Individual Retirement Accounts: Government Actions Could Encourage More Employers to Offer IRAs to Employees
Published: 2008-06-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress created individual retirement accounts (IRAs) with two goals: (1) to provide a retirement savings vehicle for workers without employer-sponsored retirement plans, and (2) to preserve individuals' savings in employer-sponsored retirement plans when they change jobs or retire. Questions remain about IRAs' effectiveness as a vehicle to facilitate new, or additional, retirement savings. GAO was asked to report on (1) the role of IRAs in retirement savings, (2) the prevalence of employer-sponsored and payroll-deduction IRAs and barriers discouraging employers from offering these IRAs, and (3) changes that are needed to improve IRA information and oversight. GAO reviewed published reports from government and financial industry sources and interviewed retirement and savings experts, small business representatives, IRA providers, and federal agency officials.
section_title: What GAO Found
paragraphs: Although Congress created IRAs to allow individuals to build and preserve their retirement savings, IRAs are primarily used to preserve savings through rollovers rather than build savings through contributions. Over 80 percent of assets that flow into IRAs come from assets rolled over, or transferred, from other accounts and not from direct contributions. Assets in IRAs now exceed assets in the most common employer-sponsored retirement plans: defined contribution plans, including 401(k) plans, and defined benefit, or pension plans. Payroll-deduction IRA programs, which allow employees to contribute to IRAs through deductions from their paychecks, and employer-sponsored IRAs, in which an employer establishes and contributes to IRAs for employees, were established to provide more options for retirement savings in the workplace. Experts GAO interviewed said that several factors may discourage employers from offering these IRAs to employees, including administrative costs and concerns about employer fiduciary responsibilities. Information is lacking on how many employers offer employer-sponsored and payroll-deduction IRAs and the actual costs to employers for administering payroll-deduction IRAs. Earlier this month, GAO reported on the role that federal agencies can have in helping employers provide IRAs to employees and in improving oversight of these savings vehicles. GAO made several recommendations to the Department of Labor (Labor) and the Internal Revenue Service to provide better information and oversight, but in the course of the review, GAO found that Labor does not have jurisdiction over payroll-deduction IRAs. Consequently, GAO also suggested that Congress may wish to consider whether payroll-deduction IRAs should have some direct oversight. A clear oversight structure could be critical if payroll-deduction IRAs become a more important means to provide a retirement savings vehicle for workers who lack an employer-sponsored retirement plan.

section_title: Letter
paragraphs: I am pleased to be here today as you examine issues related to individual  retirement accounts (IRAs) and their role in facilitating retirement savings  for individuals. Congress created IRAs more than 30 years ago through the  Employee Retirement Income Security Act of 1974 (ERISA) with two  distinct purposes: (1) to provide individuals who are not covered by an  employer-sponsored retirement plan with a tax-preferred account in which  to save for retirement, and (2) to provide individuals who are covered by a  plan a means to preserve their savings by allowing them to rollover, or  transfer, plan balances into IRAs. Since that time, IRA assets have grown  to an estimated $3.5 trillion in 2004.
Over the years, Congress has created different types of IRAs to encourage  saving for retirement. Traditional and Roth IRAs are designed to be set up  and used by individuals; two other types are employer-sponsored IRAs and  are designed for small employers and their employees. Under payroll- deduction IRA programs, also known as payroll-deduction IRAs,  employees may contribute to traditional and Roth IRAs through their  employer’s payroll system. Despite the growth in IRA assets and the varied  types of IRAs, questions remain about whether Congress’s initial goal for  IRAs has been met: to help workers without a workplace retirement plan  to save for retirement on their own behalf.
My comments today are based primarily on findings from our June 2008  report entitled Individual Retirement Accounts: Government Actions  Could Encourage More Employers to Offer IRAs to Employees. My  remarks focus on (1) the role of IRAs in retirement savings, (2) the  prevalence of employer-sponsored and payroll-deduction IRAs and  barriers discouraging employers from offering these IRAs, and (3) changes  that are needed to improve IRA information and oversight.
