Private Pensions: Better Agency Coordination Could Help Small Employers Address Challenges to Plan Sponsorship
Published: 2012-03-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Because about one-third of privatesector employees in the United States work for small employers, Congress and federal agencies have made efforts to encourage small employers to sponsor retirement plans for workers. However, federal data show workers access to plans remains limited, leaving many without a work-based plan to save for retirement. For this report, GAO examined (1) characteristics of small employers that are more or less likely to sponsor a plan for their employees, (2) challenges small employers face in establishing and maintaining a plan for their employees, and (3) options to address these challenges and attract more small employer plan sponsors. GAO defined small employers as forprofit firms that employ 100 or fewer employees. GAO analyzed Internal Revenue Service (IRS) and Department of Labor (Labor) data, interviewed agency officials and experts, held discussion groups with small employers, and reviewed relevant federal rules, literature, and retirement plan proposals.
section_title: What GAO Found
paragraphs: Based on available data, about 14 percent of small employers sponsor some type of retirement plan. Overall, GAO 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 more than on the industry in which the employer operates and the geographic region in which the employer is located. GAO found the greatest likelihood of plan sponsorship was among small employers with larger numbers of employees and those paying an average annual wage of $50,000 to $99,999. GAO also found that the most common plans sponsored by small employers are 401(k)s and Savings Incentive Match Plans for Employees (SIMPLE) Individual Retirement Arrangements (IRA)an employer-sponsored IRA designed for small employersat 46 percent and 40 percent, respectively, of total plans. However, IRS currently does not have the means to collect information on employers that sponsor another type of IRA plan designed for small employers, the Simplified Employee Pension (SEP) IRA plan, which limits what is known about employers that sponsor these plans.
Small employers and retirement experts identified several challenges to starting and maintaining retirement plans. Many small employers said they feel overwhelmed by the number of retirement plan options, administration requirements, and fiduciary responsibilities. For example, many are concerned about the potential risks associated with sponsoring a plan. Although federal agencies conduct education and outreach on retirement plans, a number of small employers and other stakeholders said small employers were unaware of these initiatives. For example, Labor, IRS, and the Small Business Administration (SBA) collaborate to develop and disseminate information and guidance online but do so through separate websites and in a largely uncoordinated fashion. Small employers and other stakeholders also cited other challenges to plan sponsorship, including a lack of financial resources, time, and personnel. However, some small employers said their employees prioritized health benefits over retirement benefits. To address some of the challenges to plan sponsorship, some small employers said they use contracted service providers that perform plan administration tasks.
Small employers and other stakeholders offered options for addressing some challenges and reducing the complexity of plan sponsorship for small employers. Options included simplification of federal requirements for plan administration, such as easing or eliminating certain plan testing requirements. Some stakeholders said increasing the tax credit for plan startup costs could further defray costs and help boost plan sponsorship. Some stakeholders also said that the federal government could conduct more education and outreach efforts to inform small employers about plans. Pension reform proposals in the United States, along with certain features of pension systems in other countries, may provide additional options that could increase plan sponsorship and increase workers access to retirement plans. For example, asset pooling is a feature that allows small employers to pool resources for economies of scale, which can lower plan costs. In light of the variety of options, Labor, the Department of the Treasury, IRS, and SBA should jointly evaluate existing options and develop new proposals with the goal of mitigating barriers to small employer plan sponsorship.
section_title: What GAO Recommends
paragraphs: GAO recommends that Labor convene an interagency task force with Treasury, IRS, and SBA to coordinate existing research, education, and outreach efforts to foster small employer plan sponsorship. GAO also recommends that IRS consider modifying tax forms to gather complete, reliable information about SEP IRAs. Agencies generally agreed with GAOs recommendations; however, Labor disagreed with GAOs recommendation to create a single webportal for federal guidance. However, because federal resources are scattered across different sites, GAO believes consolidating plan information onto one webportal could benefit small employers.

section_title: Letter
paragraphs: About 42 million workers, or about one-third of all private-sector  employees, work for small employers, and recent federal data suggest  many of these workers lack access to a work-based retirement plan to  save for retirement. An estimated 51 percent to 71 percent of workers at  employers with fewer than 100 workers do not have access to a work- based retirement plan compared to an estimated 19 percent to 35 percent  of those who work for employers with 100 or more workers.
Over the years, the federal government has taken steps to encourage  small employers to sponsor retirement plans, and Congress has enacted  legislation that has established incentives such as plan types with fewer  federal reporting requirements, higher plan contribution limits, and a tax  credit for plan startup costs. The Department of Labor (Labor) and the  Department of the Treasury’s (Treasury) Internal Revenue Service (IRS)  have also increased education and outreach to these employers.  However, small employers continue to face a number of barriers to  starting and maintaining plans for their workers. In 2008, GAO 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. Other research also suggests that a  difficult economy and concerns about the overall cost of retirement plans  may be factors for some small employers that are less likely to sponsor  plans. For example, a recent survey found that difficult business  conditions were a top reason employers reported for being unlikely to  sponsor a retirement plan.
Certain characteristics associated with small employers may also  contribute to the challenges of starting and maintaining a plan. When  compared with large employers, small employers are more likely to  encounter higher rates of employee turnover and higher costs per  employee to comply with federal regulations. Further, small employers— especially start-ups—rely heavily on owner investment and bank credit,  and operating revenue can be uncertain from year to year. Federal data suggest that about half of all new businesses (nearly all of which are  small) do not survive for more than 5 years. All these conditions can  make it difficult for small employers to focus on providing retirement  benefits for their workers.
In light of these ongoing challenges, GAO was asked to examine issues  related to retirement plan sponsorship among small employers. We  answered the following questions:
What characteristics are associated with small employers that are  more likely or less likely to sponsor a retirement plan for their  employees?
What challenges do small employers face in establishing and  maintaining a retirement plan for their employees? and
What options exist to address these challenges and attract more small  employer plan sponsors?
