million U.S. workers participate in pension and savings plans, 
and such plans in 1998 represented about $4 trillion in retirement 
savings. 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. 

Enron’s plan participants held a substantial percentage of their 
retirement assets in employer securities. Because of the financial 
losses suffered by Enron plan participants and the potential for losses 
to be incurred by participants in retirement and savings plans that are 
highly concentrated in employer securities, you asked us to: (1) 
determine the number, types, and dollar amounts of private pension 
plans that invest in employer securities; (2) describe why investing in 
employer securities through employer-sponsored plans can pose risks to 
plan participants; and (3) describe the regulatory provisions for 
disclosures to participants owning employer securities through their 
employer-sponsored plans. You also asked us to discuss the Securities 
and Exchange Commission’s (SEC) administrative determination not to 
explore the application of the Securities Act of 1933 and the 
Securities Exchange Act of 1934 to retirement plans. This information 
is presented in appendix III. 

To determine the number and types of private pension plans invested in
employer securities, we analyzed plan financial information filed 
annually (Form 5500s) with the Department of Labor’s Pension and Welfare
Benefits Administration (PWBA). We analyzed data for the Fortune 1,000
companies for plan year 1998, which was the most recent year for which 
complete plan-specific data were available for our review. To calculate 
the percentage of pension plan assets held as employer securities, we 
first subtracted certain assets that cannot be specifically identified 
as employer securities from total plan assets to arrive at “known 
assets.” To describe the risks of investing in employer securities 
through employer-sponsored plans, we focused on six companies whose 
private pension plans according to industry data were heavily invested 
in employer securities. We used these companies as examples to 
illustrate the risks that employees face when their employer-sponsored 
plans have high concentrations of employer securities or real property. 
For four of the companies we used publicly available information. We 
obtained information directly from the other two companies, but we 
agreed not to disclose their names. In addition, as part of our review 
of regulatory provisions, we interviewed officials from the Department 
of Labor (DOL), SEC, and industry associations about the laws governing 
employer securities purchases by retirement plans and the investment 
information that employers provide to plan participants. 

We conducted our work between February and August 2002 in accordance
with generally accepted government auditing standards. (See app. I for
more details about our scope and methodology.) 

Results in Brief: 

Our analysis of the 1998 plan data for the Fortune 1,000 firms showed 
that about 550 of those companies held employer securities in their 
defined benefit plans or defined contribution plans, covering about 13 
million participants. [Footnote 1] Our review is not representative of 
the entire employer-sponsored plan universe, but Fortune 1,000 plans 
covered about 40 percent of the total participants in company plans in 
1998. Employer securities held by these plans totaled $213 billion, or 
21 percent of total known assets. However, when all assets are 
included, including those that cannot be specifically identified as 
employer securities, employer securities represented 12 percent of 
total plan assets. DOL’s analysis showed that for defined contribution 
plans in 1998, employer securities represented about 16 percent of 
total plan assets and less than 1 percent for defined benefit plans. 
[Footnote 2] Manufacturers held 45 percent of the employer stock 
holdings of the Fortune 1,000 firms. However, such holdings only
represented about 10 percent of the total plan assets held by that 
sector. For plans that reported holding employer securities, employee 
stock ownership plans (ESOPs), including ESOPs combined with other 
defined contribution plans, held the highest concentrations of employer
securities, [Footnote 3] with these securities making up 58 percent of 
the total plan assets of ESOPs. 401(k) type plans held 26 percent of 
their total assets in employer securities. [Footnote 4] Defined benefit 
plans had less than 5 percent of their plan assets in employer 
securities. The highest dollar value of employer stock holdings were 
held in companies whose plans combined components of 401(k) type plans 
with ESOPs. The amount of employer securities in private pension plans 
is likely higher than we reported. Some companies did not report 
holding employer securities directly in their plans, but reported 
holding plan assets in separate accounts, such as master trust 
agreements, that may include employer securities. [Footnote 5] 

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. Employees at 
such companies as Enron and Southland experienced such consequences as
both companies declared bankruptcy. 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, such as in the case of Lucent. However, despite the risks, 
not every company whose retirement plans have high concentrations of 
employer securities results in employees incurring significant losses. 
Much depends on the corporate decisions made by the company’s 
leadership, which will determine whether or not the company stays in 
business. Two companies whose plans we reviewed had high concentrations 
of employer securities holdings, and, other than the volatility of the 
companies’ stock price, the employees have not suffered substantial 
losses due to company failure or downsizing. Finally, some companies 
help employees mitigate their losses by balancing plans where risks of 
loss are borne by employees with plans where the employer bears such 
risks. Other plans limit restrictions they place on diversification of 
employer contributions. For example, employees at one company held 
employer securities through the companies’ profit-sharing plan that was 
combined with the company’s 401(k) plan, and the company placed few 
restrictions on the ability of employees to diversify employer 
contributions. 

Under the Employee Retirement Income Security Act (ERISA) and the
Securities Acts, DOL and SEC are responsible for ensuring that certain
disclosures are made to plan participants regarding their investments. 
[Footnote 6] Although employees in plans where they control their 
investments (participant-directed accounts) receive disclosures under 
ERISA 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. 
(See app. III for SEC’s determination of how securities law applies to 
pension plans.) Industry representatives that we spoke with said that 
some companies provide plan participants with investment education, 
including information about the risks involved in owning employer 
stock. However, the investment information the companies provide is 
done on a voluntarily basis and varies by company. These industry 
officials also said that employers are concerned about the potential 
liability associated with making individualized investment advice
available to plan participants. DOL recently issued guidance about
investment advice to make it easier for plans to use independent
investment advisors to provide advice to participants in retirement 
plans. 

This report includes a Matter for Congressional Consideration to require
employers to provide an investment education notice containing basic
information on risk management and the importance of diversification. 
[Footnote 7] 

We provided a draft of this report to the Department of Labor, the
Department of Treasury, and the Securities and Exchange Commission.
All three agencies provided us with technical comments and we
incorporated each agency’s comments as appropriate. DOL also provided
written comments that are reprinted in appendix IV. DOL agreed with our
conclusion that additional investment education is necessary, but stated
that the Secretary of Labor does not currently have the legal authority
under ERISA to require DOL to issue an investment education notice.
Consequently, we changed our recommendation to a Matter for 
Congressional Consideration to amend ERISA so that it requires plan
sponsors to provide an education notice. 

Background: 

The U.S. private pension system is voluntary; employers decide whether 
to establish a retirement plan and determine the design, terms, and 
features of the plan or plans they choose to sponsor. 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. Although there is a wide range 
of specific plan designs that are permissible under current law, 
private sector pension plans are classified either as defined benefit 
or defined contribution plans. Defined benefit plans promise to 
provide, generally, a level of monthly retirement income that is based 
on salary, years of service, and age at retirement. The benefits from 
defined contribution plans are based on the contributions to and 
investment returns on individual accounts. Most private sector pension 
plans are defined contribution plans and this has been true for a 
number of years. Since the late 1980s, the number of defined benefit 
plans has decreased, and most new pension plans have been defined 
contribution plans. Many employers, particularly those with more than 
1,000 employees, sponsor both defined benefit and defined contribution 
plans. More workers are covered by defined contribution plans than 
defined benefit plans, and the assets held by defined contribution 
plans now exceeds those held by defined benefit plans. 

According to DOL, employers sponsored over 673,000 defined contribution
plans as of 1998 compared with about 56,400 defined benefit plans.
Defined contribution plans had about 58 million participants while 
defined benefit plans had about 42 million participants. 

Defined contribution plans are central to the debate about employee 
stock ownership through employer-sponsored plans. Defined contribution 
plans include thrift savings plans, profit-sharing plans, and ESOPs. 
The most dominant and fastest growing defined contribution plans are 
401(k) type plans, which are plans that allow employees to choose to 
contribute a portion of their pre-tax compensation to the plan under 
section 401(k) of the Internal Revenue Code. Most 401(k) plans are 
participant-directed, meaning that participants make investment 
decisions about their own retirement plan contributions within a set of 
investment choices selected by the plan sponsor. Employees are usually 
able to choose from a menu of diversified fund options when investing 
their own contributions. Over the last 20 years, employers have 
gradually expanded the investment choices of participants such that 
most plans are offering over 10 investment choices for participants, 
including investing in employer stock. Employees generally have less 
flexibility over the investments of the employer contributions to these 
plans, which frequently take the form of company stock. 

Many employers combine defined contribution plans with a 401(k) feature
and ESOPs or profit-sharing/thrift savings plans with a 401(k) feature. 
[Footnote 8] High concentrations of employer securities are likely to 
be found when ESOPs and 401(k) type plans are linked or when 401(k) 
plans and profit-sharing plans are linked. This is especially true when 
plans are combined with ESOPs, which by definition seek to provide for 
employee ownership. Moreover, under current law, ESOPs may require 
participants not to divest their employer stock holdings until they 
reach the age of 55 or 10 years of service, essentially restricting 
participant’s rights to diversify employer stock holdings. 

ERISA has a rule that places a 10 percent limitation on acquiring and
holding employer securities and employer real property for defined 
benefit plans. The 10 percent limitation states that a plan may not 
acquire any qualified employer securities or real property if 
immediately after the acquisition the aggregate fair market value of 
such assets exceeds 10 percent of the fair market value of the plan’s 
total assets. Employer securities and real property that appreciate in 
value after acquisition to 10 percent or more of total plan assets do 
not have to be sold. Defined contribution plans other than 401(k) type 
plans that are not ESOPs are generally exempt from the 10 percent 
limitation. 

Under ERISA, the Internal Revenue Service (IRS) and DOL’s PWBA are
primarily responsible for enforcing laws related to private pension 
plans. PWBA enforces ERISA’s reporting and disclosure provisions and 
fiduciary standards, which concern how plans should operate in the best 
interest of participants. The IRS enforces requirements concerning how 
employees become eligible to participate in benefit plans and earn 
rights to benefits. The IRS also enforces funding requirements designed 
to ensure that plans subject to such requirements have sufficient 
assets to pay promised benefits. 

In addition to the types of plans employers provide, some employer-
sponsored plans have complex designs, such as floor-offset arrangements.
Such arrangements consist of separate, but associated defined benefit 
and defined contribution plans. The benefits accrued under one plan 
offset the benefit payable from the other. In 1987, Congress limited 
the use of such plans significantly invested in employer securities. 
However, plans in existence when the provision was enacted were 
grandfathered. 

Because plan participants are investing in employer securities, 
securities law investor protection and disclosure requirements are also 
important. Congress enacted the Securities Act of 1933 and the 
Securities Exchange Act of 1934 in response to fraud in the securities 
markets and because of a perceived lack of public information in the 
stock markets. The 1940 Investment Company Act, combined with the 1933 
act, is the basis for SEC regulation of investment companies. Companies 
meeting this description must register under the Investment Company Act 
of 1940 and offer their shares under the Securities Act of 1933. These 
laws seek to ensure vigorous market competition by mandating full and 
fair disclosure and prohibiting fraud. Under these acts, a primary 
mission of the SEC is to protect investors and maintain the integrity 
of the securities market through extensive disclosure, enforcement, and 
education, but the securities laws also presume individual 
responsibility for investment decisions. 

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. Such holdings 
totaled over $213 billion and represented 21 percent of the known 
assets. However, when all assets are included, including those that 
cannot be specifically identified as employer securities, employer 
securities represented 12 percent of total assets. DOL’s analysis 
showed that for defined contribution plans in 1998, employer securities 
represented about 16 percent of total plan assets and less than 1 
percent for defined benefit plans. Our analysis found that the employer 
securities holdings were concentrated in different industries, with the 
bulk of the holdings held by manufacturers, which included technology 
and computer companies. For plans that reported holding employer 
securities, most of the employer securities were concentrated in ESOPs, 
including ESOPs combined with other defined contribution plans. A 
significant portion of employer securities were also held in the 
companies’ 401(k) type plans. The largest dollar amounts of employer 
securities holdings were in companies whose retirement plans combined 
their 401(k) type plan with ESOPs. Because some companies reported 
holding their plan assets in master trust agreements, the amount of 
employer securities holdings in these firms’ employer plans are likely 
to be higher than we can determine based on 1998 Form 5500 data. 

Fortune 1,000 Employer Plans Report Over $213 Billion of Their Assets in
Employer Securities: 

About $213 billion in plan assets held in the employer-sponsored plans 
of the Fortune 1,000 were held in employer securities. Almost all of the
$213 billion of assets in employer securities were held in the Fortune
1,000’s defined contribution plans. As shown in figure 1, less than
1 percent of defined benefit plan holdings were in employer securities 
and 24 percent of defined contribution holdings were in employer 
securities. [Footnote 9] 

Figure 1: Employer Securities Held by Defined Benefit and Defined 
Contribution Plans (billions): 

[See PDF for image] 

This figure contains a pie chart illustrating Employer Securities held 
by defined benefit and defined contribution plans, as well as a 
separate pie chart which further describes employer securities. The 
following data is depicted: 

Employer Securities Held by Defined Benefit and Defined Contribution 
Plans (billions): 

Other defined benefit holdings: $975.9; 
Other defined contribution holdings: $640.8; 
Employer securities: $212.6; Employer securities consist of:
- $207.2 or 24% of total defined contribution holdings; 
- $5.4 or 1% of total defined benefit holdings. 