In conducting our work, we evaluated retirement fund assets using  published data from federal agencies, including the Federal Reserve’s  Survey of Consumer Finance, and the Internal Revenue Service’s (IRS)  Statistics of Income, and relevant data from financial industry associations  on retirement funds. We also analyzed demographic data from household  surveys, including the U.S. Bureau of the Census Current Population  Reports, and the Investment Company Institute’s IRA Owners Survey,  which focuses on IRA ownership. To determine the prevalence of  employer-sponsored and payroll-deduction IRAs, we consulted available  government and financial industry data on the percentage of households  and workers participating in employer-sponsored IRAs. To corroborate  available data, we interviewed officials at IRS and the Department of  Labor (Labor) as well as representatives of small business member  organizations, financial industry representatives, and other retirement and  savings experts. To identify barriers that may discourage small employers  from establishing employer-sponsored IRAs and from offering payroll- deduction IRAs to employees, we interviewed federal agency officials,  industry associations, financial company representatives, small business  and consumer advocacy groups, and retirement and savings experts. To  evaluate federal oversight of IRAs, we reviewed laws governing agency  responsibilities regarding IRAs and interviewed officials at IRS and Labor.  We conducted this performance audit from September 2007 to June 2008  in accordance with generally accepted government auditing standards,  which included an assessment of data reliability. Those standards require  that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
In summary, we found that although Congress created IRAs for individuals  to both build and preserve retirement savings, IRAs are primarily used to  preserve savings through rollovers rather than to build savings through  contributions. In fact, the majority of assets that flow into IRAs come from  other accounts and not from new contributions. We also found that  employee access to payroll-deduction and employer-sponsored IRAs is  limited. Although employer-sponsored and payroll-deduction IRA  programs could help many workers to save, experts we interviewed said  several factors may discourage employers from offering these IRAs,  including administrative costs. Data on the actual cost to employers for  managing payroll-deduction IRAs are not available. Earlier this month, we  reported on the role that federal agencies can have in helping employers  provide IRAs to employees and improve oversight of these savings  vehicles. We made several recommendations to Labor and IRS to improve  IRA information and oversight, but during the course of our work, we  found that Labor provides guidance, but does not have jurisdiction over  payroll-deduction IRAs. Consequently, we also suggested that Congress  may wish to consider whether payroll-deduction IRAs should have some  direct oversight. A clear oversight structure could be critical if payroll- deduction IRAs become a more important means to provide a retirement  savings vehicle for workers who otherwise lack an employer-sponsored  retirement plan.
subsections: section_title: Background
paragraphs: Since the early 1980s, roughly half of the private-sector work force has  participated in either a defined benefit (DB) retirement plan, commonly  known as a pension, or a defined contribution (DC) plan, such as a 401(k)  plan. In 2006, approximately 79 million—or about half of all workers— worked for an employer or union sponsoring either a DB or DC plan, and  about 62 million workers participated in such a plan. Congress created  IRAs, in part, to help those individuals not covered by a DB or DC plan  save for retirement. Employees of small firms, for example, are unlikely to  work for an employer that sponsors either a DB or DC retirement plan.  Almost half of all U.S. private sector workers in 2006 were employed by  firms with fewer than 100 employees, and only 1 in 4 of these workers  worked for an employer sponsoring a retirement plan. Currently there are  several types of IRAs for individuals and small employers and their  employees.
subsections: section_title: Employer-Sponsored IRAs
paragraphs: Congress created two types of employer-sponsored IRAs with fewer  regulatory requirements than DB and DC plans to encourage small  employers to offer IRAs to their employees:    Savings Incentive Match Plans for Employees (SIMPLE). SIMPLE  IRAs, available only to employers with 100 or fewer employees, allow  eligible employees to direct a portion of their salary, within limits, to a  SIMPLE IRA. Employers sponsoring SIMPLE IRAs must either match the  employee’s contributions up to 3 percent of his or her compensation or  make 2 percent contributions of each employee’s salary to the SIMPLE  IRAs for all employees making at least $5,000 for the year.
Simplified Employee Pensions (SEP). SEP IRAs allow employers to  make tax-deductible contributions to their own and each eligible  employee’s traditional IRA at higher contribution limits than other IRAs.  SEP IRAs do not permit employee contributions, and annual employer  contributions are not mandatory.
IRS and Labor share oversight responsibilities for IRAs. Labor’s Employee  Benefits Security Administration (EBSA) enforces ERISA Title I, which  specifies the standards for employer-sponsored retirement plans,  including applicable fiduciary reporting and disclosure requirements.  EBSA also oversees the fiduciary standards for employer-sponsored IRAs,  and seeks to ensure that fiduciaries, such as employers, operate their  plans in the best interest of plan participants. While Labor does not have  direct oversight of payroll-deduction IRA programs, it has provided “safe  harbor” guidance to employers, which sets the conditions by which  employers may offer payroll-deduction IRA programs without becoming  subject to ERISA Title I requirements. IRS enforces Title II of ERISA for  all types of IRAs, which provides tax benefits for retirement plan sponsors  and participants and details participant eligibility, vesting, and funding  requirements. IRS also enforces various tax rules for IRAs, including rules  for eligibility, contributions, distributions, and rolling assets into IRAs or  converting assets from a traditional IRA into a Roth IRA. (See table 1 for  annual contribution limits for IRAs.)
