United States Government Accountability Office

GAO Report to the Committee on Ways and 

Means, House of Representatives 

INDIVIDUAL 

RETIREMENT 

ACCOUNTS 

Government Actions 

Could Encourage 

More Employers to 

Offer IRAs to 

Employees 

June 2008 

 

GAO-08-590 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2008

INDIVIDUAL RETIREMENT ACCOUNTS

Government Actions Could Encourage More 

Employers to Offer IRAs to Employees

Highlights of GAO-08-590, a report to the 

Committee on Ways and Means, House of 

Representatives 

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 employersponsored 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 payrolldeduction 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 employersponsored 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. 

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 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 GAO-08-590. 

For more information, contact Barbara 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov. 
Page i GAO-08-590 

Contents 

Letter 1

Results in Brief 3 

Background 7 

IRAs Hold the Most Retirement Assets 11 

Comparisons between IRAs and 401(k) Plans Are Difficult 17 

Several Barriers May Discourage Small Employers from Offering 

Payroll-Deduction and Employer-Sponsored IRAs to Employees 18 

IRS and Labor Share Responsibility for Overseeing IRAs, but Labor 

Has No Process in Place to Monitor IRAs and Data Gaps Exist 31 

Conclusions 41 

Matter for Congressional Consideration 43 

Recommendations for Executive Action 43 

Agency Comments and Our Evaluation 44 

Appendix I Objectives, Scope, and Methodology 49 

Appendix II Comments from the Department of Labor 52 

Appendix III Comments from the Internal Revenue Service 57 

Appendix IV GAO Contact and Staff Acknowledgments 59 

Tables 

Table 1: Characteristics of Different IRA Options 10 

Table 2: Contribution Limits for IRAs and Traditional 401(k) Plans, 

2008 17 

Table 3: Key Differences between Employer-Sponsored IRAs and 

Traditional 401(k) Plans 18 

Table 4: Key Advantages of Payroll-Deduction and EmployerSponsored IRAs 20 

Figures 

Figure 1: Retirement Plan Assets, 1995 to 2004 12 

 Individual Retirement Accounts 
Figure 2: IRA Contributions and Rollovers, 1998 to 2004 13 

Figure 3: IRA Ownership and 401(k) Participation among U.S. 

Households, 2004 15 

Figure 4: Persistency in 401(k) and IRA Contributions, 1999 to 2002 16 

Figure 5: Access of Certain Workers to an Employer-Sponsored 

Retirement Plan, 2006 19 

Figure 6: Primary Responsibilities of IRS and Labor for IRAs 33 

Figure 7: IRS Form 5498, IRA Contribution Information 35 

Figure 8: IRS Form 1099-R, Distributions from Pension, Annuities, 

Retirement or Profit-Sharing Plans, IRA, Insurance 

Contracts, etc. 36 

Figure 9: IRS Form W-2, Wage and Tax Statement 37 

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 

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Page ii GAO-08-590 Individual Retirement Accounts
Page 1 GAO-08-590 

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. 

 Individual Retirement Accounts 
Distributions from these accounts are generally subject to tax.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.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 employersponsored 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 

 

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 591⁄2 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. 

Page 2 GAO-08-590 Individual Retirement Accounts
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. 

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. 

Results in Brief 

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 

Page 3 GAO-08-590 Individual Retirement Accounts
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 payrolldeduction 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 employersponsored IRAs, and has issued guidance to employers related to payrolldeduction 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 

Page 4 GAO-08-590 Individual Retirement Accounts
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 payrolldeduction 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.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. 

 

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 payrolldeduction IRAs that are operated within the conditions of Labor’s guidance are not under 

its jurisdiction. 

Page 5 GAO-08-590 Individual Retirement Accounts
In our first recommendation, we asked Labor to examine ways to better 

encourage employers to offer and employees to participate in payrolldeduction 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 payrolldeduction IRAs, Labor described its enforcement program for employersponsored 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 employersponsored 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 payrolldeduction 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 

Page 6 GAO-08-590 Individual Retirement Accounts
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. 

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. 

Background 

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;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 

 

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. 

Page 7 GAO-08-590 Individual Retirement Accounts
in employer-sponsored retirement plans by allowing them to roll over or 

transfer plan balances into 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: 

Individual IRAs 

• 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 701⁄2 cannot contribute and 

must begin required minimum distributions from these accounts. 

