Individual Retirement Accounts
Government Actions Could Encourage More Employers to Offer IRAs to Employees Gao ID: GAO-08-890T June 26, 2008Congress 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 when they change jobs or retire. Questions remain about IRAs' effectiveness as a vehicle to facilitate new, or additional, retirement savings. GAO was asked to report on (1) the role of IRAs in retirement savings, (2) the prevalence of employer-sponsored and payroll-deduction IRAs and barriers discouraging employers from offering these IRAs, and (3) changes that are needed to improve IRA information and oversight. GAO reviewed published reports from government and financial industry sources and interviewed retirement and savings experts, small business representatives, IRA providers, and federal agency officials.
Although Congress created IRAs to allow individuals to build and preserve their retirement savings, IRAs are primarily used to preserve savings through rollovers rather than build savings through contributions. Over 80 percent of assets that flow into IRAs come from assets rolled over, or transferred, from other accounts and not from direct contributions. Assets in IRAs now exceed assets in the most common employer-sponsored retirement plans: defined contribution plans, including 401(k) plans, and defined benefit, or pension plans. Payroll-deduction IRA programs, which allow employees to contribute to IRAs through deductions from their paychecks, and employer-sponsored IRAs, in which an employer establishes and contributes to IRAs for employees, were established to provide more options for retirement savings in the workplace. Experts GAO interviewed said that several factors may discourage employers from offering these IRAs to employees, including administrative costs and concerns about employer fiduciary responsibilities. Information is lacking on how many employers offer employer-sponsored and payroll-deduction IRAs and the actual costs to employers for administering payroll-deduction IRAs. Earlier this month, GAO reported on the role that federal agencies can have in helping employers provide IRAs to employees and in improving oversight of these savings vehicles. GAO made several recommendations to the Department of Labor (Labor) and the Internal Revenue Service to provide better information and oversight, but in the course of the review, GAO found that Labor does not have jurisdiction over payroll-deduction IRAs. Consequently, GAO also suggested that Congress may wish to consider whether payroll-deduction IRAs should have some direct oversight. A clear oversight structure could be critical if payroll-deduction IRAs become a more important means to provide a retirement savings vehicle for workers who lack an employer-sponsored retirement plan.
GAO-08-890T, Individual Retirement Accounts: Government Actions Could Encourage More Employers to Offer IRAs to Employees
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Testimony:
Before the Subcommittee on Select Revenue Measures, Committee on Ways
and Means, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Thursday, June 26, 2008:
Individual Retirement Accounts:
Government Actions Could Encourage More Employers to Offer IRAs to
Employees:
Statement of Barbara D. Bovbjerg, Director:
Education, Workforce, and Income Security:
GAO-08-890T:
GAO Highlights:
Highlights of GAO-08-890T, a testimony before the Subcommittee on
Select Revenue Measures, 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 when they change jobs or
retire. Questions remain about IRAs‘ effectiveness as a vehicle to
facilitate new, or additional, retirement savings. GAO was asked to
report on (1) the role of IRAs in retirement savings, (2) the
prevalence of employer-sponsored and payroll-deduction IRAs and
barriers discouraging employers from offering these IRAs, and (3)
changes that are needed to improve IRA information and oversight. GAO
reviewed published reports from government and financial industry
sources and interviewed retirement and savings experts, small business
representatives, IRA providers, and federal agency officials.
What GAO Found:
Although Congress created IRAs to allow individuals to build and
preserve their retirement savings, IRAs are primarily used to preserve
savings through rollovers rather than build savings through
contributions. Over 80 percent of assets that flow into IRAs come from
assets rolled over, or transferred, from other accounts and not from
direct contributions. Assets in IRAs now exceed assets in the most
common employer-sponsored retirement plans: defined contribution plans,
including 401(k) plans, and defined benefit, or pension plans.
Payroll-deduction IRA programs, which allow employees to contribute to
IRAs through deductions from their paychecks, and employer-sponsored
IRAs, in which an employer establishes and contributes to IRAs for
employees, were established to provide more options for retirement
savings in the workplace. Experts GAO interviewed said that several
factors may discourage employers from offering these IRAs to employees,
including administrative costs and concerns about employer fiduciary
responsibilities. Information is lacking on how many employers offer
employer-sponsored and payroll-deduction IRAs and the actual costs to
employers for administering payroll-deduction IRAs.
Earlier this month, GAO reported on the role that federal agencies can
have in helping employers provide IRAs to employees and in improving
oversight of these savings vehicles. GAO made several recommendations
to the Department of Labor (Labor) and the Internal Revenue Service to
provide better information and oversight, but in the course of the
review, GAO found that Labor does not have jurisdiction over payroll-
deduction IRAs. Consequently, GAO also suggested that Congress may wish
to consider whether payroll-deduction IRAs should have some direct
oversight. A clear oversight structure could be critical if payroll-
deduction IRAs become a more important means to provide a retirement
savings vehicle for workers who lack an employer-sponsored retirement
plan.
Figure: IRA Contributions and Rollovers, 1998 to 2004:
[See PDF for image]
This figure is a stacked vertical bar graph depicting the following
data:
Year: 1998;
Contributions: $31.4 billion;
Rollovers: $160 billion.
Year: 1999;
Contributions: $33.5 billion;
Rollovers: $199.9 billion.
Year: 2000;
Contributions: $36.4 billion;
Rollovers: $225.6 billion.
Year: 2001;
Contributions: $35.8 billion;
Rollovers: $187.7 billion.
Year: 2002;
Contributions: $42.2 billion;
Rollovers: $204.4 billion.
Year: 2003;
Contributions: $43.9 billion;
Rollovers: $205 billion.
Year: 2004;
Contributions: $48.4 billion;
Rollovers: $216.6 billion.
[End of figure]
What GAO Recommends:
GAO is not making recommendations at this time.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-890T]. For more
information, contact Barbara Bovbjerg at (202) 512-7215 or
bovbjergb@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today as you examine issues related to
individual retirement accounts (IRAs) and their role in facilitating
retirement savings for individuals. Congress created IRAs more than 30
years ago through the Employee Retirement Income Security Act of 1974
(ERISA) with two distinct purposes: (1) to provide individuals who are
not covered by an employer-sponsored retirement plan with a tax-
preferred account in which to save for retirement, and (2) to provide
individuals who are covered by a plan a means to preserve their savings
by allowing them to rollover, or transfer, plan balances into IRAs.