Labor and IRS work together to oversee IRA prohibited transactions. In  general, prohibited transactions include any improper use of an IRA by the  account holder or others. Labor generally has interpretive jurisdiction  over prohibited transactions and IRS has certain enforcement authority.  Both ERISA and the Internal Revenue Code contain various statutory  exemptions from the prohibited transaction rules, and Labor has authority  to grant administrative exemptions and establish exemption procedures.  Labor may grant administrative exemptions on a class or individual basis  for a wide variety of proposed transactions in a plan. IRS has  responsibility for imposing an excise tax on parties that engage in a  prohibited transaction. (See fig. 1 for a description of IRS and Labor  responsibilities regarding IRAs.)
section_title: IRAs Are Primarily Used to Preserve Savings through Rollovers
paragraphs: Most assets flowing into IRAs come not from direct contributions, but  from transfers, or rollovers, of retirement assets from other retirement  plans, including 401(k) plans. These rollovers allow individuals to preserve  their retirement savings when they change jobs or retire. As shown in  figure 2, from 1998 to 2004, more than 80 percent of funds flowing into  IRAs came from rollovers, demonstrating that IRAs play a significantly  smaller role in building retirement savings than in preserving them. In  addition, IRA accounts with rollover assets were larger than those without  rollover assets. For example the median amount in a traditional IRA with  rollover assets in 2007 was $61,000, while the median amount in a  traditional IRA without rollover assets was $30,000.
Since 1998, IRA assets have comprised the largest portion of the  retirement market. As shown in figure 3, IRA assets in 2004 totaled about  $3.5 trillion compared to DC assets of $2.6 trillion and DB assets of $1.9  trillion.
More households own traditional IRAs, which were the first IRAs  established, than Roth IRAs or employer-sponsored IRAs. In 2007, nearly  33 percent of all households owned traditional IRAs, and about 15 percent  owned Roth IRAs. In contrast, about 8 percent of households participated  in employer-sponsored IRAs.
Ownership of traditional and Roth IRAs is associated with higher  education and income levels. In 2004, 59 percent of IRA households were  headed by an individual with a college degree, and only about 3 percent  were headed by an individual with no high school diploma. Over one- third of these IRA households earned $100,000 or more; about 2 percent  earned less than $10,000. Households with IRAs also tend to own their  homes. Research shows that higher levels of education and household  income correlate with a greater propensity to save. Therefore, it is not  surprising that IRA ownership increases as education and income levels  increase. However, despite the association of IRA ownership to individuals  with higher incomes, data show that lower- and middle-income individuals  also own IRAs. A study by the Congressional Budget Office (CBO) found  that in 2003, 4 percent of workers earning $20,000 to $40,000 (in 1997  dollars) contributed to traditional IRAs and 3 percent of these workers  contributed to Roth IRAs.  In the same year, 7 percent of workers earning  between $120,000 and $160,000 contributed to a traditional IRA and 8  percent contributed to a Roth IRA. The study also found that 33 percent  of individuals earning $20,000 to $40,000 who contributed to a traditional  IRA contributed the maximum amount allowed, and 35 percent made  maximum contributions to their Roth IRAs.  By contrast, 87 percent of  individuals earning $120,000 to $160,000 who contributed to a traditional  IRA made the maximum contribution, and 61 percent made the maximum  contribution to their Roth IRAs.
A study by the Investment Company Institute (ICI) that included data on  contributions by IRA owners shows that more households with Roth IRAs  or employer-sponsored IRAs contribute to their accounts than households  with traditional IRAs. For example more than half of households with  Roth, SIMPLE, or Salary Reduction Simplified Employee Pension IRA  (SAR-SEP IRA) contributed to their accounts in 2004, but less than one- third of households with traditional IRAs did so. This, again, may be partly  attributed to the emerging role of traditional IRAs as a means to preserve  rollover assets rather than build retirement savings. The ICI study also  stated that the median household contribution to traditional IRAs was  $2,300 compared to the median contribution to Roth IRAs of $3,000. The  median contribution to SIMPLE and SAR-SEP IRAs was $5,000. The study  noted that this difference may be related to higher contribution limits for  employer-sponsored IRAs than for traditional and Roth IRAs.
section_title: Worker Access to Employer-Sponsored and Payroll-Deduction IRAs Appears Limited, and Several Barriers May Discourage Employers from Offering These IRAs
paragraphs: According to experts and available government data, worker access to  employer-sponsored and payroll-deduction IRAs appears limited. To  address the issue of low retirement plan sponsorship among small  employers, Congress created SEP and SIMPLE employer-sponsored IRAs.  Labor issued a regulation under which an employer could maintain a  payroll-deduction program for employees to contribute to traditional and  Roth IRAs without being considered a pension plan under ERISA.  Although employer-sponsored IRAs have few reporting requirements to  encourage small employers to offer them, and payroll-deduction IRAs have  none, worker access to these IRAs appears limited. Increased access to  payroll-deduction IRAs could help many workers to save for retirement,  but several barriers, including costs to employers, may discourage  employers from offering these IRAs to their employees. Retirement and  savings experts offer several proposals to encourage employers to offer  and employees to participate in payroll-deduction IRAs.
subsections: section_title: Worker Access to Employer-Sponsored and Payroll-Deduction IRAs Appears Limited
paragraphs: The majority of employers with fewer than 100 employees do not offer an  employer-sponsored retirement plan for their employees. In 2006, almost  half of all U.S. private sector workers were employed by firms with fewer  than 100 employees, and only 1 in 4 of these employees worked for an  employer sponsoring a retirement plan. To address the issue of low  retirement plan sponsorship among small employers, Congress created  SIMPLE and SEP employer-sponsored IRAs with less burdensome  reporting requirements than 401(k) plans to encourage their adoption by  small employers. In addition, under a regulation issued by Labor,  employers may also provide payroll-deduction IRA programs, which allow  employees to contribute to traditional or Roth IRAs through payroll- deductions by their employer, without employers being considered a  pension plan sponsor under ERISA and becoming subject to various  ERISA fiduciary and reporting requirements. In order to encourage their  adoption, employer-sponsored and payroll-deduction IRAs offer a variety  of features designed to appeal to small employers (see table 2).
