Private Pensions: Better Agency Coordination Could Help Small Employers Address Challenges To Plan Sponsorship
Published: 2012-03-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses the challenges that small employers face when sponsoring retirement plans for their workers. About 42 million workers, or about one third of all private-sector employees, work for employers with less than 100 employees and recent federal data suggest many of these workers lack access to a work-based retirement plan to save for retirement. An estimated 51 to 71 percent of workers at employers with less than 100 workers do not have access to a work-based retirement plan, compared to an estimated 19 to 35 percent of those that work for employers with 100 or more workers. Small employers face a number of barriers to starting and maintaining a plan for their workers. Certain characteristics associated with small employers may contribute to the challenges of sponsoring a plan. For example, in 2008, we reported on challenges that can limit small employer sponsorship of Individual Retirement Arrangement (IRA) plans, including administrative costs, contribution requirements, and eligibility based on employee tenure and compensation, among others. Additionally, federal data suggest that about half of all new businesses (nearly all of which are small) do not survive for more than 5 years.
This testimony is based on our report released today that examines (1) the characteristics associated with small employers that are more or less likely to sponsor a retirement plan, (2) challenges small employers face in establishing and maintaining a retirement plan, and (3) options that exist to address those challenges and increase small employer sponsorship.
section_title: What GAO Found
paragraphs: We found that the likelihood that a small employer will sponsor a retirement plan largely depends on the size of the employers workforce and the workers average wages. Small employers, retirement experts, and other stakeholders also identified a number of challenges such as plan complexity and resource constraintsto starting and maintaining retirement plans. In addition, stakeholders offered options for addressing some challenges to plan sponsorship, which included simplifying federal requirements for plan administration and increasing the tax credit for plan startup costs. Although Labor, IRS, and the Small Business Administration (SBA) collaborate in conducting education and outreach on retirement plans, agencies disseminate information online through separate websites and in a largely uncoordinated fashion. In addition, IRS currently does not have the means to collect information on employers that sponsor a certain type of IRA plan. As a result of our findings, we are recommending efforts for greater collaboration among federal agencies to foster small employer plan sponsorship and more complete collection of IRA plan sponsorship data.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the challenges that small  employers face when sponsoring retirement plans for their workers. About  42 million workers, or about one third of all private-sector employees,  work for employers with less than 100 employees and recent federal data  suggest many of these workers lack access to a work-based retirement  plan to save for retirement. An estimated 51 to 71 percent of workers at  employers with less than 100 workers do not have access to a work- based retirement plan, compared to an estimated 19 to 35 percent of  those that work for employers with 100 or more workers. Small employers  face a number of barriers to starting and maintaining a plan for their  workers. Certain characteristics associated with small employers may  contribute to the challenges of sponsoring a plan. For example, in 2008,  we reported on challenges that can limit small employer sponsorship of  Individual Retirement Arrangement (IRA) plans, including administrative  costs, contribution requirements, and eligibility based on employee tenure  and compensation, among others. Additionally, federal data suggest that  about half of all new businesses (nearly all of which are small) do not  survive for more than 5 years.
My statement is based on our report released today that examines (1) the  characteristics associated with small employers that are more or less  likely to sponsor a retirement plan, (2) challenges small employers face in  establishing and maintaining a retirement plan, and (3) options that exist  to address those challenges and increase small employer sponsorship.
To answer these objectives, we combined and analyzed retirement plan  data from the Department of Labor (Labor) and the Internal Revenue  Service (IRS) employer data to produce a regression analysis and  descriptive statistics on 5.3 million small employers. We conducted  literature reviews and interviewed groups of small employers in five cities  as well as other stakeholders. We conducted our work in accordance  with generally accepted government auditing standards from October  2010 to March 2012. More complete information on our scope and  methodology is available in our issued report.