To answer these research questions, we combined and analyzed  retirement plan data from Labor and IRS data on 5.3 million small  employers. We performed regression analyses to identify characteristics  of small employers that are most likely to sponsor plans. We conducted  literature reviews and interviewed retirement experts, organizations  representing small employers, agency officials, and others on challenges  faced by small employers in establishing and maintaining plans, and  options for addressing those challenges. In addition, we conducted  structured interviews with groups of small employers that did and did not  sponsor plans. These interviews were conducted in five cities, which were  judgmentally selected for geographic diversity. We also reviewed  relevant federal laws and regulations. Additional details regarding our  methodology can be found in appendix I. We conducted this performance  audit from October 2010 to March 2012 in accordance with generally  accepted government auditing standards. 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.
subsections: section_title: Background
paragraphs: To encourage employers to establish and maintain 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 and establishes  standards of conduct for those that manage the plans and their assets,  generally called fiduciaries. To the extent they qualify as fiduciaries  under the law, plan sponsors assume certain responsibilities and  potential liability under ERISA. For example, a fiduciary must act  prudently and solely in the interest of plan participants and their  beneficiaries, which may require documenting decisions relating to the  plan, including hiring outside professionals or service providers that  advise and help administer plans. 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   Appendix II presents  (often referred to as traditional pension plans).information provided by Labor and IRS about some of the various types of  retirement savings plans available to small employers.
Employer-sponsored IRA plans: Employer-sponsored IRA plans allow  employers and, in some cases, employees to make contributions for  deposit in separate IRA accounts for each participating employee. These  plans generally have fewer administration and reporting requirements  than other types of plans. Participating employees bear the full  investment risk of their account assets. There are two types of employer- sponsored IRA plans. Savings Incentive Match Plans for Employees  (SIMPLE) IRA plans require employers to either match their eligible  employees’ voluntary salary reductions (typically up to 3 percent of  compensation) or to contribute 2 percent of compensation for each  eligible employee. The second type is the Simplified Employee Pension  (SEP) IRA plan, which can be sponsored by an employer of any size,  and has higher employer contribution limits than the SIMPLE IRA plan. In  a SEP IRA plan, employer contributions are voluntary and employee  salary reductions are not permitted.
Defined contribution plans: DC plans allow employers, employees, or  both to contribute to individual employee accounts that are grouped under  a single plan. Employee salary reductions, if provided under the plan,  may be pretax or after-tax, in some cases. As with employer-sponsored  IRA plans, employees participating in DC plans bear the full risk of  investment and will realize any returns (gains or losses) on those  investments. DC plans tend to have higher limits for employee  contributions but also more rules and reporting requirements than  employer-sponsored IRA plans. For example, some DC plans may be  required to conduct annual testing in order to ensure that the  contributions or benefits provided under the plan do not discriminate  against rank-and-file workers in favor of highly compensated  employees,. In addition to nondiscrimination testing, some DC plans  may also be subject to top-heavy requirements and be required to  conduct further testing to ensure a minimum level of benefits are provided  to rank-and-file workers in plans that are sponsored by owner-dominated  firms, where the majority of benefits accrue to “key” employees, such as  owners and top executives. As we have previously reported, top-heavy  requirements are intended to address a greater potential for tax-shelter  abuses in such plans. Top-heavy requirements are most likely to affect  smaller plans (fewer than 100 participants), according to the IRS. The  most common type of DC plan is a 401(k) plan. In 401(k) plans,  employees can defer a portion of their salary—pretax or after tax, if  permitted by the plan—for deposit into a separate retirement account.  Employers may also choose to make additional contributions (such as  contributing a percentage of each eligible employee’s salary), match the  amount contributed by the employee, or both. One type of 401(k) plan,  the safe harbor 401(k) plan, is not subject to some of the requirements  associated with traditional 401(k)s that generally require annual plan  testing. However, under safe harbor 401(k) plans, employers are required   Another type  to make certain contributions to each participant’s account.of tax-qualified DC plan, the profit sharing plan, gives the employer the  discretion to determine annually whether and how much to pay into the  plan, within certain maximum limits. Employer contributions, if any, are  allocated to each employee according to the terms of the plan.
The assets held in DC plans and employer-sponsored IRA plans are not insured by the  Pension Benefit Guaranty Corporation. requirements, nondiscrimination testing, and top-heavy requirements.  Operating DB plans typically requires the expertise of an actuary.
Over the years, Congress has responded to concerns about lack of  access to workplace retirement plans for employees of small businesses  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 compliance  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 businesses. For example, EGTRRA  eliminated top-heavy testing requirements for safe harbor 401(k)s,  increased contribution limits for employer-sponsored IRA plans and  401(k) plans, and created a tax credit for small employers to offset startup  costs, including the cost of educating employees about a new plan.  EGTRRA also created a tax credit for individuals within certain income  limits who make eligible contributions to retirement plans. The Pension  Protection Act of 2006, among other changes, made these EGTRRA  provisions permanent and established additional provisions that support  retirement plan participation by rank-and-file employees, such as  automatic enrollment.
To help encourage plan sponsorship, federal agencies conduct education  and outreach activities and provide information about retirement plans for  small employers. Labor, IRS, and the Small Business Administration  (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 employer retirement plans and conduct  outreach with small employers. For example, Labor, IRS, SBA and the  U.S. Chamber of Commerce partnered to create the Choosing a  Retirement Solution Campaign, which targets small employers and their  employees.retirement plan guidance for small employers, highlight key aspects of  and differences between various plans and features, including tax  benefits for employers and employees. Labor also worked with the  Society for Human Resource Management and the American Institute of  Certified Public Accountants (AICPA) on the Fiduciary Education  Campaign to provide retirement plan fiduciaries with information about  their fiduciary responsibilities under ERISA.
The campaign’s educational materials, including web-based  In addition, 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, investment management, and investment education or  advice. Service providers can also assist with plan administration  functions, including nondiscrimination testing, top-heavy testing, and filing  of government reports. Some providers also include payroll services,  which further centralize an employer’s administrative services through a  single company. Labor provides some guidance for plan sponsors in  selecting and monitoring plan service providers. Further, the American Society of Pension Professionals & Actuaries (ASPPA) publishes a list of  certified firms that adhere to ASPPA’s standards and best practices  concerning recordkeeping and administration services for retirement  plans.
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: GAO found that the number of employees and average wages greatly  influence the likelihood that a small employer will sponsor a retirement  plan. Further, the 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 retirement plan, as were those  paying average annual wages of $50,000 to $99,999. Conversely,  employers with the fewest employees and the lowest average annual  wages were very unlikely to sponsor a retirement plan.
