To better understand the current plan-freeze environment and its significance to the DB system going forward, we address the following questions: 1. To what extent are DB pension plans frozen, and what are the characteristics of such freezes? 2. What are the implications of such freezes for plan sponsors, participants, and the PBGC? To determine the extent and characteristics among plans that are currently frozen, we collected and analyzed original survey data. We also analyzed and reviewed recent studies of frozen DB plans, notably PBGC’s studies of hard frozen DB plans. Appendix I contains revised slides that update the preliminary briefing information that we provided to interested congressional staffs and members, as well as officials from the Department of Labor, PBGC, and the Department of the Treasury from late-April to June 2008. We conducted our work from April 2006 to July 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform our work to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our research objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our objectives. To achieve our survey objectives, we surveyed a stratified probability sample of 471 DB pension sponsors from PBGC’s 2004 Form 5500 Research Database. We limited our study population to 7,804 sponsors that had 100 or more total participants in sponsored plans, and our survey population results represent estimates for all sponsors with this characteristic. While they are a minority of sponsors (about 34 percent), sponsors whose plans have more than 100 participants represent about 99 percent of all DB plan participants in the single-employer DB system. Further, sponsors with more than 100 participants in participating plans also represent 99.1 percent of the total liabilities among single-employer plans. To deploy the survey, we mailed a questionnaire to DB pension plan sponsors in the three smallest strata we identified. In addition, as part of a longer questionnaire, we collected similar information via a web survey about plan freezes from the very largest strata of plan sponsors. The survey results can be reviewed in GAO-08-818SP. See appendix II for a more detailed discussion about our survey methodology. Overall, an estimated 3.3 million active participants in our study population—or 21 percent of all active participants in the private, single- employer DB system—are affected by reported freezes. (See app. I, slide 9 and slide 10.) Active participants are employees that are or may become eligible to accrue or receive additional benefits under a plan; if all participants in the DB system (that is, active participants, retirees, and separated vested participants) are considered, the proportion represented by active participants who are affected by plan freezes falls to 10 percent. (See app. I, Slide 9.) We considered only those participants who are currently accruing benefits (that is, active participants) at the time of freeze implementation to be affected by a freeze. The above calculations, therefore, do not include sponsors whose largest frozen plans are under a new-employee-only soft freeze, where the plan is closed to new entrants and benefit accruals for active participants remain unchanged. The extent to which active participants are affected by a freeze depends on the type of freeze in place. Under hard freezes, future benefit accruals cease for active participants. In contrast, soft freezes may reduce future benefit accruals for some or all active participants. Soft freezes are distinct from hard freezes in that the restrictions on participants’ future benefit accruals are less comprehensive than the total cessation of future accruals under hard freezes. Our survey shows that about half the sponsors in the study population have one or more frozen plans. (See app. I, slide 11.) Overall, about 51 percent of plans in the study population were reported as closed to new entrants, the basic requirement of a plan freeze. Nearly half of plans with a reported freeze, or 23 percent of all plans in the study population, were under a hard freeze. (See app. I, slide 12.) In addition, 12 percent reported some type of soft freeze. About 6 percent reported a partial plan freeze, while 4 percent reported an “other” freeze, which include situations where plan participants are separated into plan tiers, or freezes brought on by bankruptcy, plant closure, or plan merger. The survey results suggest that two factors may influence the likelihood that sponsors will implement a hard freeze: sponsor size and the extent to which a sponsor’s plans are subject to collective bargaining (CB) agreements. Larger sponsors, those with 10,000 or more total participants, are significantly less likely than smaller sponsors to have implemented a hard freeze, with only 9.4 percent of plans under a hard freeze among larger sponsors compared with 25.4 percent of plans under a hard freeze among smaller sponsors. (See app. I, slide 13.) Similarly, firms with some or all plans subject to CB are significantly less likely to implement hard freezes than sponsors with no plans subject to CB. (See app. I, Slide 14.) However, these two factors may be related, as larger sponsors in our survey are generally more likely to have one or more plans subject to CB than smaller sponsors. About half of the freezes of sponsors’ largest frozen plans have occurred since 2005. (See app. I, slide 16.) This figure includes only plans that are currently frozen, and it does not represent a longitudinal dataset of all plan freezes. Any plans frozen during the same time period and terminated prior to GAO’s survey are not