Individual Retirement Accounts: Government Actions Could
Encourage More Employers to Offer IRAs to Employees (04-JUN-08,
GAO-08-590).
Congress created individual retirement accounts (IRAs) with two
goals: (1) to provide a retirement savings vehicle for workers
without employer-sponsored retirement plans, and (2) to preserve
individuals' savings in employer-sponsored retirement plans.
However, questions remain about IRAs' effectiveness in
facilitating new, or additional, retirement savings. GAO was
asked to report on (1) how IRA assets compare to assets in other
retirement plans, (2) what barriers may discourage small
employers from offering IRAs to employees, and (3) the adequacy
of the Internal Revenue Service's (IRS) and the Department of
Labor's (Labor) oversight of and information on IRAs. GAO
reviewed reports from government and financial industry sources
and interviewed experts and federal agency officials.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-08-590
ACCNO: A82260
TITLE: Individual Retirement Accounts: Government Actions Could
Encourage More Employers to Offer IRAs to Employees
DATE: 06/04/2008
SUBJECT: 401(k) plans
Assets
Cost analysis
Employee incentives
Employee retirement plans
Federal employee retirement programs
Government employees
Government retirement benefits
Income statistics
Individual retirement accounts
Pensions
Performance appraisal
Reporting requirements
Retirement
Retirement benefits
Retirement income
Small business
Government agency oversight
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GAO-08-590
This is the accessible text file for GAO report number GAO-08-590
entitled 'Individual Retirement Accounts: Government Actions Could
Encourage More Employers to Offer IRAs to Employees' which was released
on June 4, 2008.
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Report to the Committee on Ways and Means, House of Representatives:
United States Government Accountability Office:
GAO:
June 2008:
Individual Retirement Accounts:
Government Actions Could Encourage More Employers to Offer IRAs to
Employees:
GAO-08-590:
GAO Highlights:
Highlights of GAO-08-590, a report to the Committee on Ways and Means,
House of Representatives.
Why GAO Did This Study:
Congress created individual retirement accounts (IRAs) with two goals:
(1) to provide a retirement savings vehicle for workers without
employer-sponsored retirement plans, and (2) to preserve individuals�
savings in employer-sponsored retirement plans. However, questions
remain about IRAs� effectiveness in facilitating new, or additional,
retirement savings. GAO was asked to report on (1) how IRA assets
compare to assets in other retirement plans, (2) what barriers may
discourage small employers from offering IRAs to employees, and (3) the
adequacy of the Internal Revenue Service�s (IRS) and the Department of
Labor�s (Labor) oversight of and information on IRAs. GAO reviewed
reports from government and financial industry sources and interviewed
experts and federal agency officials.
What GAO Found:
Individual retirement accounts, or IRAs, hold more assets than any
other type of retirement vehicle. In 2004, IRAs held about $3.5
trillion in assets compared to $2.6 trillion in defined contribution
(DC) plans, including 401(k) plans, and $1.9 trillion in defined
benefit (DB), or pension plans. Similar percentages of households own
IRAs and participate in 401(k) plans, and IRA ownership is associated
with higher educational and income levels. Congress created IRAs to
provide a way for individuals without employer plans to save for
retirement, and to give retiring workers or those changing jobs a way
to preserve retirement assets by rolling over, or transferring, plan
balances into IRAs. Rollovers into IRAs significantly outpace IRA
contributions and account for most assets flowing into IRAs. Given the
total assets held in IRAs, they may appear to be comparable to 401(k)
plans. However, 401(k) plans are employer-sponsored while most
households with IRAs own traditional IRAs established outside the
workplace.
Several barriers may discourage employers from establishing employer-
sponsored IRAs and offering payroll-deduction IRAs to their employees.
Although employer-sponsored IRAs were designed with fewer reporting
requirements to encourage participation by small employers and payroll-
deduction IRAs have none, millions of employees of small firms lack
access to a workplace retirement plan. Retirement and savings experts
and others told GAO that barriers discouraging employers from offering
these IRAs include costs that small businesses may incur for managing
IRA plans, a lack of flexibility for employers seeking to promote
payroll-deduction IRAs to their employees, and certain contribution
requirements of some IRAs. Information is lacking, however, on what the
actual costs to employers may be for providing payroll-deduction IRAs
and questions remain on the effect that expanded access to these IRAs
may have on employees. Experts noted that several proposals exist to
encourage employers to offer and employees to participate in employer-
sponsored and payroll-deduction IRAs, however limited government
actions have been taken.
The Internal Revenue Service and Labor share oversight for all types of
IRAs, but gaps exist within Labor�s area of responsibility. IRS is
responsible for tax rules on establishing and maintaining IRAs, while
Labor is responsible for oversight of fiduciary standards for employer-
sponsored IRAs and provides certain guidance on payroll-deduction IRAs,
although Labor does not have jurisdiction. Oversight ensures the
interests of the employee participants are protected, that their
retirement savings are properly handled, and any applicable guidance
and laws are being followed. Because there are very limited reporting
requirements for employer-sponsored IRAs and none for payroll-deduction
IRAs, Labor does not have processes in place to identify all employers
offering IRAs, numbers of employees participating, and employers not in
compliance with the law. Obtaining information about employer-sponsored
and payroll-deduction IRAs is also important to determine whether these
vehicles help workers without DC or DB plans build retirement savings.
Although IRS collects and publishes some data on IRAs, IRS has not
consistently produced reports on IRAs nor shared such information with
other agencies, such as Labor. Labor�s Bureau of Labor Statistics
National Compensation Survey surveys employer-sponsored benefit plans
but collects limited information on employer-sponsored IRAs and no
information on payroll-deduction IRAs. Since IRS is the only agency
that has data on all IRA participants, consistent reporting of these
data could give Labor and others valuable information on IRAs.
What GAO Recommends:
GAO believes Congress should consider whether payroll-deduction IRAs
should have some direct oversight in response to Labor�s comments that
it does not have jurisdiction over these IRAs. GAO also recommends
Labor examine ways to encourage employer sponsorship of IRAs, and
evaluate ways to determine whether employers offering IRAs are in
compliance with the law, and ways to collect additional information on
IRAs. GAO recommends IRS routinely publish and give Labor data on IRAs.
Neither IRS nor Labor agreed or disagreed with the recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-590]. For more
information, contact Barbara Bovbjerg at (202) 512-7215 or
[email protected].
[End of section]
Contents:
Letter:
Results in Brief:
Background:
IRAs Hold the Most Retirement Assets:
Comparisons between IRAs and 401(k) Plans Are Difficult:
Several Barriers May Discourage Small Employers from Offering Payroll-
Deduction and Employer-Sponsored IRAs to Employees:
IRS and Labor Share Responsibility for Overseeing IRAs, but Labor Has
No Process in Place to Monitor IRAs and Data Gaps Exist:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Department of Labor:
Appendix III: Comments from the Internal Revenue Service:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Characteristics of Different IRA Options:
Table 2: Contribution Limits for IRAs and Traditional 401(k) Plans,
2008:
Table 3: Key Differences between Employer-Sponsored IRAs and
Traditional 401(k) Plans:
Table 4: Key Advantages of Payroll-Deduction and Employer-Sponsored
IRAs:
Figures:
Figure 1: Retirement Plan Assets, 1995 to 2004:
Figure 2: IRA Contributions and Rollovers, 1998 to 2004:
Figure 3: IRA Ownership and 401(k) Participation among U.S. Households,
2004:
Figure 4: Persistency in 401(k) and IRA Contributions, 1999 to 2002:
Figure 5: Access of Certain Workers to an Employer-Sponsored Retirement
Plan, 2006:
Figure 6: Primary Responsibilities of IRS and Labor for IRAs:
Figure 7: IRS Form 5498, IRA Contribution Information:
Figure 8: IRS Form 1099-R, Distributions from Pension, Annuities,
Retirement or Profit-Sharing Plans, IRA, Insurance Contracts, etc.
Figure 9: IRS Form W-2, Wage and Tax Statement:
Abbreviations:
DB: defined benefit:
DC: defined contribution:
EBSA: Employee Benefit Security Administration:
ERISA: Employee Retirement Income Security Act of 1974:
ICI: Investment Company Institute:
IRA: individual retirement account:
IRS: Internal Revenue Service:
Labor: Department of Labor:
SAR-SEP: Salary Reduction Simplified Employee Pension:
SCF: Survey of Consumer Finance:
SEP: Simplified Employee Pension:
SIMPLE: Savings Incentive Match Plans for Employees:
SOI: Statistics of Income:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
June 4, 2008:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Jim McCrery:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
Individual retirement accounts--popularly known as IRAs--have grown in
importance and become key retirement savings vehicles for many
individuals, including small business owners, independent contractors,
and other workers who are not covered by an employer-sponsored
retirement plan. IRAs totaled an estimated $3.5 trillion in 2004.
Created more than 30 years ago by the Employee Retirement Income
Security Act of 1974 (ERISA), IRAs were established to (1) provide a
way for individuals not covered by a pension plan to save for
retirement, and (2) give retiring workers or individuals changing jobs
a way to preserve assets in employer-sponsored retirement plans by
allowing them to roll over, or transfer, plan balances into IRAs.
Employers sponsor defined benefit (DB) plans, which pay monthly
benefits to retired workers based on their previous salary, years of
employment, and other factors; they also sponsor defined contribution
(DC) plans, such as 401(k) plans, which allow workers to save for
retirement by contributing to mutual funds and other financial market
investments, sometimes with an employer contribution as well, to save
for retirement. Roughly half of all workers participate in an employer-
sponsored retirement plan.
There are several types of IRAs, including traditional and Roth, and
two types of employer-sponsored IRAs--Saving Incentive Match Plans for
Employees (SIMPLE) and Simplified Employee Pension (SEP). The
traditional IRA allows eligible individuals to make tax-deductible
contributions and accumulate tax-deferred investment earnings.
Distributions from these accounts are generally subject to tax.
[Footnote 1] The Roth IRA allows eligible individuals to make after-tax
contributions. Distributions, including investment earnings, are
generally tax-free. Under payroll-deduction IRA programs (also known as
payroll-deduction IRAs), employees establish and contribute to
traditional or Roth IRAs via the employer withholding contributions
through payroll deductions and transmitting the funds to the employee's
IRA. SIMPLE IRAs allow small employers to either match participating
employee contributions or to contribute a fixed percentage of all
eligible employees' pay.[Footnote 2] SEP IRAs allow employers of any
size to make voluntary tax deductible contributions into traditional
IRAs for themselves and their employees. Contributions to all IRAs may
not exceed certain limits.
The rapid and continuing growth in IRA assets has raised questions
about the overall role of IRAs in facilitating retirement savings,
including employer-sponsored IRAs and how the federal government
oversees the use of these savings vehicles. To address these questions,
you asked us to report on (1) how IRA assets compare to assets in
pension plans, (2) what barriers may discourage small employers from
establishing employer-sponsored IRAs and offering payroll-deduction
IRAs to their employees, and (3) how the Internal Revenue Service (IRS)
and the Department of Labor (Labor) oversee IRAs and the adequacy of
oversight and information on employer-sponsored and payroll-deduction
IRAs.
To answer these questions, we compared assets in IRAs and pension plans
using published data from federal agencies and industry associations on
retirement funds. We analyzed demographic data from household surveys
and studies focused on IRA ownership to provide descriptive information
on IRA participants, such as demographic characteristics including age
and income. To determine the barriers that may discourage small
employers from establishing employer-sponsored IRAs and from offering
payroll-deduction IRAs to employees, we interviewed federal agency
officials, industry associations, financial company representatives,
small business and consumer advocacy groups, and retirement and savings
experts. To determine how IRS and Labor oversee IRAs and assess the
adequacy of oversight and information, we interviewed officials at IRS
and Labor and reviewed laws governing agency responsibilities regarding
IRAs. A more detailed discussion of our methodology is provided in
appendix I. We conducted this performance audit from September 2007
through May 2008 in accordance with generally accepted government
auditing standards, which included an assessment of data reliability.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Results in Brief:
IRA assets exceed those in defined contribution (DC) plans and defined
benefit (DB) plans, or pensions, which employers offer workers. In
2004, IRAs held about $3.5 trillion in assets, while DC plans held $2.6
trillion in assets and DB plans held about $1.9 trillion in assets.
Similar percentages of households own IRAs and participate in 401(k)
plans, and IRA ownership is associated with higher educational and
income levels. Preserving retirement savings was one of the two reasons
Congress created IRAs, and, in keeping with that idea, rollovers--money
transferred to IRAs from DC or DB plans--have outpaced IRA
contributions. Given the amount of assets held in IRAs, they may appear
to be comparable to 401(k) plans. However, 401(k) plans and other
pension plans are employer-sponsored retirement savings vehicles,
whereas most households with IRAs own traditional IRAs established
outside of the workplace. In addition, most of the assets held in IRAs
are in traditional IRAs and not in employer-sponsored IRAs.
Millions of employees of small firms lack access to a workplace
retirement plan, and several barriers may discourage small employers
from establishing employer-sponsored IRAs and offering payroll-
deduction IRAs to their employees. Although IRAs have been largely
successful at helping individuals preserve their retirement savings
through rollovers, experts told us that IRA participation falls short
of Congress's first goal for creating IRAs--to provide individuals
without retirement plans at work with a tax-preferred account in which
to save for their retirement. Although employer-sponsored IRAs have
fewer reporting requirements than 401(k) plans to encourage small
employers to offer these IRAs to their employees and payroll-deduction
IRAs have no reporting requirements for employers, experts told us that
relatively few employers appear to offer or sponsor these IRAs.
According to IRA providers and small business groups that we
interviewed, several barriers may discourage employers from offering
payroll-deduction IRAs. Some examples of such barriers include a
perceived lack of flexibility for employers seeking to promote these
IRAs to their employees based on Labor's guidance for these IRAs and
costs that some employers may incur for offering payroll-deduction
IRAs. Information is lacking, however, on what the actual costs to
employers may be for offering payroll-deduction IRAs. Other factors
that may discourage employers from offering payroll-deduction IRAs are
limited incentives to employers to offer these IRAs and a lack of
awareness for how these IRAs work. In addition, several experts raised
questions on how expanded payroll-deduction IRAs may affect employees.
Employer-sponsored IRAs may help workers to save, as these IRAs offer
greater savings opportunities than payroll-deduction IRAs. However,
employer sponsorship of these IRAs may, in some cases, also be limited
by costs, including required employer contributions. Retirement and
savings experts noted that several legislative proposals may encourage
employer sponsorship of and employee participation in IRAs, but limited
government actions have been taken to increase the number of employers
sponsoring employer-sponsored IRAs.
IRS and Labor share oversight responsibilities for all types of IRAs,
but gaps exist within Labor's area of responsibility. IRS has
responsibility for tax rules governing how to establish and maintain
IRAs, while Labor has sole responsibility for oversight of fiduciary
standards for employer-sponsored IRAs, and has issued guidance to
employers related to payroll-deduction IRAs regarding when such an
arrangement would be a pension plan subject to Labor's jurisdiction.
Labor does not have jurisdiction to oversee payroll-deduction IRA
programs that are operated within the conditions of their guidance.