A separate GAO analysis using Labor and IRS data found an overall  small employer sponsorship rate of 14 percent in 2009.sponsorship rate does not include small employers that sponsor SEP IRA  plans because IRS currently does not have a means to collect these data,  which limits what is known about small employers that sponsor SEP   However, the  plans. According to IRS, its Form 5498, “IRA Contribution Information,”  includes some SEP information; however, the agency is unable to link this  information to an employer’s employer identification number (EIN). As a  result, IRS can identify participants in SEP plans but not sponsoring  employers.proposed a change to the form to allow IRS to identify SEP IRA plan  sponsors, officials said the proposal was not adopted.
While the IRS Tax Forms and Publication Committee  Further examination of sponsorship rates looking at small employer  characteristics found that those 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). Additionally, even  though small employers with 26 to 100 employees made up only 10  percent of the overall small employer population, they sponsored more  retirement plans than employers with 1 to 4 employees.
Looking at the average annual wage characteristics, small employers with  average annual wages of $50,000 to $99,999 had the highest rate of  retirement plan sponsorship at 34 percent while small employers with  average wages of under $10,000 had the lowest sponsorship rate—3  percent (see fig. 2). Further, despite having a smaller overall population,  small employers with average annual wages of $50,000 to $99,999  sponsor almost three times as many retirement plans compared to small  employers paying average wages of under $10,000. As a point of  comparison, the overall annual average wages for employees working for  small employers was about $38,000.
Analysis of the Labor and IRS data examining the interaction between  both characteristics—number of employees and average annual wages— illustrates how sponsorship rates increase as numbers of employees and  average annual wages increase. For example, the plan sponsorship rate  for employers with 26 to 100 employees and average wages of $30,000  to $49,999 was more than nine times higher than employers with the  same number of employees and wages below $10,000. Further, the  sponsorship rate for small employers with 26 to 100 employees exceeded  75 percent when average wages were $50,000 or higher. In contrast,  small employers with 1 to 4 employees reached their highest sponsorship  rate of 13 percent when average annual wages were $50,000 or more;  however, sponsorship rates were still about one-sixth the rate for small  employers with 26 to 100 employees in the same wage category. Our  analysis showed the sponsorship rate for employers with one to four  employees lowered the overall sponsorship rate in the average annual  wage categories. For example, the figure shows that small employers  with average annual wages of $100,000 or more have an overall  sponsorship rate of 26 percent, but this is much lower than the  sponsorship rates for small employers with five or more employees.  Figure 3 shows small employer sponsorship rates by size of employer  and average annual wage paid.
In examining the geographic distribution of sponsorship rates, small  employers in the Midwest and Northeast were more likely to sponsor  plans, while employers in the West and South were less likely.in examining data on individual states, Connecticut, Wisconsin, and  Washington, D.C., had the highest rate—with Washington, D.C., showing  the top rate of 23 percent. Florida and Mississippi had the lowest   Further,  sponsorship rates at fewer than 10 percent. Figure 4 shows the  percentage of small employers that sponsor plans by state.
According to GAO 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. Additionally, non- 401(k) DC plans, which include non-401(k) profit sharing plans, make up  11 percent of the plan type population; SARSEP IRAs are 3 percent,  while DB plans make up only about 1 percent of the small employer  sponsor population.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 stakeholdersadministration 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.   identified various plan options,  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 number of plan types and features  make it difficult for small employers to compare and choose plans.  Representatives of a plan service provider said that too many plan options  overwhelmed small employers, making it more difficult for them to choose a  plan and, ultimately, less likely that they will sponsor one. Some  stakeholders also described the administrative burden 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. For example, one small  employer with a DB plan described a dense and highly technical quarterly  investment report for his plan that ran 50 pages, making it difficult to glean  summary financial information about the plan. Another small employer who  previously sponsored a 401(k) with a company match said the amount of  required plan paperwork, including generating annual reports, was a key  reason he terminated it. Stakeholders also identified interim amendment  requirements as burdensome for plan administration. Plan sponsors  generally submit plan documentation to IRS periodically to ensure that  plans are up to date and compliant with relevant federal statutes and  regulations. However, when statutes and regulations change, some  sponsors may be required to modify plan documentation and resubmit their  plan documents to IRS. Some stakeholders, including small employers, a  small business advocacy organization, and plan service provider, said that  complying with interim amendment requirements can be costly and time  consuming for small employers. IRS has recognized that interim  amendment requirements pose a burden to plan sponsors. However, an  IRS official noted that most small employer plans are likely based on plan  designs that are preapproved by IRS, and interim amendment  requirements are likely to entail little administrative burden for most small  employer sponsors.
Fiduciary responsibilities: A number of stakeholders indicated that  understanding and carrying out a sponsor’s fiduciary responsibilities with  respect to their qualified retirement plans presents significant challenges to  some small employers. Plan sponsors may qualify as fiduciaries under  ERISA, for example, if they have discretionary authority or control over the  management of the plan or control the plan assets. Fiduciaries have a  number of responsibilities, such as the duty to act prudently, in the sole  interest of the participants and beneficiaries, and to diversify the  investments of the plan. Some small employer sponsors found the selection of investment fund options for their plans particularly challenging.  A small employer with a 401(k) plan described the difficulties of selecting  appropriate investment options, with an appropriate balance of risk, for a  workforce that includes younger and older workers. A number of small  business advocates and retirement experts said that not all small  employers have an adequate understanding of their fiduciary duties and  are not always aware of all their responsibilities under the law. For  example, a retirement expert said that small employers that do not consult  with plan professionals often lack the time and expertise to understand  complicated fiduciary rules under ERISA. One service provider explained  that some small employers mistakenly believe that all fiduciary  responsibilities and liabilities are transferred to a service provider when  they are hired. Another expert noted that some small employers have an  exaggerated sense of the liabilities that being a fiduciary carries, and may  avoid sponsoring a plan out of fear of being sued by their employees.