Source: GAO analysis of 1998 Form 5500 data. 

[End of figure] 

The Fortune 1,000 sponsored roughly 3,500 defined contribution or
defined benefit plans. Fifty-six percent, or about 2,000 of those 
plans, were defined contribution plans and 44 percent, or more than 
1,500 plans, were defined benefit plans. More than 37 million employees 
were covered by these plans, which was nearly 40 percent of the total 
participants in all company plans in 1998. [Footnote 10] Twenty million 
employees participated in one or more defined contribution plans 
sponsored by the Fortune 1,000, and over 17 million employees were 
covered by defined benefit plans. 

Manufacturers Held the Highest Amounts of Plan Assets in Employer
Securities, but Such Holdings Were Less Than 10 Percent of the
Industry’s Assets: 

Manufacturers had the highest amount of plan assets in employer
securities of the Fortune 1,000. [Footnote 11] These companies included 
computer chip companies and technology firms, as well as traditional 
manufacturing companies, such as tool production and hardware firms. 
The sector held about $976 billion plan assets in 1998. As shown in 
table 1, manufacturing companies held about 45 percent of the employer 
securities holdings of the Fortune 1,000 and covered about 41 percent 
of plan participants of the Fortune 1,000. 

Table 1: Pension Plan Assets for Fortune 1,000 Companies by Industry
(Dollars in billions): 

Industry: Manufacturing; 
Employer securities owned: $94.7; 
Percent of all employer securities: 44.54; 
Total assets: $975.9; 
Concentration of employer securities (percent): 9.7; 
Plan participants: 15,117,571; 
Percent of all plan participants: 40.84. 

Industry: Finance, insurance and real estate; 
Employer securities owned: $28.9; 
Percent of all employer securities: 13.61; 
Total assets: $152.8; 
Concentration of employer securities (percent): 18.9; 
Plan participants: 3,270,537; 
Percent of all plan participants: 8.84. 

Industry: 
Employer securities owned: 
Percent of all employer securities: 
Total assets: 
Concentration of employer securities (percent): 
Plan participants: 
Percent of all plan participants: 

Industry: Communication and information; 
Employer securities owned: $21.0; 
Percent of all employer securities: 9.91; 
Total assets: $202.9; 
Concentration of employer securities (percent): 10.4; 
Plan participants: 2,785,218; 
Percent of all plan participants: 7.52. 

Industry: Retail trade; 
Employer securities owned: $19.9; 
Percent of all employer securities: 9.36; 
Total assets: $61.5; 
Concentration of employer securities (percent): 32.3; 
Plan participants: 4,508,681; 
Percent of all plan participants: 12.18. 

Industry: Utilities; 
Employer securities owned: $14.2; 
Percent of all employer securities: 6.69; 
Total assets: $115.2; 
Concentration of employer securities (percent): 12.3; 
Plan participants: 1,239,577; 
Percent of all plan participants: 3.35. 

Industry: Services; 
Employer securities owned: $13.7; 
Percent of all employer securities: 6.45; 
Total assets: $106.0; 
Concentration of employer securities (percent): 12.9; 
Plan participants: 4,362,308; 
Percent of all plan participants: 11.79. 

Industry: Industry not reported; 
Employer securities owned: $9.0; 
Percent of all employer securities: 4.25; 
Total assets: $102.5; 
Concentration of employer securities (percent): 8.8; 
Plan participants: 2,668,234; 
Percent of all plan participants: 7.21. 

Industry: Transportation; 
Employer securities owned: $6.5; 
Percent of all employer securities: 3.08; 
Total assets: $75.4; 
Concentration of employer securities (percent): 8.7; 
Plan participants: 2,018,620; 
Percent of all plan participants: 5.45. 

Industry: Wholesale trade; 
Employer securities owned: $2.3; 
Percent of all employer securities: 1.08; 
Total assets: $14.3; 
Concentration of employer securities (percent): 16.1; 
Plan participants: 547,821; 
Percent of all plan participants: 1.48. 

Industry: Mining; 
Employer securities owned: $1.4; 
Percent of all employer securities: 0.69; 
Total assets: $15.7; 
Concentration of employer securities (percent): 9.4; 
Plan participants: 254,506; 
Percent of all plan participants: 0.69. 

Industry: Construction; 
Employer securities owned: $0.706; 
Percent of all employer securities: 0.33; 
Total assets: $5.4; 
Concentration of employer securities (percent): 13.1; 
Plan participants: 159,462; 
Percent of all plan participants: 0.43. 

Industry: Agriculture; 
Employer securities owned: $0.27; 
Percent of all employer securities: 0.01; 
Total assets: $1.4; 
Concentration of employer securities (percent): 1.9; 
Plan participants: 81,322; 
Percent of all plan participants: 0.22. 

Industry: Total; 
Employer securities owned: $212.6; 
Percent of all employer securities: 100.00; 
Total assets: $1,829.3; 
Concentration of employer securities (percent): 11.6; 
Plan participants: 37,013,857; 
Percent of all plan participants: 100.00. 

Source: GAO’s analysis of 1998 Form 5500 data. Numbers may not add to 
total due to rounding. 

[End of table] 

Although manufacturers held the highest amount of employer securities of
the 12 sectors, such holdings represented less than 10 percent of the
sector’s total assets. More than 90 percent of the manufacturing 
sector’s assets were held in assets other than employer securities, 
which provided for some diversification for the industry. The retail 
sector, which includes car, food, and clothing sales companies, had the 
highest concentration of industry assets in employer securities, with 
about 32 percent of the industries’ plans assets in employer 
securities. Companies in the industries of mining, construction, and 
agriculture had the lowest amounts of employer securities and also 
covered the fewest number of plan participants. 

ESOPs Held the Highest Percentages of Plan Assets in Employer Securities
Although 401(k) Type Plans Had Higher Dollar Amounts, and Plans That 
Combined Features Held the Most Employer Securities: 

Not surprisingly, ESOPs had the highest percentages of plan assets in
employer securities of plans that reported holding such assets. ESOPs,
including ESOPs combined with other defined contribution plans, held
over three-fifths of their known assets in employer securities, while 
401(k) type plans held a little over a quarter of their known assets in 
employer securities. Given the requirements that plans must meet to be 
designated as an ESOP, it is not surprising that ESOPs and ESOPs with 
other plan features hold the highest percentages of employer securities 
holdings. For example, ESOPs must be primarily invested in qualifying 
employer securities in order for the plan to receive the legal 
designation of an ESOP. In addition, in order to ensure that a 
company’s employees continue to hold that minimum threshold of company 
stock, many ESOPs restrict employees’ ability to sell their company 
stock. 

About 220 firms in the Fortune 1,000 sponsored plans that were ESOPs or
ESOPs combined with other defined contribution plans. Those plans held
a total of $143 billion in employer securities. Fifty-eight percent of 
ESOP total plan assets were in employer securities. However, certain 
types of ESOPs reported higher concentrations than others. For example, 
stand-alone ESOPs—ESOPs that are not combined with other defined
contribution plans—had over 98 percent of plan assets in employer
securities. Eighty-four companies sponsored such ESOPs, covering a 
little over 1 million participants. 

About 475 companies had defined contribution plans with a 401(k) type
feature and such plans had the highest total dollar amount of employer
securities totaling $172 billion in employer securities. Given that 
twice as many companies sponsored a 401(k) type plan as those offering 
an ESOP, the high dollar amounts in the 401(k) plans are not unusual. 
401(k) type plans also held significant percentages of plan assets in 
employer securities, although not as high as ESOPs. For example, about 
324 companies reported sponsoring 401(k) plans that were combined with
profit-sharing/thrift savings plans, which was by far the most prevalent
type of 401(k) plan offered by the Fortune 1,000 and covered more than
half of the participants participating in 401(k) plans. Twenty-six 
percent of those plans’ assets were held in employer securities, 
totaling about $44 billion. 

The type of defined contribution plan that had the greatest amount of
employer securities were plans that combined a 401(k) type plan with an
ESOP. About 96 companies sponsored such plans, covering about 2.5 
million employees. These plans held about $93 billion of employer
securities and about 44 percent of all employer securities, which was 
the highest amount of employer securities holdings in any of the plan 
types sponsored by the Fortune 1,000. 

Recent industry data suggest that companies are increasingly sponsoring
plans that combine features of defined contribution plans. For example,
plans that combine ESOPs with a 401(k) type plan are becoming more
prevalent among large, publicly traded companies. Because these plans
hold the most employer securities, many more workers are likely to have 
a significant amount of their retirement savings invested in the 
securities of their employers. Retirement savings, therefore, may 
increasingly become more dependent on employer stock ownership. 

Defined benefit plans have smaller percentages of employer securities
than ESOPs or 401(k) type plans. Seventy-five companies of the Fortune
1,000 sponsored defined benefit plans holding employer securities. Such
plans covered 2.3 million participants and held about $120 billion of 
plan assets. Employer securities accounted for about 5 percent, or over
$5 billion, of the known assets of these defined benefit plans. 

Finally, little information is reported on complex plan designs such as
floor-offset arrangements. The 1998 Form 5500 did not require employers
to identify plans with floor-offset arrangements. Furthermore, agency 
and industry officials said there is little information on the number of
employer-sponsored plans that have such features. 

Amount of Employer Securities Could Likely Be Higher: 

Because we cannot isolate employer securities held in “master trust
agreements,” our figures on employer securities holdings are likely to 
be understated. A master trust agreement is a trust in which assets of 
more than one plan sponsored by a single employer or by a group of 
employers are held under common control. As shown in figure 2, master 
trust assets held the highest percentage of pension plan assets. 

Figure 2: Holdings of Fortune 1,000 Companies’ Pension Plans: 

[See PDF for image] 

This figure is a pie-chart, depicting the following data: 

Master trust accounts: 45%; 
Employer securities: 12%; 
Other assets: 43%. 

Note: Total Plan Assets: $1.8 trillion. 

Source: GAO’s analysis of 1998 Form 5500 data. 

[End of figure] 

The amount of employer securities plans held within master trust
agreements cannot be determined from the 1998 Form 5500. For reporting
purposes, assets of a master trust are considered to be held in one or 
more investment accounts that may consist of a pool of assets or a 
single asset. In addition, only the account total of the master trust 
account is required to be reported on the Form 5500. For example, 29 
percent of the ESOPs sponsored by the Fortune 1,000 reported not 
holding employer securities. However, because ESOPs are required by law 
to hold employer securities, if such holdings are not reported under 
the ESOP account they are likely to be in the master trust agreement 
accounts. Consequently, our reported dollar amounts of employer 
securities are likely to understate the amount of plan assets held in 
employer securities. However, DOL officials said that few Fortune 1,000 
companies are likely to hold a significant percentage of employer 
securities in master trust agreements. 

Recognizing the difficulty of identifying plan assets held in master 
trusts, DOL revised the Form 5500 for the 1999 plan filing year. 
Beginning with the 1999 filing year, master trusts will file a form 
5500 report along with schedules itemizing the types of assets they 
hold. According to DOL officials, this will help ensure adequate 
reporting on the plan assets held in master trust investment accounts. 

In addition to employer securities holdings in master trust agreements, 
we also found basic filing errors in the data. While examples we found 
may understate or overstate our concentrations, we were not able to 
determine the extent to which such filings errors occurred. For 
example, we found filing errors such as the misreporting of employer 
securities as corporate debt instruments or stock (other than 
employer’s own common stock). In one case, we identified an ESOP that 
was reported to hold no securities. A DOL official reviewed this plan 
and, by examining an accountant’s report that accompanied the Form 
5500, discovered that the plan actually held employer securities and 
had made a mistake in filling out the Form 5500—a mistake that, 
according to DOL officials, occurs frequently. Furthermore, data 
reported on the Form 5500 combines all employer securities into a 
single line item. Employer securities held by pension plans may include
employer stock, a marketable obligation such as a bond or note, or an
interest in a publicly traded partnership. Thus, the line item for 
employer securities does not accurately reflect the amount of pension 
plan assets solely in employer stock. 

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. 
However, despite the risks, not every company whose employer plan has 
high concentrations of employer stock will result in employees incurring
significant losses. Much depends on the decisions made by the company’s
leadership and other factors such as market forces, which determine
whether the company stays in business. Some companies help employees
mitigate their risks by balancing plans where risks of loss are borne by
employees with plans where employers bear such risk. In addition, some
companies help employees limit their exposure to the risk of loss by
allowing employees, if they so choose, to diversify their holdings. 

High Concentrations of Employer Stock Holdings Can Expose Employees to
the Risk of Losing Their Jobs and Their Retirement Savings: 

Concentrating their retirement savings in employer securities means that
employees are not only concentrating their assets in a single security, 
but are investing in a security that is highly correlated to their work 
effort and earnings. Unlike investors, who have ownership in a company 
but do not work for the company, employees with high concentrations of 
holdings of employer securities in their retirement plans are 
subjecting two sources of income, their retirement income and their 
employment income, to similar risks. Such holdings directly expose the 
employee to the losses of the company they work for much more so than 
if they worked in another company. In addition, holding significant 
proportions of employer securities is directly at odds with modern 
financial theory, which says that diversifying a portfolio offers the 
benefits of reducing risks at very limited cost. 