In summary, we found that the likelihood that a small employer will  sponsor a retirement plan largely depends on the size of the employer’s  workforce and the workers’ average wages. Small employers, retirement  experts, and other stakeholders also identified a number of challenges—  such as plan complexity and resource constraints—to starting and  maintaining retirement plans. In addition, stakeholders offered options for  addressing some challenges to plan sponsorship, which included  simplifying federal requirements for plan administration and increasing the  tax credit for plan startup costs. Although Labor, IRS, and the Small  Business Administration (SBA) collaborate in conducting education and  outreach on retirement plans, agencies disseminate information online  through separate websites and in a largely uncoordinated fashion. In  addition, IRS currently does not have the means to collect information on  employers that sponsor a certain type of IRA plan. As a result of our  findings, we are recommending efforts for greater collaboration among  federal agencies to foster small employer plan sponsorship and more  complete collection of IRA plan sponsorship data.
subsections: section_title: Background
paragraphs: To encourage employers to sponsor retirement plans for their employees,  the federal government provides preferential tax treatment under the  Internal Revenue Code (IRC) for plans that meet certain requirements. In  addition, the Employee Retirement Income Security Act of 1974 (ERISA),  as amended, sets forth certain protections for participants in private- sector retirement plans, including fiduciary responsibilities that may apply  to plan sponsors, which establish certain standards of conduct for those  that manage employee benefit plans and their assets.
Small employers may choose a plan for their employees from one of three  categories: employer-sponsored IRA plans; defined contribution (DC)  plans; and defined benefit (DB) plans (often referred to as traditional  pension plans).  Employer-sponsored IRA plans, which can be either  Savings Incentive Match Plans for Employees (SIMPLE) or Simplified  Employee Pension (SEP) plans, generally allow employers and, in SIMPLE  IRA plans, employees, to make contributions to separate IRA accounts for  each participating employee. Employers generally have fewer  administration and reporting requirements compared to other types of  plans. The second plan category—DC plans—which includes 401(k) plans,  allows employers, employees, or both to contribute to individual employee  accounts within the plan. DC plans tend to have higher contribution limits  for employees than employer-sponsored IRA plans; however, they also  have more reporting requirements and other rules; for example, they may  be subject to requirements for nondiscrimination testing or top-heavy  testing. The third category is DB plans, which promise to provide a  specified retirement benefit to employees; the employer is generally  responsible for funding the plan.
Over the years, Congress has responded to concerns about lack of  access to employer-sponsored retirement plans for employees of small  employers with legislation to lower costs, simplify requirements, and ease  administrative burden. For example, the Revenue Act of 1978 and the  Small Business Job Protection Act of 1996 established the SEP IRA plan  and the SIMPLE IRA plan respectively, featuring fewer administration  requirements than other plan types. The Economic Growth and Tax Relief  Reconciliation Act of 2001 (EGTRRA) also included a number of  provisions that affected small employers, which were made permanent by  the Pension Protection Act of 2006 (PPA). The PPA also established  additional provisions that support retirement plan participation by rank- and-file employees, such as automatic enrollment.
Federal agencies also play a role in fostering retirement plan sponsorship  by small employers. To help encourage sponsorship, federal agencies  conduct education and outreach activities and provide information about  retirement plans for small employers. Labor, IRS, and SBA—which  maintains an extensive network of field offices—have collaborated with  each other and with national and local organizations to develop  information on small employers retirement plans and conduct outreach  with small employers.
Various private-sector service providers—from individual accountants,  investment advisers, recordkeepers, and actuaries to insurance  companies and banks—assist sponsors with their retirement plans. Some  sponsors hire a single provider that offers a range of plan services for one  fee, sometimes referred to as a “bundled” services arrangement. Other  sponsors hire different providers for individual services under an  “unbundled” arrangement, paying a separate fee for each service. Plan  services include legal, accounting, trustee/custodial, recordkeeping,  actuarial (for defined benefit plans), investment management, investment  education, or advice. Service providers can also assist with plan  administration functions, including any required testing and filing of  government reports.
section_title: Number of Employees and Average Pay Level Greatly Influence Plan Sponsorship
subsections: section_title: More Employees and Higher Average Wages Increase the Likelihood of Plan Sponsorship
paragraphs: We found that the number of employees and average wages greatly  influence the likelihood that a small employer will sponsor a retirement  plan. Further, our regression analysis using Labor and IRS data found  that small employers with larger numbers of employees were the most  likely of all small employers to sponsor a plan, as were those paying  average annual wages of $50,000-$99,999. Conversely, employers with  the fewest employees and the lowest average annual wages were very  unlikely to sponsor a plan.