Since that time, IRA assets have grown to an estimated $3.5 trillion in
2004.
Over the years, Congress has created different types of IRAs to
encourage saving for retirement. Traditional and Roth IRAs are designed
to be set up and used by individuals; two other types are employer-
sponsored IRAs and are designed for small employers and their
employees. Under payroll-deduction IRA programs, also known as payroll-
deduction IRAs, employees may contribute to traditional and Roth IRAs
through their employer's payroll system. Despite the growth in IRA
assets and the varied types of IRAs, questions remain about whether
Congress's initial goal for IRAs has been met: to help workers without
a workplace retirement plan to save for retirement on their own behalf.
My comments today are based primarily on findings from our June 2008
report entitled Individual Retirement Accounts: Government Actions
Could Encourage More Employers to Offer IRAs to Employees.[Footnote 1]
My remarks focus on (1) the role of IRAs in retirement savings, (2) the
prevalence of employer-sponsored and payroll-deduction IRAs and
barriers discouraging employers from offering these IRAs, and (3)
changes that are needed to improve IRA information and oversight.
In conducting our work, we evaluated retirement fund assets using
published data from federal agencies, including the Federal Reserve's
Survey of Consumer Finance, and the Internal Revenue Service's (IRS)
Statistics of Income, and relevant data from financial industry
associations on retirement funds. We also analyzed demographic data
from household surveys, including the U.S. Bureau of the Census Current
Population Reports, and the Investment Company Institute's IRA Owners
Survey, which focuses on IRA ownership. To determine the prevalence of
employer-sponsored and payroll-deduction IRAs, we consulted available
government and financial industry data on the percentage of households
and workers participating in employer-sponsored IRAs. To corroborate
available data, we interviewed officials at IRS and the Department of
Labor (Labor) as well as representatives of small business member
organizations, financial industry representatives, and other retirement
and savings experts. To identify 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 evaluate federal oversight of IRAs, we reviewed laws
governing agency responsibilities regarding IRAs and interviewed
officials at IRS and Labor.[Footnote 2] We conducted this performance
audit from September 2007 to June 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.
In summary, we found that although Congress created IRAs for
individuals to both build and preserve retirement savings, IRAs are
primarily used to preserve savings through rollovers rather than to
build savings through contributions. In fact, the majority of assets
that flow into IRAs come from other accounts and not from new
contributions. We also found that employee access to payroll-deduction
and employer-sponsored IRAs is limited. Although employer-sponsored and
payroll-deduction IRA programs could help many workers to save, experts
we interviewed said several factors may discourage employers from
offering these IRAs, including administrative costs. Data on the actual
cost to employers for managing payroll-deduction IRAs are not
available. Earlier this month, we reported on the role that federal
agencies can have in helping employers provide IRAs to employees and
improve oversight of these savings vehicles.[Footnote 3] We made
several recommendations to Labor and IRS to improve IRA information and
oversight, but during the course of our work, we found that Labor
provides guidance, but does not have jurisdiction over payroll-
deduction IRAs. Consequently, we also suggested that Congress may wish
to consider whether payroll-deduction IRAs should have some direct
oversight. A clear oversight structure could be critical if payroll-
deduction IRAs become a more important means to provide a retirement
savings vehicle for workers who otherwise lack an employer-sponsored
retirement plan.
Background:
Since the early 1980s, roughly half of the private-sector work force
has participated in either a defined benefit (DB) retirement plan,
commonly known as a pension, or a defined contribution (DC) plan, such
as a 401(k) plan.[Footnote 4] In 2006, approximately 79 million--or
about half of all workers--worked for an employer or union sponsoring
either a DB or DC plan, and about 62 million workers participated in
such a plan.[Footnote 5] Congress created IRAs, in part, to help those
individuals not covered by a DB or DC plan save for retirement.
Employees of small firms, for example, are unlikely to work for an
employer that sponsors either a DB or DC retirement plan. Almost half
of all U.S. private sector workers in 2006 were employed by firms with
fewer than 100 employees, and only 1 in 4 of these workers worked for
an employer sponsoring a retirement plan.[Footnote 6] Currently there
are several types of IRAs for individuals and small employers and their
employees.[Footnote 7]
Individual IRAs:
Traditional and Roth IRAs are geared toward individuals and offer
different tax preferences to encourage savings:
* 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, and others may make nondeductible contributions.
[Footnote 8]
* Roth IRAs. Through Roth IRAs, eligible individuals may make after-tax
contributions, and after age 59½, enrollees may take tax-free
distributions of their investment earnings.[Footnote 9]
Both traditional and Roth IRAs can also be established through payroll-
deduction IRA programs (also called payroll-deduction IRAs) which
require employer involvement.
* Payroll-deduction IRA Programs. Employees may establish and
contribute to either traditional or Roth IRAs through voluntary
deductions from their pay forwarded by their employer to employee IRAs.
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.[Footnote 10]
Employer-Sponsored IRAs:
Congress created two types of employer-sponsored IRAs with fewer
regulatory requirements than DB and DC plans to encourage small
employers to offer IRAs to their employees:
* Savings Incentive Match Plans for Employees (SIMPLE). SIMPLE IRAs,
available only to employers with 100 or fewer employees, allow eligible
employees to direct a portion of their salary, within limits, to a
SIMPLE IRA.[Footnote 11] Employers sponsoring SIMPLE IRAs must either
match the employee's contributions up to 3 percent of his or her
compensation or make 2 percent contributions of each employee's salary
to the SIMPLE IRAs for all employees making at least $5,000 for the
year.