Companies prefer to provide company contributions in employer stock for
a number of reasons. Contributions in employer stock puts more company
shares in the hands of employees who some officials believe are less 
likely to sell their shares if the company’s profits are less than 
expected or in the event of a threatened takeover. Companies also point 
out that contributing employer stock promotes a sense of employee 
ownership, linking the interest of employees with the company and other 
shareholders. In addition, employer stock contributions provide several 
tax benefits for companies. 

When employees choose to allocate a large portion of their total assets 
to their employer’s securities, they are assuming significant risk in 
order to achieve a particular expected rate of return. Studies have 
shown that employees feel a great deal of loyalty to their company. 
Because they work at the company and interact with the company’s 
managers, they believe they know the company and feel more comfortable 
investing in it. In addition, some employees enjoy being an owner-
employee and some believe their employer’s stock will outperform the 
overall market over some particular time horizon. As a result, some 
employees consider investments in employer stock through their employer-
sponsored plans a safe investment. However, employees who have 
significant portions of their retirement savings invested in employer 
stock may be exposing themselves to greater financial risks than 
necessary. Generally, financial theory indicates that, through 
diversification, an investor can achieve a similar expected rate of 
return with less risk than a portfolio concentrated in employer 
securities. 

The financial collapse of Enron and other companies, such as Color Tile
and Southland, has highlighted how vulnerable participants are when they
tie their retirement savings to their place of employment. For example, 

* Enron employees lost their jobs and a significant amount of their
retirement savings as the company became insolvent. The decline in
Enron’s stock price and its subsequent failure substantially reduced the
value of many of its employees’ retirement accounts. Enron’s stock price
went from a high of $80 per share in January 2001, to less than $1 per
share in January 2002. About 62 percent of the assets held in the 
company’s 401(k) consisted of shares of Enron stock. These 
concentrations are the result both of employee investment choice and
employer matching contributions with employer stock. In all, about
20,000 employees lost money because their 401(k) accounts were heavily
invested in Enron stock. 

* Color Tile employees lost their jobs and their retirement savings when
Color Tile filed for bankruptcy in January 1996. More than 83 percent 
of its $34 million in 401(k) plan assets were invested in Color Tile 
real property. During the bankruptcy, participant withdrawals or asset 
transfers in the 401(k) plan were prohibited until the property was 
appraised and sold. 

* Southland Corporation employees incurred losses in their retirement
savings. Southland’s pension plans included a 401(k) and profit-sharing
plans. Fifty-eight percent of the assets in Southland’s 401(k) plan was 
used to buy 1,100 7-Eleven stores which were then leased back to the 
company. When Southland filed for Chapter 11 protection in October 
1990, the 401(k) plan reduced its holdings in 7-Eleven stores to 46 
percent of the assets in Southland’s 401(k) plan. Unlike Enron and 
Color Tile, the Southland Corporation emerged from bankruptcy fairly 
quickly, with relatively small job loss to its employees. 

See appendix II for additional details on of each company. 

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. For example, between December 31, 1999, and July 2001,
Lucent Technologies’ stock price fell from $82 to $6 per share and
employees’ account balances fell because about 30 percent of the
company’s 401(k) plan assets were in employer securities. For 
nonmanagement employees, about one-third of Lucent’s workforce, the
employer 401(k) match was in the form of an ESOP contribution made in
employer stock. Employer contributions to Lucent’s management 401(k)
plan were made in the form of employer stock. In addition, more than
29,000 workers were laid off as a result of the company’s financial
troubles, although the company remains in business. 

There are various reasons for companies experiencing financial
difficulties. Although recent company failures have been attributed to
company mismanagement, companies can also experience difficulties
because of such problems as business cycles, market downturns, and 
declines in a sector of the economy. Depending on the circumstances of
the company, the employer’s stock price can experience a precipitous
drop or it can decline gradually. In either case, substantial holdings 
of employer securities in employer-sponsored plans will be affected 
because of the company’s financial problems. 

Some Companies Mitigate Risks of High Concentrations of Employer 
Securities: 

Not every company whose employees have high concentrations of employer 
securities holdings will experience substantial losses in their plan 
assets. Much depends on the corporate decisions made by the company, 
which determine whether the company stays in business and the extent to 
which the company is forced, if necessary, to reduce operations. In 
addition, much depends on the extent that employer’s stock is affected
by general market cycles or market volatility. 

Proponents of employer stock investments through employer plans point
to numerous companies that have high concentrations of employer 
securities in their employer-sponsored plans and whose participants have
not suffered as a result of such holdings. They state that high 
concentrations of employer securities are typically in large companies 
and that such companies have demonstrated long-term financial success. 
They also state that company performance improves when employees 
understand the relationship between their behavior and the accompanying
rewards that accrue to them when they own employer stock. 

Two companies whose plans we reviewed had high concentrations of 
employer stock holdings and their employees had not suffered substantial
losses in their retirement savings because of company failure or
downsizing. Each company offered defined contribution plans in the form
of profit-sharing, ESOPs, and 401(k) plans. The 401(k) plans at both
companies allowed participants to contribute a portion of their 
salaries on a pre-tax basis, and the companies offered a variety of 
investment fund choices to give plan participants the flexibility and 
option of investing their 401(k) accounts. Overall, more than 57 
percent of account balances at one company and up to 92 percent of the 
employees’ account balances at the other company are invested in 
employer stock. At one of the companies, 83 percent of the employees’ 
contributions to the 401(k) plan are invested in employer stock, and 
roughly 92 percent of the company’s contribution to employee accounts 
is invested in employer stock. 

Although each company’s stock price has experienced declines in the
recent overall downturn in the stock market, such declines have not
caused their employees to lose significant portions of their retirement 
savings. Company officials said that their company would continue to 
give their employees every opportunity to invest in employer stock. In 
addition, company officials said that despite the recent downturn in 
the market, plan participants have not significantly diversified out of 
the employer stock. 

Some companies help employees mitigate their exposure to risk by 
balancing the types plans where risks of loss are borne by employees 
with plans where employers bear such risk. When companies provide 
defined benefit plans, employees are likely to receive some level of 
retirement income even if they have incurred losses in their defined 
contribution plans. With a defined benefit plan, the employer, as plan 
sponsor, is responsible for funding the promised benefits, investing 
and managing the plan assets, and bearing the investment risk. If the 
defined benefit plans terminate with insufficient assets to pay 
promised benefits, the Pension Benefit Guaranty Corporation (PBGC) 
provides plan termination insurance to pay participant’s pension 
benefits up to a certain limit. [Footnote 12] For example, according to 
PBGC, Enron sponsored at least five defined benefit plans insured by 
PBGC. The largest of these plans covered about 20,000 participants. If 
one or more of Enron’s defined benefit plans is unable to pay promised 
benefits and is taken over by PBGC, vested participants and retirees 
will receive their promised benefits up to the limit guaranteed under 
ERISA. [Footnote 13] 

In addition, some companies help employees mitigate their exposure to
the risk of loss by allowing employees, if they so choose, to diversify 
their holdings. Two companies whose plans we reviewed had few 
restrictions on their employees’ ability to diversify their holdings of 
employer securities. For example, one company allowed vested 
participants at any age to diversify out of employer stock in the 
company-contributed portion of their account. The other company allowed 
100 percent diversification of employee 401(k) contributions, the 
company match, and the profit sharing contributions at all times. 
Several other companies have publicly announced easing restrictions on 
when employees can diversify employer contributions in their accounts. 
For example, one company announced in February 2002 that 401(k) plan 
participants could sell any of their individual account assets, 
including their employer match in employer securities, without 
restriction. Other companies have also lifted their restriction that 
required employees to hold their employer securities from company 
contributions until age 50. 

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. Under ERISA, companies with participant-
directed individual account plans are to provide plan participants with
certain information and disclosures beyond the general ERISA reporting
requirements. 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. Under the 
current disclosure requirements of DOL, there is no requirement that 
companies disclose to plan participants the risks involved in investing 
in employer stock or the benefits of diversification. Industry 
representatives we spoke with said that companies provide employees 
with investment education and plan information and in some cases go 
beyond the minimum requirements. However, because there is no 
requirement to educate employees about the investment risks or the 
benefits of diversification, investment education can vary by company. 
Few employers make more specific individualized or tailored investment 
advice available to their plan participants, in part because of 
concerns about fiduciary liability. [Footnote 14] DOL has recently 
issued guidance about investment advice, which should help clarify when 
companies can use independent investment advisors to provide advice to 
participants in retirement plans. 

ERISA Establishes Disclosure Requirements for Plan Participants: 

ERISA requires DOL to ensure that appropriate disclosures are made to
plan participants regarding their ERISA-covered pension plans. While
companies automatically make certain information available to plan
participants, there is other information that participants must request 
in writing. Certain plans, which are designed to meet specific ERISA
provisions, must provide plan participants with disclosures beyond what 
is generally required by ERISA. Compliance with this regulation is 
optional, but provides employers with a defense to fiduciary liability 
claims related to investment choices made by employees in their 
participant-directed accounts. 

Disclosures on Pension Plans Required under ERISA: 

ERISA requires companies to automatically disclose to plan participants
certain information pertaining to their pension plans. These disclosures
are the summary plan description (SPD), summary of material 
modifications (SMM), and the summary annual report (SAR). The SPD
tells participants what the plan provides and how it operates. 
Specifically, the SPD provides information on when an employee can 
begin to participate in the plan, how service and benefits are 
calculated, when benefits become vested, when and in what form benefits 
are paid, and how to file a claim for benefits. ERISA states that the 
SPD must be written in a manner “calculated to be understood by the 
average plan participant” and must be “sufficiently comprehensive to 
apprise the plan’s participants and beneficiaries of their rights and 
obligations under the plan.” In other words, the disclosed information 
should be understandable and all inclusive so participants can have 
useful information that will aid them in effectively understanding 
their pension plans. New employees must receive a copy of the most 
recent SPD within 90 days after becoming covered by the plan. 

In addition to the summary plan description, plan participants are 
entitled to receive a summary of material modifications. The summary of 
material modifications discloses any material changes or modifications 
in the information required to be disclosed in the SPD. Plan 
administrators must furnish participants with an SMM within 210 days 
after the close of the plan year in which the modification was made. 

Participants must also receive a summary annual report from their plan’s
administrator each year. The summary annual report summarizes the 
plan’s financial status based on information that the plan administrator
provides to DOL on its annual Form 5500. Generally, the SAR must be
provided to participants no later than 9 months after the close of the 
plan year. 

Plan participants may also request additional information about their
plans. If plan participants wish to learn more about their plan’s 
assets, they have the right to ask their plan administrator for a copy 
of the plan’s full annual report. In addition, a participant can 
request a copy of his or her individual benefit statement, which 
describes a participant’s total accrued and vested benefits. Plan 
participants can also request the documents and instructions under 
which the plan is established or operated. This includes the plan 
document, the collective bargaining agreement (if applicable), trust 
agreement, and other documents related to the plans. 

Regulation under Section 404(c) of ERISA Establishes Additional 
Disclosure Requirements: 

Under the 404(c) regulation, participants receive certain disclosures
pertaining to the plan and its investment options. [Footnote 15] The 
regulation is a benefit to plan participants because it allows them to 
receive additional disclosure beyond what is generally required under 
ERISA. The purpose of these informational requirements is to “ensure 
that participants and beneficiaries have sufficient information to make 
informed investment decisions.” [Footnote 16] The regulation also 
benefits employers who comply with its requirements, because it exempts 
them from fiduciary liability related to the investment choices made by 
their employees in their participant-directed accounts. 

The regulation specifically requires that the plan administrator
automatically provide the plan participant with (1) an explanation that 
the plan is a 404(c) plan and that the fiduciary will be relieved of 
liability; (2) a description of investment alternatives; (3) the 
identification of any designated investment managers; (4) an 
explanation of circumstances under which the participant may give 
investment instructions or limitations; (5) a description of 
transaction fees and expenses; and (6) the name, address, and telephone 
number of the fiduciary to contact for further information regarding 
these disclosures. In addition, for a plan with employer stock, plan 
administrators are to provide all voting information and the procedures 
for ensuring the confidentiality of participant investment 
transactions, as well as a prospectus immediately before or after the 
initial investment. 

Plan participants can also request certain plan information. This 
includes (1) a description of the annual operating expenses of the 
plan’s investment alternatives, including any investment management 
fees; (2) copies of any prospectuses, financial statements and reports, 
and other information furnished to the plan relating to investment 
alternatives; (3) the list of assets comprising the portfolio of each 
investment option that holds plan assets; (4) information about the 
value of shares or units in investment alternatives available along 
with information concerning past and current investment performance of 
each alternative; and (5) information pertaining to the value of shares 
or units in investment alternatives held in the participant’s account. 