Top-heavy requirements: Top-heavy requirements are most likely to  affect smaller plans (fewer than 100 participants), according to IRS. A  number of stakeholders said compliance with the requirements is often  burdensome and poses a major barrier to plan sponsorship for small  employers. Small employers with high employee turnover may face an  even greater likelihood of becoming top-heavy. According to some experts,  employee turnover alone can force some small employers out of  compliance with top-heavy requirements as they replace departing  employees. Over time, rank-and-file employees separate and take their  plan assets with them, while long-term employees, such as business  owners or executives, continue to contribute to the plan, eventually leading  to a top-heavy imbalance of plan assets. For example, one small employer  with a 401(k) plan stated that, because two of the four owners had worked  for the company for about 25 years and their retirement accounts made up  the majority of the total plan assets in the 401(k) plan, the plan had become  top-heavy.
To comply with the top-heavy requirements, sponsors of certain plansare required to test their plans annually. An employer’s failure to make  certain adjustments to a plan deemed top-heavy can result in it losing its  tax-qualified status and the associated tax advantages for the employer  and employees. A number of stakeholders stated that top-heavy  compliance 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,  such as hiring a plan professional to make corrections to the plan  document and instituting a minimum top-heavy employer contribution for  all participating rank-and-file employees. According to one expert, in  some cases, the costs of mandatory contributions to employees’ accounts  may prevent owners from making contributions to their own retirement  accounts, and may make some small employers reluctant to sponsor a  plan, or may drive those that sponsor a plan to terminate it. Sponsors can  avoid top-heavy testing by adopting a safe harbor 401(k) plan with no  additional contributions, which is not subject to top-heavy requirements.  However, safe harbor 401(k) plans require the employer to make either  specified matching contributions or a minimum 3 percent contribution to  each participant’s account. According to representatives of the accounting  professional, the additional cost to the employer of required contributions  under a 401(k) safe harbor plan 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 of 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 in understanding options,  requirements, and responsibilities of running a plan. For example, Labor  and IRS jointly published a guide that compares various features of  different plan types, including IRA, DC, and DB plans. Both agencies have  also developed websites and online tools to help small employers navigate  plan information and make informed decisions about plan options. For  example, IRS’s Retirement Plans Navigator is a key component of its  education efforts for small employers and is designed for employers that  are less likely to hire a service provider. According to IRS, the navigator is  intended to lead a novice through basic information on retirement plans  and compliance. Similarly, Labor, in collaboration with the American  Institute of Certified Public Accountants (AICPA), developed an interactive  website highlighting small employer retirement options. The website  introduces employers to a number of plan options from simpler IRA plans  to more complex automatic enrollment 401(k) plans, and describes the  advantages and features of various plan types. According to Labor,  employers with as few as two employees can find options using the tool.
However, a number of stakeholders suggested that many small  employers are unaware of federal resources on retirement plans. For  example, the Advisory Committee on Tax Exempt and Government  Entities (ACT) recognized that, despite the numerous IRS retirement  plan resources available, many small employers and other stakeholders  in the small business community are unaware of these resources. ACT  indicated these resources could go a long way in addressing the needs of  the small employers were it not for their lack of visibility. The lack of  visibility of federal guidance on small employer plan options may be due,  in part, to difficulties in finding useful, relevant information across federal  websites. For example, while Labor’s webpage on small employer  retirement plan options contains links to relevant topics, such as  compliance assistance, participants’ rights and fiduciary responsibilities, it  is easy to navigate away from but difficult to return to the content  developed for small employers because there is no consistent page  navigation menu for small employer information. Furthermore, while the  Labor website includes guidance on selecting and monitoring plan service  providers, there is no link to the guidance on the small employer plan  options page. IRS’s Retirement Plans Navigator is located on a separate  website from the rest of the agency’s online plan resources for small  employers. When navigating from the page on small employer retirement  plan resources on IRS’s main portal to the agency’s Retirement Plans  Navigator, a message alerts users that they are leaving the IRS website  and entering another government website. IRS officials noted that small  employers who participated in focus groups on IRS plan resources  reported challenges to understanding plan-based information when  navigating these resources. Furthermore, Labor and IRS present their  online content separately, which makes it necessary for an employer to  navigate both agencies’ websites to gather complete information about  starting and maintaining a retirement plan. For example, to review  information on fiduciary responsibilities, users must visit Labor’s website,  and to review information on nondiscrimination and top-heavy testing,  users must visit IRS’s site. 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. Consolidating Internet-based services and information is  also consistent with one of the purposes of the E-Government Act of 2002  to promote interagency collaboration in providing electronic government  services.
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 may be unwilling or unable to sponsor retirement plans. In  particular, stakeholders stated that plan sponsorship may be impractical  for smaller or newer firms that are unable to undertake the commitment to  sponsor a plan. For example, one expert noted that the first priority of a  small employer is remaining in business, and this focus may preclude  sponsoring a retirement plan as a benefit to employees until the firm  becomes more established.
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 because of the one-time costs to start a plan  and the ongoing costs involved with maintaining the plan. These costs  can result from start-up activities, complying with reporting and testing  requirements, and fees paid to an outside party for administration tasks.  Stakeholders stated that these expenses can make sponsoring a plan  unappealing. For example, one small employer stated that as a new  business owner, she thinks it is better for her business to proceed  cautiously and avoid adding to her fixed cost structure. Additionally, any  requirement for small employers to match employee contributions or to  make mandatory contributions to an employee’s account can also  increase costs. Further, small employers 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. For example, one small  employer stated that he wanted to be able to expect consistent profits  over several years before he would consider investing in a plan. Another  small employer stated that she wanted to triple her business revenue to a  little less than $1 million before she would consider sponsoring a  retirement plan.
Time and personnel: Some small employers stated they may not have  sufficient time to administer a retirement plan themselves or lacked the  personnel to take on those responsibilities. For example, one small  employer said that he was not prepared to assume the burden of  managing a plan as he thought it would require almost daily attention and  did not have the staff to devote to it. Further, a plan service provider  described how the focus of the small employer would not be on absorbing  the additional time that starting and maintaining a plan would require.  Additionally, a plan sponsor employer stated that, since her business did  not have a dedicated human resources person or accountant, she  performed these duties herself, as she would ultimately be responsible for  any mistakes. Further, small employers may not have time to develop the  expertise to investigate or 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 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 retirement plans in order to provide the business owners  with a tax-deferred savings vehicle. One small employer stated that his  firm evaluated the plan annually in order to determine whether it  continues to benefit the owners. A service provider observed that the cost  of mandatory contributions—such as those associated with safe harbor  401(k) plans—can discourage small employers, since the cost of the  contributions can outweigh the benefit to the owners.
