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.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. 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. 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. 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. 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 had the highest amount of plan assets in employer securities of the Fortune 1,000. 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. 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. 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.