Compliance with Section 404(c) Regulations of ERISA Is Optional: 

Employers choose whether to provide disclosures under the regulation.
Those who comply with the regulation are afforded certain protections
from their fiduciary liability. 

* First, compliance exempts plan fiduciaries from responsibility for
investment decisions of employees when employees exercise control over
their investments. However, the regulation establishes conditions
employers must meet in order to be exempted from fiduciary liability
related to investment choices made by participants. Employers must
provide employees with the opportunity to choose from a broad range of
investment options; allow employees to transfer the assets in their
accounts into and out of the various plan investment options with a
frequency that is reasonable in light of the market volatility of those
investment options; and the plan’s investment options must permit
employees to diversify their investments. If the plan meets the
requirements of the regulation and a participant fails to diversify his 
or her account and invests all the account assets in his or her 
employer’s stock, the employer will be able to assert that the company 
is not responsible for any financial losses incurred by the participant 
because the company has complied with the regulation. 

* Second, participants that manage the investments of their accounts 
are not considered to be fiduciaries. The employer is also not subject 
to potential fiduciary liability for the participant’s investment 
decisions. 

Plan sponsors are not relieved of all fiduciary responsibilities by 
complying with the regulation. For example, they remain responsible for 
the prudent selection of investment alternatives and monitoring plan 
investments on an ongoing basis. 

Under the Securities Act Certain Pension Plans Are Required to Register 
with SEC: 

Because defined contribution plans require that employees assume the
investment risk, securities law protections applicable to investors are
relevant to plan participants. Employees in participant-directed plans
might be given the choice of investing in securities, including employer
securities, as well as a variety of mutual funds. The securities laws 
require disclosure of information about investment objectives, 
performance, investment managers, fees, and expenses of mutual funds 
and information about the business objectives, financial status, and 
management of companies that are issuing securities. However, 
distribution of these disclosure materials to plan participants making 
investments may depend on employer compliance with requirements of 
ERISA’s 404(c) regulations. In addition, interests in certain pension 
or profit-sharing plans are securities subject to the registration and 
antifraud requirements of the Securities Act of 1933 (1933 act), which 
we discuss in further detail in appendix III. Pension or profit-sharing 
plans that have the investment characteristics of securities are 
required to register under the 1933 act. Interests of employees in 
plans are securities where the employees voluntarily participate in the 
plan and their individual contributions can be used to purchase 
employer stock. This generally includes 401(k) salary reduction plans 
and savings plans where participant contributions are used to purchase 
employer securities. If employer securities are offered and sold to 
employees pursuant to a pension plan, those securities must be 
registered also. 

SEC Makes Registration Documents Available to the Public, but Does Not 
Routinely Review Them: 

The 1933 act requires registration of securities being offered for sale 
to the public. The registration statement, which SEC makes publicly 
available, must disclose the basic business and financial information 
for the issuer with respect to the securities offering. SEC requires 
companies that offer securities to their employees under any employee 
benefit plan to register those securities on Form S-8. SEC generally 
makes the companies’ Form S-8 publicly available, but does not 
routinely review these forms. The SPD may be used to satisfy the 
prospectus delivery requirement applicable to Form S-8. [Footnote 17] 
However, the SPD is not filed with the SEC as part of the Form S-8. 
Although ERISA requires SPDs to be provided to participants, DOL no 
longer requires the SPD to be filed with the Department. 

SEC generally limits its review of corporate filings to ensure that the 
initial registration of the security and other reporting comply with 
its disclosure requirements. As part of its interpretive 
responsibility, SEC has no requirement in law or regulation to verify 
the accuracy or completeness of the information companies provide. 
SEC’s review of corporate filings may involve a full review, a full 
financial review, or monitoring of certain filings for specific 
disclosure requirements. [Footnote 18] In our work at SEC, we found 
that its ability to fulfill its mission has become increasingly 
strained, due in part to imbalances between SEC’s workload and staff 
resources. [Footnote 19] Like other aspects of SEC’s workload, the 
number of corporate filings has grown at an unprecedented rate. SEC’s 
2001 goal was to complete a full financial review of an issuer’s annual 
report required by the Exchange Act in 1 of every 3 years—a review goal 
of about 30 to 35 percent of these annual reports per year. However, 
SEC only completed full or full financial reviews of 16 percent of the 
annual reports filed or about half of its annual goal in 2001. In this 
post-Enron environment, SEC plans to reconsider how it will select 
filings for review and plans to revise its approach for allocating 
staff resources to conduct those reviews. 

The SEC does not routinely review companies’ Forms S-8 for completeness 
or accuracy and has not routinely reviewed these filings for the last 
20 years, according to SEC staff. [Footnote 20] SEC staff said that 
while they track the total number of Form S-8 filings each fiscal year. 
They do not separately track the number of filings for different types 
of plans, such as 401(k) plans or stock option plans. SEC staff can, 
however, take action against an issuer if it discovers that a Form S-8 
does not comply with applicable law. For example, SEC has taken 
enforcement actions against companies that have abused the S-8 short 
form registration. In the late 1990’s, some companies had used Form S-8 
filings inappropriately for raising capital and not for compensatory 
offerings for employee plans. 

Recently, SEC has placed increased emphasis on clear, concise and
understandable language in prospectuses. SEC requires that in drafting
disclosure documents, registrants should aim to write clearly and to
provide for more effective communication. SEC implemented the plain
English requirement for certain parts of the 1933 act prospectus. For
example, with respect to mutual funds, SEC’s rules require that the
prospectus should contain information appropriate for an average or
typical investor who may not be sophisticated in legal or financial 
matters. 

Investment Education Is Not Required, but Is Sometimes Provided in 
Addition to Disclosures: 

ERISA was enacted in 1974 within the context of defined benefit pension
plans where employers make plan investment decisions; consequently, 
ERISA does not require plan sponsors to make investment education or
advice available to plan participants. Moreover, according to DOL 
officials, employers that sponsor pension plans are not required to 
provide educational materials on retirement saving and investing. Hence,
employers are not required to provide information about the risks 
involved in investing in employer securities and the importance of 
diversification to a prudent investment strategy. Additionally, under 
ERISA, providing investment advice results in fiduciary responsibility 
for those providing the advice, while providing investment education 
does not. 

Industry officials that we spoke with said that many companies provide
employees with investment education and plan information. Plan
participants are given a number of investment education materials, such 
as newsletters, quarterly reports on participant accumulations, and 
annual reports with benefit projections. Companies also provide 
information to employees about their investment plan options. Employees 
are also provided information explaining the value of diversification. 
Furthermore, according to these officials, diversification is a theme 
that they emphasize in their investment education programs. 

Investment education varies by company in part because ERISA has no
requirements about informing participants about investment risks or
diversification. Industry officials that we spoke with told us that many
companies voluntarily provide some investment education to plan
participants and that they do so because education is needed to improve
employees’ abilities to manage their retirement savings. However, 
because there is no standard format for investment education, companies 
provide employees with information that they believe is important to 
managing their retirement savings accounts and this information varies 
by employers. 

DOL does not monitor the type of investment education provided to plan
participants and little is known about the accuracy and usefulness of 
the investment education programs and materials provided to employees. 
SEC provides broad investor education, only to the extent that it 
affects all investors, but it does not specifically target pension plan 
investors. [Footnote 21] Industry officials also said that providing 
investment education to employees does not necessarily mean that 
companies are providing information on the risks of holding employer 
securities. These officials said that telling plan participants that an 
investment may be risky or that an employee’s holdings are risky could 
be interpreted as providing investment advice. Consequently, companies 
provide general information about the benefits of diversification, but 
little information about the risk of holding certain investments, such 
as employer stock. 

Some studies also indicate that the type and amount of investment
education varies by company. For example, one study by a benefits
consulting firm found that 24 percent of their respondents reported that
their companies offered investment information on an as-needed basis,
and 11 percent reported that their companies offered no information at 
all. The remaining respondents said their companies offered detailed
information, either on an ongoing basis (33 percent), or at plan 
enrollment and annually thereafter (32 percent). 

Industry officials told us that many companies do not offer investment
advice mainly because of fiduciary concerns about the liability for such
advice if it results in losses to the participant, even if the 
investment advisor is competent and there is no conflict of interest. 
Companies also have fiduciary concerns about the ability to select and 
monitor a competent investment advisor under ERISA’s prudence standard. 
[Footnote 22] Additionally, ERISA currently prohibits fiduciary 
investment advisors from engaging in transactions with clients’ plans 
where they have a conflict of interest, for example, when the advisors 
are providing other services such as plan administration. As a result, 
these investment advisors cannot provide specific investment advice to 
plan participants about their firm’s investment products without 
approval from DOL. 

Industry officials we spoke with said that more companies are providing
plan participants informational sessions with investment advisors to 
help employees better understand their investments and the risk of not
diversifying. They also said that changes are needed under ERISA to 
better shield employers from fiduciary liability for investment advisors
recommendations to individual participants. In 1996, DOL issued guidance
to employers and investment advisers on how to provide educational
investment information and analysis to participants without triggering
fiduciary liability. [Footnote 23] This guidance identifies and 
describes certain categories of investment information, and education 
employers may provide to plan participants. These categories are (1) 
information about the plan, (2) general financial information, (3) 
information based on “asset allocation models,” and (4) “interactive 
investment materials.” According to DOL, these investment education 
categories merely represent examples of investment information and 
materials that if furnished to participants would not constitute the 
rendering of investment advice. 

DOL has recently issued guidance about investment advice, which should
help clarify when companies can use independent investment advisors to
provide advice to participants in retirement plans. In 2001, DOL issued
Advisory Opinion 2001-09A. This Advisory Opinion was a response to an
application for exemption filed on behalf of SunAmerica Retirement
Markets, Inc. (SunAmerica) with DOL, which sought exemption from the
prohibited transactions restrictions. [Footnote 24] DOL determined that 
SunAmerica’s proposed method of issuing investment advice directly to 
plan participants would not violate the prohibited transaction 
provisions of ERISA. DOL’s ruling allows financial institutions to 
provide investment advice directly to retirement plan participants when 
the advice is based on the computer programs and methodology of a third 
party, independent advisor; therefore eliminating conflicts of 
interest. DOL officials said that they hope the Advisory Opinion ruling 
helps plans to sponsor the type of nonconflicted investment advice they 
are allowed to provide plan participants. 

Conclusion: 

The Enron collapse serves to illustrate what can happen under certain
conditions when participants’ retirement savings are heavily invested in
their employer’s securities. When the employer’s securities constitutes 
the majority of employees’ individual account balances and is the 
primary type of contribution the employer provides, employees are 
exposed to the possibility of losing more than their job if the company 
goes out of business or into serious financial decline—they are also 
exposed to the possibility of losing a major portion of their 
retirement savings. We presented other concerns about what can happen 
to employees’ retirement savings under certain conditions to the 
Congress in our testimony in February 2002. [Footnote 25] In addition 
to the issues of diversification and education, we suggested that 
further restrictions on floor-offset arrangements may be warranted. 

As our analysis shows, it is not unusual to find concentrations of 
employer securities in the plans of large firms such as the Fortune 
1,000 that cover a significant portion of employees. To the extent 
these defined contribution plans become the primary component of 
employees’ retirement savings; these plans are most subject to risk of 
loss, and employees and policy makers should be concerned about the 
risks employees face by holding large portions of their retirement 
savings in employer securities. This is especially important as fewer 
companies are offering defined benefit plans that could provide some 
level of guaranteed retirement savings to employees even if they incur 
substantial losses in their defined contribution plans. 

Current ERISA disclosure requirements provide only minimum guidelines
that companies must follow on the type of information they provide to
plan participants. In addition, there is little government oversight of 
the information companies provide to plan participants. Consequently, 
the type and amount of information plan participants are receiving 
about their investments is not known. Improving the amount of 
disclosure provided to plan participants could help ensure that plan 
participants are at least getting some minimum level of information 
about investing, especially with regard to employer securities. 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. 

Matter for Congressional Consideration: 

To address the lack of investment education and information provided to
participants, the Congress should consider amending ERISA 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. 

Agency Comments: 

We provided a draft of this report to the Department of Labor, the
Department of the Treasury, and to the Securities and Exchange 
Commission for review and comment. We received written comments from 
the Department of Labor that are reprinted in appendix IV. DOL, SEC, 
and the Department of Treasury also provided technical comments on the 
draft. We incorporated each agency’s comments as appropriate. 

Included in the draft for DOL’s review was a recommendation to the 
Secretary of Labor to direct the Assistant Secretary, Pension and 
Welfare Benefits Administration, to require plan sponsors to provide 
participants in defined contribution plans with an investment education 
notice. DOL agreed with our conclusion that additional investment 
education is necessary, but stated that the Secretary of Labor does not 
currently have the legal authority under ERISA to require an investment 
education notice. Consequently, we changed our recommendation to a 
matter for consideration for the Congress to amend ERISA so that it 
requires plan sponsors to provide an education notice. 