Oversight ensures the interests of the employee participants are
protected, that their retirement savings are properly handled, and
Labor's guidance and the law are being followed. However, because
payroll-deduction IRA programs do not require employers to report to
the federal government that they are offering this service to
employees, and reporting requirements for employer-sponsored IRAs are
limited, Labor does not have processes in place to identify all
employers offering IRAs, which affects its ability to ensure that
employers are following its guidance and are in compliance with the
law. Obtaining information about employer-sponsored and payroll-
deduction IRAs is also important to determine whether these vehicles
help workers without pensions and 401(k) plans build retirement
savings. Although IRS collects and publishes some data on IRAs, IRS has
not consistently produced reports on IRAs nor shared such information
with other agencies, such as Labor. Labor's Bureau of Labor Statistics
National Compensation Survey surveys establishments in the private and
State and local government sectors to collect information on employer-
sponsored benefit plans. However, the National Compensation Survey
collects limited information on employer-sponsored IRAs and no
information on payroll-deduction IRAs. In our discussions with Labor
officials, they said they rely on industry data to obtain information.
Since IRS is the only agency that has data on all IRA participants,
consistent reporting of these data could give Labor and others valuable
information on IRAs.
We believe that Congress should consider determining whether direct
oversight is needed for payroll-deduction IRAs. We also make several
recommendations to Labor and IRS that are intended to help increase IRA
coverage, improve IRA oversight, and provide policymakers with more
useable information on IRAs. We recommend that Labor: (1) examine ways
to better encourage employer sponsorship of and employee participation
in employer-sponsored and payroll-deduction IRAs, (2) evaluate ways to
better monitor employer-sponsored and payroll-deduction IRAs, and (3)
evaluate ways to collect more useful information on these IRAs. We
recommend that IRS (1) provide Labor with summary information on IRAs,
including employer-sponsored IRAs, and (2) release statistical
information on all IRAs on an annual basis.
In written comments on the draft, Labor stated that it does not have
jurisdiction over payroll-deduction IRAs. Although Labor is responsible
for oversight of fiduciary standards for employer-sponsored IRAs, Labor
stated in its comment on our draft report that payroll-deduction IRAs
are not under Labor's jurisdiction because they are exempt from the
requirements imposed on plans by Title I of ERISA.[Footnote 3] In our
report, we describe that IRS's primary responsibility is for tax rules
governing how to establish and maintain an IRA. After further review we
agreed with Labor's analysis that payroll-deduction IRAs are not under
Labor's jurisdiction. We then concluded that there is an absence of
direct oversight of payroll-deduction IRAs. As a result of agency
comments, we added a matter for congressional consideration.
In our first recommendation, we asked Labor to examine ways to better
encourage employers to offer and employees to participate in payroll-
deduction IRAs, which would include examining costs to employers,
developing policy options to help employers defray the cost to
employers, and evaluating whether its guidance on payroll-deduction
IRAs need modifications or clarifications. In partial response to this
recommendation, Labor stated that payroll-deduction IRAs are not under
its jurisdiction. However, Labor stated that it would consider
examining the costs of payroll-deduction IRA programs when developing
its research agenda. Labor also stated that the development of
additional policy options to defray costs would be more properly
considered by the Department of the Treasury (Treasury). We believe
some further examination by Treasury and Labor of this area would be
appropriate. In addition, Labor stated that it has not received
feedback from small employers or IRA service providers that its
guidance on payroll-deduction IRA programs lack clarity. We maintain
that IRA providers have reported that this guidance does not provide
employers with adequate flexibility to promote employee participation
without becoming subject to ERISA Title I requirements. With regard to
our second recommendation that Labor evaluate ways to better monitor
employer-sponsored and payroll-deduction IRAs, Labor described its
enforcement program for employer-sponsored IRAs, and its reliance on
targeting, and provided information on the number of investigations and
amount of monetary results obtained in the past three years from these
investigations. We acknowledge the results that Labor has achieved
through its enforcement of employer-sponsored IRAs. However, we do not
believe that this information precludes our recommendation or
diminishes its validity. Moreover, we maintain that because Labor lacks
specific information on employers that sponsor such IRAs, including the
number of employers that do so, Labor relies primarily on employee
complaints as sources for its investigations. With regard to our third
recommendation that Labor evaluate ways to collect more useful
information on employer-sponsored and payroll-deduction IRAs, Labor's
comments focused on statutory requirements and policy considerations,
and stated that any collection of information on employer-sponsored and
payroll-deduction IRAs should not impose burdens on employers to report
information. However, Labor did not specifically respond to our
recommendation to evaluate alternative ways to collect useful
information that would not be overly burdensome to employers, such as
through the Bureau of Labor Statistics National Compensation Survey.
In its written comments, IRS recognized the need for federal agencies
and others to have routine and timely access to information on IRAs and
will continue to provide such information to Labor and the public.
Although IRS will be providing summary information on all IRAs to Labor
and for public information, we stand by our recommendation that IRS
should also consider providing information to Labor and others on
employers that sponsor IRAs, such as the number of employers that
sponsor SEP and SIMPLE IRAs, which is currently absent in the
information IRS stated it would provide to Labor.
Background:
Roughly half of all workers participate in an employer-sponsored
retirement or pension plan. Private sector pension plans are classified
either as defined benefit (DB) or as defined contribution (DC) plans.
DB plans promise to provide, generally, a fixed level of monthly
retirement income that is based on salary, years of service, and age at
retirement, regardless of how the plan investments perform. In
contrast, benefits from DC plans are based on the contributions to and
the performance of the investments in individual accounts, which may
fluctuate in value. Examples of DC plans include 401(k) plans, employee
stock ownership plans, and profit-sharing plans. The most dominant and
fastest growing DC plans are 401(k) plans, which allow workers to
choose to contribute a portion of their pretax compensation to the plan
under section 401(k) of the Internal Revenue Code.
IRAs were established under the Internal Revenue Code provisions of the
Employee Retirement Income Security Act of 1974 (ERISA). ERISA was
generally enacted to protect the interests of employee benefit plan
participants and their beneficiaries by requiring the disclosure to
them of financial and other information concerning the plan; by
establishing standards of conduct for plan fiduciaries;[Footnote 4] and
by providing for appropriate remedies and access to the federal courts.
To give IRAs flexibility in accumulating assets for retirement,
Congress designed a dual role for these accounts. The first role is to
provide individuals not covered by employer-sponsored retirement plans
an opportunity to save for retirement on their own in tax-deferred
accounts. The second role was to give retiring workers or individuals
changing jobs a way to preserve assets in employer-sponsored retirement
plans by allowing them to roll over or transfer plan balances into
IRAs.
Individual IRAs:
Over the past 30 years, Congress has created several types of IRAs
designed with different features for individuals and small businesses.
The types of IRAs geared toward individuals are:
* Traditional IRAs: Traditional IRAs allow individuals to defer taxes
on investment earnings accumulated in these accounts until distribution
at retirement. Eligible individuals may make tax-deductible
contributions of earned income to these accounts. Other individuals may
make nondeductible contributions to receive the tax deferral on
earnings. Yearly contribution amounts are subject to limits based on
income, pension coverage, and filing status. Taxpayers over age 70�
cannot contribute and must begin required minimum distributions from
these accounts. Withdrawals are generally taxable; and early
distributions made before age 59�, other than for specific exceptions,
are subject to a 10 percent additional income tax.[Footnote 5]
* Roth IRAs: In the Taxpayer Relief Act of 1997, Congress created the
Roth IRA, which allows eligible individuals to make after-tax
contributions to these accounts. After age 59�, enrollees may take tax-
free distributions of their investment earnings. Withdrawals of
investment earnings before age 59� are subject to a 10 percent
additional income tax and other taxes. Yearly contribution amounts are
subject to limits based on income and filing status. There are no age
limits on contributing, and no distributions are required during the
Roth IRA owner's lifetime. Withdrawals are generally tax-free after age
59�, as long as the taxpayer held the account for 5 years; early
distributions other than for specific exceptions are subject to an
additional 10-percent income tax.
Traditional and Roth IRAs can also be established as payroll-deduction
IRAs, which requires employer involvement.
* Payroll-deduction IRA Programs (also called payroll-deduction IRAs):
Through payroll-deduction IRAs, employees may establish either
traditional or Roth IRAs, and employees may contribute to these
accounts through voluntary deductions from their pay, which are
forwarded by the employer to the employee's IRA. As long as employers
follow guidelines set by Labor for managing the payroll-deduction
IRA,[Footnote 6] employers are not subject to the fiduciary
requirements in ERISA Title I that apply to employer-sponsored
retirement plans, like 401(k) plans.
Employer-Sponsored IRAs:
Other types of IRAs that are intended to encourage savings through
employers include:
* SEP IRAs: In the Revenue Act of 1978, Congress established SEP IRAs,
which were designed with fewer regulatory requirements than traditional
employer pension plans to encourage small employers to offer retirement
plans to their workers. SEP IRAs allow employers to make tax deductible
contributions to their own and each eligible employee's account. SEP
IRAs have higher contribution limits than other IRAs, but they do not
permit employee contributions. Yearly contributions are not mandatory,
but as with pension plans, they must be based on a written allocation
formula and cannot discriminate in favor of highly-compensated
employees.
* SIMPLE IRAs: In the Small Business Job Protection Act of 1996,
Congress created SIMPLE IRAs to help employers with 100 or fewer
employees more easily provide a retirement savings plan to their
employees. In this plan, eligible employees can direct a portion of
their salary, within limits, to a SIMPLE IRA and employers may either
match the employees' contribution up to 3 percent or make nonelective,
2 percent contributions of each employee's salary for all employees
making at least $5,000 for the year. This IRA replaced the Salary
Reduction Simplified Employee Pension IRA (SAR-SEP IRA)---a tax-
deferred retirement plan provided by sole proprietors or small
businesses with fewer than 25 employees. New SAR-SEP IRAs could not be
established after December 31, 1996, but plans in operation at that
time were allowed to continue.
Each of these IRAs have their own eligibility requirements, as shown in
table 1.[Footnote 7]
Table 1: Characteristics of Different IRA Options:
Contribution limits[A]:
Payroll-deduction IRAs: Applicable limits for traditional and Roth
IRAs: $4,000 for 2007; $5,000 for 2008 with $1,000 "catch-up"
contributions for eligible participants over age 50;
SIMPLE IRAs: Employee: For 2007 and 2008, $10,500, with additional,
"catch-up" contributions up to $2,500 for participants over age 50;
Employer: Either 100 percent match of employee contributions up to 3
percent of employee compensation, with allowances to reduce match to 1
percent of compensation in any 2 of 5 years; or contribute 2 percent of
each eligible employee's compensation;
SEP IRAs: Up to 25% of employee's annual compensation, not to exceed
$45,000 for 2007 and $46,000 for 2008;
Roth IRAs: $4,000 for 2007; $5000 for 2008 with $1,000 "catch-up"
contributions for eligible participants over age 50;
Traditional IRAs: $4,000 for 2007; $5000 for 2008 with $1,000 "catch-
up" contributions for eligible participants over age 50.
Employer eligibility:
Payroll-deduction IRAs: Any employer with one or more employees;
SIMPLE IRAs: Any employer with fewer than 100 employees that does not
offer another retirement plan;
SEP IRAs: Any employer with one or more employees;
Roth IRAs: N/A;
Traditional IRAs: N/A.
Employee eligibility:
Payroll-deduction IRAs: Applicable limits for traditional and Roth
IRAs: any employee, subject to IRA eligibility requirements for either
traditional or Roth IRAs;
SIMPLE IRAs: Employers may choose to cover all employees, or only those
receiving at least $5,000 compensation during any 2 years prior to the
year the plan was established;
SEP IRAs: Employers must cover all employees who are at least 21 years
of age who have performed service in at least 3 of the last 5 years;
Roth IRAs: Workers with taxable compensation may contribute based on
income and filing status;
Traditional IRAs: Any worker with taxable compensation under the age of
70� may contribute; tax deduction eligibility varies based on pension
coverage, income, and filing status. Taxpayers over age 70� may not
contribute to a traditional IRA.
Contribution options:
Payroll-deduction IRAs: As determined by the individual, based on
applicable contribution limits;
SIMPLE IRAs: Employee decides contribution amount up to $10,500
annually; employers must either match employee contribution up to 3
percent of employee's salary, or make nonelective 2 percent
contributions of each eligible employee's salary;
SEP IRAs: Employer decides whether to make contributions year-to-year;
Roth IRAs: As determined by the individual, based on applicable
contribution limits;
Traditional IRAs: As determined by the individual, based on applicable
contribution limits.
Sources: IRS, Publication 590, Individual Retirement Arrangements
(IRAs), 2007 and Publication 590, Retirement Plans for Small Business,
2007.
[A] The annual total IRA contribution limit applies across payroll-
deduction, Roth, and traditional IRAs and is not an annual limit for
each IRA type.
[End of table]
Labor's Employee Benefits Security Administration (EBSA) shares
responsibility for overseeing the IRA component of ERISA with IRS. EBSA
enforces Title I of ERISA, which specifies, among other standards,
certain fiduciary and reporting and disclosure requirements and seeks
to ensure that fiduciaries operate their plans in the best interest of
plan participants. IRS enforces Title II of ERISA, which provides,
among other standards, tax benefits for plan sponsors and participants,
including participant eligibility, vesting, and funding requirements.
IRAs Hold the Most Retirement Assets:
IRA assets have surpassed DC plan assets and DB plan assets, but the
majority of assets that flow into IRAs come from assets being rolled
over from other accounts, not from contributions. We also found that
IRA ownership is associated with higher education and higher income
levels. The percentage of households that own IRAs is similar to those
that participate in 401(k) plans, and total contributions to IRAs are
lower than contributions to 401(k) accounts. In addition, there are key
differences between the structure of employer-sponsored IRAs and that
of 401(k)s.
IRA Assets Exceed DC and DB Plan Assets and Largely Come from
Rollovers:
Since 1998, IRA assets have comprised the largest portion of the
retirement market. As shown in figure 1, in 2004, IRA assets totaled
about $3.5 trillion compared to DC assets of $2.6 trillion and DB
assets of $1.9 trillion.[Footnote 8]
Figure 1: Retirement Plan Assets, 1995 to 2004 (Dollars in trillions):
[See PDF for image]
This figure is a multiple line graph depicting the following data:
Year: 1995;
Defined benefit: $1.44;
Defined contribution: $1.31;
IRAs: $1.29.
Year: 1996;
Defined benefit: $1.54;
Defined contribution: $1.52;
IRAs: $1.47.
Year: 1997;
Defined benefit: $1.78;
Defined contribution: $1.85;
IRAs: $1.73.
Year: 1998;
Defined benefit: $1.95;
Defined contribution: $2.11;
IRAs: $2.15.
Year: 1999;
Defined benefit: $2.09;
Defined contribution: $2.27;
IRAs: $2.65.
Year: 2000;
Defined benefit: $1.95;
Defined contribution: $2.3;
IRAs: $2.63.
Year: 2001;
Defined benefit: $1.71;
Defined contribution: $2.12;
IRAs: $2.62.
Year: 2002;
Defined benefit: $1.44;
Defined contribution: $1.82;
IRAs: $2.53.
Year: 2003;
Defined benefit: $1.72;
Defined contribution: $2.25;
IRAs: $3.08.