Data on the number of employers offering employees employer-sponsored  IRAs and payroll-deduction IRAs is limited. However, based on available  data, employee access to SIMPLE and SEP IRAs appears limited. Under  ERISA Title I, there is no reporting requirement for SIMPLE IRAs, and  there is an alternative method available for reporting of employer- sponsored SEP IRAs. Payroll-deduction IRA programs are not subject to  ERISA requirements for employer-sponsored retirement plans and have no  reporting requirements. Because there are very limited reporting  requirements for employer-sponsored IRAs and none for payroll-deduction  IRAs, information on employers who offer these IRAs is limited and we  were unable to determine how many employers actually do so. For  example, the Bureau of Labor Statistics provides some data on the  percentage of employees participating in employer-sponsored IRAs, but no  data on the percentage of employers sponsoring them. The Bureau of  Labor Statistics reported that 8 percent of private sector workers in firms  with fewer than 100 employees participated in a SIMPLE IRA in 2005, and  2 percent of these workers participated in a SEP IRA. An IRS evaluation  of employer-filed W-2 forms estimated that 190,000 employers sponsored  SIMPLE IRAs in 2004. IRS did not provide an estimate of the number of  employers sponsoring SEP IRAs, and we were unable to determine how  many employers make these IRAs available to employees.
Few employers appear to offer their employees the opportunity to  contribute to IRAs through payroll deductions, but data are insufficient to  make this determination. Through payroll-deduction IRA programs,  employees may contribute to traditional or Roth IRAs by having their  employer withhold an amount determined by the employee and forwarded  directly to the employee’s IRA. Although any employer can provide  payroll-deduction IRAs to their employees, regardless of whether or not  they offer another retirement plan, retirement and savings experts told us  that very few employers do so. Because employers are not required to  report this activity to the federal government, neither Labor nor IRS is able  to determine how many employers offer payroll-deduction IRAs.
section_title: Employer-Sponsored and Payroll-Deduction IRAs Could Help Workers to Save, but Several Barriers May Discourage Employers from Offering These IRAs
paragraphs: According to experts and economics literature that we reviewed,  individuals are more likely to save for retirement through payroll  deductions than they are without payroll deductions. Both SIMPLE IRAs  and payroll-deduction IRA programs allow workers to contribute to their  retirement through payroll deductions. Payroll deductions are a key  feature in 401(k) and other DC plans. Economics literature that we  reviewed identifies payroll deduction as a key factor in the success of  401(k) plans, and participation in these plans is much higher than in IRAs,  which do not typically use payroll deduction. The Congressional Budget  Office reported that 29 percent of all workers contributed to a DC plan in  2003—where payroll deductions are the norm—while only 7 percent of all  workers contributed to an IRA.
Saving for retirement in the workplace through payroll deductions helps  workers save by providing a “commitment device” to make automatic  contributions to retirement savings before wages are spent. Such a  commitment device helps some workers overcome a common tendency to  procrastinate or not take action to save based on the choices associated  with investing or selecting a retirement savings vehicle. Payroll deductions  allow workers to contribute to retirement savings automatically before  wages are spent, relieving them of making ongoing decisions to save.  According to Labor’s guidance on payroll-deduction IRAs and several  experts we interviewed, individuals are more likely to save in IRAs  through payroll deductions than they are without these automatic  deposits.
Payroll-deduction IRA programs could provide a retirement savings  opportunity at work for the millions of workers without an employer- sponsored retirement plan. In theory, all workers under age 70½ who lack  an employer-sponsored retirement plan could be eligible to contribute to a  traditional IRA through payroll deduction, should their employer offer  such a program. Further, based on the contribution rules for traditional  and Roth IRAs, many of these individuals would be eligible to claim a tax  deduction for their traditional IRA contributions, and most low- and  middle-income workers would be eligible to contribute to Roth IRAs.  Experts told us payroll-deduction IRAs are the easiest way for small  employers to offer their employees a retirement savings vehicle. Payroll- deduction IRAs have fewer requirements for employee communication  than SIMPLE and SEP IRAs, and employers are not subject to ERISA  fiduciary responsibilities as long as they meet the conditions in Labor’s  regulation and guidance for managing these plans.