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days 
after its issue date. We are sending copies of this report to the 
Secretary of Labor; the Secretary of the Treasury; and the Chairman, 
Securities and Exchange Commission. We will also make copies available 
to others on request. In addition, the report will be available at no 
charge on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you have any questions concerning this report, please contact Barbara
Bovbjerg at (202) 512-7215, Richard Hillman at (202) 512-8678, George
Scott at (202) 512-5932, or Debra Johnson at (202) 512-9603. Other major
contributors include, Joseph Applebaum, Tamara Cross, Rachel DeMarcus, 
Jason Holsclaw, Raun Lazier, Carolyn Litsinger, Gene Kuehneman, 
Alexandra Martin-Arseneau, Corinna Nicolaou, Vernette Shaw, Roger 
Thomas, and Stephanie Wasson. 

Sincerely yours, 

Signed by: 

Barbara D. Bovbjerg: 
Director, Education, Workforce and Income Security Issues: 

Signed by: 

Richard J. Hillman: 
Director, Financial Markets and Community Investments: 

[End of section] 

Appendix I: Scope and Methodology: 

Review of Form 5500 Data: 

To determine the number and types of private pension plans invested in
employer securities, we analyzed plan financial information filed 
annually (Form 5500s) with the Internal Revenue Service and Pension and 
Welfare Benefits Administration(PWBA). The annual Form 5500 report is 
required to be submitted annually by the administrator or sponsor for 
any employee benefit plan subject to Employee Retirement Income 
Security Act (ERISA) as well as for certain employers maintaining a 
fringe benefit plan. It contains various schedules with information on 
the financial condition and operation of the plan. PWBA provided us 
with a copy of the complete 1998 electronic Form 5500 database and a 
preliminary 1999 electronic database for Form 5500s for our analysis. 
The 1998 database contained information from over 215,000 Form 5500 
reports. We did not independently verify the accuracy of the Form 5500 
databases. In addition, the data we analyzed were accurate only to the 
extent that employers exercised appropriate care in completing their 
annual Form 5500 reports. 

We decided to focus our analysis on the largest 1,000 corporations. In
order to determine the Fortune 1,000 companies for our review, we used
the “Fortune Magazines” listing of the largest corporations in the 
United States, which determines the largest corporations by looking at
corporations’ revenue during the preceding year. [Footnote 26] After 
determining the 1,000 largest corporations, we analyzed data for the 
Fortune 1,000 companies (the corporations and their subsidiaries) for 
plan year 1998, which was the most recent year for which complete plan-
specific Form 5500 data were available for our review. 

In order to review the Fortune 1,000’s Form 5500s, we matched the 
Fortune 1,000 companies to their pension plans on the basis of their
Employer Identification Numbers (EINs). An EIN, known as a federal tax
identification number, is a nine digit number that the IRS assigns to 
organizations. [Footnote 27] We used several methods to identify the 
EINs associated with the Fortune 1,000. We started with a list of EINs 
for over 500 companies that was provided to us by the Pension Benefit 
Guaranty Corporation (PBGC). To identify the EINs for the remaining 
companies we searched public filings, including 10-K statements filed 
with the SEC, using the search tools available through nexis.com. Where 
we could not find a company’s EIN and for companies whose EIN was not 
associated with a Form 5500, we conducted a text search of the 
electronic Form 5500 data to find plans sponsored by these companies. 
Additionally, we used 10-K filings for the Fortune 1,000 companies to 
identify major subsidiaries that might have their own pension plans. We 
conducted further text searches of the electronic Form 5500 data to 
identify pension plans for these subsidiaries. Our analysis includes 
information for subsidiaries to the extent we were able to identify 
them during our review. We eliminated from our analysis any Form 5500 
returns that did not report end-of-year assets and also eliminated 
plans that did not report end of year participants. This resulted in a 
database containing the information of 3,480 Form 5500 returns filed by 
996 of the Fortune 1,000 companies or their subsidiaries. Our totals 
for the number of plan participants include double counting of 
participants because some individuals may participate in more than one 
pension plan sponsored by the same employer. 

Because master trust holdings accounted for 45 percent of the assets 
held by the Fortune 1,000 employer-sponsored plans, we tried to identify
employer securities held outside of master trusts. To calculate the
percentage of pension plan assets held as employer securities, we first
subtracted master trust assets from total plan assets to arrive at 
“known assets.” We then calculated the percentage of known assets 
comprised of employer securities to determine the percentage 
concentration of plan assets in employer securities. Plans holding 
assets in master trust accounts reported only the total asset value of 
these holdings and did not itemize or otherwise identify any the 
individual investments held by a master trust for 1998 Form 5500 
filings. As such, we were unable to determine what fraction of that 45 
percent consisted of employer securities. However, we analyzed 
preliminary 1999 Form 5500 data for master trust accounts and found 
that some of the assets reported by these master trust accounts were 
holdings of employer securities. 

Implications of Investing in Employer Securities: 

To address the implications of investing in employer securities, we
identified companies whose pension plans were heavily invested in
company’s securities. We specifically looked for companies where
employees have experienced substantial retirement losses similar to
Enron and ones where the employees have benefited. Given the sensitivity
and nature of our review, it was difficult to find companies that would
speak with us and share their plans’ investment experiences, whether
good or bad. However, we were able to find officials in two companies
that were willing to discuss their pension plan and experiences.
To identify and describe the implications of companies where employees
have experienced significant losses due to bankruptcy or declines in the
market valuations of the company’s stock, we obtained information about
the company’s history and pension plans through U.S. news, trade 
industry reports, business journals, and company Web sites. We 
researched fraud cases on the world wide web; reviewed legal briefs and 
opinions outlining the details of lawsuits filed against the companies; 
and reviewed bankruptcy filings and proceedings to describe the history 
of events that lead the company to seek bankruptcy protection. 

To identify and describe situations where employees have not experienced
significant losses, we interviewed two companies whose private pension
plans are heavily invested in company securities. We developed a set of
structured interview questions to obtain information about the 
companies, specifically background information and information about 
the company’s pension plans. We also reviewed and analyzed the 
company’s summary plan descriptions and prospectus to determine how the 
plans were administered and to identify requirements and restrictions 
of each plan. 

Regulatory Provisions for Disclosures: 

To report on the regulatory provisions for disclosures to participants
owning employer stock through their employer-sponsored plans, we
reviewed relevant laws and regulations and spoke with agency and
industry officials. In order to understand the regulatory provisions for
securities, we reviewed the Securities Act of 1933 and the Securities 
Act of 1934. Similarly, we reviewed ERISA and 404(c) regulations to 
under disclosure requirements for pension plans. We also reviewed past 
reports on private pension plans, ERISA, Employee Stock Ownership Plans
(ESOPs), and issues regarding investment education and advice. We also
spoke with Department of Labor (DOL) pension and legal experts and
officials from the Securities and Exchange Commission’s Market
Regulation Division, Investor Education Division, Corporate Finance
Division, and the Enforcement Division. 

In order to determine the types of disclosures companies were providing
to plan participants, we spoke with officials from the American Benefits
Council, 401(k) Profit Sharing Council of America, the ESOP Association,
the ERISA Industry Committee, the American Society of Pension
Actuaries, the Investment Company Institute, and retirement plan
administrators and financial service providers. 

To determine whether the SEC should reconsider its administrative
determination not to explore application of the Securities Act and the
Securities Exchange Act to defined contribution plans, we first 
researched what SEC’s determination had been and second determined 
whether SEC planned to reconsider its determination. We researched the 
relevant legal history and SEC’s position papers. We reviewed relevant 
securities laws, SEC regulations, and public SEC statements, as well as 
pertinent legal matters. We interviewed and discussed SEC’s position on 
the application of the Securities Act and the Securities Exchange Act 
to defined contribution plans with SEC’s legal counsel and appropriate 
SEC staff. 

[End of section] 

Appendix II: Bankruptcy and Legal Proceedings of Companies Whose 
Employees Participated in Employer-Sponsored Plans: 

Enron: 

Enron was engaged in the business of providing natural gas, electricity,
and communications to wholesale and retail customers. Only months 
before its bankruptcy filing, the company was regarded as one of the 
most innovative, fastest growing, and best managed businesses in the 
United States. However, Enron’s problems did not arise in its core 
energy operations, but in other ventures, particularly “dot com” 
investments in Internet and communications businesses and in certain 
foreign subsidiaries. Rather than recognize these problems, the company 
assigned business losses to unconsolidated partnerships and other 
vehicles, which reportedly inflated its income. [Footnote 28] On 
December 2, 2001, the Enron Corporation filed for Chapter 11 bankruptcy 
protection. 

The decline in Enron’s stock price and its subsequent failure 
substantially reduced the value of many of its employees’ retirement 
accounts. Under Enron’s 401(k) type plan, participants were allowed to 
contribute from 1 to 15 percent of their eligible base pay in any 
combination of pre-tax salary deferrals or after-tax contributions 
subject to certain limitations. Participants were immediately fully 
vested in their voluntary contributions. [Footnote 29] Enron generally 
matched 50 percent of all participants’ pre-tax contributions up to a 
maximum of 6 percent of all employee’s base pay, with matching 
contributions invested solely in the Enron Corporation Stock Fund. 
Participants were allowed to reallocate their company matching 
contributions among other investment options when they reached the age 
of 50. 

On April 8, 2002, a class action suit was filed on behalf of the plan
participants representing 24,000 current and former Enron employees who
participated in Enron’s plans. The lawsuit alleges that the Enron
Corporation Savings Plan Administrative Committee and other persons
responsible for safeguarding the assets of the employee’s plans are 
liable for breaching their fiduciary duties under ERISA. In addition, 
the Department of Labor (DOL) has opened an investigation to determine
whether there were any ERISA violations in the operation of the
company’s employee benefit plans. DOL also reached an agreement with
Enron to appoint an independent fiduciary to assume control of the
company’s retirement plans. SEC had not taken any enforcement actions
as of August 1, 2002. [Footnote 30] 

Color Tile: 

Color Tile’s financial problems began as a result of a 1993 business
transaction that left the company undercapitalized, without the ability 
to service its debts and operate in a competitive fashion. In 1995, the
company defaulted on a $10.4 million interest payment, forcing the
company to seek relief under Chapter 11 of the bankruptcy code. In 1996,
after 44 years in the floor-covering business and failing at several 
attempts to remain competitive in a changing flooring market, Color 
Tile sought Chapter 11 protection. One day after filing for bankruptcy 
protection, the company closed 234 of its 621 company-owned stores 
nationwide. After several attempts to save the company, Color Tile 
closed the remaining of its stores a year later affecting some 3,900 
employees. Company executives blamed its financial troubles on slow 
flooring sales and competition from other centers. 

In 1996, a former Color Tile employee sued Color Tile, alleging
mishandling of the plan assets, including investing the plan assets in 
Color Tile property. The employee won, and the settlement required the 
plan trustee and fiduciary carrier to pay about $4 million to Color 
Tile’s $34 million 401(k) plan. In 1993, DOL investigated Color Tile 
and found no violations. SEC did not open an investigation of Color 
Tile. 

Southland: 

The company began to experience financial difficulties as a result of a
failed 1987 leveraged buyout. The value of the company’s stock declined,
and the company found itself under $4.9 billion of debt, which it had
incurred as the result of the 1987 leveraged buyout. In addition, the
company lost $1.3 billion and then suddenly ran out of money to pay the
interest on the debt, forcing the company to sell 58 of its convenience
stores to a Japanese retailer. Southland’s pension plans included a 
401(k) plan and a profit-sharing plan. Fifty-eight percent of the 
assets in Southland’s 401(k) plan was used to buy 1,100 7-Eleven stores 
and then leased back to the company. After its bankruptcy, Southland 
reduced its holdings in 7-Eleven stores to 46 percent of Southland’s 
401(k) plan assets. 

In 1991, Southland’s Japanese partners acquired 70 percent of 
Southland’s common stock for $430 million. The cash infusion allowed 
the company to emerge from bankruptcy with its debt load reduced by 85 
percent. Southland emerged from bankruptcy protection on March 5, 1991. 

Lucent: 

Lucent Technology, which spun off from AT&T in 1996, at one time held a
dominant position in the telecommunications equipment market. During
the first quarter of fiscal year 2000, the company’s revenues began 
faltering as a result of the company’s inability to develop and deliver 
new products as the market required. In addition, Lucent developed 
problems with AT&T, its largest and most important customer. As a 
result, Lucent shares began falling in January 2000, when the company 
said its fourth-quarter profits would fall short. In subsequent 
quarters, the company kept cutting forecast and the shares kept 
plunging. Between December 31, 1999, and July 2001, Lucent shares 
declined from $70 to $6. In fiscal year 2001, Lucent posted a $16 
billion loss and anticipated a large-scale layoff. 

Employer contributions to Lucent’s management 401(k) plan were made in
the form of employer stock. For nonmanagement employees, about
one-third of the Lucent’s workforce, the employer 401(k) match was in 
the form of an ESOP contribution made in employer stock. It is not 
clear to what extent participants were able to diversify their employer
contributions. With some 30 percent of the company’s 401(k) plan 
invested in company stock, employee account balances declined when 
Lucent’s stock price fell. 