included. However, PBGC data shows us that there has been a recent decline in the number of plan terminations among plans with 100 or more participants. The number of standard terminations declined by two-thirds from 2001 to 2002 through 2005 to 2006, a period during which there was a significant increase in the number of current plan freezes. This may suggest possible growth in the number of frozen plans currently in the single-employer DB system. Of sponsors in the study population with one or more frozen plans, 83 percent offered a replacement retirement savings vehicle to affected participants in their largest frozen plans. (See app. I, slide 18.) Eleven percent of sponsors did not offer any replacement plan to affected participants; however, this figure includes any sponsors who allowed affected participants to join or increase employee contributions to an existing but unchanged plan. An additional 6 percent of sponsors froze plans under extenuating circumstances that preclude the offering of a replacement plan (such as, a firm merger, bankruptcy, plant closure, multiple employer plan, or new-employee-only soft freeze). Of those sponsors offering replacement plans, over 80 percent offered enhanced existing or new DC plans. (See app. I, slide 19.) About 5 percent of sponsors offered a new DB plan to affected participants. Sponsors of frozen plans cited a number of reasons why they froze their largest plan. “Annual contributions needed to satisfy funding requirements and their impact on cash flows” was cited most often, with 72 percent of sponsors responding that this was a reason for freezing their largest frozen plans; “unpredictability/volatility of plan funding requirements” followed with 69 percent. (See app. I, slide 21.) The remaining 13 reasons range in prevalence from 54 percent responding that “plan was frozen in anticipation of replacing it with an alternative retirement plan” to 12 percent for “other reason.” About two-thirds of sponsors with frozen plans reported at least some level of confidence that their largest frozen plan was reasonably well- funded at the time of freeze. (See app. I, slide 22.) Further, 58 percent of sponsors were highly or moderately confident that their largest frozen plans could have undergone standard, fully-funded terminations instead of freezing. This is compared with 30 percent of sponsors who were not at all confident that their largest frozen plans could have undergone standard terminations. However, there are some limitations to these data. First, the survey asked about sponsor beliefs, not actual funding levels. Second, the data refer to when the freezes were implemented and may bear no relation to current funding levels. Third, the data only include each sponsor’s largest frozen plan. Nevertheless, the data provide some insight into sponsors’ state of mind when they chose to freeze their largest frozen plans. For sponsors with plans that are already frozen, fewer than half reported having a firm idea of the anticipated outcome for their largest frozen plans. Among these sponsors, a very small number anticipate “thawing,” or unfreezing, their plan, and about one-third said they will eventually terminate their largest frozen plans. (See app. I, slide 24.) In contrast, nearly half say they will keep the plan frozen indefinitely. Another 14 percent report that it is too early to make a decision or that they are uncertain what the outcome will be. The anticipated outcome for a sponsor’s largest plan varies significantly by the type of frozen plan. Sponsors with frozen plans that were not under a hard freeze were significantly less likely to anticipate termination as the outcome for their largest frozen plan. (See app. I, slide 25.) Among sponsors with one or more plans not currently frozen, only 10 percent have firmly decided to freeze, or not freeze, any plans in the future. (See app. I, slide 26.) Thirty- five percent of sponsors have considered freezing additional plans in the future but are uncertain if they will, while nearly 50 percent have not yet considered or discussed future freezes. The prevalence of frozen DB plans today has different implications for key stakeholders in the single-employer DB system—plan sponsors, participants, and the PBGC. Our survey found that nearly a third of the sponsors ultimately expect to terminate their largest frozen plan. Further, we found that about half of all frozen plans were hard frozen and that sponsors of hard frozen plans appear more likely to anticipate termination as an eventual outcome. However, the number of plan terminations has not increased recently. For example, from 1990 to 2006, total annual standard terminations averaged about 7 percent of insured single-employer plans. However, from 2002 to 2006, this rate had been far lower. (See app. I, slide 28.) Further, larger plans, or those plans with 100 or more participants, which account for about 36 percent of plans but which account for the overwhelming number of the system’s active participants, accounted for only about 9 percent of the terminations during the 2002 to 2006 period. This suggests that the single-employer DB system’s decline does not appear to be accelerating, with many large plans continuing in operation. Plans may freeze for many reasons, and our survey population of frozen plan sponsors cited cost of contributions and volatility of plan funding as the key reasons for freezing their largest plans. However, when we asked all sponsors, including those with no frozen plans, about the key challenges to the future health of the single-employer DB system generally, the very same issues of plan cost