A separate analysis we conducted using Labor and IRS data found an  overall small employer sponsorship rate of 14 percent in 2009. important to note, however, that this sponsorship rate does not include  small employers that sponsor SEP IRA plans because IRS currently does  not have a means to collect data on employers that sponsor this plan  type.
Further examination found that small employers with 26 to 100  employees had the highest sponsorship rate—31 percent—while small  employers with 1 to 4 employees had the lowest rate—5 percent   (See fig 1).
The sponsorship rate cited in this testimony is limited to single employers that sponsor a  plan. Consequently, the rate does not include small employers that participated only in  multiple employer plans or multiemployer plans, which are outside the scope of this study.  We are currently conducting ongoing work on these plan types and their role in the private  pension system.
section_title: 401(k)s and SIMPLE IRAs Were the Most Common Plan Types
paragraphs: According to our analysis of Labor and IRS data, 401(k) and SIMPLE IRA  plans were overwhelmingly the most common types of plans sponsored  by small employers. Out of slightly more than 712,000 small employers  that sponsored a single type of plan, about 86 percent sponsored either a  401(k) or a SIMPLE IRA plan.types sponsored by small employers.
section_title: Plan Complexity and Resource Constraints Were Most Frequently Cited Barriers to Retirement Plan Sponsorship
subsections: section_title: Many Small Employers Find Retirement Plans Complex and Burdensome to Start and Administer
paragraphs: Small employers and other stakeholders we interviewed identified various  plan options, administration requirements, fiduciary responsibilities, and  top-heavy testing requirements as complex and burdensome—often citing  these factors as barriers to sponsoring retirement plans or as reasons for  terminating them.
Plan options and administration requirements: Small employers and  other stakeholders said that plan options and administration requirements  are frequently complex and burdensome and discourage some small  employers from sponsoring a plan. For example, some small employers  and retirement experts said that the broad range of plan types and  features makes it difficult for small employers to compare and choose a  plan that best meets their needs. Some stakeholders also described the  administrative burden on small employers of plan paperwork, such as  reviewing complicated quarterly investment reports or complying with  federal reporting requirements—like those associated with required  annual statements—as particularly burdensome.
Fiduciary responsibilities: A number of stakeholders indicated that  understanding and carrying out a sponsor’s fiduciary responsibilities with  respect to managing or controlling plan assets presents significant  challenges to some small employers.found the selection of investment fund choices for their plans particularly  challenging. Further, a number of stakeholders said some small  employers may not have an adequate understanding of their fiduciary  duties and are not always aware of all their responsibilities under the law.
Top-heavy requirements: Top-heavy requirements are more likely to  affect smaller plans (those with fewer than 100 participants) than larger  ones, according to IRS. A number of stakeholders said compliance with  requirements is often burdensome and poses a major barrier to small   According to some experts, some small employer plan sponsorship. employers with high employee turnover may face an even greater  likelihood of becoming top-heavy as they replace departing employees  while key employees—such as business owners or executives—continue  to contribute to the plan. A number of stakeholders stated that compliance  with top-heavy rules is confusing and can pose significant burdens on  some small employers. For example, some retirement experts said that  small employers whose plans are found to be top-heavy may encounter a  number of additional costs in the effort to make their plans compliant.  These plans can incur additional costs associated with hiring a plan  professional to make corrections to plan documents and instituting a  minimum top-heavy employer contribution for all participating rank-and- file employees. While sponsors can avoid top-heavy testing by adopting a  safe harbor 401(k) plan that is not subject to top-heavy requirements,  experts pointed out that the employer contributions required for such  plans may offset the advantages of sponsoring such a plan.