Employer-sponsored IRAs may also help employees of small firms save for  their retirement. For example, the higher contribution limits for SIMPLE  and SEP IRAs offer greater savings benefits than payroll-deduction IRAs.  In 2007, individuals under age 50 were able to contribute up to $10,500 to  SIMPLE IRAs—more than twice the amount allowed in 2007 for payroll- deduction IRAs. Since SIMPLE IRAs require employers to either match  the contributions of participating employees or make nonelective  contributions to all employee accounts, employees are able to save  significantly more per year in SIMPLE IRAs than they are in payroll- deduction IRAs.
As we previously reported, we found that several factors may discourage  employers from establishing employer-sponsored SIMPLE and SEP IRAs.  For example, small business groups told us that the costs of managing  SIMPLE and SEP IRAs may be prohibitive for small employers. Experts  also pointed out that certain contribution requirements for these plans  may, in some cases, limit employer sponsorship of these plans. For  example, because SIMPLE IRAs require employers to make contributions  to employee accounts, some small firms may be unable to commit to these  IRAs. Small business groups and IRA providers told us that small business  revenues are inconsistent and may fluctuate greatly from year to year,  making required contributions difficult for some firms. In addition,  employers offering SIMPLE IRAs must determine before the beginning of  the calendar year whether they will match employee contributions or  make nonelective contributions to all employees’ accounts. According to  IRA providers, this requirement may discourage some small employers  from offering these IRAs, and if employers had the flexibility to make  additional contributions to employee accounts at the end of the year,  employers may be encouraged to contribute more to employee accounts.
With regard to SEP IRAs, two experts said small firms may be discouraged  from offering these plans because of the requirement that employers must  set up a SEP IRA for all employees performing service for the company in  3 of the past 5 years and with more than $500 in compensation for 2007.  These experts stated that small firms are likely to hire either seasonal  employees or interns who may earn more than $500, and these employers  may have difficulty finding an IRA provider willing to open an IRA small  enough for these temporary or low-earning participants.
We also found that several barriers may discourage small employers even  from offering payroll-deduction IRAs, including: (1) costs to employers for  managing payroll deductions, (2) a perceived lack of flexibility to promote  payroll-deduction IRAs to employees, (3) lack of incentives to employers,  and (4) lack of awareness about how these IRAs work.
Costs to employers. Additional administrative costs associated with  setting up and managing payroll-deduction IRAs may be a barrier for small  employers, particularly those without electronic payroll processing. Small  business groups told us that costs are influenced by the number of  employees participating in the program and whether an employer has a  payroll processing system in place for automatic deductions and direct  deposits to employee accounts. Several experts told us many small  employers lack electronic, or automatic, payroll systems, and these  employers would be subject to higher management costs for offering  payroll-deduction IRAs. According to Labor, costs to employers also are  significantly influenced by the number of IRA providers to which an  employer must remit contributions on behalf of employees.
Although experts reported that payroll-deduction IRAs represent costs to  employers, we found varied opinions on the significance of those costs.  Experts advocating for expanded payroll-deduction IRAs reported that  most employers would incur little or no costs since they already make  payroll deductions for Social Security and Medicare, as well as federal,  state, and local taxes. According to these experts, payroll-deduction IRAs  function like existing payroll tax withholdings, and adding another  deduction would not be substantial. However, other experts and one  report we reviewed indicated that employer costs may be significant,  particularly for employers without electronic payrolls. The report did not  estimate actual costs to employers on a per account basis. In our review,  we were unable to identify reliable government data on actual costs to  small employers.
Flexibility to promote payroll-deduction IRAs. According to IRA  providers, some employers are hesitant to offer a payroll-deduction IRA  program because they find Labor’s guidance limits their ability to  effectively publicize the program to employees for fear of being subject to  ERISA requirements. IRA providers told us employers need greater  flexibility in Labor’s guidance on payroll-deduction IRAs if they are to  encourage employees to save for retirement. However, Labor told us that  it has received no input from IRA providers as to what that flexibility  would be, and Labor officials note that Interpretive Bulletin 99-1  specifically provides for flexibility.
Lack of savings incentives for small employers. Small business  member organizations and IRA providers said contribution limits for  payroll-deduction IRAs do not offer adequate savings incentives to justify  the effort in offering these IRAs. Because the contribution limits for these  IRAs are significantly lower than those that apply to SIMPLE and SEP  IRAs, employers seeking to provide a retirement plan to their employees  would be more likely to choose other options. Those options also allow  business owners to contribute significantly more to their own retirement  account than payroll-deduction IRAs.
Lack of awareness. Representatives from small business groups said  many small employers are unaware that payroll-deduction IRAs are  available or that employer contributions are not required. However, Labor  has produced educational materials describing the payroll-deduction and  employer-sponsored IRA options available to employers and employees.
section_title: Some Proposals Encourage Employers to Offer and Employees to Participate in IRAs
paragraphs: Retirement and savings experts told us that several legislative proposals  could encourage employers to offer and employees to participate in IRAs.  Several bills have been introduced in Congress to expand worker access to  payroll-deduction IRAs.