and volatility were listed most frequently. Given that these issues seem to be an inherent problem for all sponsors, it may be that each sponsor decision to freeze a plan has a firm-specific reason or is based on other factors not picked up in our survey. In any case, the current prevalence of plan freezes does not present an encouraging landscape for DB plan sponsorship. For active plan participants, plan freezes imply a possible reduction in anticipated retirement income. In particular, a hard freeze, which ceases future benefit accruals, is especially likely to reduce anticipated retirement income—unless this income is made up through increased savings, possibly from such sources as higher wages or other nonwage benefit increases. Although a majority of the sponsors with frozen plans cited plan cost considerations as a key motivation for the freeze—suggesting that they may be somewhat reluctant to fully redirect any potential cost savings from the freeze to other areas of compensation or benefits—our survey did not collect information to fully address this issue. For example, while our survey indicated that sponsors most often do offer a replacement plan for frozen participants and this offering is most often a DC or 401(k)-type plan, we did not ask about the generosity of these replacement plans or of the previous frozen DB plan. The offering of an alternative plan may have different consequences for employees in different stages of their career. Reductions to anticipated accruals for participants affected by a freeze will vary considerably depending on key plan features, participant demographic characteristics, and market interest rate factors. However, for those participants with traditional pension plan formulas that are hard frozen and replaced with a typical DC, or 401(k)-type plan, all else being equal, longer-tenured, midcareer workers are most likely to see the greatest reductions in anticipated retirement income. This effect occurs because older, longer- tenured employees generally have less time remaining in their careers to offset anticipated accrual losses through typical 401(k)-type plan contributions compared to younger workers. Alternatively, depending on the generosity of the frozen, pay-based pension plan, certain younger (or less well-tenured) and more mobile participants might actually see increases in their anticipated retirement incomes by moving to a typical, or average, 401(k)-type plan. These concerns are not just relevant for the current active participants of a frozen plan. Our survey also shows that roughly a majority of sponsors in our study population have closed their plans to new employees, many of whom will also likely depend on a DC plan as a source of retirement income. Our survey did not collect information on the degree to which affected employees are participating in either the newly offered DC plans or any existing, but enhanced, DC plan. DC plans are increasingly the dominant retirement savings vehicle for private sector workers. Like DB plans, DC plans pose their own potential retirement-income challenges, including the need for employees to participate in the plan and to effectively manage the investment risk of their DC accounts if they are to have a secure retirement. Yet for some workers, especially for lower- income workers, this may be difficult to do as they are less likely to participate when offered the opportunity to do so and less able to make even limited contributions. The effect of plan freezes on PBGC’s net financial position is not certain, but it could be modestly positive in both the immediate- and long-term; freezes generally reduce system liabilities and potentially minimize claims among financially weak plans. The possible improvement in PBGC’s net position, however, assumes that the aggregate effect of plan freezes does not significantly reduce the agency’s premium income over time. The reductions in flat-rate premium income could come from a decline in participants, possibly from the considerable number of plans that we found that were closed to new employees or from terminations that may result from the freeze. Variable-rate premium income could also be reduced to the degree that sponsors of underfunded plans improve funding as a result of a plan freeze. PBGC’s financial status is influenced not only by the number of freezes and terminations but also by the relative health and size of the plans and sponsors that decide to terminate. For example, PBGC finds that hard frozen plans are more likely to be underfunded and to terminate, which may highlight two other trends. Plan sponsors that initiate a standard termination must have sufficient assets in the plan to pay participants their accrued benefits and are unlikely to represent the very same plan sponsors that are also underfunded. If relatively well-funded and financially healthy sponsors are the ones who terminate their frozen plans, it may leave the underfunded, and potentially financially distressed, frozen plan sponsors under PBGC’s insurance responsibility. Alternatively, data from PBGC shows that relatively large plans terminate at a much lower rate than smaller plans. This is possibly encouraging for PBGC’s financial status, to the degree that these larger plans do not result in claims, because these plans represent the bulk of liabilities and participants. Ultimately, no matter what the impact on its net financial position, the freezing of plans and the exiting from the single-employer DB system by sponsors do not indicate future plan growth for the PBGC. One part of its mission is to foster the continuation and maintenance