* Simplified Employee Pensions (SEP). SEP IRAs allow employers to make
tax-deductible contributions to their own and each eligible employee's
traditional IRA at higher contribution limits than other IRAs.[Footnote
12] SEP IRAs do not permit employee contributions, and annual employer
contributions are not mandatory.[Footnote 13]
IRS and Labor share oversight responsibilities for IRAs. Labor's
Employee Benefits Security Administration (EBSA) enforces ERISA Title
I, which specifies the standards for employer-sponsored retirement
plans, including applicable fiduciary reporting and disclosure
requirements. EBSA also oversees the fiduciary standards for employer-
sponsored IRAs, and seeks to ensure that fiduciaries, such as
employers, operate their plans in the best interest of plan
participants. While Labor does not have direct oversight of payroll-
deduction IRA programs, it has provided "safe harbor" guidance to
employers, which sets the conditions by which employers may offer
payroll-deduction IRA programs without becoming subject to ERISA Title
I requirements.[Footnote 14] IRS enforces Title II of ERISA for all
types of IRAs, which provides tax benefits for retirement plan sponsors
and participants and details participant eligibility, vesting, and
funding requirements. IRS also enforces various tax rules for IRAs,
including rules for eligibility, contributions, distributions, and
rolling assets into IRAs or converting assets from a traditional IRA
into a Roth IRA. (See table 1 for annual contribution limits for IRAs.)
Table 1: Contribution Limits for IRAs, 2008:
Individual/employee contribution limit[B]:
Individual IRAs: Traditional IRA[A]: Up to $5,000, or $6,000 for
eligible participants over age 50;
Individual IRAs: Roth IRA[A]: Up to $5,000, or $6,000 for eligible
participants over age 50;
Employer-Sponsored IRAs: SIMPLE IRA: Up to $10,500, or $13,000 for
eligible participants over age 50;
Employer-Sponsored IRAs: SEP IRA: Employees cannot contribute.
Employer contribution limit:
Individual IRAs: Traditional IRA[A]: Not applicable;
Individual IRAs: Roth IRA[A]: Not applicable;
Employer-Sponsored IRAs: SIMPLE IRA: Contribution equal to 2 percent of
employee's compensation or matching contributions up to 3 percent of
employee's compensation[C];
Employer-Sponsored IRAs: SEP IRA: 25 percent of an employee's
compensation, up to maximum of $46,000.
Source: Internal Revenue Service.
[A] Employees may choose to contribute to either traditional or Roth
IRAs through an employer's payroll-deduction IRA program, and employee
contributions are subject to either traditional or Roth IRA rules.
Employers may not contribute to employee IRAs through payroll-deduction
IRA programs.
[B] Only employees of firms offering SIMPLE or SEP IRAs may contribute
to these IRAs, while any eligible individual may contribute to
traditional or Roth IRAs. The annual total IRA contribution limit
applies across Roth and traditional IRAs and is not an annual limit for
each IRA type.
[C] Employers may reduce the 3 percent contribution limit to a lower
percentage but not lower than 1 percent. Employers may not contribute
less than 3 percent for more than 2 calendar years in a 5-year period.
[End of table]
Labor and IRS work together to oversee IRA prohibited transactions. In
general, prohibited transactions include any improper use of an IRA by
the account holder or others.[Footnote 15] Labor generally has
interpretive jurisdiction over prohibited transactions and IRS has
certain enforcement authority. 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 16] Labor may grant
administrative exemptions on a class or individual basis for a wide
variety of proposed transactions in a plan. IRS has responsibility for
imposing an excise tax on parties that engage in a prohibited
transaction.[Footnote 17] (See fig. 1 for a description of IRS and
Labor responsibilities regarding IRAs.)
Figure 1: Primary Responsibilities of IRS and Labor for IRAs:
[See PDF for image]
This figure is an illustration depicting 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:
* Oversees ERISA fiduciary standards for employer-sponsored IRAs.
* Issues guidance on establishing a payroll-deduction IRA without being
subject to ERISA fiduciary and reporting requirements.
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]
IRAs Are Primarily Used to Preserve Savings through Rollovers:
Most assets flowing into IRAs come not from direct contributions, but
from transfers, or rollovers, of retirement assets from other
retirement plans, including 401(k) plans. These rollovers allow
individuals to preserve their retirement savings when they change jobs
or retire. As shown in figure 2, from 1998 to 2004, more than 80
percent of funds flowing into IRAs came from rollovers, demonstrating
that IRAs play a significantly smaller role in building retirement
savings than in preserving them. In addition, IRA accounts with
rollover assets were larger than those without rollover assets. For
example the median amount in a traditional IRA with rollover assets in
2007 was $61,000, while the median amount in a traditional IRA without
rollover assets was $30,000.[Footnote 18]
Figure 2: IRA Contributions and Rollovers, 1998 to 2004:
[See PDF for image]
This figure is a stacked vertical bar graph depicting the following
data:
Year: 1998;
Contributions: $31.4 billion;
Rollovers: $160 billion.
Year: 1999;
Contributions: $33.5 billion;
Rollovers: $199.9 billion.
Year: 2000;
Contributions: $36.4 billion;
Rollovers: $225.6 billion.
Year: 2001;
Contributions: $35.8 billion;
Rollovers: $187.7 billion.
Year: 2002;
Contributions: $42.2 billion;
Rollovers: $204.4 billion.
Year: 2003;
Contributions: $43.9 billion;
Rollovers: $205 billion.
Year: 2004;
Contributions: $48.4 billion;
Rollovers: $216.6 billion.
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]
Since 1998, IRA assets have comprised the largest portion of the
retirement market. As shown in figure 3, IRA assets in 2004 totaled
about $3.5 trillion compared to DC assets of $2.6 trillion and DB
assets of $1.9 trillion.[Footnote 19]
Figure 3: Retirement Plan Assets, 1995 to 2004:
[See PDF for image]
This figure is a multiple line graph depicting the following data:
Year: 1995;
Defined benefit: $1.44 trillion;
Defined contribution: $1.31 trillion;
IRAs: $1.29 trillion.
Year: 1996;
Defined benefit: $1.54 trillion;
Defined contribution: $1.52 trillion;
IRAs: $1.47 trillion.
Year: 1997;
Defined benefit: $1.78 trillion;
Defined contribution: $1.85 trillion;
IRAs: $1.73trillion.
Year: 1998;
Defined benefit: $1.95 trillion;
Defined contribution: $2.11 trillion;
IRAs: $2.15 trillion.
Year: 1999;
Defined benefit: $2.09 trillion;
Defined contribution: $2.27 trillion;
IRAs: $2.65 trillion.
