Employer-sponsored pension plans, in combination with Social Security and personal savings, provide millions of retirees and their families with retirement income. Employers can provide these benefits using two basic types of plans—defined benefit (DB) or defined contribution (DC) pension plans. For a DB plan, the employer determines retirement benefit amounts for individual employees using specific formulas that consider certain factors, such as age, years of service, and salary levels. Employers bear the full responsibility and risk of providing sufficient funding to guarantee that the benefits promised by the formulas will be paid. The amount an employer must contribute to a DB plan can vary from year-to-year depending on changes in areas such as workforce demographics or investment earnings. For a DC plan, the employer establishes an individual account for each eligible employee and generally promises to make a specified contribution to that account each year. Employee contributions are also often allowed or required. The employee’s retirement benefits depend on the total of employer and employee contributions to the account as well as the investment gains and losses that have accumulated at the time of retirement. Therefore, the employee bears the risk of whether the funds available at retirement will provide a sufficient level of retirement income. Private employers are not required to provide their employees with pension benefits; however, those employers that do so must meet certain minimum legal standards. The Employee Retirement Income Security Act of 1974 (ERISA) requires that private employers manage pension plan funds prudently and in the best interests of participants and their beneficiaries, that participants be informed of their rights and obligations, and that there be adequate disclosure of the plan’s terms and activities. For DB plans only, ERISA created a federal insurance program financed primarily by employer-paid premiums to guarantee the payment of pension benefits when an underfunded DB plan is terminated. Administrative expenses for pension plans include fees for plan design, payroll deductions, recordkeeping, trustee services, regulatory compliance, investment management, and employee communications. To provide the requested information, we used a research database of computerized IRS Form 5500 reports that is maintained by the Department of Labor (DOL). ERISA requires all private employers that sponsor pensions, regardless of their size or industry, to annually file a separate Form 5500 report for each of their pension plans. Each report is to include financial, participant, and actuarial data. Unlike other studies that tended to concentrate on the total number of each type of plan in existence, our study focused on the number of employers that used either or both types of pension plans. We did not independently verify the accuracy of the research database; however, both IRS and DOL check the data for accuracy and consistency. It is important to note that these checks cannot substitute for reviewing each employer’s original records—the data were accurate only to the extent that employers exercised appropriate care in completing their Form 5500 reports. As agreed with your office, we limited the scope of our review to include Form 5500 data for 1984 through 1993—the 10 most recent years for which the necessary data were available. The research database did not contain information on employers that did not offer any type of pension plan. We included only single-employer plans in our analyses, since the database did not indicate the number of companies that participated in multiemployer plans. For employers that offered both DC and DB plans, we could not determine whether these plans covered the same or different groups of employees. It is also important to recognize that the contribution and administrative expense data presented in this report are averages for large groups of employers. Thus, the data do not represent any individual employer’s pension plan arrangements or practices nor do they represent the maximum allowable employee and employer contribution rates for DC plans. Also, pension plan experiences in the entire private sector may not be generalizable to the federal government. Appendixes I and II provide more detailed information on our analyses of the Form 5500 data and the results obtained, respectively. To obtain insights on what factors employers may consider in deciding what types of pension plans to provide their employees, we reviewed the retirement-related literature included in the bibliography at the end of this report. We obtained written comments on a draft of this report from DOL officials. These comments are discussed at the end of this letter. We did our review in Washington, D.C., from February 1996 to July 1996 in accordance with generally accepted government auditing standards. Appendix I contains a more detailed discussion of our objectives, scope, and methodology. From 1984 to 1993, the number of private employers that sponsored single-employer pension plans increased from approximately 455,000 to almost 565,000. Over this same period, the percentage of all employers that offered only DC pension plans increased from 68 to 88 percent. The percentage of employers that offered only DB plans decreased from 24 to 