The collapse of Lucent’s stock sparked a class-action lawsuit by Lucent
employees whose 401(k) accounts suffered losses. The suit alleges that
Lucent breached its fiduciary duty for allegedly failing to inform
employees that investing in Lucent stock was imprudent. The lawsuit also
alleges that Lucent executives knew the company’s business was
deteriorating, but continued to encourage participants and 
beneficiaries to make and maintain substantial investments in company 
stock. The case is currently pending the in the courts. SEC had not 
taken any enforcement actions as of August 1, 2002. 

[End of section] 

Appendix III: SEC’s Application of the Securities Laws to Retirement 
Plans: 

The federal securities laws regulate the securities markets, the 
companies issuing securities, and market participants. The securities 
laws can relate to employee benefit plans in several ways. The 
interests of employees in the plan itself can be securities, or the 
plan may invest in instruments that are securities, such as stocks, 
bonds or interests in mutual funds. Finally, the plan may have 
investments in collective investment vehicles such as interests in 
pooled investment funds, bank common and collective trust funds, or 
insurance company pooled separate accounts. 

In most cases, participation interests in pension and profit-sharing 
plans [Footnote 31] are not required to register under the Securities 
Act of 1933 (1933 act). Registration is not required unless 
participation in the plan is voluntary and employee contributions can 
be used to purchase employer securities. Thus where a plan includes a 
401(k) arrangement and employees can choose to invest in employer 
securities through voluntary salary reductions or deferrals, 
participation interests will be securities. Pension and profit-sharing 
plans that are required to register are permitted by SEC to use an 
abbreviated registration form and may use various documents, including 
a Summary Plan Description Footnote 32] as the prospectus deliverable to
employees. 

The company securities offered to employees through such a voluntary
and contributory employee benefit plan must be registered under the 1933
act, unless an exemption is available. These offerings qualify for an
abbreviated registration statement. Interests of plans in collective
investment vehicles are also securities, but may be exempt from
registration. 

Registration Requirements Under the Securities Act and the Exchange 
Act: 

The 1933 act requires the registration with the Securities and Exchange
Commission (SEC) of all offers and sales of securities, unless an
exemption from registration is available. The registration regime is 
based on the premise that investors are protected if all relevant 
features of the securities being offered are fully and fairly 
disclosed. Full disclosure is believed to provide investors with 
sufficient opportunity to evaluate the merits of an investment. A 
registration statement that meets the 1933 act’s disclosure 
requirements must be filed, unless one of the exemptions under section 
3 or 4 of the 1933 act is available. The 1933 act also prohibits the
use of fraud or misrepresentation in the offer or sale of a security, 
whether or not registration is required. 

Section 2(a)(1) of the 1933 act contains a broad definition of security,
which includes any note, stock, treasury stock, bond, debenture, 
evidence of indebtedness, certificate of interest, or participation 
interest in an investment contract. [Footnote 33] 

The Securities Exchange Act of 1934 (Exchange Act) also imposes
registration and reporting requirements upon issuers of certain 
securities. These requirements keep shareholders and markets informed 
about the issuer. Section 12(a) of the Exchange Act requires that all 
securities traded on a national exchange be registered with the SEC. 
[Footnote 34] The Exchange Act also requires an issuer to register if 
it has a class of equity securities held by more than 500 shareholders 
of record and more than $10 million in total assets. [Footnote 35] An 
issuer with a class of registered securities must file periodic
reports, including quarterly and annual reports. 

The U.S. Supreme Court Has Determined That an Employee’s Interest in an 
Involuntary, Noncontributory Retirement Plan Is Not a Security: 

With respect to the definition of security, the Supreme Court in SEC v.
W.J. Howey Co. determined that “an investment contract for the purposes
of the 1933 act means a contract, transaction or scheme whereby a person
(1) invests his money (2) in a common enterprise and (3) is led to 
expect profits (4) solely from the efforts of a promoter or a third 
party.” [Footnote 36] 

In International Brotherhood of Teamsters v. Daniel, [Footnote 37] the 
Supreme Court found that an interest in a compulsory (all employees 
automatically participate), noncontributory (the employer makes all the 
contributions) defined benefit employee pension plan is not a security 
under the 1933 act’s definition. In determining that the interest in 
the plan did not meet the commonly understood definition of an 
investment contract, the Court focused on the factors set out in the 
Howey test. First, the Court found that an employee who participates in 
a noncontributory, compulsory pension plan makes no payment into the 
pension plan, and the employer’s payments into the plan do not relate 
to the individual benefit received by employees. Therefore, the 
investment portion of the Howey test is not satisfied in the case of a 
defined benefit plan. In addition, the Court found that because a major 
part of the retirement benefits were to be derived from the employer’s 
contributions, rather than from the efforts of the plan’s managers in 
investing the income, the plan did not have sufficient profit aspects 
to fall within the test for an investment contract in Howey. 

The Court also pointed out that the fact that ERISA comprehensively
governs the use and terms of employee pension plans severely undercuts
all arguments for extending the securities laws to noncontributory,
compulsory pension plans. The Court explained that ERISA regulates the
substantive terms of pension plans, setting standards for plan funding 
and limits on the eligibility requirements an employee must meet as well
requirements for disclosure of specified information in a specified 
manner. 

SEC’s Position That Interests in Voluntary Contributory Plans Are 
Securities and Must Be Registered if Employee Funds Can Be Used to 
Purchase Employer Stock Is Reiterated in Interpretive Releases: 

In 1941, the SEC first stated its view that employee interests in 
pension and profit sharing plans generally are securities, but did not 
require registration of interests in the plans unless the plan provided 
for purchase of the employer’s stock. [Footnote 38] In SEC’s view, the 
burden of preparing a registration statement in connection with a 
pension plan could result in many employers not sponsoring pension 
plans. However, a registration requirement is justified if employer 
stock can be purchased, because the employer has a direct financial 
interest in the solicitation of employees’ contributions. This 
conclusion was based on the view that where employer stock is among the 
investment options, “it is not unfair to make the employer assume the 
same burdens which corporations typically assume when they go to the 
public for financing.” According to the Supreme Court’s opinion in the 
Daniel case, after 1941, SEC made no further efforts to register plan 
securities other than voluntary, contributory plans where the 
employees’ contributions were invested in the employer’s securities. 

Subsequent to the Daniel decision, the SEC issued two major interpretive
releases, [Footnote 39] the first of which set forth views on when a 
participation interest in a pension plan is an investment contract and 
thus a security. Release No. 6188, dated February 1, 1980, reiterated 
the SEC’s view that, while employee interests in pension plans 
generally are securities, employee interests should be registered only 
when the plan is both voluntary and contributory and may invest in 
stock of the employer an amount greater than that paid into the plan by 
the employer. The release defines a “voluntary” plan as one in which 
employees may elect whether or not to participate, and a “contributory” 
plan as one in which employees make direct payments, usually in the 
form of cash or payroll deductions. 

This administrative practice is based on the SEC’s opinion that (1) 
registration serves no purpose where a plan is involuntary, since in 
that situation the participant is not permitted to make an investment 
decision, and (2) the costs of registration are a significant burden to 
an employer and should be imposed only where the employer has a direct 
financial interest in soliciting voluntary employee contributions. 

The 1980 release found that voluntary, contributory plans where an
employee is permitted to invest in employer securities met the four 
parts of the Howey test defining an investment contract. First, the 
payment of cash or its equivalent by an employee satisfies the 
“investment” requirement. Second, the “common enterprise” requirement 
is met where the interests of employees in the plan are “separable” and 
possess “substantially the characteristics of a security.” In both 
defined contribution and defined benefit plans, there is a separate 
account maintained for each participant to the extent of each person’s 
contribution to the plan. Third, the “expectation of profits” 
requirement is met when the employee voluntarily contributes his or her 
own funds to the plan and can expect that the funds will generate 
profits through the efforts of the plan managers. In the Daniel case, 
the Court suggested that unless a defined benefit plan has a 
substantial dependence on earnings, as well as vesting requirements 
that are not excessively difficult to satisfy, there might be no 
expectation of profits. The 1980 release stated, however, that a 
voluntary, contributory defined benefit plan could meet the expectation 
of profits test because it may depend on earnings to pay promised 
benefits and because the vesting requirements under ERISA are much less 
strict than the requirement that was present in the Daniel case. 
Finally, the 1980 release stated that the “from the efforts of others” 
test was easily satisfied because the earnings generated by a plan 
would result from the efforts of the plan managers. 

SEC’s analysis concluded that the interests of employees in voluntary,
contributory pension plans are securities within the meaning of the 1933
act. The staff also concluded that the interests are offered and sold to
employees within the meaning of the 1933 act. Consequently, the 
interests are subject to registration requirements unless one of the 
exemptions from registration applies. Antifraud laws apply to all sales 
of securities. 

Most Types of Pension Plans Are Exempt from Registration under Section
3(a)(2) of the 1933 Act: 

Section 3 of the 1933 act exempts various types of securities from the
registration requirements, generally based on the nature of the issuer 
and the terms of the security. The statutory exemptions apply to the 
1933 act’s registration requirements, but do not apply to prevent 
potential liability under the antifraud provisions. 

Section 3(a)(2) of the 1933 act exempts collective funding vehicles 
maintained by banks and insurance companies for employee benefit plans 
and the interests of employees in qualified plans, unless any employee
funds can be used to purchase employer securities. [Footnote 40] In 
addition, if the plan does not restrict the plan’s overall investment 
in employer securities so that it cannot exceed the employer’s 
contribution, the exemption is not available, and the interests offered 
by the plan must be registered. [Footnote 41] Under the SEC’s analysis, 
registration will generally be required in connection with any plan 
that permits contributions from participants and permits all or any 
portion of these contributions to be applied to the purchase of 
employer stock. The SEC’s view that the 3(a)(2) exemption extends to
pension plans is based on its reading of the legislative history of the
provisions and its view that the section should be given a broad
interpretation so as to exempt most plans. 

On January 15, 1981, the SEC issued Release No. 33-6281, an interpretive
release providing further guidance on the application of the 1933 act to
employee benefit plans. In the 1981 release, the staff expanded on the
definition of a voluntary, contributory plan, explaining that the
determination of whether a plan is voluntary and contributory depends
solely on whether participating employees can decide at some point
whether or not to contribute their own funds to the plan. The release 
also discussed the amendments to the section 3(a)(2) exemptions made by 
the Small Business Investment Incentive Act of 1980. The 1980 amendments
broadened the scope of the exemption by including certain insurance
contracts and governmental plans within its coverage. In addition, the
amendments make clear that any security arising out of a contract with 
an insurance company will be exempt under section 3(a)(2) in connection
with a plan specified in the section. 

In the 1981 release, the staff also discussed cash or deferred 
arrangements qualifying under section 401(k) of the Internal Revenue 
Code. Arrangements considered in the 1981 release allowed employees to 
elect to receive immediate payment of the employer’s plan contribution 
or to defer receipt and have it invested in a plan where it will 
accumulate for later repayment. The staff determined that these 
arrangements are not contributory on the part of employees because they 
did not involve out-of-pocket investments by employees of their own 
funds in employer stock. Instead, the plans are funded by employer 
contribution. 

However, subsequent to the 1981 release, the Treasury Department issued 
rules [Footnote 42] under section 401(k) that allowed plans to provide 
for pre-tax employee contributions through salary reduction. In a 
salary reduction plan, the employee elects to reduce his compensation 
and have the amount contributed to a plan. This type of salary 
reduction is considered to be an out-of-pocket contribution into the 
plan. Because such a plan is voluntary and contributory, plan interests 
would be securities. Registration of 401(k) plan interests in a salary 
reduction plan would be required if employee contributions are 
permitted to be invested in employer stock. [Footnote 43] 

Other Exemptions from Securities Act Registration: 

Other Securities Act exemptions may apply to offers and sales of 
employer securities. In 1988, SEC adopted Rule 701 to exempt from 1933 
act registration employee plans of employers that are not subject to the
Exchange Act’s periodic reporting requirements. Rule 701 is available 
to a number of types of employee benefit plans. [Footnote 44] During a 
12-month period, an offering may be exempt for an amount up to the 
greatest of $1 million, 15 percent of the total assets of the issuer, 
or 15 percent of the outstanding amount of the class of securities 
being offered and sold in reliance on section 701. Securities acquired 
under a Rule 701 offering are treated as restricted securities and may 
not be resold unless the 1933 act’s registration requirements are 
complied with or unless another exemption applies. 

Private and limited offerings also are exempt whether or not the company
is subject to Exchange Act reporting. Under Section 3(b) of the 1933 
act [Footnote 45] SEC may adopt regulations exempting issuers in the 
amount of $5 million or less. Under section 3(a)(11), “intrastate” 
offerings are exempt from registration where all aspects of the 
offering are within the confines of one state and are purely local in 
nature.[Footnote 46] 

Section 4(2) [Footnote 47] exempts transactions by an issuer not 
involving any public offering. This exemption applies to offerings to 
sophisticated institutional and individual investors who do not need 
the protections of federal registration. In SEC v. Ralston Purina Co., 
[Footnote 48] the Supreme Court determined that an offering to 
employees was not necessarily exempt as not involving a public 
offering. Ralston Purina made its stock available to all employees 
regardless of their connection with the company or knowledge of the 
business. Citing the design of the 1933 act to protect investors by 
promoting full disclosure of information necessary to informed 
investment decisions, the Court found that the employees were a class 
of persons that needed the protection offered by registration because
they were not able to fend for themselves in connection with the 
transaction. 