Year: 2000;
Defined benefit: $1.95 trillion;
Defined contribution: $2.3 trillion;
IRAs: $2.63 trillion.
Year: 2001;
Defined benefit: $1.71 trillion;
Defined contribution: $2.12 trillion;
IRAs: $2.62 trillion.
Year: 2002;
Defined benefit: $1.44 trillion;
Defined contribution: $1.82 trillion;
IRAs: $2.53 trillion.
Year: 2003;
Defined benefit: $1.72 trillion;
Defined contribution: $2.25 trillion;
IRAs: $3.08 trillion.
Year: 2004" 3.48 2.55 1.87
Defined benefit: $1.87 trillion;
Defined contribution: $2.55 trillion;
IRAs: $3.48 trillion.
Source: Employee Benefit Research Institute.
[End of figure]
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 20]
Ownership of traditional and Roth IRAs 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 21]
Over one-third of these IRA households earned $100,000 or more; about 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
22] Therefore, it is not surprising that IRA ownership increases as
education and income levels increase. However, despite the association
of IRA ownership to individuals with higher incomes, data show that
lower-and middle-income individuals also own IRAs. A study by the
Congressional Budget Office (CBO) found that in 2003, 4 percent of
workers earning $20,000 to $40,000 (in 1997 dollars) contributed to
traditional IRAs and 3 percent of these workers contributed to Roth
IRAs. In the same year, 7 percent of workers earning between $120,000
and $160,000 contributed to a traditional IRA and 8 percent contributed
to a Roth IRA.[Footnote 23] The study also found that 33 percent of
individuals earning $20,000 to $40,000 who contributed to a traditional
IRA contributed the maximum amount allowed, and 35 percent made maximum
contributions to their Roth IRAs.[Footnote 24] By contrast, 87 percent
of individuals earning $120,000 to $160,000 who contributed to a
traditional IRA made the maximum contribution, and 61 percent made the
maximum contribution to their Roth IRAs.
A study by the Investment Company Institute (ICI) 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 25] For example more than half of
households with Roth, SIMPLE, or Salary Reduction Simplified Employee
Pension IRA (SAR-SEP IRA) contributed to their accounts in 2004, but
less than one-third of households with traditional IRAs did so. This,
again, may be partly attributed to the emerging role of traditional
IRAs as a means to preserve rollover assets rather than build
retirement savings. The ICI 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 SIMPLE
and SAR-SEP IRAs was $5,000. The study noted that this difference may
be related to higher contribution limits for employer-sponsored IRAs
than for traditional and Roth IRAs.
Worker Access to Employer-Sponsored and Payroll-Deduction IRAs Appears
Limited, and Several Barriers May Discourage Employers from Offering
These IRAs:
According to experts and available government data, worker access to
employer-sponsored and payroll-deduction IRAs appears limited. To
address the issue of low retirement plan sponsorship among small
employers, Congress created SEP and SIMPLE employer-sponsored IRAs.
Labor issued a regulation under which an employer could maintain a
payroll-deduction program for employees to contribute to traditional
and Roth IRAs without being considered a pension plan under ERISA.
Although employer-sponsored IRAs have few reporting requirements to
encourage small employers to offer them, and payroll-deduction IRAs
have none, worker access to these IRAs appears limited. Increased
access to payroll-deduction IRAs could help many workers to save for
retirement, but several barriers, including costs to employers, may
discourage employers from offering these IRAs to their employees.
Retirement and savings experts offer several proposals to encourage
employers to offer and employees to participate in payroll-deduction
IRAs.
Worker Access to Employer-Sponsored and Payroll-Deduction IRAs Appears
Limited:
The majority of employers with fewer than 100 employees do not offer an
employer-sponsored retirement plan for their employees. In 2006, almost
half of all U.S. private sector workers were employed by firms with
fewer than 100 employees, and only 1 in 4 of these employees worked for
an employer sponsoring a retirement plan.[Footnote 26] To address the
issue of low retirement plan sponsorship among small employers,
Congress created SIMPLE and SEP employer-sponsored IRAs with less
burdensome reporting requirements than 401(k) plans to encourage their
adoption by small employers. In addition, under a regulation issued by
Labor, employers may also provide payroll-deduction IRA programs, which
allow employees to contribute to traditional or Roth IRAs through
payroll-deductions by their employer, without employers being
considered a pension plan sponsor under ERISA and becoming subject to
various ERISA fiduciary and reporting requirements.[Footnote 27] In
order to encourage their adoption, employer-sponsored and payroll-
deduction IRAs offer a variety of features designed to appeal to small
employers (see table 2).
Table 2: Features of Employer-Sponsored and Payroll-Deduction IRAs:
IRA features: Employee contributions allowed;
Employer-sponsored IRAs: SIMPLE IRAs[A]: [Check];
Employer-sponsored IRAs: SEP IRAs[B]: [Empty];
Payroll-deduction IRAs: [Check].
IRA features: Employer contributions allowed;
Employer-sponsored IRAs: SIMPLE IRAs[A]: [Check];
Employer-sponsored IRAs: SEP IRAs[B]: [Check];
Payroll-deduction IRAs: [Empty].
IRA features: Mandatory annual employer contributions;
Employer-sponsored IRAs: SIMPLE IRAs[A]: [Check];
Employer-sponsored IRAs: SEP IRAs[B]: [Empty];
Payroll-deduction IRAs: [Empty].
IRA features: No employer financial reporting requirements;
Employer-sponsored IRAs: SIMPLE IRAs[A]: [Check];
Employer-sponsored IRAs: SEP IRAs[B]: [Check];
Payroll-deduction IRAs: [Check].
IRA features: Employer tax credit available for partial start-up costs;
Employer-sponsored IRAs: SIMPLE IRAs[A]: [Check];
Employer-sponsored IRAs: SEP IRAs[B]: [Check];
Payroll-deduction IRAs: [Empty].
IRA features: Available to all employers;
Employer-sponsored IRAs: SIMPLE IRAs[A]: [Empty];
Employer-sponsored IRAs: SEP IRAs[B]: [Check];
Payroll-deduction IRAs: [Check].