of private-sector pension plans. PBGC’s single-employer insurance program currently covers 28,800 plans, which is 65 percent fewer plans than it covered 15 years ago. Given the prevalence of plans that are currently frozen and the relationship between plan freezes and plan termination, the shrinking of the single-employer insurance program plan base seems likely to continue. The private DB pension system, a key source of retirement income for millions of Americans, continues to experience a slow decline. Plan freezes are a common phenomenon, affect a large number of participants, and have important implications for plan sponsors, participants, and the PBGC. While plan freezes are not as irrevocable as plan terminations, they are indicative of the system’s continued erosion. Yet freezes are just one of the many developments now affecting the DB system. The broad ranging Pension Protection Act of 2006, changes in accounting rules, rising retiree health care costs and health care costs generally, a weak economy, and falling interest rates all represent challenges that DB plan sponsors may need to confront. How key stakeholders, plan sponsors, participants, the PBGC, other government agencies, and congressional policymakers respond to all of these challenges will shape the fortunes of the DB system and its future role in providing retirement security to American workers. We provided a draft of this report to the Department of Labor, the Department of the Treasury, and PBGC. The PBGC provided written comments, which appear in appendix III. PBGC generally agreed with the findings and conclusions of the report. However, PBGC did express some concerns about our survey methodology—especially with respect to the comparability of our estimates of hard frozen plans and affected active participants with their estimates, which are based on the Form 5500 filings for plan year 2006 received to date. PBGC notes that differences in results may be due to a variety of reasons, including that our survey data are more recent than the 2006 Form 5500 and the potential for some reporting errors on the Form 5500. Other explanations include the potential for response bias in the GAO survey, our use of a size variable that is sponsor-based rather than plan-based and the GAO survey’s omission of newly formed pension plans since 2004. We addressed many of PBGC’s specific methodological concerns by providing additional information to our technical appendix. We note that the very different methodologies used by PBGC and GAO in estimating the number of hard plan freezes and the number of active participants affected by such freezes suggest that the studies’ results should be compared with extreme caution. We do note that our survey questionnaire was pre-tested extensively. Further, regarding the issue of response bias, we considered this as we analyzed our survey’s results. We do not believe response bias is a significant issue because we did not find significant differences when we analyzed a comparison of key characteristics of the survey respondents to all sponsors in the study population. We also did not include newly-formed DB plans other than those formed by survey respondents because such data were not available, and, in our view, would not have a significant effect on our estimates. PBGC identified a number of explicit areas of agreement with our report. They noted that our finding with respect to the differences in prevalence of freezes between large and small plans is generally consistent with their estimates. They also mentioned that our report was consistent with their views on the effect that freezes may have on the future health of the DB system, the PBGC itself, as well as the impact of freezes on retirement incomes. Further, despite PBGC’s concerns about the magnitude of certain estimates in our report, they generally found the relative estimates of alternative definitions of plan freezes to be new and important information. Lastly, PBGC noted that the comparison of our survey estimates to Form 5500 estimates highlights the delay that PBGC faces getting basic plan data. PBGC expects that plan data will become timelier in the near future, but some delay will still remain that may hinder PBGC’s awareness of changing trends among plans that it insures. The Department of Labor and Treasury provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Labor, the Secretary of the Treasury, and the Director of the PBGC, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions concerning this report, please contact me at (202) 512-7215 or bovbjergb@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions are listed in appendix V. Liabilities (in billions) – Cost of annual contributions needed to satisfy funding requirements and their impact on cash flow (72 percent) – Unpredictability/volatility of plan funding requirements (69 percent) freezes, a rise in terminations has yet to materialize (notably among the largest plans) To achieve our objectives, we conducted a survey of sponsors of defined- benefit (DB) pension plans. For the purposes of our study, we defined “sponsors” as the listed sponsor on the 2004 Form 5500 for the largest sponsored plan (by total participants). To identify all plans for a given sponsor we matched plans through unique sponsor identifiers. See appendix I for further detail on how we defined a sponsor in the data. We constructed our population of DB plan sponsors from the 2004 Pension Benefit Guaranty Corporation’s (PBGC) Form 5500 Research Database by identifying unique sponsors listed in this database and aggregating plan level data (for example, plan