Employer-sponsored pension plans, in combination with Social Security and personal savings, provide millions of retirees and their families with retirement income. As we reported in our October 1996 report, most employers that sponsor pension plans provide benefits using a DC plan.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 and can be made on either a pretax or after-tax basis. Pretax contributions are not taxed in the year they are earned, but rather, they are taxed when withdrawn from the employee’s account. After-tax contributions are taxable in the year that they are earned as part of the employee’s annual income. Employers can make “matching” contributions, which are made only if employees also contribute to their accounts, and/or “nonmatching” contributions that are made regardless of whether or not employees contribute to their accounts. The employee’s retirement benefits depend on the total of employer and employee contributions to the account as well as the account’s investment gains and losses. In the early 1980s, Congress began to consider a new retirement system for federal civilian employees that would be more like private sector retirement systems and include a DC plan component. As a result, in 1986 the Federal Employees’ Retirement System Act was enacted, which closed the Civil Service Retirement System (CSRS) to new entrants and established FERS for employees generally hired after December 31, 1983. FERS is a three-tiered program that includes a basic annuity in addition to the defined contribution TSP and Social Security. Although FERS provides an annuity in addition to Social Security and DC pension benefits, many financial planners believe that under current market conditions income from participant and government contributions to TSP alone could generate 50 percent or more of the retirement income available to most FERS participants. Thus, it may be useful for policymakers to know how the features of TSP compare with the features of private sector DC plans. In comparing the features of private and public sector pension plans, it is important to consider key differences between private and public employers. Notably, private sector employers can deduct the cost of providing pension benefits from their taxable revenues. To qualify for these tax advantages, however, private employers must be in compliance with complex and frequently changing laws and regulations. Public employers need not comply with all of the rules that private employers face in designing and modifying their pension systems. Public sector pension benefits must be legislated, and changes to retirement programs for public employees involve political as well as business, financial, and human resource management issues. Notwithstanding the different environments in which private and public pensions evolve, it is also important to recognize that all employers that sponsor pension and other employee benefit programs do so for the same underlying business and financial reasons, which include to (1) attract and maintain an effective workforce in a competitive marketplace, (2) motivate employees to work towards meeting their employers’ goals, and (3) manage the transition of older employees from work to retirement. To provide the requested information on patterns in plans’ features, we reviewed SPDs—documents that all private employers were to file with DOL for each pension plan they sponsored—for a sample of private sector employers with 100 or more employees that sponsored only single-employer DC plans to supplement their employees’ Social Security retirement benefits. We stratified our sample by employer size using 3 groups—employers with 100 to 999 employees, 1,000 to 9,999 employees, and 10,000 or more employees. Because of the larger sampling error associated with the first two strata, we reported on two groups—all the employers in our sample and the subset of larger employers with 10,000 or more employees, the one stratum for which our sample included the entire population of such employers. Because DOL officials told us that the Department would not be able to provide SPDs for all the employers in our sample, we requested SPDs from DOL and directly from the employers. As a result, we were able to obtain and analyze 281 SPDs—67 percent of the 419 employers in our sample. In considering the representativeness of the sample of employers for which we had obtained SPDs, we found that the 281 employers were generally comparable to our universe of 3,297 employers, in terms of employer size, industry type, and geographic region. We also analyzed pension plan information that was available from DOL’s research database from which we had selected our sample of employers to provide additional information on the plans’ features. To provide information on TSP, we reviewed summary documents published by the Federal Retirement Thrift Board. As agreed with the Subcommittee, we limited the scope of our analyses involving SPDs to those employers with 100 or more employees. Also as agreed, our review included the largest primary plan offered by private employers that sponsored only DC plans in 1993, the most recent data available at the time of our review. We included only single-employer plans in our analyses, because the research database did not identify all of the employers associated with each multiemployer plan. Unless specifically noted, the estimates presented in this report are generalizable to the population of employers with 100 or more employees that sponsored only single-employer DC plans in 1993 with a sampling error of no more than 10 percent at the 95-percent confidence level. Also, as agreed with the Subcommittee, we did not independently verify the accuracy of the information (1) described in the SPDs or (2) contained in the DOL research database. Moreover, we could not confirm that the SPDs provided by DOL represented the most up-to-date information for each DC plan in our sample. Lastly, due to differences such as those described in the background section of this report, pension plan experiences in the private sector may not be applicable to the federal government. To provide information on the use of multiple plans, we used the DOL research database to identify the number of private employers with two or more employees that sponsored more than one DC plan to provide benefits for the same groups of employees in 1993. We did not independently verify DOL’s criteria for identifying plans in their research database as primary versus supplementary. To obtain insights on what factors employers may consider in deciding whether to sponsor multiple plans, we reviewed retirement-related literature and consulted with pension experts, which we selected on the basis of prior work we had done on private sector pensions. Appendixes I and II provide more detailed information on our objectives, scope, and methodology and the results obtained, respectively. We requested comments on a draft of this report from the Secretary of Labor. These comments are discussed at the end of this letter. We did our review in Washington, D.C., from October 1996 to July 1997 in accordance with generally accepted government auditing standards. Employers that sponsor DC plans generally establish certain minimum age and/or service requirements that employees must meet before they are allowed to participate in these plans. These eligibility requirements allow employers to reduce the administrative costs associated with establishing individual accounts for employees. Flexibility to establish minimum participation requirements may be especially useful to employers facing high turnover rates. Such requirements allow employers to use their resources to benefit employees who are more likely to remain with the employer for the long term. Under ERISA, as amended, employers cannot require employees to be over age 21 or to have completed more than 1 year of service with the employer. However, an exception applies to plans where participants immediately own all employer contributions made to individual accounts—employers may require that employees complete 2 years of service to be eligible to participate in these plans. Of the 3,297 employers with 100 or more employees that sponsored only single-employer DC plans in 1993, 51 percent (1,673 employers) reported using some combination of age and length of service to determine when an employee was eligible to participate in the plan. The most common combination, which was used by 73 percent of these 1,673 employers, was that an employee must be age 21 with 1 year of service—the legal limit. For the 100 larger employers, 55 percent used only length of service to determine eligibility (with most requiring 1 year of service), while 28 percent used a combination of age and service (with 93 percent requiring an age of 21 and 1 year of service). Figure 1 shows the distribution of employers according to the type of eligibility requirement used. Although the summary plan documents did not provide information on the rate of participation among covered employees, we were able to determine the percentage of employees with active accounts in 1993 for 2,127 (or 65 percent) of the employers in our review using DOL’s research database. For these employers, 74 percent had a participation rate of 76 to 100 percent, 18 percent had 51 to 75 percent participation, 4 percent had 26 to 50 percent participation, and 4 percent had 25 percent participation or less. We could determine the participation rate for 72 of the larger employers. These employers showed a considerably lower rate of participation—15 percent had a participation rate of 76 to 100 percent, 24 percent had 51 to 75 percent participation, 15 percent had 26 to 50 percent participation, and 47 percent had 25 percent participation or less. A high or low rate of participation may be a reflection of whether or not employers contributed to their plans. According to experts with whom we consulted, employers that reported 100 percent participation generally made contributions automatically to participant accounts. Newly hired federal employees covered by FERS are eligible to participate in TSP during the second open season after they are hired. Two open seasons are held each year (May 15 to July 31 and November 15 to January 31); thus, the minimum service required to participate ranges from 6 to 12 months. The government establishes and makes automatic contributions to accounts for all eligible employees covered by FERS. As of March 1997, 83 percent of eligible FERS employees made contributions to their accounts. DC plans are funded by means of employer and/or participant contributions.