Year: 2004;
Defined benefit: $1.87;
Defined contribution: $2.55;
IRAs: $3.48.
Source: Employee Benefit Research Institute.
[End of figure]
Most assets flowing into IRAs come from the transfer of retirement
assets between IRAs or from other retirement plans, including 401(k)
plans, not from contributions. These "rollovers" allow individuals to
preserve their retirement savings when they change jobs or retire. As
shown in figure 2, from 1998 to 2004, over 80 percent of funds flowing
into IRAs came from rollovers, demonstrating that IRAs play a smaller
role in building retirement savings than they play in preserving
retirement savings. IRA accounts that contain rollover assets also
exceeded those without rollover assets. For example, in 2007, the
median amount in a traditional IRA with rollover assets was $61,000,
while the median amount in a traditional IRA without rollover assets
was $30,000.[Footnote 9]
Figure 2: IRA Contributions and Rollovers, 1998 to 2004 (Dollars in
billions):
[See PDF for image]
This figure is stacked bar graph depicting the following data:
Year: 1998;
Rollovers: $160;
Contributions: $31.4;
Total: $191.4.
Year: 1999;
Rollovers: $199.9;
Contributions: $33.5;
Total: $233.4.
Year: 2000;
Rollovers: $225.6;
Contributions: $36.4;
Total: $262.
Year: 2001;
Rollovers: $187.8;
Contributions: $35.8;
Total: $223.6.
Year: 2002;
Rollovers: $204.4;
Contributions: $42.2;
Total: $246.8.
Year: 2003;
Rollovers: $205;
Contributions: $43.9;
Total: $248.9.
Year: 2004;
Rollovers: $213.6;
Contributions: $48.4
Total: $262.
Source: Investment Company Institute.
Note: IRA contributions include those made to traditional IRAs, Roth
IRAs, and employer-sponsored IRAs. Figures for 2003 and 2004 include
estimates and projections.
[End of figure]
Households with IRAs Tend to Have Higher Education, Higher Incomes, and
Own Traditional IRAs:
Traditional and Roth IRA ownership is associated with higher education
and income levels. In 2004, 59 percent of IRA households were headed by
an individual with a college degree, and only about 3 percent were
headed by an individual with no high school diploma.[Footnote 10] Over
one-third of these IRA households earned $100,000 or more, and less
than 2 percent earned less than $10,000. Households with IRAs also tend
to own their homes. Research shows that higher levels of education and
household income correlate with a greater propensity to save.[Footnote
11] Therefore, it is not surprising that IRA ownership increases as
education and income levels increase. Lastly, IRA ownership is highest
among households headed by individuals aged 45 to 54.
More households own traditional IRAs, which were the first IRAs
established, than Roth IRAs or employer-sponsored IRAs. In 2007, nearly
33 percent of all households owned traditional IRAs, and about 15
percent owned Roth IRAs. In contrast, about 8 percent of households
participated in employer-sponsored IRAs.[Footnote 12]
Similar Percentages of Households Own IRAs and Participate in 401(k)
Plans, but IRA Contributions Are Lower Than Contributions to 401(k)
Plans:
The percentage of households that own IRAs is similar to the percentage
that own 401(k)s, but IRA contributions are less than 401(k)
contributions. In 2004, 29 percent[Footnote 13] of households owned
individually arranged IRAs, and 26 percent participated in 401(k) plans
(see fig. 3).[Footnote 14] Ten percent of households own a traditional
or Roth IRA and participate in 401(k) plans.
Figure 3: IRA Ownership and 401(k) Participation among U.S. Households,
2004:
[See PDF for image]
This figure is an illustration of IRA Ownership and 401(k)
Participation among U.S. Households, 2004, as follows:
IRA: 29%;
401(k) plan: 26%;
Both IRA and 401(k) plan: 10%.
Sources: Employee Benefit Research Institute; PhotoDisc (images).
Note: Data does not include employer-sponsored IRAs.
[End of figure]
Although contributions to both 401(k) plans and IRAs increased from
2002 to 2004, 401(k) contributions were almost four times greater than
those made to IRAs. Few studies have been done that have compared
contributions by IRA owners and 401(k) participants. However, one study
assessed the consistency of taxpayer annual contributions to
traditional IRAs and to 401(k) plans from tax years 1999 to
2002.[Footnote 15] As shown in figure 4, the study found that only 1.4
million taxpayers contributed to their traditional IRAs in all 4 years,
while nearly 16 million taxpayers contributed to their 401(k) accounts
in the same time period.
Figure 4: Persistency in 401(k) and IRA Contributions, 1999 to 2002
(number in millions):
[See PDF for image]
This figure is a vertical bar graph depicting the following data:
Year: 1999 only;
401(k)s: 26 million;
Traditional IRAs: 4.1 million.
Year: 1999 and 2000;
401(k)s: 21.9 million;
Traditional IRAs: 2.7 million.
Year: 1999 to 2001:
401(k)s: 18.4 million;
Traditional IRAs: 1.9 million.
Year: 1999 to 2002;
401(k)s: 15.7 million;
Traditional IRAs: 1.4 million.
Source: Internal Revenue Service.
[End of figure]
The study found that the persistency in making IRA contributions may
partially be attributed to limits in the tax deductions some owners
could take for their contributions. Certain criteria, including age,
income, tax filing status, and coverage in a work-based retirement
plan, affect the tax deduction taxpayers could take for contributing to
an IRA.
In addition, a study by the Investment Company Institute that included
data on contributions by IRA owners shows that more households with
Roth IRAs or employer-sponsored IRAs contribute to their accounts than
households with traditional IRAs.[Footnote 16] For example, in 2004,
more than half of households with Roth, SAR-SEP, or SIMPLE IRAs
contributed to their accounts, but less than one-third of households
with traditional IRAs contributed to their accounts. This, again, may
be partly attributed to the emerging role of traditional IRAs as a
means to preserve rollover assets more than to build retirement
savings. The Investment Company Institute study also stated that the
median household contribution to traditional IRAs was $2,300 compared
to the median contribution to Roth IRAs of $3,000. The median
contribution to SAR-SEP and SIMPLE IRAs was $5,000. The study noted
that this difference may be related to the higher contribution limits
for employer-sponsored IRAs than for traditional IRAs and Roth IRAs.
Table 2 shows contributions limits for the current tax year.
Table 2: Contribution Limits for IRAs and Traditional 401(k) Plans,
2008:
Employee contribution limit[A]:
Traditional IRA: Up to $5,000;
Roth IRA: Up to $5,000;
SEP IRA: Employees cannot contribute;
SAR-SEP IRA: Up to $15,500;
SIMPLE IRA: Up to $10,500;
Traditional 401(k) plans: Up to $15,500.
Employer contribution limit:
Traditional IRA: Not applicable;
Roth IRA: Not applicable;
SEP IRA: 25 percent of an employee's compensation up to maximum of
$46,000;
SAR-SEP IRA: 25 percent of an employee's compensation up to maximum of
$46,000;
SIMPLE IRA: A contribution equal to 2 percent of employee's
compensation or a matching contribution of up to 3 percent of
employee's compensation[B];
Traditional 401(k) plans: 100 percent of employee's compensation, or up
to $46,000.
Source: Internal Revenue Service.
[A] Employee contribution limits to traditional IRAs, Roth IRAs, SIMPLE
IRAs, and traditional 401(k) plans are higher for individuals age 50 or
older (see table 1).
[B] Employers may reduce the 3 percent contribution limit to a lower
percentage, but not lower than 1 percent. Employers may not lower the 3
percent limit for more than 2 calendar years in a 5-year period.
[End of table]
Comparisons between IRAs and 401(k) Plans Are Difficult:
Comprehensive comparisons between IRAs and 401(k) plans are difficult
because of differences in plan structures. 401(k) plans are sponsored
by employers, whereas most households with IRAs own traditional IRAs
established outside of the workplace. In addition, most of the assets
in IRAs are in traditional IRAs that are set up by individuals and
provide individual investors with a vehicle to contribute to their own
retirement savings. Employer-sponsored IRAs, such as SIMPLE and SEP,
were established for small employers who lack the resources to provide
a 401(k) plan. In addition, payroll deduction IRA programs enable small
employers to provide employees the opportunity to save for retirement.
Key differences exist between employer-sponsored IRAs and 401(k) plans,
as shown in table 3.
Table 3: Key Differences between Employer-Sponsored IRAs and
Traditional 401(k) Plans:
Reporting requirements:
Employer-sponsored IRAs: No annual reporting requirements;
Traditional 401(k) plans: Must report information on plan and plan
operations to federal government annually; Subject to annual testing to
ensure contributions to nonmanagerial employees are proportional to
contributions employers make for themselves and their managers.
Vesting[A]:
Employer-sponsored IRAs: Contributions are immediately 100% vested;
Traditional 401(k) plans: Employee salary reduction contributions are
immediately 100% vested; employer contributions may be vested over time
according to plan terms.
Withdrawals, loans, and payments:
Employer-sponsored IRAs: Withdrawals permitted anytime subject to
federal income taxes, early withdrawals subject to an additional tax;
Traditional 401(k) plans: Withdrawals permitted after specified event
occurs (e.g., retirement, plan termination, etc.) subject to federal
income taxes; plan may permit loans and hardship withdrawals; early
withdrawals subject to an additional tax.
Sources: Department of Labor and Internal Revenue Service.
[A] Vesting refers to when a participant has earned a right to a
benefit that cannot be taken away (i.e., a nonforfeitable right to the
participant's accrued benefit).
[End of table]
Several Barriers May Discourage Small Employers from Offering Payroll-
Deduction and Employer-Sponsored IRAs to Employees:
Several barriers may discourage small employers from offering payroll-
deduction and employer-sponsored IRAs to their employees. Although
employer-sponsored IRAs were designed with fewer reporting requirements
to encourage small employers to offer them, few employers appear to do
so. In addition, few employers appear to offer payroll-deduction IRA
programs. Retirement and savings experts said payroll-deduction IRAs
could help many workers save for retirement and these IRAs may be the
easiest way for small employers to offer a retirement savings
opportunity to their employees. Several barriers, including costs, may
discourage employers from offering them; however, information is
lacking on the actual costs to employers. In addition, several experts
raised questions on how expanded payroll-deduction IRAs may affect
employees. Employer-sponsored IRAs offer greater savings opportunities
than payroll-deduction IRAs, but employer sponsorship of IRAs may also
be hindered by costs, including required employer contributions.
Retirement and savings experts offered several legislative proposals to
encourage employers to offer and employees to participate in IRAs, but
limited government actions have been taken to increase the number of
employers sponsoring employer-sponsored IRAs.
Barriers May Discourage Small Employers from Offering IRAs to
Employees, and Many of These Employees Lack Access to Workplace
Retirement Savings:
Employees of small firms are more likely to lack access to a retirement
plan at work than employees of larger firms, and several barriers may
limit small employers from offering payroll-deduction programs and
employer-sponsored IRAs to their employees. Although IRAs have been
largely successful at helping individuals preserve their retirement
savings through rollovers, experts told us that IRA participation falls
short of Congress' first goal for creating IRAs--to provide a tax-
preferred account for workers without employer-sponsored retirement
plans to save for their retirement. For example, millions of employees
of small firms lack access to a workplace retirement plan. The
Congressional Research Service found that private-sector firms with
fewer than 100 employees employed about 30.9 million full-time workers
between the ages of 25 and 64 in 2006. About 19.9 million of those
workers lacked access to an employer-sponsored retirement plan, as
shown in figure 5.[Footnote 17]
Figure 5: Access of Certain Workers[A] to an Employer-Sponsored
Retirement Plan, 2006:
[See PDF for image]
This figure is a horizontal bar graph depicting the following data:
All firms:
Workers with access to a retirement plan: 42.6 million;
Workers without access to a retirement plan: 31.9 million.
Firms with fewer than 100 employees:
Workers with access to a retirement plan: 11 million;
Workers without access to a retirement plan: 19.9 million.
Source: Congressional Research Service analysis of the U.S. Census
Bureau, Current Population Survey, 2006.
[A] Private sector, full-time, full-year, wage and salary workers,
between the ages of 25 and 64.
[End of figure]
To address the issue of low retirement plan sponsorship among small
employers, Congress created SEP and SIMPLE employer-sponsored IRAs, and
has encouraged employers not offering a retirement plan to offer
payroll-deduction IRAs. These IRAs were designed to have fewer and less
burdensome reporting requirements than 401(k) plans to encourage
participation, and payroll-deduction IRA programs do not have any
employer reporting requirements. Payroll-deduction and employer-
sponsored IRAs offer several advantages, as shown in table 4.
Table 4: Key Advantages of Payroll-Deduction and Employer-Sponsored
IRAs:
Key advantages:
Payroll-deduction IRAs:
* Employees contribute through payroll deduction to traditional or Roth
IRAs;
* No employer contributions;
* Not considered employer retirement plan; employers are not subject to
requirements for such plans;
* No annual financial reporting requirements;
Employer-sponsored IRAs: SIMPLE IRAs:
* Employees contribute through salary reduction;
* Employers choose to either make up to a 3 percent match of
participating employee's compensation, or contribute 2 percent of each
eligible employee's compensation;
* Employers may be able to claim a tax credit for part of start-up
costs;
* No annual financial reporting requirements;
Employer-sponsored IRAs: SEP IRAs:
* Only employer contributions allowed;
* Employers may contribute up to 25 percent of their own and each
eligible employee's annual compensation to SEP IRAs;
* Contributions are not mandatory annually;
* Employers may be able to claim a tax credit for part of start-up
costs;
* No annual financial reporting requirements.
Source: GAO analysis of IRS documents.
[End of table]
Labor issued a regulation under which an employer could maintain a
payroll deduction program for employees to contribute to their IRAs
without being considered a pension plan under ERISA. Through payroll-
deduction IRAs, an employer withholds and forwards an amount determined
by the employee directly to an IRA (traditional or Roth) established by
the employee. Although any employer can provide payroll-deduction IRAs
to their employees, regardless of whether or not they offer another
retirement plan, retirement and savings experts told us that very few
employers offer their employees the opportunity to contribute to IRAs
through payroll deduction. Further, Labor and IRS officials told us
that data is limited on how many employers offer payroll-deduction
IRAs.[Footnote 18] Because there are no reporting requirements for
payroll-deduction IRAs, and very limited reporting requirements for
employer-sponsored IRAs--as discussed later in this report--we were
unable to determine exactly how many employers offer these IRAs to
their employees. For example, because an employer's responsibility with
payroll-deduction IRAs is to forward employee contributions to IRAs,
employers are not required to report to the federal government that
they are providing this service to employees. Consequently, neither
Labor nor IRS is able to determine how many employers offer payroll-
deduction IRAs.
Employee access to SIMPLE and SEP IRAs also appears limited. SIMPLE
IRAs are only available to firms with 100 employees or fewer who do not
already offer another retirement plan; and SEP IRAs are available to
employers of any size, including those who may offer either a DC or DB
plan. The Bureau of Labor Statistics reported that, in 2005, 8 percent
of private sector workers in firms with fewer than 100 employees
participated in a SIMPLE IRA, and 2 percent of workers participated in
a SEP IRA.[Footnote 19] An IRS evaluation of employer-filed W-2 forms
estimated that in 2004, 190,000 employers sponsored SIMPLE IRAs.