section_title: Federal Guidance Is Available to Address the Complexities Associated with Plan Sponsorship But May Lack Visibility among Small Employers
paragraphs: Federal agencies provide guidance that can assist small employers in  addressing some of the challenges they face in starting and maintaining  retirement plans. Labor and IRS, often in collaboration with SBA, have  produced publications, conducted workshops, and developed online  resources, among other efforts, to assist small employers. However, a  number of stakeholders, including the IRS Advisory Committee on Tax  Exempt and Government Entities, indicated that many small employers  are unaware of federal resources on retirement plans, which may, in part,  be due to difficulties in finding useful, relevant information across a  number of different federal websites. For example, IRS’s Retirement  Plans Navigator, a web-based tool designed to help small employers  better understand retirement plan options, is located on a separate  website from the rest of the agency’s online plan resources for small  employers. Furthermore, Labor and IRS each present retirement plan  information separately on their respective websites. Neither agency  maintains a central web portal for all information relevant to small  employer plan sponsorship, though such portals exist for federal  information resources in other areas such as healthcare.
section_title: Small Employers Identified Lack of Financial Resources, Time, and Personnel as Deterrents to Sponsoring Retirement Plans
paragraphs: Small employers that lack sufficient financial resources, time, and  personnel, such as smaller or newer firms, may be unwilling or unable to  sponsor plans.
Financial resources: Small employers, especially those with lower profit  margins or an unstable cash flow, could be less willing or less able to  sponsor a retirement plan. One-time costs associated with starting a plan  and the ongoing costs involved with maintaining the plan—as well as any  requirement to match employee contributions or make mandatory  contributions to an employee’s account—were cited as barriers to plan  sponsorship. Further, small employers we interviewed stated that general  economic uncertainty makes them reluctant to commit to such long-term  expenses and explained that they needed to reach a certain level of  profitability before they would consider sponsoring a plan.
Time and personnel: Some small employers stated they may not have  sufficient time to administer a plan themselves or lacked the personnel to  take on those responsibilities. Further, small employers may not have  time to develop the expertise needed to investigate and choose financial  products, select the best investment options, or track their performance.  For example, one small employer described how business owners without  the financial expertise to compare and select from among different plan  options would likely find the experience intimidating.
section_title: Small Employers Report That Insufficient Incentives and Lack of Employee Demand Discourage Plan Sponsorship
paragraphs: Some small employers we interviewed stated that they may be less likely  to sponsor a retirement plan if they do not perceive sufficient benefits to  the business or themselves. For example, several small employers stated  that their firms sponsored plans in order to provide owners with a tax- deferred retirement savings vehicle and one employer described how the  firm annually assesses the plan to determine if it continues to benefit the  owners. Additionally, a number of small employers stated that employees  prioritized healthcare benefits over retirement benefits. Some small  employers, such as those who described having younger or lower paid  workforces, stated that their employees were less concerned about  saving for retirement or were living paycheck to paycheck and did not  have funds left over to contribute to a plan. As a result, both types of  workers were not demanding retirement benefits.
section_title: Plan Service Providers Help Small Employers Meet Some But Not All Retirement Plan Needs
paragraphs: A number of small employers indicated that they use plan service  providers to address various aspects of plan administration, which  enabled them to overcome some of the challenges of starting and  maintaining a plan. For example, one employer noted that her business  would not have the time or the expertise to administer its plan without the  help of a service provider. While some service providers said they offer  affordable plan options and some small employers said the fees service  providers charge were affordable, others said they were too high. Further,  some stakeholders pointed to other limitations of using service providers,  such as the difficulties of choosing providers, setting up a new plan  through a provider, switching from one provider to another, as well as the  significant responsibilities that may remain with the sponsor, such as  managing plan enrollments and separations and carrying out their  fiduciary duties, where applicable.
section_title: Proposed Options to Spur Plan Sponsorship Target Simplification, Incentives, and Education
paragraphs: Stakeholders proposed several options to address some of the  administrative and financial challenges that inhibit plan sponsorship.  These options included simplifying plan administration rules, revising or  eliminating top-heavy testing requirements, and increasing tax credits.