Low employee demand for an employer-sponsored retirement plan may  also be a challenge for small employers. For example, a number of small  employers stated that employees prioritized health care benefits over  retirement benefits. One small employer thought that, given the limited  funds available to contribute towards benefits, his employees would  prefer those resources be applied toward lowering the employees’ share  of health insurance premiums. Small employers emphasized that offering  health care benefits was necessary to attract quality employees. Further,  one small employer stated that his employees perceived a more  immediate need for health care benefits, while perceiving retirement  benefits as a future concern. Additionally, some small employers, such as  those who described having younger workforces, stated that their  employees were less concerned about saving for retirement and, as a  result, were not demanding retirement benefits. Other small employers  told us that employees, particularly those with low pay, do not have any  interest in retirement benefits because they live paycheck to paycheck  and are less likely to have funds left over to contribute to a plan. For  example, one small employer discontinued his plan when too few of his  employees—most of whom he described as low wage—participated in  the plan. Another small employer noted that even senior-level managers  in his business did not participate in the plan. However, a retirement  expert stated that, while some employees might not be interested in  participating in a retirement plan, he believed the perceived lack of  demand to be exaggerated. He added that he believed some businesses  may use lack of employee demand as an excuse when the small  employer was not interested in sponsoring a plan.
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 challenges of starting and maintaining a  plan. For example, one small employer said his service provider  addresses his plan testing requirements and educates employees about  the plan. Another employer noted that her business would not have the  time or the expertise to administer their plan without a service provider. A  third employer stated that he would not be able to administer a plan  without the assistance of a service provider to help navigate the  complexity of plan administration.
Some stakeholders said that service providers offer small employers plan  administration solutions by providing basic, affordable plan options. For  example, one service provider said a small employer could sponsor a  plan for an administrative fee as low as $1,200 annually. They and other  retirement industry representatives said they are able to provide plan  options at affordable rates because they market and administer IRS pre- approved standard plans in high volume, thereby reducing the costs of  administration. Even so, while 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 a provider, setting up a new  plan through a provider, and switching to a new provider, as well as the  significant plan responsibilities that remain with the sponsor. For example,  a small employer described the process of finding a service provider and  setting up a plan as particularly difficult, especially for an employer with  little knowledge of retirement plans or experience in working with a  service provider. Another small employer said she was not satisfied with  the services of her current service provider but would not consider  switching to a new one because of the administrative hardships that  would entail. Finally, as representatives of the accounting profession  noted, even with the assistance of a service provider, small employer  sponsors often continue to have significant plan responsibilities, such as  managing plan enrollments and separations, and carrying out their  fiduciary duties.
section_title: Proposed Options to Spur Plan Sponsorship Target Simplification, Incentives, and Education
subsections: section_title: Stakeholders Proposed Simplifying Requirements and Increasing Tax Credits to Encourage Plan Sponsorship
paragraphs: Stakeholders provided several suggestions targeted at addressing some  of the administrative and financial challenges they believed inhibited plan   These proposals, which they said could reduce complexity  sponsorship.and ease administrative and financial burdens for small employer plan  sponsors, included simplifying plan administration rules, revising or  eliminating top-heavy testing, and increasing tax credits.
Simplify plan administration requirements: Several stakeholders  suggested proposals that could simplify plan administration requirements  and ease administrative burdens for small employers. For example,  representatives of a large service provider stated that there is a need for  simplification of existing rules and processes for retirement plans and  proposed easing nondiscrimination and top-heavy testing requirements  as an example. Similarly, several small employers said that federal  regulators should strive for simplicity in requirements governing plan  administration. A small employer who sponsored a 401(k) plan suggested  reducing the amount of paperwork as an example. Another small  employer who sponsored a 401(k) plan said federal regulators should  “just keep it simple.” One proposal from a national small business  association would simplify plan requirements by reducing the frequency of  statements sent to certain plan participants, from quarterly to once per  year, and allowing some required disclosures to be made available solely  online. Another proposal, advocated by IRS, would simplify plan  requirements by streamlining interim amendment requirements—an  aspect of plan administration that stakeholders identified as particularly  burdensome for some small employers. Each year since 2004, IRS has  published a cumulative list of changes in plan qualification requirements  that must be incorporated by plan sponsors. An IRS official stated that  IRS is proposing to replace a requirement for some interim amendments  with a requirement for notices to be sent directly to employees. These  notices would explain how a plan intends to comply with changes to  relevant laws and regulations and could reduce the burden for plan  sponsors by reducing the number of times plan documents must be  amended. The amendments that would be subject to the less-stringent  requirement would be those triggered by changes to laws and regulations  but that do not affect plan benefits.
Revise or eliminate top-heavy testing: A number of stakeholders  proposed revising or eliminating top-heavy testing to ease administrative  and financial burdens. For example, representatives of the accounting  profession told us that top-heavy testing is duplicative because there are  other plan testing requirements intended to detect and prevent plan   The representatives and  discrimination against rank-and-file employees. officials of a large service provider told us lack of plan participation or high  turnover among a business’s rank-and file employees frequently cause  plans sponsored by small employers to become top-heavy. As a result,  the representatives said top-heavy testing should be revised or  eliminated.
Increase tax credits: Some stakeholders believed that tax credits, in  general, are effective in encouraging plan sponsorship and that larger tax  credits could encourage more small employers to sponsor plans.  However, a stakeholder cautioned that the credits must be sufficient to  offset the costs of plan sponsorship, which a service provider said can  amount to $2,000 or more per year. Currently, small employers may claim  an annual tax credit of up to $500 based on plan startup costs for each of  the first 3 years of starting a qualified plan. A national organization  representing small employers cited tax credits as a top factor in an  employer’s decision to sponsor a plan; however, an organization official  said the likelihood of an employer doing so often depends on whether the  tax credit offsets a significant portion of administrative and startup costs  of sponsoring plans. Some small employers stated that larger tax credits  could ease the financial burden of starting a plan by offsetting plan- related costs, thus creating greater incentives for an employer to sponsor  a plan. Other stakeholders said that existing plan startup tax credits are  insufficient to encourage plan sponsorship. Officials at another national  small business association cautioned that short term tax credits do not  provide sufficient incentives for a small employer to make the long-term  commitment of sponsoring a plan. Similarly, one small employer who  sponsored both 401(k) and DB plans said there needs to be a larger  incentive for the small employer to sponsor a plan because starting and  maintaining plans can be expensive.