However, officials told us that this figure was likely understated, as
it does not include accounts that may be owned by sole proprietors or
individuals who own unincorporated businesses by themselves, who are
not required to file W-2 forms.[Footnote 20] GAO was unable to
determine the number of employers sponsoring SEP plans, but IRS data
from 2002 show more taxpayers owned SEP than SIMPLE IRAs, with 3.5
million SEP accounts compared to 2 million SIMPLE accounts.
Payroll-Deduction IRAs Could Help Workers Save, but Barriers May
Discourage Employers from Offering a Payroll-Deduction IRA Program:
Retirement and savings experts reported that increased worker access to
payroll-deduction IRAs could help many workers to save for retirement
at work. Through payroll-deduction IRA programs, employees may either
contribute to traditional or Roth IRAs, depending on the eligibility
requirements of these plans. Any individual under the age of 70� with
taxable compensation may contribute to a traditional IRA, and many
individuals could receive a tax deduction for their contribution.
[Footnote 21] Most low-and middle-income individuals are eligible to
contribute to Roth IRAs.[Footnote 22] In theory, all of the estimated
20 million employees of small firms mentioned previously who lacked an
employer-sponsored retirement plan in 2006 could be eligible to
contribute to a traditional IRA through payroll-deduction; and many of
these individuals would be eligible to claim a tax deduction for their
contribution.
According to Labor's guidance on payroll-deduction IRAs and several
experts we interviewed, individuals are more likely to save in IRAs
through payroll deductions than they are without deductions. Payroll
deductions are a key feature in 401(k) and other DC plans. Economics
literature that we reviewed identifies payroll deduction as a key
factor in the success of 401(k) plans, and participation in these plans
is much higher than in IRAs, which do not typically use payroll
deduction. According to the Congressional Budget Office, in 2003, 29
percent of all workers contributed to a DC plan, while only 7 percent
of all workers contributed to an IRA.[Footnote 23] According to recent
economics literature that we reviewed, several papers point to the
importance of employment-based defaults, employer endorsements, and
advice from peers as factors that may influence an employee's decision
to participate in a retirement plan.[Footnote 24] The influential role
that employers may have in an employee's decision to participate in a
workplace plan may encourage some employees to also participate in
payroll-deduction IRAs.[Footnote 25]
Payroll deduction facilitates retirement savings by addressing key
behavioral barriers of procrastination and inertia, or a lack of
action, according to economics literature that we reviewed and experts
we interviewed. Although many individuals have intentions to save for
retirement, some may procrastinate because retirement is seen as a
remote event and more immediate expenses take precedence. Some
individuals also experience inertia because they lack knowledge on how
to save or have difficulty making decisions with a number of complex
options. Literature that we reviewed states that payroll deduction
gives employees a "commitment device" to help them automatically
contribute to retirement before wages are spent, relieving them of
making ongoing decisions to save.[Footnote 26]
Retirement and savings experts and representatives of small business
and consumer groups told us payroll-deduction IRAs are the easiest way
for small employers to offer their employees a retirement savings
vehicle. According to Labor publications and experts, payroll-deduction
IRAs provide employers with a low-cost retirement benefit for their
employees, because these IRAs do not permit employer contributions.
Payroll-deduction IRAs also have fewer requirements for employee
communication than SIMPLE and SEP IRAs,[Footnote 27] and employers are
not subject to ERISA fiduciary responsibilities so long as they meet
the conditions in Labor's regulation and guidance for managing these
plans.[Footnote 28] Finally, payroll-deduction IRAs allow employers to
select a single IRA provider to service the accounts to keep
administrative costs down and simplify the process for employees.
[Footnote 29]
Despite these advantages, payroll-deduction IRAs may present several
limitations which discourage employers from offering a payroll-
deduction IRA program, including: (1) costs to small employers for
setting up payroll deductions, (2) lack of flexibility to promote
payroll-deduction IRAs to employees, (3) lack of incentives to
employers, and (4) lack of awareness about how these IRAs work.
* Costs to employers. Additional administrative costs associated with
setting up and managing payroll-deduction IRAs may be a barrier for
small employers, particularly for those without electronic payroll
processing. According to Labor, costs to employers are significantly
influenced by the number of IRA providers an employer must remit
contributions to on behalf of employees. As such, Labor's guidance
allows employers to select a single IRA provider for all employees.
Also, under Labor's guidance, an IRA sponsor may reimburse the employer
for the actual costs of operating a payroll-deduction IRA as long as
such costs do not include profit to the employer. Small business groups
told us that costs could also be influenced by the number of employees
participating in the program and whether an employer has a payroll
processing system in place to make automatic deductions and direct
deposits to employee accounts. Several experts told us that many small
employers lack electronic, or automatic, payroll systems, and these
employers would be subject to higher management costs for offering
payroll-deduction IRAs. Moreover, representatives from small business
groups and other experts told us that providing health care insurance
is a more pressing issue to many small employers than providing a
retirement savings opportunity.
Although experts reported that payroll-deduction IRAs represent costs
to employers, we found that opinions on the significance of those costs
varied. Experts advocating for expanded payroll-deduction IRAs reported
that most employers would incur little to no costs since most employers
already make payroll deductions for Social Security and Medicare, as
well as federal, state, and local taxes. According to these experts,
payroll-deduction IRAs function similarly to existing payroll tax
withholdings and adding another deduction would not be a substantial
requirement. However, other experts reported that costs to employers
may be significant. One report indicated that costs to employers for
managing payroll-deduction IRAs were substantial, particularly for
employers without electronic payrolls; however, the study did not
estimate what the actual costs to employers may be on a per account
basis.[Footnote 30] In our review, we were unable to identify reliable
government data on actual costs to small employers.
* Flexibility to Promote Payroll-Deduction IRAs. According to IRA
providers, some employers are hesitant to offer a payroll-deduction IRA
program because they find Labor's guidance limits their ability to
effectively publicize the availability of payroll-deduction IRAs to
employees for fear of being subject to ERISA requirements.[Footnote 31]
Labor officials told us they issued this guidance to make it easier for
employers to understand the guidelines to follow in order to maintain
the safe harbor that applies to payroll-deduction IRAs. This guidance
explains the conditions under which employers can offer payroll-
deduction IRAs and not be subject to the ERISA reporting and fiduciary
responsibilities, which apply to employer retirement plans, like 401(k)
plans. Labor officials said they have not received any feedback from
employers or IRA providers on the clarity of the guidance since it was
issued in 1999. However, at the time the guidance was issued, some
employers had indicated to Labor that they were hesitant to offer
payroll-deduction IRAs due to ERISA fiduciary responsibilities.
[Footnote 32] IRA providers told us that employers need greater
flexibility in Labor's guidance to promote payroll- deduction IRAs and
provide a greater sense of urgency to employees to save for retirement.
However, Labor told us that it has received no input from IRA providers
as to what that flexibility would consist of, and Labor officials note
that Interpretive Bulletin 99-1 specifically provides for flexibility.
* Lack of savings incentives for small employers. Small business member
organizations and IRA providers said that the contribution limits for
payroll-deduction IRAs do not offer adequate savings incentives to
justify the effort to offer these IRAs.[Footnote 33] Because the
contribution limits to these IRAs are significantly lower than those
that apply to SIMPLE and SEP IRAs, employers seeking to provide a
retirement plan to their employees would be more likely to choose other
options, which allow business owners to contribute significantly more
to their own retirement than payroll-deduction IRAs allow.
* Lack of awareness. One reason payroll-deduction IRA programs have not
been widely adopted by employers may be a lack of awareness about how
payroll-deduction and other IRAs work. Representatives from small
business groups said many small employers are unaware that payroll-
deduction IRAs are available or that employer contributions are not
required. However, Labor has produced educational materials describing
the payroll-deduction and employer-sponsored IRA options available to
employers and employees, and one Labor official told us that that Labor
has received positive feedback from small businesses for their efforts.
IRA providers told us they experience challenges in marketing IRAs
because varying eligibility requirements make it difficult to
communicate IRA benefits to a mass market. Instead, providers said it
is more efficient to market IRAs to current customers and focus
advertising budgets on capturing rollover IRAs.
Questions Remain on How Expanded Payroll-Deduction IRAs May Affect
Employees:
Some experts questioned whether increased worker access to payroll-
deduction IRA programs will in fact lead to increased participation and
retirement savings for many workers. For example, IRA providers and
experts expressed concerns that low-and moderate-income workers may
choose not to participate in payroll-deduction IRAs because they lack
discretionary income. Many low-and moderate-income workers are already
eligible to contribute to IRAs, but have chosen not to do so because
they lack sufficient income to save for retirement. Experts raised
doubts that payroll-deduction IRA programs would lead to adequate
retirement savings, as low-income individuals would be unable to
contribute to these IRAs consistently. Further, experts said that
individuals with low-balance IRAs would be inclined to make early
withdrawals and be subject to additional income taxes. Experts also
reported that because the incentives for tax-deferred IRA contributions
are based on marginal tax rates, lower-income individuals receive a
lower immediate tax subsidy than higher income individuals. Two experts
told us that policymakers should begin their evaluation of payroll-
deduction IRAs by calculating how much savings is required for an
adequate standard of living in retirement, and then determine what role
payroll-deduction IRAs could play in reaching that level.
SIMPLE and SEP IRAs Can Help Workers to Save, but Several Factors May
Discourage Employer Sponsorship:
We found that employer-sponsored SEP and SIMPLE IRAs can help small
employers and their workers to save for their retirement, but several
factors may discourage small employers from offering these IRAs to
their employees. Experts said the higher contribution limits and
flexible employer contribution options of SEP and SIMPLE IRAs offer
greater savings benefits to employers and employees than payroll-
deduction IRAs.[Footnote 34] For example, the 2007 SIMPLE contribution
limit of $10,500 per year for individuals under age 50 is more than
twice the amount allowed in 2007 in payroll-deduction IRAs. In 2007,
SEP IRAs allowed employers to contribute the lesser of 25 percent of an
employee's compensation or up to $45,000.[Footnote 35] Moreover,
because SIMPLE IRAs require employers to match the contributions of
participating employees or to make "nonelective" contributions to all
employee accounts, employees are able to save significantly more per
year in SIMPLE accounts than they are in payroll-deduction IRAs. Under
SEP rules, employers must set up SEP IRAs for all employees working for
them in at least 3 of the past 5 years who have reached age 21 and
received at least $500 in compensation in 2007, and employees may not
contribute to their own accounts. Annual employer contributions are not
mandatory; however, if an employer decides to contribute, they must
make contributions to the SEP IRAs of all employees performing services
in that year. Because annual contributions are not mandatory for SEP
IRAs, employers have the flexibility to adjust contributions depending
on business revenues. Employers offering SIMPLE IRAs must either make a
nonelective contribution of 2 percent of each eligible employee's
compensation or a minimum of a 1 percent match to the SIMPLE IRAs of
those employees who choose to contribute to their accounts.[Footnote
36]
Certain factors may limit employer sponsorship of SIMPLE and SEP IRAs.
Small business groups told us that the costs of managing SEP and SIMPLE
IRAs may be prohibitive for small employers. Experts also pointed out
that contribution requirements for SIMPLE and SEP plans may, in some
cases, limit employer sponsorship of these plans. For example, because
SIMPLE IRAs require employers to make contributions to employee
accounts, some small firms may be unable to commit to these IRAs. Small
business groups and IRA providers told us that small business revenues
are inconsistent and may fluctuate greatly from year to year, making
required contributions difficult for some firms. In addition, employers
offering SIMPLE IRAs must determine before the beginning of the
calendar year whether they will match employee contributions or make
nonelective contributions to all employees' accounts. According to IRA
providers, this requirement may discourage some small employers from
offering these IRAs, and if employers had the flexibility to make
additional contributions to employee accounts at the end of the year,
employers may be encouraged to contribute more to employee accounts.
With regard to SEP IRAs, two experts said small firms may be
discouraged from offering these plans because of the requirement that
employers must set up a SEP IRA for all employees performing service
for the company in 3 of the past 5 years and with more than $500 in
compensation for 2007. These experts stated that small firms are likely
to hire either seasonal employees or interns who may earn more than
$500, and these employers may have difficulty finding an IRA provider
willing to open an IRA small enough for these temporary or low-earning
participants.
Proposals Exist to Encourage Employers to Offer and Employees to
Participate in IRAs:
Retirement and savings experts reported that several legislative
proposals could encourage employers to offer and employees to
participate in IRAs. While several bills have been introduced in
Congress to expand worker access to payroll-deduction IRAs, limited
government actions have been taken to increase the number of employers
sponsoring employer-sponsored IRAs.
* Employer incentives to offer IRAs. Several retirement and savings
experts said additional incentives should be in place to increase
employer sponsorship of IRAs. For example, experts suggested tax
credits should be made available to defray start-up costs for small
employers of payroll-deduction IRAs, particularly for those without
electronic or automatic payroll systems. These credits should be lower
than the credits available to employers for starting SIMPLE, SEP, and
401(k) plans to avoid competition with those plans, these experts
said.[Footnote 37] IRA providers and small business groups said
increasing contribution limits for SIMPLE IRAs to levels closer to
those for 401(k) plans would encourage more employers to offer these
plans. Other experts said doing so could provide incentives to
employers already offering 401(k) plans to switch to SIMPLE IRAs, which
have fewer reporting requirements.
* Employee incentives to participate in IRAs. Experts offered several
proposals to encourage workers to participate in IRAs, including: (1)
expanding existing tax credits for moderate-and low-income workers, (2)
offering automatic enrollment in payroll-deduction IRAs, and (3)
increasing public awareness about the importance of saving for
retirement and how to do so. Several experts said expanding the scope
of the Retirement Savings Contribution Credit, commonly known as the
saver's credit, could encourage IRA participation among workers who are
not covered by an employer-sponsored retirement plan.[Footnote 38] They
said expanding the saver's credit to include more middle-income earners
and making the credit refundable--available to tax filers even if they
do not owe income tax--could encourage more moderate-and low-income
individuals to participate in IRAs. However, an expanded and refundable
tax credit would have revenue implications for the federal budget.
Other experts told us that automatically enrolling workers into payroll-
deduction and SIMPLE IRAs could increase employee participation;
however, small business groups and IRA providers said that mandatory
automatic enrollment could be burdensome to small employers.[Footnote
39] In addition, given the lack of available income for some, several
experts told us that low-income workers may opt out of automatic
enrollment programs or be more inclined to make early withdrawals,
which can result in additional income taxes. Experts also said
increasing public awareness of the importance of saving for retirement
and educating individuals how to do so could increase IRA
participation. Several experts reported the growth of DC plans and IRAs
has resulted in individuals bearing greater responsibility for their
own retirement and earlier and more frequent information about
retirement savings could encourage IRA participation.
IRS and Labor Share Responsibility for Overseeing IRAs, but Labor Has
No Process in Place to Monitor IRAs and Data Gaps Exist:
IRS and Labor share oversight for all types of IRAs, but Labor lacks a
process to monitor all IRAs and data gaps exist. IRS is responsible for
tax rules on establishing and maintaining IRAs, while Labor is
responsible for oversight of fiduciary standards for employer-sponsored
IRAs. Payroll-deduction IRAs are not under Labor's jurisdiction;
[Footnote 40] however, Labor does provide guidance to help ensure such
a retirement program is not subject to the Title I requirements of
ERISA. Reporting requirements for employer-sponsored IRAs are limited.