Employer incentives to offer IRAs. Several retirement and savings  experts said additional incentives should be in place to increase employer  sponsorship of IRAs. For example, experts suggested tax credits should be  made available to defray start-up costs for small employers of payroll- deduction IRAs, particularly for those without electronic or automatic  payroll systems. These credits should be lower than the credits available  to employers for starting SIMPLE, SEP, and 401(k) plans to avoid  competition with those plans, these experts said. IRA providers and small  business groups said increasing contribution limits for SIMPLE IRAs to  levels closer to those for 401(k) plans would encourage more employers to  offer these plans. Other experts said doing so could provide incentives to  employers already offering 401(k) plans to switch to SIMPLE IRAs, which  have fewer reporting requirements.
Employee incentives to participate in IRAs. Experts offered several  proposals to encourage workers to participate in IRAs, including: (1)  expanding existing tax credits for moderate- and low-income workers, (2)  offering automatic enrollment in payroll-deduction IRAs, and (3)  increasing public awareness about the importance of saving for retirement  and how to do so. Several experts said expanding the scope of the  Retirement Savings Contribution Credit, commonly known as the “saver’s  credit,” could encourage IRA participation among workers who are not  covered by an employer-sponsored retirement plan. They said expanding  the saver’s credit to include more middle-income earners and making the  credit refundable—available to tax filers even if they do not owe income  tax—could encourage more moderate- and low-income individuals to  participate in IRAs. However, an expanded and refundable tax credit  would have revenue implications for the federal government. Other  experts told us that automatically enrolling workers into payroll-deduction  and SIMPLE IRAs could increase employee participation; however, small  business groups and IRA providers said that mandatory automatic  enrollment could be burdensome to small employers. In addition, given  the lack of available income for some, several experts told us that low- income workers may opt out of automatic enrollment programs or be  more inclined to make early withdrawals. Experts also said increasing  public awareness of the importance of saving for retirement and educating  individuals about how to do so could increase IRA participation.
section_title: Changes at Labor and IRS Could Help Encourage Employers to Offer IRAs and Improve IRA Information and Oversight
paragraphs: Earlier this month, we reported that changes at IRS and Labor could  encourage employers to offer IRAs and improve IRA information and  oversight. We found that regulators lack information about employer- sponsored and payroll-deduction IRAs that could help determine whether  these vehicles help workers without employer-sponsored pension plans  build retirement savings. For example, IRS collects information on  employer-sponsored IRAs but does not share the information collected  with Labor, which has oversight responsibility for employer-sponsored  IRAs. We also found that certain oversight vulnerabilities need to be  improved. Currently, Labor has no process in place to monitor employer- sponsored IRAs, and has no jurisdiction over payroll-deduction IRAs. As a  result of our findings, we made recommendations to Labor and IRS to  improve IRA information and oversight and suggested that Congress may  wish to consider whether payroll-deduction IRAs should have some direct  oversight.
subsections: section_title: Regulators Lack Information and Consistent Reporting on Employer-Sponsored and Payroll-Deduction IRAs
paragraphs: Because employer-sponsored IRAs have few employer reporting  requirements and payroll-deduction IRAs have none, regulators lack  information on these IRAs. Under Title I of ERISA, there is no reporting  requirement for SIMPLE IRAs, and there is an alternative method available  for reporting employer-sponsored SEP IRAs.  Employers who offer  payroll-deduction IRAs have no reporting requirements, and consequently,  there is no reporting mechanism that captures how many employers offer  payroll-deduction IRAs. Although IRS receives information reports for all  traditional and Roth IRAs, those data do not show how many were for  employees using payroll-deductions. In our discussions with Labor and  IRS officials, they explained that the limited reporting requirements for  employer-sponsored IRAs were put in place to try to encourage small  employers to offer their employees retirement plan coverage by reducing  their administrative and financial burdens.
Although the reporting requirements for employer-sponsored IRAs are  limited, IRS does collect some information on these IRAs through several  “information” forms provided by financial institutions and employers.  These forms provide information on salary-reduction contributions to  employer-sponsored IRAs, as well as information on IRA contributions,  fair market value, and distributions. For example, information on  retirement plans are reported annually by employers and others to IRS on  its Form W-2. The Form W-2 contains details on the type of plan offered by  the employer, including employer-sponsored IRAs, and the amounts  deducted from wages for contributions to these plans.
According to agency officials, IRS cannot share the information it receives  on employer-sponsored IRAs with Labor because it is confidential tax  information. Labor also does not receive relevant information from  employers, such as annual financial reports, as it does from private  pension plan sponsors. For example, pension plan sponsors must file  Form 5500 reports with Labor on an annual basis, which provide Labor  with valuable information about the financial health and operation of  private pension plans. Although Labor’s Bureau of Labor Statistics  National Compensation Survey surveys employee benefit plans in private  establishments, receiving information on access, participation, and take- up rates for DB and DC plans, the survey does not collect information on  the number of employers sponsoring employer-sponsored IRAs.  Consequently, Labor does not receive important information on employers  who have established employer-sponsored IRAs, over which it has  oversight responsibilities.