Withdrawals are generally taxable; and early distributions made before age 

591⁄2, other than for specific exceptions, are subject to a 10 percent 

additional income tax.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 591⁄2, enrollees may take tax-free distributions of 

their investment earnings. Withdrawals of investment earnings before age 

591⁄2 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 591⁄2, 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 

 

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. 

Page 8 GAO-08-590 Individual Retirement Accounts
employer to the employee’s IRA. As long as employers follow guidelines 

set by Labor for managing the payroll-deduction IRA,6

 employers are not 

subject to the fiduciary requirements in ERISA Title I that apply to 

employer-sponsored retirement plans, like 401(k) plans. 

Other types of IRAs that are intended to encourage savings through 

employers include: 

Employer-Sponsored IRAs 

• 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 1.7 

 

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. 

Page 9 GAO-08-590 Individual Retirement Accounts
Table 1: Characteristics of Different IRA Options 

Payroll-deduction IRAs SIMPLE IRAs SEP IRAs Roth IRAs Traditional IRAs 

Contribution 

limitsa

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 

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 

Up to 25% of 

employee’s annual 

compensation, not 

to exceed $45,000 

for 2007 and 

$46,000 for 2008 

$4,000 for 2007; 

$5000 for 2008 

with $1,000 “catchup” contributions 

for eligible 

participants over 

age 50 

$4,000 for 2007; 

$5000 for 2008 

with $1,000 “catchup” contributions 

for eligible 

participants over 

age 50 

Employer 

eligibility 

Any employer with one 

or more employees 

Any employer with fewer 

than 100 employees that 

does not offer another 

retirement plan 

Any employer with 

one or more 

employees 

N/A N/A 

Employee 

eligibility 

Applicable limits for 

traditional and Roth 

IRAs: any employee, 

subject to IRA eligibility 

requirements for either 

traditional or Roth 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 

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 

Workers with 

taxable 

compensation may 

contribute based 

on income and 

filing status 

Any worker with 

taxable 

compensation 

under the age of 

701⁄2 may 

contribute; tax 

deduction eligibility 

varies based on 

pension coverage, 

income, and filing 

status. Taxpayers 

over age 701⁄2 may 

not contribute to a 

traditional IRA 

Contribution 

options 

As determined by the 

individual, based on 

applicable contribution 

limits. 

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 

Employer decides 

whether to make 

contributions yearto-year 

As determined by 

the individual, 

based on 

applicable 

contribution limits 

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. 

Page 10 GAO-08-590 Individual Retirement Accounts
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. 

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. 

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. 

IRAs Hold the Most 

Retirement Assets 

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.8

 

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). 

Page 11 GAO-08-590 Individual Retirement Accounts
Figure 1: Retirement Plan Assets, 1995 to 2004 

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Dollars in trillions

Source: Employee Benefit Research Institute.

Year

Defined benefit

Defined contribution

IRAs

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 $30,000.9

 

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). 

Page 12 GAO-08-590 Individual Retirement Accounts
Figure 2: IRA Contributions and Rollovers, 1998 to 2004 

0

50

100

150

200

250

300

1998 1999 2000 2001 2002 2003 2004

Dollars in billions

Year

Rollovers

Contributions

Source: Investment Company Institute.

31.4 33.5 36.4 35.8 42.2 43.9 48.4

160 199.9 225.6 187.8 204.4 205 213.6

Note: IRA contributions include those made to traditional IRAs, Roth IRAs, and employer-sponsored 

IRAs. Figures for 2003 and 2004 include estimates and projections. 

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.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 

 

10Additional 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.” 

Page 13 GAO-08-590 Individual Retirement Accounts
correlate with a greater propensity to save.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.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 percent13 of households owned individually arranged IRAs, and 

26 percent participated in 401(k) plans (see fig. 3).14 Ten percent of 

households own a traditional or Roth IRA and participate in 401(k) plans. 

 

11Sara 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). 

12Sara 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). 

13This figure does not include employer-sponsored IRAs. Other industry data indicates that 

8 percent of households participated in employer-sponsored IRAs in 2004. 

14Survey 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.” 

Page 14 GAO-08-590 Individual Retirement Accounts
Figure 3: IRA Ownership and 401(k) Participation among U.S. Households, 2004 

26% 10% 29%

401(k) plan Both IRA IRA 

and 401(k) 

plan

Sources: Employee Benefit Research Institute; PhotoDisc (images).