Under Title I, there is no reporting requirement for SIMPLE IRAs, and
an alternative method available for reporting of employer-sponsored SEP
IRAs.[Footnote 41] Labor does not have processes in place to identify
all employers offering IRAs, numbers of employees participating, and
employers not in compliance with the law. Obtaining information about
employer-sponsored and payroll-deduction IRAs is also important to
determine whether these vehicles help workers without pensions and
401(k) plans build retirement savings. Although IRS publishes some IRA
data, IRS has not consistently produced IRA reports.
IRS and Labor Share Responsibility for Overseeing IRAs:
IRS and Labor share responsibility for overseeing IRAs. IRS has primary
responsibility for tax rules governing how to establish and maintain an
IRA, as shown in figure 5.[Footnote 42] Labor has sole responsibility
for overseeing ERISA's fiduciary standards for employer-sponsored IRAs.
Fiduciaries have an obligation, among others, to make timely
contributions to fund benefits. When contributions are delinquent for
those IRAs subject to Labor's jurisdiction, Labor investigates and
takes action to ensure that contributions are restored to the plan.
Labor also issues guidance related to payroll-deduction IRAs. In 1999,
Labor issued an interpretive bulletin that consolidated Labor
regulations and various advisory opinions on payroll-deduction programs
for IRAs into one set of guidance. Specifically, the bulletin sets out
Labor's safe harbor under which an employer may establish a payroll-
deduction IRA program without inadvertently establishing an employee
benefit plan subject to all of the ERISA requirements.[Footnote 43]
Figure 6: Primary Responsibilities of IRS and Labor for IRAs:
[See PDF for image]
This figure is an illustration of the primary responsibilities of IRS
and Labor for IRAs, as follows:
IRS:
* Issues guidance for setting up traditional, Roth, employer-sponsored,
and payroll-deduction IRAs.
* Responsible for rules governing contributions, including contribution
limits and eligibility, distribution rules, and rollover and conversion
rules for all IRAs.
Department of Labor:
* Issues guidance for setting up traditional, Roth, employer-sponsored,
and payroll-deduction IRAs.
* Responsible for rules governing contributions, including contribution
limits and eligibility, distribution rules, and rollover and conversion
rules for all IRAs.
Joint responsibility for overseeing IRA prohibited transactions:
* Labor has interpretive authority over IRA prohibited transactions.
* IRS has responsibility for imposing the excise tax on prohibited
transactions.
Sources: GAO analysis of Employee Retirement Income Security Act of
1974 and the Internal Revenue Code; Art Explosion (images).
[End of figure]
Labor and IRS also work together to oversee IRA prohibited
transactions; generally, Labor has interpretive jurisdiction and IRS
has certain enforcement authority.[Footnote 44] Both ERISA and the
Internal Revenue Code contain various statutory exemptions from the
prohibited transaction rules and Labor has authority to grant
administrative exemptions and establish exemption procedures.[Footnote
45] Labor has interpretive authority over prohibited transactions and
may grant administrative exemptions on a class or individual basis for
a wide variety of proposed transactions with a plan. IRS has
responsibility related to imposing an excise tax on parties that engage
in a prohibited transaction.[Footnote 46]
Reporting Requirements for Employer Sponsored IRAs Are Limited:
Reporting requirements for employer-sponsored IRAs are limited.
Currently, the financial institution/trustee handling the employer-
sponsored IRA provides the IRS and participants with annual statements
containing contribution and fair market value information on IRS Form
5498, IRA Contribution Information, as shown in figure 7.
Figure 7: IRS Form 5498, IRA Contribution Information:
[See PDF for image]
This figure is a copy of IRS Form 5498, IRA Contribution Information.
Source: Internal Revenue Service.
[End of figure]
Distributions from that same plan are reported by the financial
institution making the distribution to both IRS and the recipients of
the distributions on IRS Form 1099-R, Distributions from Pension,
Annuities, Retirement or Profit-Sharing Plans, IRA, Insurance
Contracts, etc., as shown in figure 8.
Figure 8: IRS Form 1099-R, Distributions from Pension, Annuities,
Retirement or Profit-Sharing Plans, IRA, Insurance Contracts, etc.
[See PDF for image]
This figure is a copy of IRS Form 1099-R, Distributions from Pension,
Annuities, Retirement or Profit-Sharing Plans, IRA, Insurance
Contracts, etc.
Source: Internal Revenue Service.
[End of figure]
Information on retirement plans are also reported annually by employers
and others to IRS on its Form W-2, which contains the amounts deducted
from wages for contributions to pension plans, as well as codes that
provide more details on the kinds of plans, such as employer-sponsored
IRAs, where the contribution was made, as shown in figure 9.
Figure 9: IRS Form W-2, Wage and Tax Statement:
[See PDF for image]
This figure is a copy of IRS Form W-2, Wage and Tax Statement.
Source: Internal Revenue Service.
[End of figure]
Employers who offer payroll-deduction IRAs have no reporting
requirements, and consequently, there is no reporting mechanism that
captures how many employers offer payroll-deduction IRAs. Although IRS
receives information reports for all traditional and Roth IRAs, those
data do not show how many of those IRAs were for employees using
payroll-deduction IRAs. In our discussions with Labor and IRS
officials, they explained that the limited reporting requirements for
employer-sponsored IRAs were put in place to try to encourage small
employers to offer their employees retirement plan coverage by reducing
their administrative and financial burdens.
According to Labor officials, IRS does not share the information it
receives with Labor because it is confidential tax information. IRS
clarified that it does not share tax information involving specific
employers or employees with Labor because it is confidential.
Consequently, Labor does not have information on employer-sponsored
IRAs. Labor also does not receive information, such as annual financial
reports, from such employers, as it does from private pension plan
sponsors. For example, pension plan sponsors must file Form 5500
reports with Labor on an annual basis, which provides Labor with
valuable information about the financial health and operation of
private pension plans.[Footnote 47] Labor's Bureau of Labor Statistics
(BLS) National Compensation Survey surveys employee benefit plans in
private establishments, receiving information on access, participation,
and take-up rates for DB and DC plans. The BLS survey, however,
collects less information on employer-sponsored IRAs.
Labor Has No Process in Place to Monitor Employer-Sponsored and Payroll-
Deduction IRAs:
Given the limited reporting requirements for employer-sponsored IRAs
and the absence of requirements for payroll-deduction IRAs, as well as
Labor's role in overseeing these IRAs, a minimum level of oversight is
important to ensure that employers are acting in accordance with the
law. Yet, Labor officials said that they are unable to monitor (1)
whether all employers are in compliance with the prohibited transaction
rules and fiduciary standards, such as by making timely and complete
employer-sponsored IRA contributions or by not engaging in self-
dealing;[Footnote 48] and (2) whether all employers who offer a payroll-
deduction IRA are meeting the conditions of Labor's guidance.
* Employer-sponsored IRAs: Labor officials said that they do not have a
process for actively seeking out and determining whether employer-
sponsored IRAs are engaging in prohibited transactions or not abiding
by their fiduciary responsibilities, such as by having delinquent or
unremitted employer-sponsored IRA contributions. Instead, as in the
case of Labor's oversight of pension plans, Labor primarily relies on
participant complaints as sources of investigative leads to detect
employers that are not making the required contributions to their
employer-sponsored IRA. For example, according to Labor officials,
about 90 percent of its IRA investigations were the result of
participant complaints. However, while Labor has other processes in
place for private pension plan oversight, such as computer searches and
targeting to identify ERISA violations, Labor does not have other
processes for IRA investigation leads. Unlike its oversight of pension
plans, Labor is at a greater risk of not being able to ensure that all
IRA sponsors are in compliance with the laws designed to protect
individuals' retirement savings.
* Payroll-deduction IRAs: Through payroll-deduction IRAs, employees may
establish either traditional or Roth IRAs, and employees may contribute
to these accounts through voluntary deductions from their pay, which
are forwarded by the employer to the employee's IRA. As long as
employers meet the conditions in Labor's regulation and guidance,
employers are not subject to the fiduciary requirements in ERISA Title
I that apply to employer-sponsored retirement plans, such as 401(k)
plans. According to Labor officials, if they become aware of an
employer operating a payroll-deduction IRA that may not be following
agency guidance, Labor will conduct an investigation to determine if
the IRA should be treated as an ERISA pension plan. The IRA may be
become subject to the requirement of Title I of ERISA, which includes
filing a detailed annual report (Form 5500) with Labor. Labor officials
said this was done in an effort to ensure that plans are being operated
and maintained in the best interest of plan participants.
Labor officials told us that they are not aware of employers improperly
relying on the safe harbor regarding payroll-deduction IRAs. However,
without a process to monitor payroll-deduction IRAs, Labor cannot be
certain of the extent or nature of certain employer activities which
may fall outside of the guidance provided by Labor. For example, Labor
does not know the extent to which employers are sending employee
contributions to IRA providers, exercising any influence over the
investments made or permitted by the IRA provider, or receiving any
compensation in connection with the IRA program except reimbursement
for the actual cost of forwarding the payroll deduction. In addition,
Labor does not have information on the number of employers that are
operating payroll-deduction IRAs.
Regulators Lack Information and Consistent Reporting on Employer-
Sponsored and Payroll-Deduction IRAs:
Ensuring that information is obtained about employer-sponsored and
payroll-deduction IRAs by regulators is one way to help them and others
determine the status of these IRAs and whether those individuals who
lack employer-sponsored pension plans are able to build retirement
savings through employer-sponsored and payroll-deduction IRAs. However,
key information on IRAs is currently not reported, such as information
that identifies employers offering payroll-deduction IRAs, distribution
by employers of the number of employees that contribute to payroll-
deduction IRAs, and distribution by employer of the type of payroll-
deduction IRA account offered (traditional or Roth) and the total
employee contributions to these accounts. Experts that we interviewed
said that, without information on the distribution by employer of the
type of payroll-deduction IRA offered and the total employee
contributions to these accounts, they are unable to determine how many
employers and employees participate in payroll-deduction and the extent
to which these IRAs have contributed to the retirement savings of its
participants. In addition, the limited reporting requirements prevent
information from being obtained about the universe of employers that
offer employer-sponsored and payroll-deduction IRAs. Also, without
information on the distribution by employer of the type of payroll-
deduction IRA offered, and the total employee contributions to these
accounts, it is difficult to determine the extent to which payroll-
deduction IRAs are being used and to determine ways to increase
retirement savings for workers not covered by an employer-sponsored
pension plan. This information can be useful when determining policy
options to increase IRA participation among uncovered workers because
it provides a strong foundation to assess the current extent to which
these IRAs are being utilized and information about the people that are
participating in these plans.
Although IRS does publish some of the information it receives on IRAs
through its Statistics of Income program (SOI), IRS does not produce
IRA reports on a consistent annual basis. IRS officials told us that
they are currently facing three major challenges that affect their
ability to publish IRA information on a more consistent basis. First,
IRS relies, in part, on information returns to collect data on IRAs,
which are not due until the following year after the filing of the tax
return. IRS officials said that these returns have numerous errors,
making it difficult and time-consuming for IRS to edit them for
statistical analysis. They also said that the IRA rules, and changes to
those rules, make it difficult for some taxpayers, employers, and
trustees to understand, which contributes to filing errors. Second,
IRS's reporting of IRA data is not a systematic process. In the past,
the production of IRS reports on IRAs was done on an ad hoc basis. IRS
officials told us that they recognize this problem and are in the early
stages of determining ways to correct it. Third, in the past, one
particular IRS employee, who has recently retired, took the lead for
developing a statistical analysis on IRAs. Since IRS does not have a
process in place to train another employee to take over this role, a
knowledge gap was created that IRS is trying to fill.
Labor officials and retirement and savings experts told us that without
the consistent reporting of IRA information by IRS, they use studies by
financial institutions and industry associations for research purposes,
which include assessing the current state of IRAs and future trends.
These experts said that although these studies are helpful, some may
double count individuals because one person may have more than one IRA
at different financial institutions. They also said that more
consistent reporting of IRA information could help them ensure that
their analyses reflect current and accurate information about
retirement assets, such as the fair market value of IRAs. Since IRS is
the only agency that has data on all IRA participants, consistent
reporting of these data could give policymakers and others a
comprehensive look at the IRA landscape.
Conclusions:
Thirty years ago, when Congress created IRAs, these accounts were
designed, in part, to help workers who do not have pensions or 401(k)
plans save for their retirement. Currently, IRAs play a major role in
preserving retirement assets but a very small role in creating them.
Although studies show that individuals find it difficult to save for
retirement on their own, millions of U.S. workers have no retirement
savings plan at work. Employer-sponsored and payroll-deduction IRAs
afford an easier way for workers, particularly those who work for small
employers, to save for retirement. They also offer employers less
burdensome reporting and legal responsibilities than defined benefit
pension plans and defined contribution plans, such as 401(k) plans.
Yet, encouraging employers to offer IRAs to their employees will not be
productive if Congress and regulators do not make sure that there is
also adequate information and improved oversight of employer-sponsored
and payroll-deduction IRAs. Given that limited reporting requirements
for employer-sponsored IRAs and the absence of reporting requirements
for payroll-deduction IRAs were meant to encourage small employers to
offer retirement plans to employees, providing more complete and
consistent data on IRAs would help ensure that regulators have the
information they need to make informed decisions about how to increase
coverage and facilitate retirement savings. Currently, IRS collects
information on employer-sponsored IRAs that it does not share with
Labor because it is confidential tax information, but IRS does report
summary information on employer-sponsored IRAs that could be useful for
Labor to have on a consistent basis. Without IRS sharing such
information, data on IRAs will continue to be collected on an episodic
basis, and mapping the universe of IRAs, especially employer-sponsored
IRAs, will continue to be difficult.
Steps must be taken to improve oversight of payroll-deduction IRAs and
determine whether direct oversight is needed. Currently, neither Labor
nor IRS is able to determine how many employers are offering their
employees the opportunity to contribute to traditional or Roth IRAs
through payroll-deduction IRA programs, and Labor has no process in
place--nor responsibility--to monitor employers offering payroll-
deduction IRAs. Consequently, Labor is unable to determine the universe
of employers offering payroll-deduction IRAs, the prevalence and nature
of activities that fall outside Labor's safe harbor, and the impact on
employees. As a result, Labor lacks key information on employers who
offer payroll-deduction IRAs. Without information on the number of
employers offering these IRAs to employees, and the number of employees
participating in these programs, neither Labor nor IRS is able to
determine the effectiveness of payroll-deduction IRAs in facilitating
retirement savings for workers lacking an employer-sponsored pension.
Moreover, given that payroll-deduction IRAs currently lack direct
oversight, it is important to decide whether such oversight is needed.
Without direct oversight, employees may lack confidence that payroll-
deduction IRAs will provide them with adequate protections to
participate in these programs, which is particularly important given
the current focus in Congress on expanding payroll-deduction IRAs.
However, any direct oversight of payroll-deduction IRAs should be done
in a way that does not pose an undue burden on employers or their
employees.