Ensuring that regulators obtain information about employer-sponsored  and payroll-deduction IRAs is one way to help them and others determine  the status of these IRAs and whether those individuals who lack employer- sponsored pension plans are able to build retirement savings through  employer-sponsored and payroll-deduction IRAs. However, key  information on IRAs is currently not reported, such as information that  identifies employers offering payroll-deduction IRAs and the distribution  by employer of the number of employees that contribute to payroll- deduction IRAs. Experts that we interviewed said that, without such  information, they are unable to determine how many employers and  employees participate in payroll-deduction IRAs and the extent to which  these IRAs have contributed to the retirement savings of participants. In  addition, the limited reporting requirements prevent information from  being obtained about the universe of employers that offer employer- sponsored and payroll-deduction IRAs, which affects Labor’s ability to  monitor employer-sponsored IRAs. This information also can be useful  when determining policy options to increase IRA participation among  uncovered workers because it provides a strong foundation to assess the  extent to which these IRAs are being utilized.
Although IRS does publish some of the information it receives on IRAs  through its Statistics of Income program, IRS does not produce IRA  reports on a consistent basis. IRS officials told us that they are currently  facing several challenges that affect their ability to publish IRA  information more regularly. First, IRS relies, in part, on information  returns to collect data on IRAs: such returns are not due until the  following year after the filing of the tax return. IRS officials said that these  returns have numerous errors, making it difficult and time-consuming for  IRS to edit them for statistical analysis. They also said that the IRA rules,  and changes to those rules, are difficult for some taxpayers, employers,  and trustees to understand, which contributes to filing errors. Also, in the  past, one particular IRS employee, who has recently retired, took the lead  in developing a statistical analysis on IRAs. Since IRS does not have a  process in place to train another employee to take over this role, a  knowledge gap was created that IRS is trying to fill. IRS officials told us  that they recognize this problem and are in the early stages of determining  ways to correct it.  In addition, IRS officials told us they had problems  with the IRA data for tax year 2003, which prevented them from issuing a  report for that year.  The result has been that IRS has published IRA data  for tax years 2000, 2001, 2002 and 2004, but none for tax year 2003.
Labor officials and retirement and savings experts told us that without the  consistent reporting of IRA information by IRS, they use studies by  financial institutions and industry associations for research purposes,  which include assessing the current state of IRAs and future trends. These  experts said that although these studies are helpful, some may double- count individuals because one person may have more than one IRA at  different financial institutions. They also said that more consistent  reporting of IRA information could help them ensure that their analyses  reflect current and accurate information about retirement assets, such as  the fair market value of IRAs. Since IRS is the only agency that has data on  all IRA participants, consistent reporting of these data could give  policymakers and others a more comprehensive view of the IRA  landscape.
section_title: Labor Has No Process in Place to Monitor Employer-Sponsored IRAs
paragraphs: Given the limited reporting requirements for employer-sponsored IRAs  and the absence of requirements for payroll-deduction IRAs, as well as  Labor’s role in overseeing employer-sponsored IRAs, a minimum level of  oversight is important to ensure that employers are acting in accordance  with the law and within Labor’s guidance on payroll-deduction IRAs. Yet,  Labor officials said that they are unable to monitor (1) whether all  employers are in compliance with the prohibited transaction rules and  fiduciary standards, such as by making timely and complete employer- sponsored IRA contributions or by not engaging in self-dealing; and (2)  whether all employers who offer a payroll-deduction IRA are meeting the  conditions of Labor’s guidance.
Employer-sponsored IRAs. Labor officials said that they do not have a  process for actively seeking out and determining whether employer- sponsored IRAs are engaging in prohibited transactions or not abiding by  their fiduciary responsibilities, such as by having delinquent or unremitted  employer-sponsored IRA contributions. Instead, as in the case of Labor’s  oversight of pension plans, Labor primarily relies on participant  complaints as sources of investigative leads to detect employers that are  not making the required contributions to their employer-sponsored IRA.
Payroll-deduction IRAs. Payroll-deduction IRAs are not under Labor’s  jurisdiction; however, Labor does provide guidance regarding the  circumstances under which an employer may provide a payroll-deduction  IRA program without being subject to the Title I requirements of ERISA.  As long as employers meet the conditions in Labor’s regulation and  guidance, employers are not subject to the fiduciary requirements in  ERISA Title I that apply to employer-sponsored retirement plans, such as  401(k) plans. IRS, also, does not have direct oversight over payroll- deduction IRA programs. IRS oversees the rules associated with the  traditional and Roth IRAs that payroll-deduction programs may fund  through employee contributions. However, IRS does not have oversight  over employer management of these programs.
Labor officials told us that they are not aware of employers improperly  relying on the safe harbor regarding payroll-deduction IRAs. However,  without a process to monitor payroll-deduction IRAs, Labor cannot be  certain of the extent or nature of certain employer activities that may fall  outside of the guidance provided by Labor.
section_title: Recent Recommendations Regarding IRAs
paragraphs: In order to improve oversight and information available on IRAs, we  recently made several recommendations to Congress, Labor, and IRS,  which are summarized in table 3.