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  conduct more education and outreach to inform small employers about  plan options and requirements; however, opinions varied on the  appropriate role for the federal government in this area.
A retirement expert said that the federal government can do more to  educate consumers about retirement plans and improve general financial  literacy. Officials of a service provider to small businesses stated that,  because clients are generally not aware of the retirement plan options  available to them, the federal government should provide more education  and outreach to improve awareness of the plan types available and rules  that apply to each. Another large service provider mentioned the federal  government should provide educational materials that help small  employers find quality service providers. In addition, in its 2011 report,  ACT made numerous recommendations calling for better publicity of IRS  resources. According to the report, the committee recommended, among  other things, that IRS explore potential partnerships with community  organizations and plan service providers to enhance the visibility of IRS  resources for small employers.
Although several small employers agreed on the need for more education  and outreach about plan options and requirements, opinions varied on the  extent to which the federal government should provide these services.  For example, a representative of a small employer believed the federal  government could provide more educational materials that are easy to  understand. Another small employer said the federal government should  focus education and outreach 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: There are a number of domestic pension reform proposals from public  policy organizations, as well as practices in other countries, that include  features, such as asset pooling, that potentially reduce administrative and  financial burdens and could boost retirement plan sponsorship among  small employers. By pooling funds, small employers realize economies of  scale because plan administration is simplified and administrative costs  and asset management fees are reduced. Pooling also creates larger  plans, which are more likely to attract service providers that previously  may have found it uneconomical to service smaller individual plans. One  proposal by the Economic Policy Institute, which incorporates the concept  of asset pooling, would create a federally managed and federally  guaranteed national savings plan. Generally, participation in the  program would be mandatory for workers, and employers and  employees would be required to make equal contributions totaling 5  percent of employees’ earnings. Funds would be pooled and  professionally managed, and benefits would be paid out in the form of  annuities to ensure that workers do not outlive their savings. 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. The automatic IRA approach would provide  employers that do not sponsor any retirement plans with a mechanism  that allows their employees to save a portion of their pay in an IRA. For  most employees, payroll deductions would be made by direct deposit,  and enrollment would be automatic unless employees choose to opt out  of participation.
However, as we reported in 2009, some of these proposals that call for  broader systemic reforms pose other trade-offs. For example, proposals  that mandate participation would increase plan sponsorship and coverage  for workers. However, mandatory participation may create burdens for  some employers, and employers might compensate for the costs of  contributing to workers’ retirement plans by reducing workers’ wages and  other benefits. Proposals that guarantee investment returns can protect  workers from market fluctuations and can ensure a minimum level of  benefits; however, significant costs to the government might result if the  guarantee were unsustainable. In addition, proposals that simplify and  centralize 401(k) plans may require new regulatory and oversight efforts,  and compliance-related costs could be passed on to employers, workers,  and taxpayers in general.
Retirement systems in other countries also use asset pooling and other  features that reduce administrative and financial burdens for small  employers and could spur plan sponsorship. For example, the United  Kingdom’s National Employment Savings Trust (NEST), launched in  2011, features low fees for participating employers and employees and  default investment strategies for plan participants. NEST also permits  plan participants to take their retirement accounts with them throughout  their working life, which eliminates ongoing administration of those  accounts by former employers when a worker leaves a company. As we  previously reported, the predominant pension systems in the Netherlands  and Switzerland pool plan assets into pension funds for economies of   Denmark’s pension system also pools  scale and for lower plan fees.plan assetsfurther lowering administrative costs for small employers.
section_title: Conclusions
paragraphs: Despite efforts by the federal government to develop new plan designs  and to increase tax incentives to spur plan formation and retirement  saving generally, sponsorship remains low among small employers. To  some extent, it would be expected that sponsorship rates for small  employers would be somewhat lower than for larger employers partly  because of the heavy “churn” of small business formation and dissolution.  However, small employers’ sponsorship rates remain far below those of  larger firms. If a complete picture of sponsorship by small employers were  available—including information on small employers that sponsor SEP  IRA plans, which is lacking because IRS currently does not have a means  to collect these data—IRS and Labor would be better able to target their  research and outreach efforts.
Small employers continue to face a variety of challenges to starting and  maintaining retirement plans, including obtaining useful information about  the large menu of available plan options, managing administrative  requirements that small employers reported as burdensome and overly  complex, and drawing upon small employers’ often limited resources to  administer and finance a plan. While increased competition among plan  service providers may result in more affordable options and plans that are  easier to start and maintain, options for many small employers may  remain out of reach.
Federal agencies have a key role to play in understanding and  addressing the barriers to plan sponsorship and to spur sponsorship  among small employers by conducting research and conducting  education and outreach to small employers. Labor and IRS already  provide small employers with a great deal of online information. However,  much of the information is scattered among a variety of websites and  portals in a largely uncoordinated fashion. A small employer with little  knowledge of retirement plan options is forced to navigate multiple  sources to retrieve relevant information and may be discouraged from  doing so. Increased collaboration and more comprehensive strategic  planning between these agencies could enhance outreach and education  efforts to more small employers. For example, Labor and IRS could reach  out to small employers by utilizing SBA’s extensive network of field offices  and by entering into partnerships with public and private organizations.  More fundamentally, a coordinated review by the relevant agencies of  existing plan designs and their effectiveness in spurring plan sponsorship  and participation could help agencies evaluate and develop options that  mitigate the barriers to small employer plan sponsorship.
section_title: Recommendations for Executive Action
subsections: section_title: Department of Labor
paragraphs: To address the need to strengthen the retirement security of employees  at small businesses and to build on interagency data-sharing agreements  already in place, we recommend that the Secretary of Labor convene an  interagency task force with representatives from Treasury, IRS, and SBA,  and other agencies deemed appropriate, to review, analyze, and address  the challenges facing small business retirement security in the United  States. The aim of this taskforce would be to develop strategies and  arrangements for the agencies to routinely and systematically coordinate  their existing research, education, and outreach efforts to foster small  employer plan sponsorship. Specifically, this body should focus on, but  not be limited to, the following goals:
Conduct plan research on the characteristics associated with small  businesses that are more or less likely to sponsor a retirement plan  (including employer-sponsored IRA plans) to support agencies’  education and outreach efforts to small employers and provide  Congress and the public with information about plan coverage among  them.