Although the limited reporting requirements for employer-sponsored IRAs
and the absence of reporting requirements for payroll-deduction IRAs
were meant to encourage small employers to offer retirement savings
vehicles to employees, there is also a need for those responsible for
overseeing retirement savings vehicles to have the information
necessary to do so. This will help ensure that there is a structure in
place to help protect individuals' retirement savings if they choose
either employer-sponsored or payroll-deduction IRAs. If current
oversight vulnerabilities are not addressed, future problems could
emerge as more employers and workers participate in employer-sponsored
and payroll-deduction IRAs. However, any improvements to plan oversight
and data collection should be done in a way that does not pose an undue
burden on employers or their employees.
Matter for Congressional Consideration:
Given the absence of direct oversight of payroll-deduction IRAs,
Congress may wish to consider whether payroll-deduction IRAs should
have some direct oversight.
Recommendations for Executive Action:
We recommend that the Secretary of Labor take the following three
actions:
1. To increase retirement plan coverage for the millions of workers not
covered by an employer-sponsored pension plan and the possibility that
payroll-deduction IRAs can help bridge the coverage gap, examine ways
to better encourage employers to offer and employees to participate in
these IRAs that could include:
* examining and determining the financial and administrative costs to
employers for establishing payroll-deduction IRA programs, especially
for those employers that do not have an automatic payroll system in
place;
* developing policy options to help employers defray the costs
associated with establishing payroll-deduction IRA programs, while
taking into consideration the potential costs to taxpayers and small
employers; and:
* evaluating whether modifications or clarifications to its guidance on
payroll-deduction IRAs are needed to encourage employers to establish
payroll-deduction IRA programs.
2. To improve the federal government's ability to regulate employer-
sponsored and payroll-deduction IRAs and protect plan participants,
evaluate ways to determine whether employers who establish employer-
sponsored IRAs and offer payroll-deduction IRAs are in compliance with
the law and the safe harbor provided under Labor's regulations and
Interpretive Bulletin 99-1, while taking employer burden into account.
3. To improve the federal government's ability to better assess ways to
improve retirement plan coverage for workers who do not have access to
an employer-sponsored retirement plan, and to provide Congress, federal
agencies, and the public with more usable and relevant information on
all IRAs, evaluate ways to collect additional information on employer-
sponsored and payroll-deduction IRAs, such as adding questions to the
Bureau of Labor Statistics National Compensation Survey that provide:
* information sufficient to identify employers that offer payroll-
deduction and employer-sponsored IRAs and:
* the distribution by employer of the number of employees that
contribute to payroll-deduction and employer-sponsored IRAs.
We also recommend the Commissioner of the Internal Revenue Service take
the following two actions:
* To supplement information Labor would receive through the Bureau of
Labor Statistics National Compensation Survey, provide Labor with
summary information on IRAs and information collected on employers that
sponsor IRAs.
* Considering the need for federal agencies, Congress, and the public
to have access to timely and useful information on IRAs, release its
reports on IRA contributions, accumulations, and distributions on a
consistent basis, such as annually.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Secretary of Labor, the
Secretary of the Treasury, and the Commissioner of Internal Revenue. We
obtained written comments from the Assistant Secretary of Labor and
from the Commissioner of Internal Revenue, which are reproduced in
appendixes II and III. Both agencies neither agreed nor disagreed with
our recommendations, and provided more information about what each
agency was currently doing. Treasury and both EBSA and BLS within Labor
provided technical comments, which were incorporated in the report
where appropriate.
Labor clearly stated in its comments that payroll-deduction IRAs are
not under Labor's jurisdiction. We agree with Labor and have revised
our report to reflect Labor's authority. As stated in our report, Labor
does provide guidance to help ensure that payroll-deduction programs
are not subject to the Title I requirements of ERISA. In addition, we
described in our report that IRS's responsibility over IRAs is to
provide tax rules governing how to establish and maintain an IRA. As
previously described in the report, several bills have been introduced
to Congress to expand worker access to payroll-deduction IRAs. However,
without direct oversight of payroll-deduction IRAs, employees may lack
confidence that payroll-deduction IRAs will provide them with adequate
protections to participate in such programs, which is particularly
important given the increasing role that IRAs have in retirement
savings. Given that Labor and IRS do not have direct oversight over
payroll-deduction IRAs, we added the matter for congressional
consideration to the report suggesting that Congress may wish to
consider whether payroll-deduction IRAs should have some direct
oversight.
In response to our first recommendation that Labor should examine and
determine the financial and administrative costs to employers for
establishing payroll-deduction IRA programs for their employees, Labor
neither agreed nor disagreed with the recommendation and stated that
payroll-deduction IRAs are not under its jurisdiction. However, as a
part of its broad program of research, Labor studies costs and expenses
related to retirement programs and said it will consider GAO's
recommendation in developing its research agenda on costs and expenses
related to retirement programs.
Labor also stated that its Interpretive Bulletin 99-1 addresses the
costs related to payroll-deduction IRA programs, which states that
employers may select one IRA sponsor to receive payroll contributions
to keep administrative costs down, and that employers can receive
payments from an IRA sponsor to cover the actual costs of operating the
IRA payroll-deduction program. Even though Labor's Interpretive
Bulletin addresses some costs related to payroll-deduction programs,
because we do not know the actual costs of managing a payroll-deduction
IRA program, it is difficult to determine if these remedies are
sufficient. For example, if the actual costs of maintaining such a
program are minimal--as some experts have suggested--limiting employees
to one IRA provider may discourage some employees from participating in
the program unnecessarily. On the other hand, if the costs of managing
these programs are significant--as other experts have suggested--this
allowance may be insufficient to encourage employers to offer a payroll-
deduction IRA program.
Labor also noted that Interpretive Bulletin 99-1 indicates that
employees can receive payments from an IRA sponsor to cover the actual
costs of operating the IRA payroll-deduction program. However,
employers may not receive any consideration beyond "reasonable
compensation for services actually rendered in connection with payroll
deductions." Without an accurate assessment of what the actual costs of
operating these programs are to employers, Labor may be unable to
readily determine whether such programs fall outside the safe harbor
and may be considered to have become ERISA Title I programs.
Furthermore, without accurate cost estimates and a determination of
what constitutes "reasonable compensation" to employers, employers may
be reluctant to seek compensation from IRA service providers to defray
the costs of operating a payroll-deduction IRA program.
In response to our recommendation that Labor should develop policy
options to help employers defray the costs associated with establishing
payroll-deduction IRA programs, Labor stated that Interpretive Bulletin
99-1 advises employers on how to defray the costs of operating payroll-
deduction IRA programs without subjecting the program to coverage under
ERISA, but also noted that payroll-deduction IRAs operated in
accordance with Interpretive Bulletin 99-1 are outside of Labor's
jurisdiction. Consequently, Labor suggested that the development of
additional policy options to help employers defray costs may be more
properly considered by the Secretary of Treasury. We believe some
further examination by Treasury and Labor of this area would be
appropriate. We believe that any policy options proposed to defray
costs to employers should, in fact, be based on an accurate assessment
of what the actual costs to employers of managing such programs.
Efforts to identify appropriate policies to defray costs would be most
efficiently executed if coordinated with the process of determining the
actual costs of managing payroll deduction programs, and that
responsibility may lie more with Labor. Proposals designed to defray
employer costs that are not determined by an accurate accounting of
actual costs to employers' risks providing either an excessive or
insufficient benefit to employers. Labor stated that Interpretive
Bulletin 99-1 advises employers on how to defray the costs of operating
payroll-deduction IRA programs without subjecting the program to
coverage under ERISA.
In response to our recommendation that Labor evaluate whether
modifications or clarifications to its guidance on payroll-deduction
IRAs are needed, Labor stated that the draft report does not provide
specifics regarding why employers believe they cannot effectively
publicize the availability of payroll-deduction IRAs, and stated that
Labor had not received any input from employers or IRA sponsors about
being unable to effectively publicize the availability of payroll-
deduction IRAs. Our report includes a discussion of the barriers
identified by retirement and savings experts that may discourage
employers from offering payroll-deduction IRAs to employees. IRA
providers told us that Labor's guidance lacks adequate flexibility for
employers to promote these IRAs to their employees, without operating
outside of the safe harbor and potentially becoming subject to ERISA
Title I requirements. In addition, as we noted in our report, employers
have indicated that they are hesitant to offer payroll-deduction IRAs
due to the possibility that ERISA fiduciary responsibilities could
apply.
In response to our second recommendation that Labor evaluate ways to
determine whether employers who establish employer-sponsored IRAs and
offer payroll-deduction IRAs are in compliance with law, while taking
employer burden into account, Labor simply described its enforcement
program and its reliance on targeting, and stated that during the past
three fiscal years, 170 SIMPLE IRAs and SEP plans had been investigated
with approximately $1.2 million obtained in monetary results.
We acknowledge that Labor's enforcement program for employer-sponsored
IRAs has led to investigations and has produced monetary results.
However, as indicated in our report, Labor has primarily relied on the
complaints of participants as sources for its investigations, as about
90 percent of its investigations into employer-sponsored IRAs were the
result of participant complaints. In addition, our report indicates
that because of the limited reporting requirements for employer-
sponsored IRAs, Labor does not have specific information on employers
that sponsor such IRAs, or even how many there are. Because Labor lacks
such information, it is unable to target and investigate potential
ERISA violations for employer-sponsored IRAs. We do not believe the
information provided by Labor on its enforcement activities precludes
our recommendation and we believe our recommendation remains valid.
Regarding our third recommendation that Labor evaluate ways to collect
additional information on employer-sponsored and payroll-deduction
IRAs, Labor's comments focused on statutory requirements and policy
considerations, and stated that any collection of information on
employer-sponsored and payroll-deduction IRAs should not impose burdens
on employers to report information. The intent of our recommendation
was to evaluate alternative, less burdensome approaches to obtain
important information, such as through the Bureau of Labor Statistics
National Compensation Survey. As we noted in our report, key
information on IRAs is currently not reported and ensuring that such
information is obtained can help determine valuable information about
whether employers are choosing to sponsor employer-sponsored IRAs or
offer payroll-deduction IRAs, and whether individuals are able to build
retirement savings through these vehicles. We do not believe the
information provided by Labor makes our recommendation less important
and we believe our recommendation remains valid.
In response to our recommendation that IRS provide Labor with summary
information on IRAs and information collected on employers that sponsor
IRAs, and release its reports on IRA contributions, accumulations, and
distributions on a consistent basis, IRS stated that it recognizes the
need for federal agencies and others to have access to routine and
timely information on IRAs and then listed the information it currently
provides. IRS also stated that it will continue to provide data and
ensure that Labor receives information on IRAs on the same day that
such information is published or otherwise made available to the
public. Although IRS will be providing summary information on all IRAs
to Labor and for public information, we stand by our recommendation
that IRS should also consider providing information to Labor and others
on employers that sponsor IRAs, such as the number of employers that
sponsor SEP and SIMPLE IRAs, which is currently absent in the
information IRS stated it would provide to Labor.
We are sending copies of this report to the Commissioner of Internal
Revenue, the Secretary of Labor, the Secretary of the Treasury;
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 [hyperlink,
http://www.gao.gov].
If you have any questions concerning this report, please contact me at
(202) 512-7215 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made significant contributions to
this report are listed in appendix IV.
Signed by:
Barbara D. Bovbjerg:
Director, Education, Workforce and Income Security Issues:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
During our review, our objectives were to (1) compare individual
retirement account (IRA) assets to assets in pension plans, (2)
describe the barriers that may discourage small employers from offering
employer-sponsored and payroll-deduction IRAs to their employees, and
(3) describe how the Internal Revenue Service (IRS) and the Department
of Labor (Labor) oversee IRAs and assess the adequacy of oversight and
information of employer-sponsored and payroll-deduction IRAs.
To identify how IRA assets compare to assets in pension plans and to
describe the demographic characteristics of IRA owners, we reviewed
reports with published data from the Federal Reserve's Survey of
Consumer Finance (SCF), Statistics of Income (SOI), and relevant
industry surveys. The following is a list of the studies we reviewed:
* Copeland, Craig. "Individual Account Retirement Plans: An Analysis of
the 2004 Survey of Consumer Finances." Issue Brief, no. 293
(Washington, D.C., Employee Benefit Research Institute, May 2006). This
report is based on analysis of data from the 2004 SCF. SCF is a
triennial survey that asks extensive questions about household income
and wealth components. In 2004, it sampled 4,522 households. The
Employee Benefit Research Institute (EBRI) is a private nonprofit
organization that conducts public policy research on economic security
and employee benefits issues. Its membership includes a cross-section
of pension funds, businesses, trade associations, labor unions, health
care providers and insurers, government organizations, and service
firms.
* Holden, Sara and Michael Bogdan. "The Role of IRAs in U.S.
Households' Saving for Retirement." Research Fundamentals, vol. 17, no.
1 (Washington, D.C., Investment Company Institute, January 2008). The
demographic and financial information of IRA owners come from the May
2007 IRA Owners Survey. The 599 randomly selected respondents are
representative of U.S. households owning traditional or Roth IRAs. The
standard error for the total sample is � 4 percentage points at the 95
percent confidence level. The Investment Company Institute (ICI) used
the American Association for Public Opinion Research #4 method to
calculate its response rate and believes it achieved a response rate in
line with comparable industry surveys. ICI is a national association of
U.S. investment companies, including mutual funds, closed-end funds,
exchange-trade funds, and unit investment trusts. Its research
department collects and disseminates industry statistics, and conducts
research studies relating to issues of public policy, economic and
market developments, and shareholder demographics.
* "The U.S. Retirement Market, Second Quarter 2007." Research
Fundamentals, vol. 16, no. 3-Q2 (Washington, D.C., Investment Company
Institute, December 2007). The information on total IRA market assets
comes from tabulations of total IRA assets provided by the IRS SOI for
tax years 1989, 1993, and 1996 through 2004. The tabulations are based
on a sample of IRS returns. See information above for a description of
ICI.
* Holden, Sara and Michael Bogdan. "Appendix: Additional Data on IRA
Ownership in 2007." Research Fundamentals, vol. 17, no. 1A (Washington,
D.C., Investment Company Institute, January 2008). Information on the
number of households owning IRAs is based on data from the U.S. Bureau
of the Census Current Population Reports. See information above for a
description of ICI.
* Sailer, Peter, Victoria L. Bryant, and Sara Holden, Internal Revenue
Service, "Trends in 401(k) and IRA Contribution Activity, 1999-2002 -
Results from a Panel of Matched Tax Returns and Information Documents."
(Washington, D.C., 2005). This study is based on SOI's database of over
71,000 individual taxpayers who filed for tax years 1999 through 2002.
The analysis is limited to those taxpayers who filed for all 4 years in
the study. The weighted file represents 143.2 million taxpayers, or
about 81 percent, of the original 177 million who filed for 1999.
* West, Sandra and Victoria Leonard-Chambers. "The Role of IRAs in
Americans' Retirement Preparedness." Research Fundamentals, vol. 15,
no. 1 (Washington, D.C., Investment Company Institute, January 2006).