IRA features: Available to all employer's workers;
Employer-sponsored IRAs: SIMPLE IRAs[A]: [Empty];
Employer-sponsored IRAs: SEP IRAs[B]: [Empty];
Payroll-deduction IRAs: [Check].
Source: GAO analysis of Labor and IRS Publication 3998.
[A] SIMPLE IRAs are limited to employers with fewer than 100 employees.
Employers sponsoring SIMPLE IRAs must offer the IRAs to all employees
who have earned income of at least $5,000 in any prior 2 years and are
reasonably expected to earn at least $5,000 in the current year.
[B] Employers sponsoring SEP IRAs must offer the IRAs to all employees
who are at least 21 years of age, employed by the employer for 3 of the
last 5 years, and had compensation of $500 for 2007.
[End of table]
Data on the number of employers offering employees employer-sponsored
IRAs and payroll-deduction IRAs is limited. However, based on available
data, employee access to SIMPLE and SEP IRAs appears limited. Under
ERISA Title I, there is no reporting requirement for SIMPLE IRAs, and
there is an alternative method available for reporting of employer-
sponsored SEP IRAs.[Footnote 28] Payroll-deduction IRA programs are not
subject to ERISA requirements for employer-sponsored retirement plans
and have no reporting requirements. Because there are very limited
reporting requirements for employer-sponsored IRAs and none for payroll-
deduction IRAs, information on employers who offer these IRAs is
limited and we were unable to determine how many employers actually do
so. For example, the Bureau of Labor Statistics provides some data on
the percentage of employees participating in employer-sponsored IRAs,
but no data on the percentage of employers sponsoring them. The Bureau
of Labor Statistics reported that 8 percent of private sector workers
in firms with fewer than 100 employees participated in a SIMPLE IRA in
2005, and 2 percent of these workers participated in a SEP IRA.
[Footnote 29] An IRS evaluation of employer-filed W-2 forms estimated
that 190,000 employers sponsored SIMPLE IRAs in 2004.[Footnote 30] IRS
did not provide an estimate of the number of employers sponsoring SEP
IRAs, and we were unable to determine how many employers make these
IRAs available to employees.
Few employers appear to offer their employees the opportunity to
contribute to IRAs through payroll deductions, but data are
insufficient to make this determination. Through payroll-deduction IRA
programs, employees may contribute to traditional or Roth IRAs by
having their employer withhold an amount determined by the employee and
forwarded directly to the employee's IRA. 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 do so. Because
employers are not required to report this activity to the federal
government, neither Labor nor IRS is able to determine how many
employers offer payroll-deduction IRAs.[Footnote 31]
Employer-Sponsored and Payroll-Deduction IRAs Could Help Workers to
Save, but Several Barriers May Discourage Employers from Offering These
IRAs:
According to experts and economics literature that we reviewed,
individuals are more likely to save for retirement through payroll
deductions than they are without payroll deductions. Both SIMPLE IRAs
and payroll-deduction IRA programs allow workers to contribute to their
retirement through payroll deductions.[Footnote 32] 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. The
Congressional Budget Office reported that 29 percent of all workers
contributed to a DC plan in 2003--where payroll deductions are the
norm--while only 7 percent of all workers contributed to an IRA.
[Footnote 33]
Saving for retirement in the workplace through payroll deductions helps
workers save by providing a "commitment device" to make automatic
contributions to retirement savings before wages are spent.[Footnote
34] Such a commitment device helps some workers overcome a common
tendency to procrastinate or not take action to save based on the
choices associated with investing or selecting a retirement savings
vehicle. Payroll deductions allow workers to contribute to retirement
savings automatically before wages are spent, relieving them of making
ongoing decisions to save. 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
these automatic deposits.
Payroll-deduction IRA programs could provide a retirement savings
opportunity at work for the millions of workers without an employer-
sponsored retirement plan. In theory, all workers under age 70½ who
lack an employer-sponsored retirement plan could be eligible to
contribute to a traditional IRA through payroll deduction, should their
employer offer such a program.[Footnote 35] Further, based on the
contribution rules for traditional and Roth IRAs, many of these
individuals would be eligible to claim a tax deduction for their
traditional IRA contributions,[Footnote 36] and most low-and middle-
income workers would be eligible to contribute to Roth IRAs.[Footnote
37] Experts told us payroll-deduction IRAs are the easiest way for
small employers to offer their employees a retirement savings vehicle.
Payroll-deduction IRAs have fewer requirements for employee
communication than SIMPLE and SEP IRAs,[Footnote 38] and employers are
not subject to ERISA fiduciary responsibilities as long as they meet
the conditions in Labor's regulation and guidance for managing these
plans.[Footnote 39]
Employer-sponsored IRAs may also help employees of small firms save for
their retirement. For example, the higher contribution limits for
SIMPLE and SEP IRAs offer greater savings benefits than payroll-
deduction IRAs.[Footnote 40] In 2007, individuals under age 50 were
able to contribute up to $10,500 to SIMPLE IRAs--more than twice the
amount allowed in 2007 for payroll-deduction IRAs.[Footnote 41] Since
SIMPLE IRAs require employers to either match the contributions of
participating employees or make nonelective contributions to all
employee accounts, employees are able to save significantly more per
year in SIMPLE IRAs than they are in payroll-deduction IRAs.
As we previously reported, we found that several factors may discourage
employers from establishing employer-sponsored SIMPLE and SEP IRAs. For
example, small business groups told us that the costs of managing
SIMPLE and SEP IRAs may be prohibitive for small employers. Experts
also pointed out that certain contribution requirements for these 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.
We also found that several barriers may discourage small employers even
from offering payroll-deduction IRAs, including: (1) costs to employers
for managing payroll deductions, (2) a perceived 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 those without electronic payroll
processing. Small business groups told us that costs are influenced by
the number of employees participating in the program and whether an
employer has a payroll processing system in place for automatic
deductions and direct deposits to employee accounts. Several experts
told us many small employers lack electronic, or automatic, payroll
systems, and these employers would be subject to higher management
costs for offering payroll-deduction IRAs. According to Labor, costs to
employers also are significantly influenced by the number of IRA
providers to which an employer must remit contributions on behalf of
employees.[Footnote 42]
Although experts reported that payroll-deduction IRAs represent costs
to employers, we found varied opinions on the significance of those
costs. Experts advocating for expanded payroll-deduction IRAs reported
that most employers would incur little or no costs since they 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 like existing payroll tax withholdings, and
adding another deduction would not be substantial. However, other
experts and one report we reviewed indicated that employer costs may be
significant, particularly for employers without electronic payrolls.