Note: Data does not include employer-sponsored IRAs. 

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 2002.15 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. 

 

15Peter 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. 

Page 15 GAO-08-590 Individual Retirement Accounts
Figure 4: Persistency in 401(k) and IRA Contributions, 1999 to 2002 

0

5

10

15

20

25

30

1999 only 1999 and 2000 1999 to 2001 1999 to 2002

Number in millions

Year

Source: Internal Revenue Service. 

401(k)s

Traditional IRAs

15.7

1.4

18.4

1.9

21.9

2.7

26

4.1

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.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 

 

16Sandra 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). 

Page 16 GAO-08-590 Individual Retirement Accounts
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

Traditional 

IRA Roth IRA SEP IRA SAR-SEP IRA SIMPLE IRA 

Traditional 401(k) 

plans 

Employee 

contribution limita

Up to $5,000 Up to $5,000 Employees cannot 

contribute 

Up to $15,500 Up to $10,500 Up to $15,500 

Employer 

contribution limit 

Not applicable Not applicable 25 percent of an 

employee’s 

compensation up 

to maximum of 

$46,000 

25 percent of an 

employee’s 

compensation up 

to maximum of 

$46,000 

A contribution 

equal to 2 percent 

of employee’s 

compensation or a 

matching 

contribution of up to 

3 percent of 

employee’s 

compensationb

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. 

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. 

Comparisons between 

IRAs and 401(k) Plans 

Are Difficult 

Key differences exist between employer-sponsored IRAs and 401(k) plans, 

as shown in table 3. 

Page 17 GAO-08-590 Individual Retirement Accounts
Table 3: Key Differences between Employer-Sponsored IRAs and Traditional 401(k) Plans 

Employer-sponsored IRAs Traditional 401(k) plans 

Reporting requirements No annual reporting requirements 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 

Vestinga Contributions are immediately 100% vested Employee salary reduction contributions are 

immediately 100% vested; employer contributions 

may be vested over time according to plan terms 

Withdrawals, loans, and 

payments 

Withdrawals permitted anytime subject to 

federal income taxes, early withdrawals 

subject to an additional tax 

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). 

Several barriers may discourage small employers from offering payrolldeduction 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 payrolldeduction IRA programs. Retirement and savings experts said payrolldeduction 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. 

Several Barriers May 

Discourage Small 

Employers from 

Offering PayrollDeduction and 

Employer-Sponsored 

IRAs to Employees 

Page 18 GAO-08-590 Individual Retirement Accounts
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 employersponsored 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 employersponsored retirement plan, as shown in figure 5.17

Barriers May Discourage 

Small Employers from 

Offering IRAs to 

Employees, and Many of 

These Employees Lack 

Access to Workplace 

Retirement Savings 

Figure 5: Access of Certain Workersa to an Employer-Sponsored Retirement Plan, 

2006 

Employer size of firm

Millions of workers

Source: Congressional Research Service analysis of the U.S. Census Bureau, Current Population Survey, 2006.

0 10 20 30 40 50 60 70 80

Firms with fewer

than 100 employees

All firms

Workers without access to a retirement plan

Workers with access to a retirement plan

42.6 31.9

11 19.9

a

Private sector, full-time, full-year, wage and salary workers, between the ages of 25 and 64. 

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 

 

17Patrick 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). 

Page 19 GAO-08-590 Individual Retirement Accounts
employer reporting requirements. Payroll-deduction and employersponsored IRAs offer several advantages, as shown in table 4. 

Table 4: Key Advantages of Payroll-Deduction and Employer-Sponsored IRAs 

Employer-sponsored IRAs 

Payroll-deduction IRAs SIMPLE IRAs SEP IRAs 

Key 

advantages 

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 

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 

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. 

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 payrolldeduction 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 payrolldeduction 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 

Page 20 GAO-08-590 Individual Retirement Accounts
data is limited on how many employers offer payroll-deduction IRAs.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.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.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. 

 

18Labor 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 payrolldeduction contributions for Roth and traditional IRAs. See Internal Revenue Bulletin 1999-

2, at 44 (Jan. 11, 1999). 

19U.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). 

20IRS was also unable to estimate the number of SEP IRAs sponsored by sole proprietors. 