Evaluate and develop proposals for mitigating barriers to small  employer retirement plan sponsorship, including an assessment of the  cost effectiveness of existing plan designs—with regard to the  expansion of coverage, and the potential to provide an adequate  retirement income, as necessary--and the appropriateness of  alternative plan designs.
Create a single web portal to centralize federal agencies’ retirement  plan information to enhance the visibility and usefulness of federal  guidance on plans for small employers.
section_title: Department of the Treasury
paragraphs: Considering the lack of information on the number and characteristics of  sponsors of SEP IRA plans, as well as their performance in improving  retirement security, the Secretary of the Treasury should direct the  Commissioner of the Internal Revenue Service to consider modifications  to tax forms, such as Forms W-2 or 5498, that would allow IRS to gather  complete and reliable information about these plans.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of the report to Labor, Treasury, IRS, Commerce,  and SBA for review and comment. Agencies generally agreed with our  recommendations. Only Labor provided a written response (see app. VII).  Labor, Treasury, IRS, and SBA also provided technical comments, which  we incorporated as appropriate. Commerce did not provide comments.
In its written response, Labor generally agreed with the findings and  conclusions of the report. Labor also noted that, since 1995, the agency  has developed various initiatives to provide education and outreach to the  small business community—particularly in the context of retirement  saving and financial literacy—by partnering with SBA, the U.S. Chamber  of Commerce, and other entities to target small employers. Labor cited  these and other efforts as progress in response to of our recommendation  for a taskforce that would analyze and address the challenges facing  small business retirement security, stating that Labor remains committed  to continuing its existing coordination efforts with respect to plan research  and developing proposals for mitigating barriers to small business plan  sponsorship.
However, Labor disagreed with our recommendation to create a unified  web portal to centralize retirement plan information for small employers,  expressing concerns about its necessity. Specifically, Labor noted that an  SBA website, http://www.business.gov, currently serves as the central  portal for information—including information about retirement plans— relevant to small employers. However, none of the stakeholders we  interviewed during this report—including Labor and SBA officials— identified http://www.business.gov as a resource of retirement plan  information for small employers. Further, in reviewing  http://www.business.gov, we found the retirement plan information  consisted primarily of links that send users to websites maintained by  Labor. We did not find links to or information regarding any IRS retirement  plan guidance, including the Retirement Plans Navigator—the agency’s  key online retirement plan tool for small employers—or  http://www.choosingretirementsolution.org, Labor’s online retirement plan  tool for small employers. However, even if http://www.business.gov  contained links to all available federal guidance on retirement plans for  small employers, it is not clear how it would increase the visibility of the  guidance among small employers because so few small employers and  other stakeholders we spoke with appeared to be aware of its existence.   Thus, while we commend Labor for its existing coordination efforts, we  continue to believe that there are additional benefits to be gained by  consolidating information on retirement plans for small employers into a  single, easy-to-use source—an initiative that would also appear to be  consistent with the administration’s interest in information technology  consolidation and in encouraging agencies to conduct their missions  more effectively.
Finally, in its written response, Labor cited BLS’s 2010 National  Compensation Survey, which found that an estimated 45 percent of  establishments employing fewer than 100 workers offered a retirement  plan to their workers. This is not necessarily inconsistent with our  estimate of 14 percent of small employers sponsoring some form of  retirement plan, given the different units of analysis used. While the  National Compensation Survey used “establishment” as its unit of  analysis, we chose to use “firms” for the purposes of this study. There are  important differences between an establishment and a firm. For example,  according to BLS’s definition, an establishment is a single economic unit  at a single physical location. Thus, an establishment can be a business at  a single physical location or a branch of a larger company operating  multiple branches and the characteristics of each branch is measured as  a separate business instead of in the aggregate. On the other hand, for  this study, we defined a firm as a complete, for-profit, independent  business with 1 to 100 employees. As a result, Labor’s estimate  comprises a broader population of employers beyond the small  employers we examined. Further discussion of our methodology can be  found in appendix I.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Labor,  Secretary of the Treasury, the Secretary of Commerce, the SBA  Administrator, and other interested parties. This report will also be  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact Charles Jeszeck at (202) 512-7215 or jeszeckc@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs can be found on the last page of this report. Key contributors are  listed in appendix VIII.
section_title: Appendix I: Objectives, Scope, and Methodology
subsections: section_title: Information Regarding the Rates of Small Business Employees Who Do Not Have Access to a Retirement Plan, Based on BLS and Census Data
paragraphs: In the body of this report, we present a range for the rate of employee  access to retirement plans. According to the Congressional Research  Service (CRS), the differences in the estimates regarding employee  access to retirement plans between information obtained from Bureau of  Labor Statistics (BLS) and the Census Bureau may stem from the  different populations used in the surveys. BLS’s National Compensation  Survey (NCS) is conducted among a nationally representative sample of  private-sector business establishments. The term establishment usually  refers to a single place of business at a particular location. An  establishment might be a branch or a small operating unit of a larger firm.  The Census Bureau’s Current Population Survey (CPS) is conducted  among a nationally representative sample of households. Employer  characteristics are reported at the level of the firm, which may include  more than one establishment. CRS has reported that, in any given year,  the NCS can reasonably be expected to show a higher rate of retirement  plan participation than the CPS because the business owners and  benefits specialists who are interviewed for the NCS might have greater  knowledge about the retirement benefits they sponsor than the household  members who are interviewed for the CPS. However, CRS has noted that  the gap in Census and BLS estimates has grown over time, further  complicating the process of estimating both the proportion of workers  without employer-sponsored retirement plans and the trend in retirement  plan participation rates.