Registration Requirements That Apply to ESOPs: 

An ESOP is a defined contribution plan that invests primarily in 
employer securities and usually distributes the securities upon the 
employee’s retirement. Under SEC’s analysis, an employee’s interest in 
a voluntary, contributory ESOP is a security. In Uselton v. Commercial 
Lovelace Motor Freight [Footnote 49] the Tenth Circuit held that an 
interest in a contributory and voluntary employee stock ownership plan 
was a security and that ERISA did not provide sufficient protection to 
displace the application of the federal securities laws. However, an 
interest in a mandatory stock ownership plan completely funded by the 
employer was held not to be a security in Matassarin v. Lynch. 
[Footnote 50] 

A 1992 Study Recommends Disclosure to Plan Participants Who Make
Their Own Investments in Pension Plans: 

In May 1992, the SEC’s Division of Investment Management issued a study
entitled, “Protecting Investors: A Half Century of Investment Company
Regulation.” The study proposed that all pooled investment vehicles for
participant-directed defined contribution plans be required to deliver
prospectuses for the underlying investment vehicles to plan 
participants. The study reviewed the legislative history of the 1970 
amendments to Section 3(a)(2) of the 1933 act and found that the basis 
for the exemption was concerns expressed by both the banking and 
insurance industries that the lack of a clear exemption under the 
securities laws for pooled investment vehicles might expose banks and 
insurance companies to civil liabilities. Congress exempted these 
pooled investment vehicles, in part, because they were subject to 
oversight by bank and insurance regulators. The interests issued by the 
pooled investment vehicles in question were still subject to the anti-
fraud provisions of the 1933 act, notwithstanding the amendments. In 
addition, Congress assumed that the person making investment decisions 
for a plan (the sponsoring employer or a professional investment 
manager) was a sophisticated investor able to fend for itself with the 
application of only the 1933 act’s antifraud provisions. The study 
highlighted, however, that since the passage of the 1970 amendments, the
character of employee benefit plans has shifted from defined benefit 
plans, in which the plan sponsor bears the investment risk, to 
participant-directed defined contribution plans, in which the plan 
participant bears the investment risk. 

Finding that the information received by plan participants was far less
than the information received by investors who invest directly in 
securities issued by investment companies and other issuers, the 
Division of Investment Management expressed its view that disclosure to 
these plan participants should be improved. It recommended that the SEC 
send to Congress legislation that would: (i) remove the current 
exemption from registration in Section 3(a)(2) for interests in pooled 
investment vehicles consisting of assets of participant-directed 
defined contribution plans; and (ii) require delivery of the 
prospectuses and other disclosure documents of the pooled investment 
vehicles (other than mutual funds) to all plan participants. 

Subsequent to the issuance of the study, the DOL issued voluntary rules
under Section 404(c) of ERISA that provide plan fiduciaries with a safe
harbor from liability under certain conditions when plan participants
exercise control over the assets in their individual accounts. One of 
the rule’s specific guidelines allowing fiduciaries of participant-
directed plans potentially to avoid fiduciary liability is that plan 
participants who invest in securities that are subject to the 1933 act 
receive at or about the time of a participant’s initial investment in 
the securities a copy of the issuer’s most recent prospectus. Footnote 
51] In general, the guidelines obligate the plan sponsor to provide or 
make available to plan participants sufficient information so that they 
may make informed investment decisions. While the disclosures required 
by the 404(c) rules generally make more information available to plan 
participants by encouraging plan sponsors to provide or make available 
more information about the underlying investment options offered by the 
plan, the view of the Division of Investment Management is that plan 
participants have a continuing need for information in order to 
evaluate their investments, and decide whether to maintain or 
reallocate those investments. Accordingly, the approach of the Division 
of Investment Management would go farther by requiring delivery to plan 
participants of a current mutual fund prospectus on a continuing basis 
as well as delivery of annual and semi-annual shareholder reports by 
mutual funds and other underlying investment vehicles. [Footnote 52] 

Interests in Employee Benefit Plans That Are Securities May Be 
Registered Using Form S-8: 

If Securities Act registration of employee’s interests in an employee
benefit plan is required, then Form S-8 is generally the appropriate 
form for use. Form S-8 is also used for registering employer securities 
issued in connection with employee benefit plans. Form S-8 is available 
only if the employer is subject to the Exchange Act reporting 
requirements. Form S-8 utilizes an abbreviated disclosure format that 
reflects the SEC’s distinction between offerings made to employees 
primarily for compensatory and incentive purposes and offerings made by 
registrants for capital-raising purposes. The SEC has exercised its 
rule-making authority to reduce the costs and burdens incident to 
registration of employee benefit plan securities. 

The SEC substantially revised Form S-8 in 1990. [Footnote 53] The 
revisions included making the registration statements effective 
automatically upon filing. [Footnote 54] A prospectus is customarily 
part of a registration statement, and contains the basic business and 
financial information about the issuer with respect to a particular 
securities offering. Investors use the prospectus to appraise the 
merits of the offering and make educated investment decisions. However, 
Form S-8 is the only registration form that does not require the 
registrant to prepare and file with the SEC a separate document to 
satisfy the prospectus delivery requirements under the federal 
securities laws. Instead, Form S-8 requires only that certain specified 
current plan information be delivered to employees in a timely fashion. 
No particular legal format is specified. The information could be 
provided in one or more documents prepared in the ordinary course of 
employee communications. Registrants can deliver materials required to 
be prepared for plan participants by ERISA and could deliver the 
Summary Plan Description as a basic disclosure document. [Footnote 55] 
The issuer must also supply participants with a written statement that 
certain documents are incorporated by reference into the prospectus, 
and advise the participant of their availability on request. These 
documents include the Exchange Act filings containing issuer 
information and financial statements. 

At the same time, the SEC also permitted 1933 act registration of an
indeterminate amount of plan interests; simplified the calculation of 
filing fees; and amended Form 11-K, the Exchange Act annual report for
employee benefit plans, to require only plan financial statements. 

Registration and Reporting Requirements Under the Securities Exchange 
Act: 

Section 12(g) of the Exchange Act [Footnote 56] requires that 
registration statements be filed by issuers that have both a class of 
equity securities having more than 500 shareholders of record and more 
than $10 million in total assets. Companies must register their stock 
and satisfy all reporting requirements of the Exchange Act if these 
criteria are met. For purposes of determining the number of record 
holders of a class of securities, an employee benefit plan holding 
employer securities is counted as only one record holder. [Footnote 57] 
If the employer’s securities must be registered under the Exchange Act, 
the employer will incur periodic reporting obligations, including 
annual and quarterly reports, as well as filings reporting certain 
specified material changes in the issuer’s condition or operations. 

If the interests of the plan participants are considered securities, 
the plan may be subject to registration under the Exchange Act. 
However, interests in qualified plans are exempt from registration 
under the Exchange Act because Rule 12h-1 exempts from registration all 
interests in employee stock bonus, stock purchase, pension, profit 
sharing, retirement, incentive, or similar plans that are not 
transferable by the employee. 

Employee plans that are owners of securities that are registered under 
the Exchange Act may be subject to different Exchange Act reporting
requirements. A plan that becomes the beneficial owner of more than
5 percent of a class of equity securities registered under the Exchange 
Act must file a report with the SEC on Schedule 13G. [Footnote 58] When 
a plan acquires stock for the benefit of officers and directors of an 
employer, the officers and directors are required to follow the Section 
16 reporting requirements. Transactions of these company insiders may 
be subject to the short swing profit recovery rules if the insider 
switches into or out of an employer stock fund or takes a cash 
distribution from the fund in a “discretionary transaction” if the 
transaction occurs less than 6 months after any previous “opposite way” 
transaction. [Footnote 59] 

Anti-fraud Rules Applicable to Employee Benefit Plans: 

Section 10(b) of the Exchange Act [Footnote 60] prohibits the use of 
any manipulative or deceptive practices in connection with the purchase 
or sale of a security. Rule 10b-5 [Footnote 61] makes it unlawful for 
any person to make a material misstatement or omission in connection 
with the purchase or sale of a security. Section 10(b) and Rule 10b-5 
will apply to material misrepresentations and omissions made to plan 
participants in connection with plan transactions that involve 
securities. Violations of Rule 10b-5 can be asserted by plan 
participants if the plan is making material misstatements or omissions 
in the materials the plan provides to participants in connection with a 
sale of company stock to plan participants. Rule 10b-5 can also apply 
to the purchase or sale of a security on the basis of material 
nonpublic information about that security in breach of a duty of trust 
or confidence. [Footnote 62] This could apply where an officer or 
director buys or sells shares through a plan and was aware of material
non-public information when the transaction took place. 

Section 17(a) of the 1933 act [Footnote 63] prohibits fraud, material 
misstatements and omissions of fact in connection with the sale of 
securities. Section 17(a) applies whether the sale is registered or 
exempted from the 1933 act registration. Neither section 17(a) nor 
Exchange Act Rule 10b-5 imposes an affirmative duty to disclose, but 
can impose liability for omissions that make statements materially 
misleading. 

Conclusion: 

Historically, SEC has taken the position that interests in employee 
benefit plans can be securities for purposes of the 1933 act 
requirements to register offers and sales of securities. However, SEC 
has taken the view that offers and sales of plan interests are not 
subject to registration unless the plan allows employee funds to be 
used to purchase employer stock. In 1979, the U.S. Supreme Court 
decided that interests in plans where employees had no choice 
concerning participation and where employees did not make contributions 
to the plan were not securities and did not have to be registered. In 
the wake of the Supreme Court’s decision, SEC issued two releases 
indicating that only voluntary, contributory plans where employee funds 
could be invested in employer stock would be required to file 
registration statements. 

SEC’s position is based, in part, on its interpretation of the 
registration exemptions contained in section 3(a)(2) of the 1933 act. 
In SEC’s view, in light of the Daniel opinion, the 3(a)(2) exemption 
applies to all qualified employee plans, except those that allow the 
use of employee funds to purchase employer stock. While SEC’s 1980 
release indicated that it did not favor a broader registration 
requirement, this release was issued when the prevalent plan was a 
defined benefit plan. SEC has not reconsidered its position as 
expressed in this 1980 release and believes it is bound by the Supreme 
Court’s decision in Daniel. 

[End of section] 

Appendix IV: Comments from the Department of Labor: 

U.S. Department of Labor: 
Assistant Secretary for Pension and Welfare Benefits: 
Washington, D.C. 20210: 

August 23, 2002: 

Ms. Barbara D. Bovbjerg: 
Director, Education. Workforce, and Income Security Issues: 
United States General Accounting Office: 
Washington, DC 20548: 

Dear Ms. Bovbjerg: 

We have reviewed the General Accounting Office's (GAO) draft report 
entitled "Private Pensions: Participants Need Information on the Risks 
of Investing in Employer Securities and the Benefits of 
Diversification" (GAO-02-943). This letter provides some general 
comments and our response to the draft report's recommendation to the 
Secretary of Labor. 

We agree with GAO's conclusion that additional investment education is 
necessary. The Department recognizes that in an environment where 
workers are becoming increasingly responsible for their own retirement 
security through the direction of investments in defined contribution 
plans (such as 401(k)-type plans), access to investment education and 
advice is of critical importance. The President proposed such a change 
to strengthen the retirement security of workers and their families, as 
part of his pension reform package that was passed by the House of 
Representatives with bipartisan support in H.R. 3762. While there arc a 
number of bills currently under consideration by the Congress to 
address these issues, H.R. 3762 would, among other things, require 
individual account plans to furnish quarterly benefit statements that 
would not only inform participants and beneficiaries of the value of 
the investments allocated to their individual accounts, but also 
explain the importance of a well-balanced and diversified investment 
portfolio, as well as the risks of investing a significant portion of 
one's investment portfolio in one entity, such as employer securities. 
H.R. 3762 also would increase worker access to affordable, quality 
investment advice by clarifying the limited liability of employers when 
selecting investment advice providers and creating, through a statutory 
exemption from the prohibited transaction provisions, a level-playing 
field among investment advice providers. 

The draft report recommends that "the Secretary of Labor should direct 
the Assistant Secretary, Pension and Welfare Benefits Administration, 
to require 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." However, the Secretary 
does not currently have the legal authority under ERISA to require all 
sponsors of defined contribution plans to provide either investment 
education or investment advice. Therefore, we suggest the GAO consider 
revising its recommendation to conclude that Congress should take 
appropriate action to address this matter. 

Finally, the report presents a number of statistics illustrating the 
investment of ERISA pension plan assets in employer securities. The 
Department would like to highlight certain contextual issues that merit 
consideration when interpreting these statistics. Most of the 
statistics presented in the report pertain to plans sponsored by 
Fortune 1000 companies. These large companies are likely on average to 
invest a larger proportion of 401(k) assets in employer securities than 
are smaller companies. They are also more likely to sponsor additional 
plans, including defined benefit plans, which are not heavily invested 
in employer securities. An individual participant's risk from 
investments in employer securities is best understood in the context of 
his or her combined retirement assets, including both defined benefit 
and contribution pensions, as well as other retirement savings. 