Page 21 GAO-08-590 Individual Retirement Accounts
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 701⁄2 with 

taxable compensation may contribute to a traditional IRA, and many 

individuals could receive a tax deduction for their contribution.21 Most 

low- and middle-income individuals are eligible to contribute to Roth 

IRAs.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 payrolldeduction; and many of these individuals would be eligible to claim a tax 

deduction for their contribution. 

Payroll-Deduction IRAs 

Could Help Workers Save, 

but Barriers May 

Discourage Employers 

from Offering a PayrollDeduction IRA Program 

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.23 According to recent economics literature that we 

 

21Eligibility 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. 

22An 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. 

23Congressional Budget Office, “Utilization of Tax Incentives for Retirement Saving: Update 

to 2003,” Background Paper (Washington, D.C., March 2007). 

Page 22 GAO-08-590 Individual Retirement Accounts
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.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.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.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. Payrolldeduction IRAs also have fewer requirements for employee 

 

24John 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). 

25Under 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. 

26Steven 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). 

Page 23 GAO-08-590 Individual Retirement Accounts
communication than SIMPLE and SEP IRAs, 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.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.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 

 

27For 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. 

28Further, 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. 

29If one or more of the conditions are not met, the employer may be considered to have 

established or maintained a pension plan. 

Page 24 GAO-08-590 Individual Retirement Accounts
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, payrolldeduction 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.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.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 

 

30Mary 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.) 

31Labor’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. 

Page 25 GAO-08-590 Individual Retirement Accounts
responsibilities.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.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 payrolldeduction 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. 

 

32In 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). 

33In 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. 

Page 26 GAO-08-590 Individual Retirement Accounts
Some experts questioned whether increased worker access to payrolldeduction 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 payrolldeduction IRAs could play in reaching that level. 

Questions Remain on How 

Expanded PayrollDeduction IRAs May Affect 

Employees 

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.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 

$45,000.35 Moreover, because SIMPLE IRAs require employers to match the 

 

34SIMPLE 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. 

35Compensation generally does not include contributions to the SEP. 

Page 27 GAO-08-590 Individual Retirement Accounts
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 payrolldeduction 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.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 

 

36According 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). 

Page 28 GAO-08-590 Individual Retirement Accounts
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 employersponsored 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 payrolldeduction 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.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 

 

37The 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. 

Page 29 GAO-08-590 Individual Retirement Accounts
credit, could encourage IRA participation among workers who are not 

covered by an employer-sponsored retirement plan.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.39 In addition, given 

the lack of available income for some, several experts told us that lowincome 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. 

 

38Currently, the saver’s credit provides a nonrefundable tax credit to low- and moderateincome 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 taxpreferred accounts, such as IRAs, than higher income individuals. 

39Several 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). 

Page 30 GAO-08-590 Individual Retirement Accounts
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. Payrolldeduction IRAs are not under Labor’s jurisdiction;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 employersponsored 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.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, but 

Labor Has No Process 

in Place to Monitor 

IRAs and Data Gaps 

Exist 

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 5.42 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 

 

40As 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. 

41Section 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. 

42IRS 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. 

Page 31 GAO-08-590 Individual Retirement Accounts
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.43

 

43Labor’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. 

Page 32 GAO-08-590 Individual Retirement Accounts
Figure 6: Primary Responsibilities of IRS and Labor for IRAs 

IRS Department of Labor

• Labor has interpretive authority over IRA prohibited transactions.

• IRS has responsibility for imposing the excise tax on prohibited transactions.

• 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. 

• 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

Sources: GAO analysis of Employee Retirement Income Security Act of 1974 and the Internal Revenue Code; Art Explosion (images).

Labor and IRS also work together to oversee IRA prohibited transactions; 

generally, Labor has interpretive jurisdiction and IRS has certain 

enforcement authority.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 

 

44Generally, 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. 

Page 33 GAO-08-590 Individual Retirement Accounts
establish exemption procedures.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.46

Reporting Requirements 

for Employer Sponsored 

IRAs Are Limited 

Reporting requirements for employer-sponsored IRAs are limited. 

Currently, the financial institution/trustee handling the employersponsored 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. 

 

45The 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. 

46A 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. 

Page 34 GAO-08-590 Individual Retirement Accounts
Figure 7: IRS Form 5498, IRA Contribution Information 

Source: Internal Revenue Service.

