Employer Stock in Pension Plans: Economic and Tax Issues (CRS Report for Congress)
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| Release Date |
Sept. 4, 2002 |
| Report Number |
RL31551 |
| Report Type |
Report |
| Authors |
Jane G. Gravelle, Government and Finance Division |
| Source Agency |
Congressional Research Service |
Summary:
The loss of retirement assets held in Enron stock by Enron employees has stimulated proposals
to
restrict the holding of employer stock in retirement plans, and other proposals to regulate these plans.
Stock in the Enron plan came from firm contributions in the form of stock that was not allowed to
be sold and from voluntary investment by employees. This report focuses on rationales for providing
employer retirement plans and for holding (or not holding) employer stock in these plans, both from
the perspective of the private sector and of government policy.
Retirement plans fall into two types: defined benefit plans, where a pension based on earnings
and years of service is provided; and defined contribution plans, where individuals receive benefits
based on accumulated principal and interest. Either plan can hold employer stock, but holdings are
limited to 10% of assets in the case of defined benefit plans. These plans receive tax subsidies, as
do employee stock purchase plans and certain types of stock options.
The analysis suggests that there are economic reasons that firms and employees may engage in
pension and profit sharing (or stock ownership) plans even in the absence of tax subsidies. Pension
plans, primarily defined benefit plans, may be attractive for administrative and risk-reduction
reasons, for dealing with inadequate investment in on-the-job training, and for smoothing the
retirement of older workers. Stock options and stock ownership plans may be useful for addressing
inconsistency in objectives between shareholders and managers and worker monitoring problems,
although these benefits are not likely to accrue to stock ownership by the rank and file of large
companies. These employee stock ownership plans may also deter hostile takeovers, which may
undermine economic efficiency and stockholder interests. Stock contributions are also popular
because they do not reduce cash flow, which has both benefits and costs from an economic efficiency
perspective.
Government subsidies to plans may be justified to increase retirement incomes and access to
annuities because of a shortfall in optimal savings and certain economic problems with self selection
in purchasing annuities. These objectives also underlie the justification of Social Security. Pursuing
these goals may actually conflict with another worthy objective, on-the-job training. However,
objectives that are addressed via employee stock ownership do not appear important in shaping the
nature of large, broadly-based, retirement plans. Diversification of plan assets and prudent
investment portfolios do appear consistent with rationales for government intervention.
Attempts to address this issue might take several forms: restrictions on shares of employer stock
in plans, prohibiting employer stock contributions or lifting restrictions on sale, denying a tax
deduction on employer contributions until they could be sold, and requiring independent investment
advice. The last proposal is not costless and could undermine participation for small firms. For
administrative and other reasons, it may be rational to impose share restrictions on allocations of
contributions, rather than on assets. There are no plans to update this report.