The Department of Labor appreciates having had the opportunity to 
comment on this draft report. 

Sincerely, 

Signed by: 
Ann L. Combs: 

[End of section] 

Footnotes: 

[1] Defined benefit plans promise to provide generally a level of 
monthly retirement income that is based on salary, years of service, 
and age at retirement. The benefits from defined contribution plans are 
based on the contributions to and investment returns on individual
accounts. 

[2] DOL’s analysis included all plans with 100 or more participants. 

[3] ESOPs are defined contribution plans that require plan sponsors to 
invest plan assets principally in shares of the sponsor’s stock. 

[4] These are limited to defined contribution plans with a 401(k) type 
feature that are combined with profit-sharing/thrift savings plans. 

[5] An employer-sponsored plan that pools its assets in a master trust 
with those of other plans for investment purposes reports only one 
asset amount on the Form 5500. This amount represents the plan’s 
interest in the master trust but provides no information about the 
master trust’s investments, such as employer stock. 

[6] ERISA is a federal law that sets minimum standards for pension 
plans sponsored by private employers. 

[7] For information on other issues we raised with Congress, see U.S. 
General Accounting Office, Private Pensions: Key Issues to Consider 
Following the Enron Collapse, GAO-02-480T (Washington, D.C.: Feb. 27, 
2002). 

[8] A profit-sharing plan is a type of defined contribution plan that 
provides for contributions to employees based on employer profits. 
Profit-sharing plans provide for employer contributions to participants 
based on a definite formula that is generally based on employee 
compensation. A thrift savings plan is a defined contribution plan to 
which employees make contributions, usually as a percentage of salary. 

[9] The Fortune 1,000 defined contribution plans had about $848 billion 
in plan holdings and defined benefit plans had about $981 billion in 
holdings. 

[10] Total participant numbers include double counting. 

[11] We based our industry classifications on those used by DOL in the 
Private Pension Bulletin: Abstract of 1998 Form 5500 Annual Reports, 
Number 11, Winter 2001-02. 

[12] PBGC was created to insure the pension benefits of participants—in 
certain defined benefit plans—whose plans terminate without sufficient 
assets to pay all benefits owed. If a defined benefit plan terminates 
without sufficient funds to pay all benefits that participants are 
entitled to, PBGC takes over the plan and its assets and is responsible 
for paying benefits up to limits set by law to participants who are 
entitled to receive them. 

[13] In accordance with ERISA, PBGC benefit payments are subject to a 
maximum benefit guarantee. For plans terminating in 2002, the maximum 
insured amount payable is $42,954 per year for a worker who retires at 
age 65. 

[14] Under ERISA, providing investment advice results in fiduciary 
responsibility for those providing the advice. 

[15] 29 C.F.R. 2550.404c-1. ERISA 404(c) generally relieves employers 
of liability for fiduciary error when the employer permits participants 
to exercise control over their accounts. 

[16] Final Regulations Regarding Participant Directed Individual 
Account Plans, 57 Federal Register 46,906, 46,909-10 (Oct. 13,1992) 
(codified at 29 C.F.R. 2550.404c-1). 

[17] Rule 428 under 17 C.F.R. Section 230.428 specifies what companies 
must deliver to plan participants to satisfy the prospectus delivery 
requirement of Form S-8. 

[18] A full review involves an in-depth examination of the accounting, 
financial, and legal aspects of an issuer’s filing. A full financial 
review involves an in-depth accounting analysis of an issuer’s 
financial statements and management’s discussion and business plan
disclosure. 

[19] See U.S. General Accounting Office, Human Capital: Major Human 
Capital Challenges at SEC and Key Trade Agencies, GAO-02-662T 
(Washington, D.C.: Apr. 23, 2002). 

[20] According to SEC’s Interpretive Release No. 6188, SEC made 
revisions to the Form S-8 and revised its procedures for making it 
effective. The Commission believed that the public interest would be 
better served by prompt effectiveness of such filings without the delay
necessitated by the low review priority given to them. SEC 
substantially revised Form S-8 in 1990. 

[21] Within SEC, its Office of Investor Education is responsible for 
disseminating information to educate the investing public about the 
advantages and risks associated with investing. In this capacity, SEC 
seeks to protect investors by first providing them with pertinent 
information to assist in making investment decisions appropriate for 
their circumstances. SEC provides web-based links to other federal, 
state, and related investor education web sites that contain materials 
or information useful to investors. 

[22] ERISA’s prudence standard requires a fiduciary to act as a prudent 
person experienced in such matters would in similar circumstances. 

[23] Interpretive Bulletin 96-1. 

[24] The Advisory Opinion prohibited fiduciary investment advisors from 
engaging in transactions with clients’ plans where they have a conflict 
of interest. 

[25] See U.S. General Accounting Office, Private Pensions: Key Issues 
to Consider Following the Enron Collapse, GAO-02-480T (Washington,D.C.: 
Feb. 27, 2002). 

[26] All companies on the list must publish financial data and must 
report part or all of their figures to a government agency. Private 
companies and cooperatives that produce a 10-K are, therefore, 
included; subsidiaries of foreign companies incorporated in the United
States are excluded. Revenues are as reported, including revenues from 
discontinued operations when they are published on a consolidated basis 
(except when the divested company’s revenues equal 50 percent or more 
of the surviving company’s revenues on an annual basis). The revenues 
for commercial banks and savings institutions are interest and 
noninterest revenues. Such figures for insurance companies include 
premium and annuity income, investment income, and capital gains or 
losses, but exclude deposits. Revenues figures for all companies 
include consolidated subsidiaries and exclude excise taxes. 

[27] The IRS uses the number to identify taxpayers who are required to 
file various business tax returns as well as the Form 5500. EINs are 
used by employers, sole proprietors, corporations, partnerships, 
nonprofit associations, trusts, estates of decedents, government 
agencies, certain individuals, and other business entities. 

[28] In late 2001, Enron revealed it would incur losses of at least $1 
billion and would restate its financial results for 1997, 1998, 1999, 
2000, and for the first quarters of 2001, to correct errors that 
inflated Enron’s net income by $586 million. 

[29] Employees hired after July 1999 are fully vested in their company 
contributions after 1 year of service. 

[30] SEC has taken few enforcement actions to date against companies 
concerning their pension plans. SEC staff advised that the SEC had not 
taken actions to safeguard or recover assets of retirement plans 
triggered by situations where—in the last 10 years—employees have 
suffered substantial losses because plans that held employer stock had
declined in value or had limited employees’ ability to diversify 
investments or sell company stock. According to SEC staff, these 
matters do not deal with disclosure or registration issues that are 
under SEC’s authority. Instead, these matters are more related to the 
merits of the plans and how they operate under ERISA, thus, falling 
under DOL’s regulatory authority. 

[31] “Pension” and “profit sharing” plans are generally qualified under 
§401(a) of the Internal Revenue Code, and receive favorable tax 
treatment. Qualified plans must satisfy coverage, participation, 
vesting, and benefit accrual standards that are intended to ensure that 
plans are established for the exclusive benefit of employees and 
prevent discrimination in favor of highly compensated individuals. A 
pension plan is established and maintained by an employer primarily to 
provide systematically for the payment of definitely determinable 
benefits to its employees over a period of years, usually for life, 
after retirement. 26 C.F.R. §1.401-1(b)(1)(i). A profit-sharing plan is 
a plan established by an employer to provide for participation in 
profits by employees pursuant to a definite formula for allocating the
contributions and distributing accumulated funds. 26 C.F.R. 
§1.401(b)(1)(ii). A profit sharing plan is a defined contribution plan 
because the employer’s contribution is set at a percentage of profits. 

[32] 29 U.S.C. §1021(a) requires the administrator of an ERISA plan to 
furnish each plan participant a summary plan description. 

[33] 17 U.S.C. § 77b(a)(1). 

[34] 15 U.S.C. § 78l(a). 

[35] 15 U.S.C. §78l(g)(1); 17 C.F.R. §240.12g-1. 

[36] 328 U.S. 293, 298-99 (1946). 

[37] 439 U.S. 551(1979). 

[38] Opinion of Assistant General Counsel, CCH Fed. Sec. L. Rep. [1941-
1944 Transfer Binder], para. 75,195. 

[39] An interpretive release sets forth the views of the SEC or its 
staff on questions of current concern, without stating them in the form 
of legal requirements. They are general public statements of policy. 

[40] In the Daniel decision, the Supreme Court read the 3(a)(2) 
exemption to refer only to the plan’s interest in the investment 
vehicle. SEC’s view that the exemption also applies to interests of 
participants in the plans themselves is based on its reading of the 
exemption’s legislative history and the practical consideration that 
many plans would have no exemption without a broad interpretation. 

[41] Comdial Corporation, SEC No-Action Letter, available May 28, 1984. 
A “no action letter” is an SEC staff response to private requests for 
an indication that certain contemplated transactions will not trigger 
SEC enforcement action. 

[42] Certain Cash or Deferred Arrangements Under Employee Plans, 46 
F.R. 55544, (Nov. 10, 1981). A 401(k) feature can be appended to a 
qualified plan. The Treasury regulations refer to 401(k) features as 
“qualified cash or deferred arrangements.” The cash or deferred 
arrangement can be in the form of a salary reduction agreement between 
an employee and the employer under which a contribution will be made 
only if the employee elects to reduce his compensation or to forgo an 
increase in his compensation. 26 C.F.R. 1.401 (k)-1(a)(3)(i). 

[43] Diasonics, Inc., SEC No-Action Letter, available December 29, 
1982. 

[44] 17 C.F.R. §230.701. The Rule 701 exemption applies to purchase 
plans, option plans, bonus plans, stock appreciation rights, profit 
sharing, thrift, incentive, or similar plans. 

[45] 15 U.S.C. §77c(b). 

[46] 15 U.S.C. §77c(a)(11). 

[47] 15 U.S.C. §77d(2). 

[48] 346 U.S. 119 (1953). In more recent cases, the ability to fend for 
oneself has been interpreted to mean that the persons to whom the 
securities are offered must be “sufficiently sophisticated to demand 
and understand the information that is available to them.” Thomas Lee 
Hazen, 1 Treatise on the Law of Securities Regulation 406 (4th ed.
2002). 

[49] 940 F. 2d 564 (10th Cir. 1991). 

[50] 174 F. 3d 549 (5th Cir. 1999). 

[51] Final Regulations Regarding Participant Directed Individual 
Account Plans (ERISA Section 404(c) Plans) 29 C.F.R. §2550.404c-1. 

[52] Mutual funds must send semiannual reports to their shareholders. 
These reports are required to include information concerning the 
investments’ aggregate value, a listing of amounts and values of 
securities owned; an itemized income statement; a statement of the
remuneration paid to all directors and members of an advisory board. In 
addition, SEC applies certain requirements to the mutual fund 
prospectus, including a requirement that mutual funds provide 
shareholders with after-tax performance information. 

[53] See Release No. 33-6867 (July 13, 1990). 

[54] A registration statement is generally effective twenty days after 
the later of the filing of the initial registration statement or the 
most recent amendment to the registration statement. 

[55] Release No. 33-6281, pt. IV (C) outlines staff interpretive 
positions regarding the incorporation by reference in a Form S-8 
prospectus of plan information contained in an ERISA summary plan 
description. 

[56] 15 U.S.C. §78l(g). 

[57] Rule 12g5-1(a)(2). Of course, the number of beneficial owners 
(plan participants) will be far more numerous. 

[58] The reporting requirement is intended to notify SEC of a potential 
change in control, however, because employee plans are not the 
beneficial owners of securities, they may qualify for an abbreviated 
reporting requirement. Rule 13d-1(b)(1)(ii)(F) permits employee benefit 
plans subject to the provisions of ERISA to file the short-form 13G if 
the securities are acquired in the ordinary course of business and not 
with the purpose or effect of changing the control of the issuer. 
Beneficial ownership is defined as the power to vote and/or exercise 
investment power over the security. 17 C.F.R. §240.13d-3. Defined 
contribution plans generally pass through voting rights. 

[59] Section 16(b) of the Exchange Act requires insiders to disgorge to 
the company any profit realized from a short swing transaction. A 
discretionary transaction is generally at the volition of the 
participant. 

[60] 15 U.S.C. §78j(b). 

[61] 17 C.F.R. §240.10b-5. 

[62] Rule 10b5-1 defines “on the basis of” to mean the person making 
the purchase or sale was aware of the material nonpublic information 
when the person made the purchase or sale. However, Rule 10b5-1(c) 
establishes conditions whereby a person’s purchase or sale is not “on 
the basis of” material non-public information if another person is 
instructed to make the purchase or sale for the instructing person’s 
account and at the time of the original instruction the instructor was 
not aware of the material nonpublic information. This could include a 
situation where a person enrolls in a plan and agrees to have a payroll 
deduction invested in employer securities. 

[63] 15 U.S.C. §77q(a). 

[End of section] 

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