participants) for any plans associated with this sponsor. As a result of this process, we identified 22,960 plan sponsors. A summary of the number of sponsors and participants is shown in table 1. As shown in table 1, sponsors having 100 or more participants accounted for about 99 percent of DB plan participants and about 99 percent of total liabilities in sponsored plans in 2004. We limited our study to this population of 7,804 larger sponsors (our study population) because it would be informative about the vast majority of covered participants and we expected a higher success rate in locating, contacting, and obtaining responses from this group than would have been obtained from the smallest sponsors. We drew a stratified probability sample of 471 DB plan sponsors, where the strata were based on the number of participants covered by the sponsor’s plans. See table 2 for a summary of the study population, the selected sample, respondents, and out-of-scope sponsors by stratum. The sample was designed to provide acceptably precise estimates of the proportions of sponsors with at least one frozen plan. Further, sponsors in the larger sponsor strata are sampled at a higher rate than sponsors in the smaller strata to improve the precision of estimates of plan-level and participant-level estimates. As shown in table 2, response rates ranged from 46 percent to 82 percent, with an overall weighted response rate of 78 percent. We developed two questionnaires to obtain information about the experiences of DB pension plan sponsors that have 100 or more participants. One questionnaire—with 18 questions—was mailed in November 2007 to a stratified random sample of 366 pension plan sponsors and asked questions about their experiences with DB plans, benefit freezes, if any, and factors that may have contributed to the decision to freeze. The strata were based on the size of the plan sponsor (as measured by number of participants) and were comprised of three categories. In the initial mailing, we sent a cover letter and questionnaire to pension plan sponsors. To encourage responses, we followed up with another mailing of a copy of the questionnaire in December 2007. In addition, to try to increase the response rate, we called all sponsors who had not responded to the mail survey. A second, longer questionnaire was sent in December 2007, via the Internet, to the 105 largest pension plan sponsors who were part of the Fortune 500 or Global Fortune 500 and had 50,000 or more participants. This was preceded by an email to notify respondents of the survey and to test our email addresses for these respondents. This web questionnaire asked plan sponsors about their recent experiences with DB plans and benefit freezes. The first 17 questions and last question of this questionnaire mirrored the questions asked in the mail questionnaire about benefit freezes. We asked these plan sponsors additional questions about their reactions to the current environment for such plans and how the plan or plans may be a part of the firm’s total compensation structure. To help increase our response rate, we sent four follow-up emails from January through April 2008. In addition, we also contacted some respondents by telephone to clarify unclear responses. We received responses from 48 respondents. For the 18 questions that asked about frozen pension plans in both the mail and web survey, we obtained an overall unweighted response rate of 70 percent and a weighted response rate of 78 percent. To pretest the questionnaires, we conducted cognitive interviews and held debriefing sessions with 11 pension plan sponsors; three pretests were conducted in-person and focused on the web survey, and eight were conducted by telephone and focused on the mail survey. We selected respondents to represent a variety of sponsor sizes and industry types, including a law firm, an electronics company, a defense contractor, a bank, and a university medical center, among others. We conducted these pretests to determine if the questions were burdensome, understandable, and measured what we intended. On the basis of the feedback from the pretests, we modified the questions as appropriate. In addition to the closed-ended questions, we provided an opportunity to provide responses to an open-ended question about the key challenges facing the future health of the single-employer DB system. The responses to this question were classified and coded for content by a GAO analyst, while a second analyst verified that the original analyst had coded the response appropriately. Two-hundred-seventeen respondents provided substantive comments to this item. Some comments were coded into more than one category since some respondents provided more than one topic or category. This means that the number of coded items does not equal the total number of respondents who commented. These comments cannot be generalized to our population of plan sponsors. See table 3 for a tally of the comments. Table 3. Summary of Content Analysis, by General Category of Comment Affordability (i.e. cost of funding, administrative cost, cash flow) Non-cost administrative issues (i.e. complexity, reporting requirements, accounting rules) Workforce issues (i.e. demographics, recruitment/retention) Disadvantageous compared to DC plans Competition (i.e. industry, international) Strong belief in DB system PBGC insurance (i.e. premiums, incentives for unhealthy plans) To produce the estimates from this survey, answers from each responding case were weighted in the analysis to account statistically for all the members of the population, including those that were not