Simplify plan administration requirements: Some stakeholders  suggested options that could simplify plan administration requirements.  Options included reducing the frequency of statements sent to plan  participants and allowing some required disclosures to be made available  solely online. IRS officials stated that the agency is also considering  proposals to replace a requirement for some interim amendments which stakeholders have identified as a burden for some small  employers—with a requirement for notices to be sent directly to  employees, which would reduce the number of times plan documents  must be amended and submitted to IRS.
Revise or eliminate top-heavy testing: A number of stakeholders  proposed revising or eliminating top-heavy testing requirements to ease  administrative and financial burdens. For example, representatives of the  accounting profession told us that top-heavy testing is duplicative  because other plan testing requirements help detect and prevent plan  discrimination against rank-and-file employees. Representatives of a large service provider told us that lack of plan participation or high  turnover among a business’ rank-and file employees frequently cause  plans sponsored by small employers to become top-heavy.
When statutes and regulations change, some sponsors may be required to modify plan  documentation and submit it to IRS. Each year since 2004, IRS has published a  cumulative list of changes in plan requirements that must be incorporated by plan  sponsors. See, for example, IRS Notices 2011-97.
Increase tax credits: Some stakeholders believed that tax credits, in  general, are effective in encouraging plan sponsorship, but other  stakeholders said that the current tax credit for starting a plan is  insufficient. A national organization representing small employers cited  tax credits as a top factor in an employer’s decision to sponsor a plan,  adding that an employer’s willingness to start a plan depends, to some degree, on the extent to which the tax credit offsets plan-related costs.Similarly, some small employers stated that larger tax credits could ease  the financial burden of starting a plan by offsetting plan-related costs.  Additionally, one small employer said the incentive needs to be larger as  sponsorship costs can amount to $2,000 or more per year.
subsections: section_title: Stakeholders Said More Education and Outreach Are Needed to Increase Awareness of Plan Options and Requirements
paragraphs: Numerous stakeholders agreed that the federal government could  increase education and outreach efforts to inform small employers about  plan options and requirements; however, opinions varied on the  appropriateness of the federal government’s role in these efforts. Officials  of a service provider to small employers stated that, because clients are  generally not aware of the retirement plan options available to them, the  federal government should offer more education and outreach to improve  awareness of the types of plans that are available and the rules that apply  to each. Several small employers also offered ideas. For example, a  small employer said the federal government should focus education and  outreach efforts on service providers instead of on small employers.  Conversely, some small employers said the federal government should  have a limited role or no role in providing education and outreach efforts.
section_title: Other Options to Encourage Plan Sponsorship Would Require Broader Reforms
paragraphs: Domestic pension reform proposals from public policy organizations, as  well as practices in other countries, include features such as asset  pooling that could reduce the administrative and financial burdens of  small employers. For example, one domestic proposal calls for the  creation of a federally managed and federally guaranteed national  savings plan. Under this proposal, participation in the program would  generally be mandatory for workers; both employers and employees  would contribute to the plan; and plan funds would be pooled and  professionally managed. By pooling funds, plan administration would be  simplified and administrative costs and asset management fees would be  reduced. In addition, Automatic IRAs—which are individual IRAs instead  of employer-sponsored plans—are another proposal that draws from  several elements of the current retirement system: payroll-deposit saving,  automatic enrollment, and IRAs. Such a proposal would provide  employers who do not sponsor any retirement plans with a mechanism  that allows their employees to save for retirement. However, as we  reported in 2009, such proposals pose trade-offs. For example,  although a proposal that mandates participation would increase plan  sponsorship and coverage for workers, employers might offset the  resulting sponsorship costs by reducing workers’ wages and other  benefits. Retirement systems in other countries also use asset pooling  and other features that help reduce administrative and financial burdens  for small employers. For example, as we previously reported, the  predominant pension systems in the Netherlands and Switzerland pool  plan assets into pension funds for economies of scale and for lower plan  fees. The United Kingdom’s National Employment Savings Trust  (NEST) features low fees for participating employers and employees and  default investment strategies for plan participants.