The report did not estimate actual costs to employers on a per account
basis.[Footnote 43] 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 program to employees for fear of being
subject to ERISA requirements.[Footnote 44] IRA providers told us
employers need greater flexibility in Labor's guidance on payroll-
deduction IRAs if they are to encourage employees to save for
retirement. However, Labor told us that it has received no input from
IRA providers as to what that flexibility would be, 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 contribution limits for payroll-
deduction IRAs do not offer adequate savings incentives to justify the
effort in offering these IRAs.[Footnote 45] Because the contribution
limits for 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. Those
options also allow business owners to contribute significantly more to
their own retirement account than payroll-deduction IRAs.
* Lack of awareness. 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.
Some Proposals Encourage Employers to Offer and Employees to
Participate in IRAs:
Retirement and savings experts told us that several legislative
proposals could encourage employers to offer and employees to
participate in IRAs. Several bills have been introduced in Congress to
expand worker access to payroll-deduction 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 46] 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 47]
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
government. 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 48] 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. Experts also said increasing public awareness of the
importance of saving for retirement and educating individuals about how
to do so could increase IRA participation.
Changes at Labor and IRS Could Help Encourage Employers to Offer IRAs
and Improve IRA Information and Oversight:
Earlier this month, we reported that changes at IRS and Labor could
encourage employers to offer IRAs and improve IRA information and
oversight.[Footnote 49] We found that regulators lack information about
employer-sponsored and payroll-deduction IRAs that could help determine
whether these vehicles help workers without employer-sponsored pension
plans build retirement savings. For example, IRS collects information
on employer-sponsored IRAs but does not share the information collected
with Labor, which has oversight responsibility for employer-sponsored
IRAs. We also found that certain oversight vulnerabilities need to be
improved. Currently, Labor has no process in place to monitor employer-
sponsored IRAs, and has no jurisdiction over payroll-deduction IRAs. As
a result of our findings, we made recommendations to Labor and IRS to
improve IRA information and oversight and suggested that Congress may
wish to consider whether payroll-deduction IRAs should have some direct
oversight.
Regulators Lack Information and Consistent Reporting on Employer-
Sponsored and Payroll-Deduction IRAs:
Because employer-sponsored IRAs have few employer reporting
requirements and payroll-deduction IRAs have none, regulators lack
information on these IRAs. Under Title I of ERISA, there is no
reporting requirement for SIMPLE IRAs, and there is an alternative
method available for reporting employer-sponsored SEP IRAs. 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 were for employees using payroll-deductions. 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.
Although the reporting requirements for employer-sponsored IRAs are
limited, IRS does collect some information on these IRAs through
several "information" forms provided by financial institutions and
employers. These forms provide information on salary-reduction
contributions to employer-sponsored IRAs, as well as information on IRA
contributions, fair market value, and distributions. For example,
information on retirement plans are reported annually by employers and
others to IRS on its Form W-2. The Form W-2 contains details on the
type of plan offered by the employer, including employer-sponsored
IRAs, and the amounts deducted from wages for contributions to these
plans.[Footnote 50]
According to agency officials, IRS cannot share the information it
receives on employer-sponsored IRAs with Labor because it is
confidential tax information. Labor also does not receive relevant
information from employers, such as annual financial reports, 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 provide Labor with valuable information about the financial
health and operation of private pension plans.[Footnote 51] Although
Labor's Bureau of Labor Statistics 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
survey does not collect information on the number of employers
sponsoring employer-sponsored IRAs. Consequently, Labor does not
receive important information on employers who have established
employer-sponsored IRAs, over which it has oversight responsibilities.
Ensuring that regulators obtain information about employer-sponsored
and payroll-deduction IRAs 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 and the
distribution by employer of the number of employees that contribute to
payroll-deduction IRAs. Experts that we interviewed said that, without
such information, they are unable to determine how many employers and
employees participate in payroll-deduction IRAs and the extent to which
these IRAs have contributed to the retirement savings of 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, which affects Labor's ability to
monitor employer-sponsored IRAs. This information also can be useful
when determining policy options to increase IRA participation among
uncovered workers because it provides a strong foundation to assess the
extent to which these IRAs are being utilized.
Although IRS does publish some of the information it receives on IRAs
through its Statistics of Income program, IRS does not produce IRA
reports on a consistent basis. IRS officials told us that they are
currently facing several challenges that affect their ability to
publish IRA information more regularly. First, IRS relies, in part, on
information returns to collect data on IRAs: such returns 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, are difficult for some taxpayers, employers, and trustees to
understand, which contributes to filing errors. Also, in the past, one
particular IRS employee, who has recently retired, took the lead in
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. IRS officials
told us that they recognize this problem and are in the early stages of
determining ways to correct it. In addition, IRS officials told us they
had problems with the IRA data for tax year 2003, which prevented them
from issuing a report for that year. The result has been that IRS has
published IRA data for tax years 2000, 2001, 2002 and 2004, but none
for tax year 2003.
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 more
comprehensive view of the IRA landscape.
Labor Has No Process in Place to Monitor Employer-Sponsored 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 employer-sponsored IRAs, a minimum level of
oversight is important to ensure that employers are acting in
accordance with the law and within Labor's guidance on payroll-
deduction IRAs. 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 52] 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.
* Payroll-deduction IRAs. Payroll-deduction IRAs are not under Labor's
jurisdiction; however, Labor does provide guidance regarding the
circumstances under which an employer may provide a payroll-deduction
IRA program without being subject to the Title I requirements of ERISA.
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.[Footnote 53] IRS, also, does not have direct oversight
over payroll-deduction IRA programs. IRS oversees the rules associated
with the traditional and Roth IRAs that payroll-deduction programs may
fund through employee contributions. However, IRS does not have
oversight over employer management of these programs.