selected or did not respond to the survey. Estimates produced from this sample are from the population of sponsors represented in PBGC’s 2004 Research Database that had at least 100 participants. Because our results are based on a sample and different samples could provide different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (for example, plus or minus 11 percentage points). We are 95 percent confident that each of the confidence intervals in this report include the true values in the study population. Unless we note otherwise, percentage estimates based on all sponsors (for example, percent of sponsors with at least one frozen plan) have 95 percent confidence intervals of within plus or minus 8 percentage points. All other percentage estimates in this report have 95 percent confidence intervals of within plus or minus 11 percentage points, unless otherwise noted. Confidence intervals for other estimates are presented along with the estimate where used in the report. In addition to the reported sampling errors, the practical difficulties of conducting any survey may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents, or the types of people who do not respond can introduce unwanted variability into the survey results. We included steps in both the data collection and data analysis stages for the purpose of minimizing such nonsampling errors. We took the following steps to increase the response rate: developing the questionnaire, pretesting the questionnaires with pension plan sponsors, conducting multiple follow-ups to encourage responses to the survey, contacting respondents to clarify unclear responses, and double keying and verifying all data during data entry. Although the overall response rate was 78 percent, we performed an additional analysis to check whether our survey respondents had characteristics that were significantly different from all sponsors in the study population. To do this, we identified several sponsor characteristics that were available for the entire study population and estimated these population values using the survey respondents. For each estimate tested, we found no significant difference between the estimate and the actual population value. We performed computer analyses of the sample data to identify inconsistencies and other indications of error and took steps to correct inconsistencies or errors. A second, independent analyst checked all computer analyses. In July 2008 discussions with PBGC staff and in their comments on this report, PBGC indicated that it has calculated estimates of the number of hard frozen plans on the most recently available Form 5500 data. Based on Form 5500 filings received to date, PBGC currently estimates that 15.9 percent of plans were hard frozen in 2006. Our survey estimates are not directly comparable with PBGC’s estimates for a number of reasons: The GAO Survey is Based on a Statistical Sample - GAO survey estimates, including those involving hard freezes are based on a probability sample and is subject to sampling error. The PBGC calculations are based on Form 5500 data filings which must be completed by plan sponsors of PBGC-insured defined benefit plans. The GAO Survey Focuses on Sponsors with Larger Plans - Our survey specifically excluded “smaller” sponsors—those with less than 100 total participants. Although leaving out such smaller sponsors excluded a majority of all plans on the 2004 Form 5000 file, it only excluded about 1 percent of participants, and allowed us to survey a smaller sample. However, if the rate of hard freezes was different for plans having fewer than 100 participants than for larger plans, then we would expect that our survey estimate would differ from an estimate developed from all plans. The GAO Survey Focuses on Hard- and Soft-Freezes and Includes Post- 2006 Freezes - Our survey questionnaire used a definition of a hard freeze that was intended to be substantively similar to the definition contained with the Form 5500 instructions. However, our questionnaire also included a broad range of plan freeze definitions as well as additional questions pertaining to a sponsor’s largest frozen plan. The mode of data collection, topical focus, format, item wording or item interpretation of our questionnaire may influence respondents in different ways relative to the applicable hard freeze character code on the Form 5500. One critical difference that could lead to different estimates is that our survey captures freezes that occurred since 2006. The 2006 Form 5500 only includes information as of the end of the 2006 plan year. Possible Differences in Actual Survey Respondents - While we generally directed our survey to the individual we identified as being most knowledgeable about the DB plans of a given sponsor, it may be the case that the individuals responding to our survey are not the very same individuals that also complete the Form 5500, possibly leading to different responses. Despite these differences in approach and methodology, some may wish to compare PBGC’s estimate of 15.9 percent of plans were hard frozen in 2006 and our study population estimate of 23.3 percent of plans as hard frozen among sponsors with 100 or more participants in all plans. Any comparisons should be made with extreme caution for all of the reasons noted above. Further, the 95 percent confidence interval for our estimate ranges from 18.3 to 28.3 percent. PBGC also calculated that, based on Form 5500 filings for plan year 2006 received as of July 2008, 0.75 million active participants out of 2.39 million total participants were in frozen plans. As with the estimated percentage of