The demographic and financial information of IRA owners come from the
May 2005 survey of 595 randomly selected representative U.S. households
owning IRAs, including traditional IRAs, Roth IRAs, Savings Incentive
Match Plans for Employees (SIMPLE), Simplified Employee Pensions (SEP),
and Salary Reduction Simplified Employee Pension (SAR-SEP) IRAs. The
standard error for the total sample is �4 percentage points at the 95
percent confidence level. ICI used the American Association for Public
Opinion Research #4 method to calculate its response rate and believes
it achieved a response rate in line with comparable industry surveys.
See information above for a description of ICI.
To describe barriers that may discourage employers from offering
employer-sponsored and payroll-deduction IRAs, we interviewed
retirement and savings experts, including individuals representing
public policy research organizations, small business member
organizations, consumer and employee advocacy groups, financial
industry associations, IRA service provider companies and a pension
professional member association. We also interviewed officials at Labor
and IRS to gather the perspective of officials of federal agencies with
responsibility for payroll-deduction and employer-sponsored IRAs. In
our interviews with these experts, we gathered information on
challenges that small employers face in offering IRAs to their
employees and challenges that employees face in participating in IRAs.
In these interviews, we also gathered information on proposals that
exist to encourage employers to offer and employees to participate in
IRAs. In addition, we reviewed available economics literature and
research conducted by federal agencies, public policy organizations,
and academic researchers on the factors affecting employer sponsorship
of and employee participation in IRAs and other retirement savings
plans.
To describe how the IRS and Labor oversee IRAs and to assess the
adequacy of oversight and information on employer-sponsored and payroll-
deduction IRAs, we obtained and reviewed information about Labor's and
IRS's oversight practices and responsibilities regarding IRAs. To
accomplish this, we interviewed Labor and IRS officials about the steps
they take to monitor IRA plans. However, we did not assess the
effectiveness of IRS and Labor compliance and enforcement efforts. We
also reviewed the agencies' statutory responsibilities in the Internal
Revenue Code and the Employee Retirement Income Security Act of 1974
(ERISA) for overseeing IRAs. We analyzed Labor and IRS oversight
processes to identify any gaps that may exist.
We conducted this performance audit from September 2007 through May
2008 in accordance with generally accepted government auditing
standards, which included an assessment of data reliability. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Department of Labor:
U.S. Department of Labor:
Assistant Secretary for Employee Benefits Security Administration:
Washington, D.C. 20210:
May 22, 2008:
Ms. Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Bovbjerg:
We have reviewed the Government Accountability Office's (GAO) draft
report entitled "Individual Retirement Accounts: Government Actions
Could Encourage More Employers to Offer IRAs to Employees" (GAO-08-
590).
The Department is dedicated to supporting the growth of the private
benefit system and to encouraging retirement income savings. There are
approximately 700,000 employer-sponsored retirement plans currently
under the jurisdiction of the Employee Benefits Security Administration
(EBSA). Employers enjoy an array of retirement plan design options that
Congress created to encourage employer sponsorship of plans.
As stated in the draft report, some of these options specifically
address the concerns of small employers. Employer-sponsored IRAs have
fewer reporting requirements than other types of employee benefit
plans. In addition, small employers may provide payroll-deduction
programs that simply enable employees to make voluntary contributions
to IRAs. These payroll-deduction IRAs are not employer-sponsored plans
and are not subject to the requirements imposed on plans by Title I of
ERISA. EBSA provides guidance to help employers ensure that payroll-
deduction IRAs are not subject to Title I requirements,[Footnote 49] if
that is the employer's goal, and to understand the differences among
the various types of plans and non-employer sponsored programs.
In this regard, the Department has devoted significant resources to
assist small employers in choosing a retirement program, through
comprehensive education and outreach [Footnote 50] and regulatory
programs. EBSA's education and outreach program focuses on providing
information on the various retirement savings options to small
businesses with no retirement plan. These initiatives include
publications as well as seminars, a DVD providing the peer perspective
from employers that sponsor the most popular plans, such as SIMPLE IRAs
and SEPs, and an interactive website. Specific publications include
"Choosing a Retirement Solution for Your Small Business," "Payroll
Deduction IRAs for Small Business," "SEP Retirement Plans for Small
Business," and "SIMPLE IRA Plans for Small Business." The Department
partners with the American Institute of Certified Public Accountants to
reach accountants of small businesses to assist them in their role in
the small business owner's decision to set up a plan. The Department
also works with local Chambers of Commerce and other organizations to
reach small businesses directly.
Recommendation: The Secretary of Labor should examine and determine the
financial and administrative costs to employers for establishing
payroll-deduction IRA programs, especially for those employers that do
not have an automatic payroll system in place.
The draft report states that administrative costs associated with
setting up and managing payroll-deduction IRAs may be a barrier for
small employers, particularly for those without electronic payroll
processing. Some of the costs listed depend on whether an employer has
a payroll processing system in place to make automatic deductions and
direct deposits, and the number of employees participating in the
program. The draft report also states that opinions regarding the
significance of these costs varies.
EBSA's Interpretive Bulletin 99-1 addresses the costs related to
payroll-deduction IRA programs. The guidance clarifies that employers
may select one IRA sponsor to receive payroll contributions to keep
administrative costs down and simplify the process for employees. The
guidance also states that employers can receive payments from an IRA
sponsor to cover the actual costs of operating the IRA payroll-
deduction program.
While payroll-deduction IRAs are not under the jurisdiction of the
Department, as part of its broad program of research, the Department
studies costs and expenses related to retirement programs. While these
studies examine a range of retirement programs, they generally
emphasize employer-sponsored plans under the Department's jurisdiction.
We will consider this recommendation as we develop our research agenda.
Recommendation: The Secretary of Labor should develop feasible policy
options to help employers defray the costs associated with establishing
payroll-deduction IRA programs, while taking into consideration the
potential costs to taxpayers.
The Department generally pursues policies to help employers defray the
costs associated with establishing employer-sponsored retirement plans.
In addition, EBSA's Interpretive Bulletin 99-1 advises employers on how
to defray the costs of operating payroll-deduction IRA programs without
subjecting the program to coverage under ERISA. Payroll-deduction IRAs
operated in accordance with this guidance fall outside the Department
of Labor's jurisdiction. Thus, the development of additional policy
options may be more properly considered by the Secretary of the
Treasury.
Recommendation: The Secretary of Labor should evaluate whether
modifications or clarifications to its guidance on payroll-deduction
IRAs are needed to encourage employers to establish payroll-deduction
IRA programs.
We appreciate that the draft report on page 20 explains that the
Department has taken steps to promote payroll-deduction IRAs in issuing
Interpretive Bulletin 99-1. The Interpretive Bulletin provides
employers a "safe harbor" and easy-to-use guidance to avoid coverage as
a plan under Title I of ERISA. Under the guidance, if an employer
limits its involvement to collecting deducted amounts and remits them
to the IRA, the IRA will not be an ERISA covered plan. The guidance
also details the requirements for the maintenance of employer
neutrality with respect to the IRA sponsor and through example details
what it means for an employer to endorse the program.
The draft report states that according to IRA providers, some employers
are hesitant to offer payroll-deduction IRA programs because they find
the Interpretive Bulletin limits their ability to effectively publicize
the availability of payroll-deduction IRAs to employees for fear of
being subject to ERISA requirements. Other than this perceived lack of
flexibility for employers seeking to promote IRAs, the draft report
does not provide any other specifics regarding why employers believe
they cannot effectively publicize the availability of payroll-deduction
IRAs. The safe harbor states that an employer may encourage an employee
to save for retirement through payroll withholding and contribution to
an IRA, and provide informational materials written by the IRA sponsor
without making the IRA a pension plan subject to Title I of ERISA. The
Department has not received any input from employers or IRA sponsors
stating the guidance does not permit them to effectively publicize the
availability of payroll-deduction IRAs.
Recommendation: To improve the federal government's ability to regulate
employer-sponsored and payroll-deduction IRAs and protect plan
participants, the Secretary of Labor should evaluate ways to determine
whether employers who establish employer-sponsored IRAs and offer
payroll-deduction IRAs are in compliance with the law, while taking
employer burden into account.
Ensuring the security of retirement benefits is a core mission of EBSA.
In the draft report the GAO is concerned that EBSA is unable to monitor
whether all employers are in compliance with the law and recommends
that the Department evaluate ways to determine whether employers who
establish employer-sponsored IRAs and offer payroll-deduction IRAs are
in compliance with the law.
EBSA operates an aggressive enforcement program to protect the benefits
of workers, retirees and their families. In FY 2007 alone, EBSA's
activities yielded S1.5 billion in monetary results; and EBSA's
investigations led to the indictment of 115 persons for criminal
activity related to employee benefit plans. Since 2001, EBSA has
achieved nearly $11 billion in monetary results and more than 800
criminal indictments.
EBSA relies on targeting to focus its enforcement resources in an
effective manner. "Targeting" is the process whereby specific
individuals or entities are identified for investigation because of
some indication that an ERISA violation may have occurred or may be
about to occur. On the national level, we identify broad topic areas
which have been shown to involve a number of potential violations. Each
region then bases its enforcement activities on both national
initiatives and regional initiatives. We believe that these methods of
selecting cases have been very successful, as EBSA has consistently
reported enforcement results nearly double those of just a few years
ago.
The draft report specifies that a minimum level of oversight is
important to ensure that employers are acting in accordance with the
law. Targeting permits EBSA to provide this level of oversight. During
the past three fiscal years, EBSA was able to maintain this level of
oversight by investigating 170 SIMPLE IRA and SEP plans and obtaining
monetary results of approximately $1.2 million.
Recommendation: To improve the federal governments' ability to better
assess ways to improve retirement plan coverage for workers who do not
have access to an employer-sponsored retirement plan, and to provide
Congress, federal agencies, and the public with more usable and
relevant information on all IRAs, the Secretary of Labor should
evaluate ways to collect additional information on employer-sponsored
and payroll-deduction IRAs, such as adding questions to the Bureau of
Labor Statistics National Compensation Survey that provide:
* information sufficient to identify employers that offer payroll-
deduction and employer-sponsored IRAs;
* the distribution by employer of the number of employees that
contribute to payroll-deduction and employer-sponsored IRAs.
In creating IRAs, Congress weighed the benefits of promoting retirement
savings and the burdens of reporting requirements, and decided to limit
reporting requirements for employer-sponsored IRAs. Under section
101(h)(1) of ERISA, reports are not required by an employer maintaining
any simple retirement account established pursuant to section 408(p) of
the Internal Revenue Code. In the case of a SEP described in section
408(k) of the Internal Revenue Code, Department regulations [Footnote
51] provide for an alternative method of compliance with the reporting
and disclosure requirements of Title I of ERISA by using simple IRS
Form 5305-SEP. Payroll-deduction IRAs are not Title I ERISA covered
plans and have no reporting obligations under ERISA. Given the
statutory requirements, and the policy consideration to encourage small
employers to provide retirement programs, EBSA agrees that any
collection of information on employer-sponsored and payroll-deduction
IRAs should not impose burdens on employers to report information.
Conclusion:
EBSA is committed to protecting the employer-sponsored benefits of
American workers, retirees, and their families, and to promoting
policies to encourage retirement savings. We will continue to strive to
improve our outreach programs to educate employers and the public on
retirement savings programs, as well as our enforcement program to
deter, detect and correct violations of ERISA. We appreciate having had
the opportunity to review and comment on the draft report. Please do
not hesitate to contact us if you have questions concerning this
response or if we can be of further assistance.
Sincerely,
Signed by:
Bradford P. Campbell:
Assistant Secretary:
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Department Of The Treasury:
Internal Revenue Service:
Washington, D.C. 20224:
May 23, 2008:
Ms. Barbara D. Bovbjerg:
Director, Education, Workforce and Income Security Issues:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Ms. Bovbjerg:
Thank you for the opportunity to comment on the Government
Accountability Office's draft report on: Individual Retirement
Accounts: Government Actions Could Encourage More Employers to Offer
IRAs to Employees (GAO-08-590). Our comments are shown below:
* The IRS recognizes the needs for federal agencies, Congress, and the
public to have access to routine and timely information on Individual
Retirement Accounts (IRAs). As such, the IRS regularly has made
information available on the statutory adjustment to income claimed by
taxpayers for contributions to IRAs as well as total taxable IRA
distributions reported on Forms 1040 and 1040A as a part of its annual
Statistics of Income -- Individual Income Tax Returns, Publication
1304. The first data in the annual series were available for Tax Year
1975 and the most recent annual published information is for Tax Year
2005. Data for Tax Year 2006 will be available later this summer.
* The IRS has regularly made available in the Statistics of Income
Bulletin, statistical information for IRAs from information returns and
documents filed with the IRS such as Form 5498, IRA Contributions. Data
for Tax Year 2000 are available in the Spring 2004 edition (Publication
1136 -- Volume 23, Number 4). Data for Tax Years 2001 and 2002 are
available in the Spring 2006 edition (Publication 1136 -- Volume 25,
Number 4) while data for Tax Year 2004 will be available in the soon to
be released Spring 2008 edition (Publication 1136 -- Volume 27, Number
4). In addition, the IRS has made data available on this subject as
part of the Statistics of Income Division's participation in meetings
of the American Statistical Association, National Tax Association and
other professional forums. Papers resulting from these activities are
routinely published in the SOI Division's annual Paper Series (formerly
called the Special Studies in Federal Tax Statistics series). All of
these data are also available in electronic format as part of the Tax
Stats home page on the IRS web site at [hyperlink, http://www.irs.gov].
* The IRS plans to continue providing IRA data in the annual
Publication 1304 (Individual Income Tax Returns), as well as the
periodic information in Publication 1136 (SOI Bulletin), and the SOI
Paper Series. The IRS will also ensure that the Department of Labor
receives information on IRAs on the same day that such information is
published or otherwise made available to the public.
If I can further assist you, please call me or contact Thomas B.
Petska, Director, Statistics of Income Division, at (202) 874-0700.
Sincerely,
Signed by:
Douglas H. Shulman:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Barbara Bovbjerg, (202) 512-7215 or [email protected]:
Staff Acknowledgments:
In addition to the contact above, Tamara Cross, Assistant Director;
Raun Lazier; Susan Pachikara; Matt Barranca; Joseph Applebaum, Susan
Aschoff; Doreen Feldman; Edward Nannenhorn; MaryLynn Sergent; Roger
Thomas; Walter Vance; and Jennifer Wong made important contributions to
this report.
[End of section]
Footnotes:
[1] Taxpayers ineligible for the deduction can make nondeductible
contributions to take advantage of the deferral on investment earnings.
Distributions are partially taxable. Distributions received before age
59� are subject to an additional 10-percent income tax unless they meet
certain requirements or are used for specific purposes, including the
purchase of a first home or for higher education expenses.
[2] Employers must have 100 or fewer employees who earned $5,000 or
more during the preceding calendar year.
[3] As long as employers follow guidelines set by Labor for managing
payroll-deduction IRAs, employers are not subject to the fiduciary
requirements in ERISA Title I that apply to employer-sponsored
retirement plans, such as 401(k) plans. As a consequence payroll-
deduction IRAs that are operated within the conditions of Labor's
guidance are not under its jurisdiction.