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 that may
fall outside of the guidance provided by Labor.
Recent Recommendations Regarding IRAs:
In order to improve oversight and information available on IRAs, we
recently made several recommendations to Congress, Labor, and IRS,
which are summarized in table 3.
Table 3: Recent GAO Recommendations Regarding IRAs:
Target: Congress;
Recommendations: Given the absence of direct oversight of payroll-
deduction IRAs, we suggested that Congress may wish to consider whether
payroll-deduction IRAs should have some direct oversight.
Target: Labor;
Recommendations: Examine ways to better encourage employers to offer
and employees to participate in payroll-deduction IRA programs that
could include:
* determining the costs to employers for establishing such programs;
* developing policy options to help employers defray these costs, and;
* evaluating whether modifications to its guidance are needed to
encourage employers to offer payroll-deduction IRA programs.
Target: Labor;
Recommendations: 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.
Target: Labor;
Recommendations: 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.
Target: IRS;
Recommendations: Provide Labor with summary information on IRAs and
information collected on employers that sponsor IRAs.
Target: IRS;
Recommendations: Release its reports on IRA contributions,
accumulations, and distributions on a consistent basis, such as
annually.
Source: GAO.
[End of table]
We reported that neither IRS nor Labor have direct oversight of payroll-
deduction IRAs and that Congress may wish to consider whether payroll-
deduction IRAs should have some direct oversight. Although Labor
provides guidance regarding the circumstances under which employers may
offer payroll-deduction programs without being subject to the Title I
requirements of ERISA, Labor does not have jurisdiction to monitor
whether employers are managing such programs within the bounds of
Labor's safe harbor. Similarly, IRS has responsibility over tax rules
for establishing and maintaining traditional and Roth IRAs that may be
funded through employee contributions from payroll-deduction programs;
however, IRS also does not have authority to monitor employers offering
these programs. We have reported that 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. As such, we have
suggested that Congress consider whether payroll-deduction IRAs should
have some direct oversight.
We have also reported that it is important for Labor to have an
accurate accounting of the costs to employers for managing payroll-
deduction IRAs. In our review, we were unable to determine the actual
costs to employers for managing a payroll-deduction IRA program. Some
experts reported that such costs were significant, while others
reported that they were minimal. Further, under Labor's guidance on
payroll-deduction IRAs, employers may receive reasonable compensation
for the cost of operating payroll-deduction IRA programs as long as
such compensation does not represent a profit to employers. However,
because the information on costs of managing such programs is lacking,
Labor may be unable to readily determine if employers are receiving
excessive compensation and if 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.
Conclusions:
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 through their
employer. 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, barriers exist, such as administrative costs, that may discourage
employers from offering payroll-deduction IRAs. As federal agencies
begin to determine the true cost of establishing payroll-deduction
IRAs, employers will have a better understanding of the costs and will
be in a better position to evaluate whether they will be able to offer
payroll-deduction IRAs to their employees.
Encouraging employers to offer IRAs to their employees can be much more
productive if Congress and regulators ensure that there is adequate
information on employer-sponsored IRAs and payroll-deduction IRAs.
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 agencies that are
responsible for overseeing retirement savings vehicles to have the
information necessary to do so. Providing 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. In addition, ensuring that Labor has a
process in place to monitor employer-sponsored IRAs will help ensure
that there is a structure in place to help protect individuals'
retirement savings if they choose employer-sponsored IRAs. If current
oversight vulnerabilities are not addressed, future problems could
emerge as more employers and workers participate in employer-sponsored
IRAs.
Steps must also be taken to improve oversight of payroll-deduction IRAs
and determine whether direct 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.
We are continuing our work on IRAs, and are beginning to examine the
fees that are charged IRA participants. We are pleased that the
Committee on Ways and Means and this subcommittee are interested in
retirement savings, particularly IRAs, and look forward to continuing
our work with you.
Mr. Chairman and Members of the subcommittee, this completes my
prepared statement and I would be happy to respond to any questions the
subcommittee may have at this time.
Contacts and Acknowledgments:
For further information regarding this testimony, please contact
Barbara D. Bovbjerg, Director, Education, Workforce, and Income
Security Issues at (202) 512-7215 or bovbjergb@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this statement. Individuals making key
contributions to this testimony include Tamara Cross (Assistant
Director), Matt Barranca, Susan Pachikara, Raun Lazier, Joseph
Applebaum, Susan Aschoff, Doreen Feldman, Edward Nannenhorn, MaryLynn
Sergent, Roger Thomas, Walter Vance, and Jennifer Wong.
[End of section]
Footnotes:
[1] GAO, Individual Retirement Accounts: Government Actions Could
Encourage More Employers to Offer IRAs to Employees, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-08-590] (Washington, D.C.: June
4, 2008).
[2] A more detailed discussion of our methodology is provided in app. I
to [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-590].
[3] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-590].
[4] Private sector pension plans are classified either as DB or 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 pre-tax compensation to the
plan under section 401(k) of the Internal Revenue Code.
[5] Craig Copeland, "Employment-Based Retirement Plan Participation:
Geographic Differences and Trends, 2006," Issue Brief, no. 311,
(Washington D.C, Employee Benefit Research Institute, November 2007).
[6] The Employee Benefit Research Institute, a private, nonprofit
public policy research organization, estimated that in 2006, over 66
million workers were employed by private sector employers with fewer
than 100 employees. Of these workers, 16.7 million had access to an
employer-sponsored retirement plan. See Craig Copeland, "Employment-
Based Retirement Plan Participation: Geographic Differences and Trends,
2006," additional data from the U.S. Bureau of the Census, March 2007
Current Population Survey provided by the author.
[7] This is a simplified discussion of the features and rules
associated with traditional, Roth, and SIMPLE and SEP IRAs and payroll-
deduction IRA programs. For a more detailed discussion, see [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-08-590].
[8] Other rules for traditional IRAs also apply. For example, yearly
contribution amounts are subject to limits based on earned income,
pension coverage, and filing status. Taxpayers over age 70½ cannot
contribute and must begin required minimum distributions from these
accounts. Withdrawals are generally taxable and early distributions
made before age 59½ other than for specific exceptions are subject to a
10 percent additional income tax. Withdrawals for the purchase of a
first-time residence or payments for higher education are not subject
to additional tax, as provided under specific tax rules.