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. 

Page 35 GAO-08-590 Individual Retirement Accounts
Figure 8: IRS Form 1099-R, Distributions from Pension, Annuities, Retirement or Profit-Sharing Plans, IRA, Insurance 

Contracts, etc. 

Source: Internal Revenue Service.

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. 

Page 36 GAO-08-590 Individual Retirement Accounts
Figure 9: IRS Form W-2, Wage and Tax Statement 

Source: Internal Revenue Service.

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 payrolldeduction 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. 

Page 37 GAO-08-590 Individual Retirement Accounts
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.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 employersponsored IRA contributions or by not engaging in self-dealing;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 employer47The 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. 

48Section 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. 

Page 38 GAO-08-590 Individual Retirement Accounts
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. 

Page 39 GAO-08-590 Individual Retirement Accounts
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 payrolldeduction IRAs, and distribution by employer of the type of payrolldeduction 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 employersponsored 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 

Page 40 GAO-08-590 Individual Retirement Accounts
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. 

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. 

Conclusions 

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 

Page 41 GAO-08-590 Individual Retirement Accounts
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 payrolldeduction 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 employersponsored 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. 

Page 42 GAO-08-590 Individual Retirement Accounts
Given the absence of direct oversight of payroll-deduction IRAs, Congress 

may wish to consider whether payroll-deduction IRAs should have some 

direct oversight. 

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: 

Matter for 

Congressional 

Consideration 

Recommendations for 

Executive Action 

• 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 employersponsored 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 

Page 43 GAO-08-590 Individual Retirement Accounts
as adding questions to the Bureau of Labor Statistics National 

Compensation Survey that provide: 

• information sufficient to identify employers that offer payrolldeduction 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: 

1. 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. 

2. 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. 

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. 

Agency Comments 

and Our Evaluation 

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 

Page 44 GAO-08-590 Individual Retirement Accounts
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 payrolldeduction 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 

Page 45 GAO-08-590 Individual Retirement Accounts
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 payrolldeduction 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 

Page 46 GAO-08-590 Individual Retirement Accounts
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 employersponsored 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 employersponsored 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 employersponsored 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. 

Page 47 GAO-08-590 Individual Retirement Accounts
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 http://www.gao.gov. 

If you have any questions concerning this report, please contact me 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 report. GAO staff who made significant contributions to this report 

Barbara D. Bovbjerg 

are listed in appendix IV. 

Director, Education, Workforce 

 and Income Security Issues 

Page 48 GAO-08-590 Individual Retirement Accounts
Appendix I: Objectives, Scope, and Appendix I: Objectives, Scope, and Methodology 

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 employersponsored 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. 

Page 49 GAO-08-590 Individual Retirement Accounts 
Appendix I: Objectives, Scope, and 

Methodology 

• “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, 

Page 50 GAO-08-590 Individual Retirement Accounts
Appendix I: Objectives, Scope, and 

Methodology 

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 payrolldeduction 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. 

Page 51 GAO-08-590 Individual Retirement Accounts
Appendix II: Comments from the Department Appendix II: Comments from the Department of Labor 

of Labor 

Page 52 GAO-08-590 Individual Retirement Accounts 
Appendix II: Comments from the Department 

of Labor 

Page 53 GAO-08-590 Individual Retirement Accounts
Appendix II: Comments from the Department 

of Labor 

Page 54 GAO-08-590 Individual Retirement Accounts
Appendix II: Comments from the Department 

of Labor 

Page 55 GAO-08-590 Individual Retirement Accounts
Appendix II: Comments from the Department 

of Labor 

Page 56 GAO-08-590 Individual Retirement Accounts
Appendix III: Comments from the Internal Appendix III: Comments from the Internal Revenue Service 

Revenue Service 

Page 57 GAO-08-590 Individual Retirement Accounts 
Appendix III: Comments from the Internal 

Revenue Service 

Page 58 GAO-08-590 Individual Retirement Accounts
Appendix IV: 

A

GAO Contact and Staff 

cknowledgments 

Page 59 GAO-08-590 

Appendix IV: GAO Contact and Staff 

Acknowledgments 

Barbara Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov 

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. 

 Individual Retirement Accounts 

GAO Contact 

Staff 

Acknowledgments 

(130799) 
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