We reported that neither IRS nor Labor have direct oversight of payroll- deduction IRAs and that Congress may wish to consider whether payroll- deduction IRAs should have some direct oversight. Although Labor  provides guidance regarding the circumstances under which employers  may offer payroll-deduction programs without being subject to the Title I  requirements of ERISA, Labor does not have jurisdiction to monitor  whether employers are managing such programs within the bounds of  Labor’s safe harbor. Similarly, IRS has responsibility over tax rules for  establishing and maintaining traditional and Roth IRAs that may be funded  through employee contributions from payroll-deduction programs;  however, IRS also does not have authority to monitor employers offering  these programs. We have reported that without direct oversight of payroll- deduction IRAs, employees may lack confidence that payroll-deduction  IRAs will provide them with adequate protections to participate in such  programs, which is particularly important given the increasing role that  IRAs have in retirement savings. As such, we have suggested that Congress  consider whether payroll-deduction IRAs should have some direct  oversight.
We have also reported that it is important for Labor to have an accurate  accounting of the costs to employers for managing payroll-deduction IRAs.  In our review, we were unable to determine the actual costs to employers  for managing a payroll-deduction IRA program. Some experts reported  that such costs were significant, while others reported that they were  minimal. Further, under Labor’s guidance on payroll-deduction IRAs,  employers may receive reasonable compensation for the cost of operating  payroll-deduction IRA programs as long as such compensation does not  represent a profit to employers. However, because the information on  costs of managing such programs is lacking, Labor may be unable to  readily determine if employers are receiving excessive compensation and  if such programs fall outside the safe harbor and may be considered to  have become ERISA Title I programs. Furthermore, without accurate cost  estimates and a determination of what constitutes “reasonable  compensation” to employers, employers may be reluctant to seek  compensation from IRA service providers to defray the costs of operating  a payroll-deduction IRA program.
section_title: Conclusions
paragraphs: Currently, IRAs play a major role in preserving retirement assets but a very  small role in creating them. Although studies show that individuals find it  difficult to save for retirement on their own, millions of U.S. workers have  no retirement savings plan through their employer. Employer-sponsored  and payroll-deduction IRAs afford an easier way for workers, particularly  those who work for small employers, to save for retirement. They also  offer employers less burdensome reporting and legal responsibilities than  defined benefit pension plans and defined contribution plans, such as  401(k) plans. Yet, barriers exist, such as administrative costs, that may  discourage employers from offering payroll-deduction IRAs. As federal  agencies begin to determine the true cost of establishing payroll-deduction  IRAs, employers will have a better understanding of the costs and will be  in a better position to evaluate whether they will be able to offer payroll- deduction IRAs to their employees.
Encouraging employers to offer IRAs to their employees can be much  more productive if Congress and regulators ensure that there is adequate  information on employer-sponsored IRAs and payroll-deduction IRAs.  Although the limited reporting requirements for employer-sponsored IRAs  and the absence of reporting requirements for payroll-deduction IRAs  were meant to encourage small employers to offer retirement savings  vehicles to employees, there is also a need for agencies that are  responsible for overseeing retirement savings vehicles to have the  information necessary to do so. Providing complete and consistent data on  IRAs would help ensure that regulators have the information they need to  make informed decisions about how to increase coverage and facilitate  retirement savings. In addition, ensuring that Labor has a process in place  to monitor employer-sponsored IRAs will help ensure that there is a  structure in place to help protect individuals’ retirement savings if they  choose employer-sponsored IRAs. If current oversight vulnerabilities are  not addressed, future problems could emerge as more employers and  workers participate in employer-sponsored IRAs.
Steps must also be taken to improve oversight of payroll-deduction IRAs  and determine whether direct oversight is needed. Without direct  oversight, employees may lack confidence that payroll-deduction IRAs will  provide them with adequate protections to participate in these programs,  which is particularly important given the current focus in Congress on  expanding payroll-deduction IRAs. However, any direct oversight of  payroll-deduction IRAs should be done in a way that does not pose an  undue burden on employers or their employees.
We are continuing our work on IRAs, and are beginning to examine the  fees that are charged IRA participants. We are pleased that the Committee  on Ways and Means and this subcommittee are interested in retirement  savings, particularly IRAs, and look forward to continuing our work with  you.
Mr. Chairman and Members of the subcommittee, this completes my  prepared statement and I would be happy to respond to any questions the  subcommittee may have at this time.
section_title: Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact Barbara  D. Bovbjerg, Director, Education, Workforce, and Income Security Issues  at (202) 512-7215 or bovbjergb@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Tamara Cross (Assistant Director), Matt Barranca, Susan  Pachikara, Raun Lazier, Joseph Applebaum, Susan Aschoff, Doreen  Feldman, Edward Nannenhorn, MaryLynn Sergent, Roger Thomas, Walter  Vance, and Jennifer Wong.
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