[9] Other rules apply to Roth IRAs. For example, yearly contribution
amounts are subject to limits based on earned income and filing status.
Withdrawals of investment earnings before age 59½ are subject to a 10
percent additional 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
owner's lifetime. Withdrawals are generally tax free after age 59½ as
long as the taxpayer held the account for 5 years.
[10] See 29 C.F.R. § 2509.99-1 (also known as Interpretive Bulletin 99-
1).
[11] Congress created SIMPLE IRAs in the Small Business Job Protection
Act of 1996. SIMPLE IRAs 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. SAR-SEP IRAs could not be established after December 31,
1996, but plans in operation at that time were allowed to continue. For
those plans still in operation in 2008, SAR-SEP IRAs allow eligible
employees to contribute up to $15,500 per year, and employers may
contribute 25 percent of an employee's compensation, up to a maximum
$46,000.
[12] Congress established SEP IRAs in the Revenue Act of 1978. As with
DB plans, SEP IRA contributions must be based on a written allocation
formula and cannot discriminate in favor of highly compensated
employees.
[13] 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.
[14] See Interpretive Bulletin 99-1. Labor's guidance explains that an
employer who establishes a payroll-deduction IRA program is not
considered to have established an employee retirement plan subject to
ERISA if the following are satisfied: (1) the employer maintains
neutrality with respect to IRA investment options available in
communications with employees; (2) 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 beyond "reasonable
compensation" for operating the program.
[15] Individuals subject to prohibited transaction rules include the
individual who established the IRA, members of the individual's family,
and fiduciaries. 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. The Department of the 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.
[16] 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 Department
of the Treasury's authority over prohibited transaction exemptions to
Labor, with certain exceptions.
[17] 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.
[18] 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).
[19] 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).
[20] 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).
[21] Additional analysis of the Federal Reserve's Survey of Consumer
Finance by the Employee Benefit Research Institute. 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).
[22] 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).
[23] Congressional Budget Office, Utilization of Tax Incentives for
Retirement Savings: Update to 2003 (Washington, D.C., March 2007). The
eligibility rules for Roth IRAs and for tax-deductible contributions to
traditional IRAs may influence IRA participation rates. For example, an
individual's eligibility to contribute to Roth IRAs is based on their
modified adjusted gross income (AGI) and their tax filing status.
Eligibility for a full or partial deduction for traditional IRA
contributions depends on whether a taxpayer or spouse is covered by an
employer-sponsored retirement plan, as well as limits on modified AGI
and filing status.
[24] The income categories in the CBO study are reported in 1997
dollars. Some workers may have both a traditional and Roth IRA.
[25] 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).
[26] See Craig Copeland, "Employment-Based Retirement Plan
Participation: Geographic Differences and Trends, 2006," with
additional data from the 2007 March Current Population Survey provided
by the author.
[27] See 29 C.F.R.§ 2510.3-2(d).
[28] 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.
[29] 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). SIMPLE IRAs are only
available to firms with 100 employees or fewer who do not already offer
another retirement plan; SEP IRAs are available to employers of any
size, including those who may offer either a DC or DB plan.
[30] 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.
[31] Labor and IRS officials told us data are limited on how many
employers offer payroll-deduction IRAs; however, 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). In 1999, Labor
issued Interpretive Bulletin 99-1, which set the conditions under which
employers could offer payroll-deduction IRAs and remain clear of the
reporting and disclosure requirements, fiduciary duties, and
enforcement rights under ERISA Title I that apply to employer-sponsored
pensions. See 29 C.F.R.§ 2509.99-1, and 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).
[32] SEP IRAs do not offer this feature. Only employers may contribute
to SEP IRAs and employee contributions to these IRAs are not permitted.
[33] Congressional Budget Office, "Utilization of Tax Incentives for
Retirement Saving: Update to 2003," Background Paper (Washington, D.C.,
March 2007).
[34] Steven F. Venti, "Choice, Behavior, and Retirement Saving," in The
Oxford Handbook of Pensions and Retirement Income, Eds. Gordon C.
Clark, Alicia H. Munnell, and 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).
[35] Individuals who have already established an IRA on their own and
who currently contribute at the maximum would not be eligible to
contribute to payroll-deduction IRAs. Others who already have an IRA
but contribute less than the maximum could contribute additional
amounts in a payroll-deduction IRA, but could not go over the overall
limit.
[36] Any individual under the age of 70½ with taxable compensation may
contribute to a traditional IRA, and many individuals could receive a
tax deduction for their contribution. 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.
[37] 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.
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 if age 50 or older). Couples with income between
$159,000 and $169,000 could contribute at reduced limits. Those making
more than $169,000 cannot contribute.
[38] 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.
[39] Further, employers are not required to determine an employee's
eligibility status for Roth contributions or tax-deferred contributions
to traditional IRAs, which vary based on the employee's modified
adjusted gross income or tax filing status. These responsibilities fall
on the employee.
[40] SIMPLE IRAs require that employers contribute to their employee's
IRAs by 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
with a limit of $10,500 in 2007. Individuals over age 50 at the end of
the 2007 calendar year could make an additional "catch-up" contribution
of up to $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.
[41] In 2008, SEP IRAs allowed employers to contribute the lesser of 25
percent of an employee's compensation or up to $46,000. Compensation
generally does not include contributions to the SEP.
[42] 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.
[43] 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.)
[44] Labor officials told us they issued this guidance to make it
easier for employers to understand the guidelines 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 ERISA reporting and fiduciary responsibilities,
which apply to employer retirement plans like 401(k) plans.
[45] 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.
[46] 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.
[47] 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 a 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.
[48] 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 1 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).
[49] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-590].
[50] In addition to information collected through employer-filed W-2
forms, 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. 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.
[51] The Form 5500 provides basic information to identify the plan and
type of plan as well as more detailed information, including data on
assets, liabilities, insurance, and financial transactions. Form 5500
contains information on the financial condition of the plan and the
benefits that the plan expects to pay out.
[52] 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 fiduciaries 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.
[53] 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 become subject
to the requirements 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.
[End of section]
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