[4] ERISA defines fiduciaries as persons who (1) exercise discretionary
authority or control over the management of a private sector employee
benefit plan or the plan's assets, (2) render investment advice for a
fee or other compensation with respect to plan assets, or (3) have any
discretionary authority or responsibility to administer the plan. Under
ERISA, fiduciaries are required to act prudently and exclusively in the
interest of plan participants and beneficiaries.
[5] Early withdrawals are generally subject to an additional income
tax. However, withdrawals in certain instances, for example,
withdrawals for the purchase of a first-time residence or related to
payments for higher education, are not subject to additional tax, as
provided under specific tax rules.
[6] See 29 C.F.R. � 2509.99-1 (also known as Interpretive Bulletin 99-
1).
[7] In addition to SEP and SIMPLE IRAs, employers may offer "deemed
IRAs" to their employees, which allow employees to keep IRA assets in
their employer's tax-qualified retirement plan as a separate,
traditional or Roth IRA. Employees may make voluntary contributions to
the deemed IRA, subject to IRA rules. According to the Department of
the Treasury, few such IRAs exist.
[8] Craig Copeland, "Individual Account Retirement Plans: An Analysis
of the 2004 Survey of Consumer Finances," Issue Brief, no. 293
(Washington, D.C., Employee Benefit Research Institute, May 2006).
[9] Sara Holden and Michael Bogdan, "The Role of IRAs in U.S.
Households' Saving for Retirement," Research Fundamentals, vol. 17,
no.1 (Washington, D.C., Investment Company Institute, January 2008).
[10] Additional analysis of the Federal Reserve's Survey of Consumer
Finance (SCF) by the Employee Benefits Research Institute, Craig
Copeland, "Individual Account Retirement Plans: An Analysis of the 2004
Survey of Consumer Finances."
[11] Sara Holden, Kathy Ireland, Victoria Leonard-Chambers, and Michael
Bogdan, "The Individual Retirement Account at Age 30: A Retrospective,"
Perspective, vol. 11, no. 1 (Washington, D.C., Investment Company
Institute, February 2005).
[12] Sara Holden and Michael Bogdan, "Appendix: Additional Data on IRA
Ownership in 2007," Research Fundamentals, vol. 17, no. 1A (Washington,
D.C., Investment Company Institute, January 2008).
[13] This figure does not include employer-sponsored IRAs. Other
industry data indicates that 8 percent of households participated in
employer-sponsored IRAs in 2004.
[14] Survey of Consumer Finance (SCF) data is based on a sample of
households, and estimates from the SCF survey have associated sampling
errors. Therefore, it is not known whether the 29 percent and 26
percent point estimates represent statistically significant differences
in the underlying populations. Additional analysis of the SCF by the
Employee Benefit Research Institute, Craig Copeland, "Individual
Account Retirement Plans: An Analysis of the 2004 Survey of Consumer
Finances."
[15] Peter Sailer, Victoria Bryant, and Sara Holden, "Trends in 401(k)
and IRA Contribution Activity, 1999-2002 - Results from a Panel of
Matched Tax Returns and Information Documents," Internal Revenue
Service, Washington, D.C.
[16] Sandra West and Victoria Leonard-Chambers, "The Role of IRAs in
Americans' Retirement Preparedness," Research Fundamentals, vol. 15,
no. 1 (Washington, D.C., Investment Company Institute, January 2006).
[17] Patrick Purcell, Pension Sponsorship and Participation: Summary of
Recent Trends, CRS Report for Congress, Order Code RL30122 (Washington,
D.C., Congressional Research Service, Sept. 6, 2007).
[18] Labor and IRS have taken steps to promote these plans. For
example, in 1975, Labor issued a regulation describing the conditions
under which payroll-deduction IRA programs offered by employers are not
considered a pension plan under Title I of ERISA. See 29 C.F.R.� 2510.3-
2(d). Through this regulation--and several other advisory opinions and
an Interpretive Bulletin issued in 1999--Labor provided employers with
a "safe harbor" from reporting and disclosure requirements, fiduciary
duties, and enforcement rights under ERISA Title 1 that apply to
employer-sponsored pensions. 29 C.F.R.� 2509.99- 1 (also known as
Interpretive Bulletin 99-1). See 64 Fed. Reg. 33000 (June 18, 1999). In
1999, IRS issued an announcement providing information to employees and
employers on payroll-deduction contributions for Roth and traditional
IRAs. See Internal Revenue Bulletin 1999-2, at 44 (Jan. 11, 1999).
[19] U.S. Department of Labor, U.S. Bureau of Labor Statistics,
National Compensation Survey: Employee Benefits in Private Industry in
the United States, 2005, Bulletin 2589 (May 2007).
[20] IRS was also unable to estimate the number of SEP IRAs sponsored
by sole proprietors.
[21] Eligibility for a full or partial deduction for traditional IRA
contributions depends on whether a taxpayer or spouse is covered by an
employer plan, as well as limits on modified adjusted gross income
(AGI) and filing status. For example, a single worker not covered by an
employer plan is eligible for the full deduction regardless of income,
and a married taxpayer filing jointly whose spouse is covered by an
employer plan can take the full deduction if the couple's modified AGI
is $159,000 or less for 2008. Other individuals may be eligible for
partial deductions, and even those ineligible for any deduction can
still make nondeductible contributions to a traditional IRA.
[22] An individual's eligibility to contribute to Roth IRAs is based on
their modified AGI and their tax filing status. For example, in 2008,
single, head-of-household, and married individuals filing separately
with a modified AGI of less than $101,000 could contribute up to $5,000
($6,000 if age 50 or older.) Individuals with an AGI that is more than
$101,000 but less than $116,000 could contribute at reduced limits, and
individuals making $116,000 or more could not contribute to Roth IRAs.
Individuals that are married, filing jointly, or qualified widowers
with a modified AGI less than $159,000 could contribute up to the
$5,000 limit ($6,000 for age 50 or older). Couples with income between
$159,000 and $169,000 could contribute at lower levels, and those
making more than $169,000 cannot contribute.
[23] Congressional Budget Office, "Utilization of Tax Incentives for
Retirement Saving: Update to 2003," Background Paper (Washington, D.C.,
March 2007).
[24] John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian,
"The Importance of Default Options for Retirement Savings Outcomes:
Evidence from the United States," Working Paper 12009 (Cambridge,
Mass., National Bureau of Economic Research, January 2006); Ester Duflo
and Emmanuel Saez, "The Role of Information and Social Interactions in
Retirement Plan Decisions: Evidence from a Randomized Experiment,"
Quarterly Journal of Economics, Vol 68. (2003).
[25] Under Labor's Interpretive Bulletin 99-1, an employer may
encourage its employees to save for retirement by providing general
information on the payroll-deduction program and other educational
materials that explain the advisability of retirement savings without
converting the payroll-deduction program into a plan covered under
Title I of ERISA.
[26] Steven F. Venti, "Choice, Behavior, and Retirement Saving," in The
Oxford Handbook of Pensions and Retirement Income, Eds. Gordon C.
Clark, Alicia H. Munnell, J. Michael Orszag (Oxford, Great Britain,
2006) 603-17 and Olivia Mitchell and Stephen Utkus, "Lessons from
Behavioral Finance for Retirement Plan Design," Pension Research
Council Working Paper, PRC WP 2003-6 (Philadelphia, Pa., 2003).
[27] For example, SIMPLE IRAs require employers to provide employees
with a summary plan description and an annual election notice. SEP IRAs
require employers to provide employees with written statements that
explain the terms of the pension, how changes are made, and when
employees will receive information about contributions to their
accounts.
[28] Further, employers are not required to determine an employee's
eligibility status for Roth contributions or tax-deferred contributions
to traditional IRAs, which may vary based on the employee's modified
adjusted gross income or tax filing status. These responsibilities
would fall on the employee.
[29] If one or more of the conditions are not met, the employer may be
considered to have established or maintained a pension plan.
[30] Mary M. Schmitt and Judy Xanthopoulos, "Automatic IRAs: Are They
Administratively Feasible, What Are the Costs to Employers and the
Federal Government, and Will They Increase Retirement Savings?"
Preliminary Report Prepared for AARP, Optimal Benefit Strategies, LLC
(Mar. 8, 2007.)
[31] Labor's guidance on payroll-deduction IRAs is summarized in
Interpretive Bulletin 99-1, Payroll Deduction Programs for Individual
Retirement Accounts, 29 C.F.R � 2509.99-1.
[32] In the explanation section of the Federal Register notice in which
Labor issued Interpretive Bulletin 99-1, Labor stated that "some
employers have indicated that they are reluctant to create payroll
withholding programs for individual retirement accounts because they
are concerned that such programs would be considered pension plans
covered by ERISA and therefore subject to the requirements of Title I
of ERISA." 64Fed. Reg. 33000 (June 18, 1999).
[33] In 2008, eligible individuals were allowed to contribute a total
of $5,000 to one or more traditional and Roth IRAs, and individuals
older than age 50 could contribute $6,000.
[34] SIMPLE IRAs require that employers contribute to their employees'
IRAs by either making "nonelective" 2 percent contributions to the
accounts of all employees, or by matching the salary-reduction
contributions of participating employees up to 3 percent of the
employee's compensation, up to $10,500 in 2007. Individuals over age 50
at the end of the 2007 calendar year could make an additional "catch-
up" contribution of $2,500 to their SIMPLE IRAs. Under a SEP, employers
contribute directly to SEP-IRAs for all employees, including the
employer, with contributions up to 25 percent of each employee's pay,
but no more than $45,000 in 2007.
[35] Compensation generally does not include contributions to the SEP.
[36] According to IRS Publication 560, employers sponsoring SIMPLE IRAs
who elect to match employee contributions may not match less than 3
percent for more than 2 years in a 5-year period. See IRS, Retirement
Plans for Small Business, Publication 560 (2006).
[37] The currently available "Tax Credit for Small Employer Pension
Plan Startup Costs" applies to eligible employers who offer SEP,
SIMPLE, and qualified plans. This credit is intended to cover costs to
set up, administer, and educate employees about the plan for up to a
maximum of $500 per year for each of the first 3 years of the plan. It
should be noted that providing a similar tax credit for employers
offering payroll-deduction IRAs would have revenue implications for the
federal budget.
[38] Currently, the saver's credit provides a nonrefundable tax credit
to low-and moderate-income savers of up to 50 percent of their annual
IRA or 401(k) contributions up to $2,000. In 2007, the credit was
available to single and married individuals filing separate income tax
returns who make no more than $26,000 and to married couples filing
jointly who make no more than $52,000. Depending on income and filing
status, taxpayers may claim a credit as high as 50 percent or as low as
10 percent of their contributions. The saver's credit was designed to
provide greater savings incentive to low-and moderate-income workers
who, because of their lower marginal tax rates, receive lower tax
subsidies by saving in tax-preferred accounts, such as IRAs, than
higher income individuals.
[39] Several studies show that 401(k) plans with automatic enrollment
features have increased participation rates, especially among young and
lower income workers who are less likely to participate in these plans.
However, as previously mentioned, 401(k) plans are different from IRAs
with different incentives. One study of a large firm found that
automatic enrollment increased participation by eligible employees from
57 percent to 86 percent in one year for new hires. Brigitte C. Madrian
and Dennis F. Shea, "The Power of Suggestion: Inertia in 401(k)
Participation and Savings Behavior," The Quarterly Journal of
Economics, vol. 116, issue 4 (November 2001).
[40] As long as employers follow guidelines set by Labor for managing
the payroll-deduction IRA, employers are not subject to the fiduciary
requirements in ERISA Title I that apply to employer-sponsored
retirement plans, such as 401(k) plans.
[41] Section 101(h)(1) of ERISA Title I provides that no report shall
be required for qualified salary reduction arrangements under section
408(p) of the Internal Revenue Code (SIMPLE IRAs). In addition, Labor
provides an alternative method of compliance for reporting SEP
arrangements through IRS Form 5305-SEP.
[42] IRS issues guidance for setting up traditional and Roth IRAs
through its Publication 590, Individual Retirement Arrangements, and
similar guidance for employer-sponsored IRAs can be found in IRS's
Publication 560, Retirement Plans for Small Business. These
publications include information on the type of financial institutions
that can be used to establish an IRA, and the requirements that a
taxpayer must meet to establish such an account.
[43] Labor's guidance explains that an employer that establishes a
payroll-deduction IRA program (traditional or Roth) is not considered
to have established an employee retirement plan subject to ERISA if the
following are satisfied: (1) in employee communications regarding the
program, the employer maintains neutrality with respect to IRA
investment options available; (2) if the employer establishes
limitations on the number of IRA investment options available, the
program discloses any costs or limitations on employees' ability to
rollover to other IRAs; (3) the employer does not pay any
administrative, investment management, or other fees which the IRA
sponsor would require an employee to pay for establishing or
maintaining the IRA; (4) the employer does not receive any
consideration for operating the program.
[44] Generally, prohibited transactions include any improper use of an
IRA by the account holder or any disqualified person, which includes
the individual who established the IRA, members of the individual's
family, and fiduciaries with respect to the IRA. Examples of prohibited
transactions with an IRA include: borrowing money from an IRA, selling
property to it, receiving unreasonable compensation for managing the
account, using the account as security for a loan, and buying property
for personal use with IRA funds. Treasury retains authority only with
respect to transactions that are exempted by subsection 404(c) of ERISA
from the application of the prohibited transaction provisions of Title
I of ERISA.
[45] The statutory exemptions generally include loans to participants,
the provision of services needed to operate a plan for reasonable
compensation, loans to employee stock ownership plans, and investment
with certain financial institutions regulated by other state or federal
agencies. Reorganization Plan No. 4 of 1978 transferred the Treasury
Department's authority over prohibited transaction exemptions to Labor,
with certain exceptions.
[46] A provision of the Internal Revenue Code directly imposes an
excise tax against disqualified persons, including employee benefit
plan sponsors and service providers, who engage in prohibited
transactions with tax-qualified pension and profit sharing plans. The
IRS must coordinate with Labor regarding the imposition of the excise
tax under section 4975 of the Internal Revenue Code. In place of the
imposition of an excise tax under the Internal Revenue Code, if the
prohibited transaction involves the IRA owner, the IRA is disqualified
from favorable tax treatment.
[47] The Form 5500 has multiple parts and various schedules. The main
part of the form provides basic information to identify the plan and
type of plan. Form 5500 schedules are used to collect more in-depth
information, including data on assets, liabilities, insurance, and
financial transactions. These schedules can be separated into two
distinct groups: those that contain financial information on the plan
and those that contain information on the benefits that the plan
expects to pay out. Information from the financial schedules helps to
provide a picture of a plan's financial condition, while the benefit
schedules collect information on the contributions to and distributions
made from the plan in the current and future years.
[48] Section 406(b) of ERISA and �4975 of the Internal Revenue Code
prohibit a plan fiduciary from engaging in self-dealing, which is
described as conduct by fiducaries that consists of taking advantage of
their position in a transaction and acting for their own interests
rather than for the interests of the beneficiaries of the plan.
[49] Interpretive Bulletin 99-1 (29 CPR 2509.99-1).
[50] Section 516 of ERISA requires the Department to maintain a program
designed to effectively promote retirement income savings by the
public, including information on the forms of retirement income
savings.
[51] 29 CPR 2520.104-48.
[End of section]
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