hard frozen plans, our numbers are not completely comparable, due to differences in our methodologies Although our survey identified the active participants affected by the sponsor’s largest frozen plan, we did not specifically ask about total participants in the largest frozen plan. Our questionnaire also asked sponsors to report the calendar year of freeze implementation, while the Form 5500 data is reported on a plan year basis, which can differ from the calendar year. Another important difference is that PBGC data is not current and new hard frozen plans and active participants affected by such freezes may yet be identified. Some of these newly identified plans may be plans of sponsors that reported freezes in our survey in 2007 or later. When we removed hard frozen plans that occurred for a sponsor’s largest plan since 2006 and recalculated the number of active participants affected by hard freezes, we estimate that 1.27 million active participants are affected by a hard freeze in the sponsor’s largest frozen plan. As with all of our survey estimates, this result is subject to sampling error. The 95 percent confidence interval of active participants affected by the sponsors largest hard frozen plan (removing post-2006 freezes) ranges from 0.75 million to 1.78 million. Barbara D. Bovbjerg at (202) 512-7215 or bovbjergb@gao.gov. In addition to the contact above, Charles A. Jeszeck, Charles Ford, Isabella Johnson, Luann Moy, Mark Ramage, Joe Applebaum, Craig Winslow, Gene Kuehneman, Brian Friedman, Melissa Swearingen, Marietta Mayfield, Sue Bernstein, and Walter Vance made important contributions to this report.

Summary: Private defined benefit (DB) pension plans are an important source of retirement income for millions of Americans. However, from 1990 to 2006, plan sponsors have voluntarily terminated over 61,000 sufficiently funded single-employer DB plans. An event preceding at least some of these terminations was a so-called plan "freeze"--an amendment to the plan to limit some or all future pension accruals for some or all plan participants. Available information that the government collects about frozen plans is limited in scope and may not be recent. GAO conducted a stratified probability sample survey of 471 single-employer DB plan sponsors out of a population of 7,804 (with 100 or more total plan participants) to gather more timely and detailed information about frozen plans. We have prepared this report under the Comptroller General's authority as part of our ongoing reassessment of risks associated with the Pension Benefit Guaranty Corporation's (PBGC) single-employer pension insurance program, which, in 2003, we placed on our high-risk list of programs that need broad-based transformations and warrant the attention of Congress and the executive branch. Frozen DB plans have possible implications for PBGC's long-term financial position. This report examines (1) the extent to which DB pension plans are frozen and the characteristics of frozen plans; and (2) the implications of these freezes for plan participants, plan sponsors, and the PBGC. Frozen plans are fairly common today, with about half of all sponsors in our study population having one or more frozen DB plans. Overall, about 3.3 million active participants in our study population, who represent about 21 percent of all active participants in the single-employer DB system, are affected by a freeze. The most common type of freeze is a hard freeze--a freeze in which all future benefit accruals cease--which accounts for 23 percent of plans in our study population; however, an additional 22 percent of plans are frozen in some other way. Larger sponsors (i.e. those with 10,000 or more total participants) are significantly less likely than smaller sponsors to have implemented a hard freeze, with only 9 percent of plans under a hard freeze among larger sponsors compared with 25 percent of plans under a hard freeze among smaller sponsors. The vast majority of sponsors with frozen plans in our study population, 83 percent, have alternative retirement savings arrangements for these affected participants, but 11 percent of sponsors do not. (An additional 6 percent of sponsors froze plans under circumstances that preclude a replacement plan.) Plan sponsors cited many reasons for freezing their largest plans but most often noted two: the impact of annual contributions on their firm's cash flows and the unpredictability of plan funding. Sponsors of frozen plans generally expressed a degree of uncertainty about the anticipated outcome for their largest plan, but sponsors whose largest plan was hard frozen were significantly more likely to anticipate plan termination as the likely plan outcome. The implications of a freeze vary for sponsors, participants, and PBGC. For plan sponsors, while hard freezes appear to indicate an increased likelihood of plan termination, a rise in plan terminations has yet to materialize. For participants, a freeze generally implies a reduction in anticipated future retirement benefits, though this may be somewhat or entirely offset by increases in other benefits or a replacement retirement-savings plan. However, because the replacement plans offered to affected participants most frequently are defined contribution, the investment risk and responsibility for saving are shifted to employees. Finally, plan freezes may potentially improve PBGC's net financial position, but the degree to which it is accompanied by sponsor efforts to improve plan funding is unclear. In any event, the shrinking of the single-employer pension insurance program plan base seems likely to continue.