section_title: Conclusions and Report Recommendations
paragraphs: With a significant portion of the private-sector workforce not covered by a  pension plan at any one time, retirement security remains a critical issue  for our nation. Based on the limited data available, we found the rate of  plan sponsorship among small employers, a segment of the economy  which employs about one third of all private sector workers, was only 14  percent in 2009. Although one would expect that the high churn rate of  small business formation and dissolution would impede small employer  plan sponsorship, it also means that many millions of workers in this  sector are without access to an employer-sponsored retirement savings  plan. Thus, while remaining sensitive to the financial challenges currently  facing our nation, expanding coverage among small employers should be  an important consideration of national strategies seeking to strengthen  the pension component of retirement income security.
Our discussions with small employers and other stakeholders identified a  variety of challenges small employers face in sponsoring retirement  plans. One initial problem is the inability of small employers to easily  obtain useful information on how to establish and maintain plans.  Although Labor and IRS already provide small employers with  considerable online information about retirement plans, information is  scattered across multiple federal websites and portals in a largely  uncoordinated fashion, making it difficult for busy employers to navigate  and locate what they need. However, even if federal information about  retirement plans were more accessible to small employers, our interviews  with small employers identified a number of other significant challenges to  plan sponsorship, including plan administration requirements that are  perceived to be unduly complicated and burdensome, not having  sufficient financial and personnel resources to sponsor a plan, and  insufficient incentives to create and maintain a plan.
These challenges, while very real, are also complex and in many  instances may not lend themselves to easy answers. Because the  expertise to address these issues is spread across multiple agencies and  departments that may not always communicate or work together  effectively on these issues, there is the potential that inertia and other  competing priorities will push these issues onto the back burner.
The report we are issuing today recommends the creation of a  multiagency task force, to be overseen by the Department of Labor, that  would explore and analyze these challenges in greater detail, including  ways to make information more accessible, to streamline reporting and  disclosure requirements in a thoughtful manner, and to identify the  appropriateness and effectiveness of existing and proposed tax  incentives and plan designs to boost sponsorship among small  employers. Such a task force could help jump-start sustained action on  what we consider to be an essential element of our nation’s retirement  security challenge and initiate a national dialogue on the critical issues of  pension coverage   Finally, federal agencies’ ability to address the challenges to small  employer plan sponsorship depends in part on the availability of relevant,  timely, and complete data. During our work in estimating the extent of  small employer plan sponsorship, we found that complete data on small  employer plan sponsorship did not exist because IRS did not have the  means to collect information on employers that sponsor SEP IRA plans.  Although there are about 1.5 million SEP IRAs, many of these may be  sponsored by larger businesses, and we simply do not know the  distribution of these plans across all employers. Without a complete  picture of small employer plan sponsorship rates, agencies may find it  difficult to effectively target their research and outreach efforts. Thus, in  our report we also recommend that the Secretary of the Treasury direct  the Commissioner of the Internal Revenue Service to consider modifying  existing tax forms, such as Forms W-2 or 5498, to gather complete and  reliable information about these plan types. Although the challenges that  small employers face in sponsoring plans are significant, they can be  addressed and with appropriate federal action and cooperation, as well as  assistance from the service provider community.
While the Department of Treasury, IRS, Labor, SBA, and the Department  of Commerce generally agreed with our findings and conclusions, Labor  disagreed with our recommendation to create a single web portal for  federal guidance on retirement plans for small employers. Because  federal resources are scattered across different sites, we believe  consolidating plan information onto one web portal can benefit small  employers. A complete discussion of our recommendations, Labor’s  comments, and our response are provided in our full report.
Chairman Kohl and Ranking Member Corker, and Members of the  Committee, this concludes my prepared remarks. I am happy to answer  any questions that you or other members of the committee   may have.
For further questions on this testimony, please contact me at   (202) 512-7215. Individuals making key contributions to this testimony  include Edward Bodine, Kun-Fang Lee, David Lehrer, and David Reed.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.