section_title: Data Sources and Development of the Analytic Data Set
paragraphs: To perform this work, we combined and analyzed 2009 data from the  Department of Labor’s (Labor) Form 5500 database, the Internal  Revenue Service’s (IRS) Information Returns Processing (IRP) database,  and the IRS Compliance Data Warehouse database (CDW) to obtain  information on what would make a small employer more or less likely to  sponsor a retirement plan, descriptive statistics on small employer  retirement plan sponsors and nonsponsors, and descriptive statistics on  the types of retirement plans sponsored by small employers. The Form  5500 database provided information on defined benefit (DB) and defined  contribution (DC) plans, and the publicly available data was downloaded  directly from Labor’s website: http://www.dol.gov/ebsa/foia/foia-5500.html.  The IRP database provided information on employer-sponsored SIMPLE  IRA and SARSEP IRA plans and was provided by the IRS officials in the  Tax-Exempt Governmental Entity Employment Plans division. The CDW  database provided the characteristics regarding the universe of small  employers with 100 or fewer employees and was provided by IRS officials  with the Statistics of Income (SOI) division. We assessed the reliability of  the Form 5500, the IRP, and the CDW data generally and of data  elements that were critical to our analyses and determined that they were  sufficiently reliable for our analyses.
Our unit of analysis was the small employer, as identified by its employer  identification number (EIN). For the purposes of this study, we defined a  small employer as an independently owned and operated for-profit firm  with at least 1 employee and no more than 100 employees. This definition  excluded agricultural businesses, such as farms, as well as tax-exempt  organizations, such as nonprofits and government entities. This definition  also excluded subsidiary for-profit firms.
To prepare the Form 5500 data in advance of combining the data with the  other datasets, we screened out any plans that were not entered in the  Form 5500 or Form 5500-SF as “single employer plans,” those that did  not have a plan year beginning date in 2009, as well as screened out any  plans that had entries in the Welfare Benefit Codes. Our analysis did not  consider small employers that only participated in multiple employer  plans, in which two or more employers maintain a single plan, or  multiemployer plans, in which a joint plan is maintained under a collective  bargaining agreement between at least one employee organization and  more than one employer. As individual employers are not considered  sponsors of multiple employer plans and multiemployer plans, including  these plans was considered beyond the scope of this report. We then  matched the Form 5500 data and the IRP data with the CDW data using  the EIN in common. Any matches between a small employer in the CDW  database and a plan in either the Form 5500 or IRP database classified  the small employer as one that sponsored the plan while any small  employers that did not match with a plan were classified as nonsponsors.
section_title: Data Analysis of Small Employer Plan Sponsorship
paragraphs: We developed bivariate and multivariate regression models to estimate  the likelihood that a small employer would sponsor a retirement plan  using the following small employer characteristics: the number of  employees, the annual average wage of the employees, the industry  using the 2007 North American Industry Classification System (NAICS)  with a depth of two digits, and the region in which the small employer  resided as defined by the Census Bureau. For results of the regression  model, see appendix VI. The regression model did not include the age of  the business as a variable in the model. It is difficult to measure this  variable because, over time, a small employer may change its EIN. For  example, some small employers change their business structure, which  may also require the business to obtain a new EIN. It would be  challenging to track businesses over time with changes to the EIN.
In addition to the regression model, we produced a descriptive statistical  analysis of small employer characteristics using cross-tabulations of the  following characteristics: the number of employees, the annual average  salary of the employees, the industry using the NAICS with a depth of two  digits, and the state in which the small employer is located. The ranges  used for the characteristics identifying the number of employees and  average annual wages were established using the statistical spreads  identified by the regression model.
section_title: Data Analysis of Plan Type
section_title: Appendix II: Some Retirement Plans Available to Small Employers
paragraphs: Table 2 is based on guidance produced by Labor and the IRS to educate  small employers about their retirement plan options. This guidance, titled  “Choosing a Retirement Solution for Your Small Business,” can be found  at http://www.dol.gov/ebsa/pdf/choosing.pdf. The content of this table is  reproduced from the Labor/IRS publication without alteration, with the  following exceptions: GAO updated some dollar amounts to reflect  changes made for 2012, where applicable (specifically, the maximum  annual contributions to the defined contribution plans and SEP IRA plans,  and the maximum compensation upon which contributions to non-DB  plans may be based), reordered the columns, and omitted information  about payroll deduction IRA plans, which are beyond the scope of this  review. GAO did not independently verify the legal accuracy of the  information contained in the table.
section_title: Appendix III: IRS Form 5498 IRA Contribution Information
section_title: Appendix IV: Small Employer Plan Sponsorship Rate by Industry
paragraphs: In analyzing small employer retirement plan sponsorship by industry, we  found that small employers in heath care and manufacturing were most  likely to sponsor a retirement plan, while small employers in the food and  hospitality industry were least likely to sponsor a plan. See figure 8 for the  sponsorship rate by industry and table 3 for a sample list of businesses  contained within each industry type.
section_title: Appendix V: Small Employer Plan Sponsorship Rate by State in 2009
section_title: Appendix VI: Regression Results
paragraphs: Appendix VI: Regression Results ** denotes p-value < 0.01.  * denotes p-value < 0.05.
subsections: section_title: Category Employee count 1 to 4
paragraphs: Odds ratio from  multivariate model  95 percent Wald  Confidence  Limits (lower)
95 percent Wald  Confidence  Limits (upper)
Ref.
section_title: Average wage per employee Less than $10,000
paragraphs: Ref.
Ref.
Ref.
Industry classification  (NAICS)
section_title: Appendix VII: Comments from the Department of Labor
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, individuals making key  contributions to this report include David Lehrer, Assistant Director;  Edward Bodine, Analyst-in-Charge; Curtis Agor; Kun-Fang Lee; and  David Reed. Susan Aschoff, Susan Baker, James Bennett, Michael  Brostek, Sarah Cornetto, Cynthia Grant, Catherine Hurley, Anna Kelley,  Gene Kuehneman, Karen O’Conor, Dae Park, MaryLynn Sergent, Aron  Szapiro, Frank Todisco, James Ungvarsky, and Walter Vance also  provided valuable assistance. SOI (IRS) provided valuable assistance in  extracting small employer data from the CDW.