9 percent, and the percentage that offered both DC and DB plans decreased from 8 to 3 percent. Figure 1 shows the change in the percentage of employers offering each combination of pension plans from 1984 to 1993. The increase in the percentage of employers sponsoring only DC plans occurred across companies of all sizes. In 1984, the majority of employers with fewer than 500 employees offered only DC plans, while the majority of employers with 500 or more employees sponsored DB plans—either alone or in combination with a DC plan. By 1993, the only employment-size categories where DB plans continued to be offered by the majority of companies were employers with 10,000 to 19,999 employees and 20,000 to 49,999 employees. Figures 2 and 3 show the percentage of employers offering the various types of pension plans by employer size for 1984 and 1993, respectively. The increase in the percentage of employers offering only DC plans occurred across all industries. For example, the number of employers in the services industry that sponsored pension plans increased from 183,908 in 1984 to 268,533 in 1993, and the percentage of those employers that offered only DC plans increased from 71 to 93 percent. Table 1 shows the numbers of employers that sponsored pension plans and the proportion of those employers that sponsored only DC plans by industry for 1984 and 1993. The DOL database was not readily amenable to tracking the pension plans of individual employers over the 1984 to 1993 time period. Accordingly, we did not determine the extent to which individual employers may have terminated and replaced their DB plans with DC plans. However, one study examined 11,950 employers that sponsored DB plans in 1985. For the 6,974 of these employers that filed a Form 5500 report in 1992, the study found that 1,449 (or about 21 percent) of the employers had terminated their DB plans and adopted or retained DC plans. Larger employers continued to use DB plans more extensively than smaller employers. From 1984 to 1993, an increasing proportion of the employers with 2,500 or more employees offered both DC and DB plans. In 1993, nearly half of these employers included a DB plan as part of their retirement package—with or without a supplementary DC plan. Table 2 shows the percentage of employers that offered only DC, DC and DB, or only DB plans by employer size for 1984 and 1993. In 1993, the average ratio of employer-to-employee contributions for employers that sponsored only DC plans was 1.8 (that is, employers contributed $1.80 for each $1.00 contributed by employees). The average ratio for employers that sponsored only DB plans was 19.7. For employers that sponsored both DC and DB plans, the ratios were 0.6 and 58.8, respectively. These results suggest that most private employers did not require employees to contribute to their DB plans. Furthermore, employers contributed proportionately more to DC plans that were designed to provide primary pension benefits than they did to DC plans that supplemented the benefits of a DB plan. From 1988 to 1993, employers provided a declining proportion of the total contributions for DC plans and an increasing proportion of the total contributions for DB plans, regardless of whether they offered one or both types of plans. The ratio of employer-to-employee contributions decreased from approximately 3.8 to 1.8 for employers that sponsored only DC plans and, with considerable fluctuation during the intervening years, increased from 19.1 in 1988 to 19.7 in 1993 for employers that sponsored only DB plans. Similarly, for employers that sponsored both DC and DB plans, the ratio decreased from 0.8 to 0.6 for the DC plans and increased from 20.1 to 58.8 for the DB plans. Figure 4 shows these ratios by the type of plans sponsored from 1988 to 1993. In 1993, the average reported administrative expense per plan participant was $103 for employers that sponsored only DC plans and $157 for employers that sponsored only DB plans. For employers that sponsored both DC and DB plans, the administrative expense per participant was $71 and $125, respectively. Therefore, a retirement benefits package that consisted of only a DC plan was the least expensive to administer, on average. These results also suggest that employers that sponsor both DC and DB plans may experience some administrative efficiencies compared with employers that offer only one type of pension plan. Although we did not analyze administrative expenses by employer size, the literature indicates that larger companies incur lower administrative expenses because of considerable economies of scale. From 1988 to 1993, the average reported administrative expense per participant remained fairly constant for both DC and DB plans.Consequently, growth in administrative expenses did not appear to explain why employers that already had a DB plan would shift to a DC plan. However, the lower administrative expense associated with DC versus DB plans might have been an influential factor for employers designing a retirement benefits package for the first time. Figure 5 shows the average administrative expense per participant for pension plans by the type(s) of plans employers offered from 1988 to 1993. The literature suggested various factors that may explain why employers might prefer to offer only DC plans to their employees.