Individual Retirement Accounts: Government Actions Could Encourage More Employers to Offer IRAs to Employees
Published: 2008-06-04T00:00:00

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. However, questions remain about IRAs' effectiveness in facilitating new, or additional, retirement savings. GAO was asked to report on (1) how IRA assets compare to assets in other retirement plans, (2) what barriers may discourage small employers from offering IRAs to employees, and (3) the adequacy of the Internal Revenue Service's (IRS) and the Department of Labor's (Labor) oversight of and information on IRAs. GAO reviewed reports from government and financial industry sources and interviewed experts and federal agency officials.
section_title: What GAO Found
paragraphs: Individual retirement accounts, or IRAs, hold more assets than any other type of retirement vehicle. In 2004, IRAs held about $3.5 trillion in assets compared to $2.6 trillion in defined contribution (DC) plans, including 401(k) plans, and $1.9 trillion in defined benefit (DB), or pension plans. Similar percentages of households own IRAs and participate in 401(k) plans, and IRA ownership is associated with higher educational and income levels. Congress created IRAs to provide a way for individuals without employer plans to save for retirement, and to give retiring workers or those changing jobs a way to preserve retirement assets by rolling over, or transferring, plan balances into IRAs. Rollovers into IRAs significantly outpace IRA contributions and account for most assets flowing into IRAs. Given the total assets held in IRAs, they may appear to be comparable to 401(k) plans. However, 401(k) plans are employer-sponsored while most households with IRAs own traditional IRAs established outside the workplace. Several barriers may discourage employers from establishing employer-sponsored IRAs and offering payroll-deduction IRAs to their employees. Although employer-sponsored IRAs were designed with fewer reporting requirements to encourage participation by small employers and payroll-deduction IRAs have none, millions of employees of small firms lack access to a workplace retirement plan. Retirement and savings experts and others told GAO that barriers discouraging employers from offering these IRAs include costs that small businesses may incur for managing IRA plans, a lack of flexibility for employers seeking to promote payroll-deduction IRAs to their employees, and certain contribution requirements of some IRAs. Information is lacking, however, on what the actual costs to employers may be for providing payroll-deduction IRAs and questions remain on the effect that expanded access to these IRAs may have on employees. Experts noted that several proposals exist to encourage employers to offer and employees to participate in employer-sponsored and payroll-deduction IRAs, however limited government actions have been taken. The Internal Revenue Service and Labor share oversight for all types of IRAs, but gaps exist within Labor's area of responsibility. IRS is responsible for tax rules on establishing and maintaining IRAs, while Labor is responsible for oversight of fiduciary standards for employer-sponsored IRAs and provides certain guidance on payroll-deduction IRAs, although Labor does not have jurisdiction. Oversight ensures the interests of the employee participants are protected, that their retirement savings are properly handled, and any applicable guidance and laws are being followed. Because there are very limited reporting requirements for employer-sponsored IRAs and none for payroll-deduction IRAs, Labor does not have processes in place to identify all employers offering IRAs, numbers of employees participating, and employers not in compliance with the law. Obtaining information about employer-sponsored and payroll-deduction IRAs is also important to determine whether these vehicles help workers without DC or DB plans build retirement savings. Although IRS collects and publishes some data on IRAs, IRS has not consistently produced reports on IRAs nor shared such information with other agencies, such as Labor. Labor's Bureau of Labor Statistics National Compensation Survey surveys employer-sponsored benefit plans but collects limited information on employer-sponsored IRAs and no information on payroll-deduction IRAs. Since IRS is the only agency that has data on all IRA participants, consistent reporting of these data could give Labor and others valuable information on IRAs.

section_title: Letter
paragraphs: Individual retirement accounts—popularly known as IRAs—have grown in  importance and become key retirement savings vehicles for many  individuals, including small business owners, independent contractors,  and other workers who are not covered by an employer-sponsored  retirement plan. IRAs totaled an estimated $3.5 trillion in 2004.
Created more than 30 years ago by the Employee Retirement Income  Security Act of 1974 (ERISA), IRAs were established to (1) provide a way  for individuals not covered by a pension plan to save for retirement, and  (2) give retiring workers or individuals changing jobs a way to preserve  assets in employer-sponsored retirement plans by allowing them to roll  over, or transfer, plan balances into IRAs. Employers sponsor defined  benefit (DB) plans, which pay monthly benefits to retired workers based  on their previous salary, years of employment, and other factors; they also  sponsor defined contribution (DC) plans, such as 401(k) plans, which  allow workers to save for retirement by contributing to mutual funds and  other financial market investments, sometimes with an employer  contribution as well, to save for retirement. Roughly half of all workers  participate in an employer-sponsored retirement plan.
There are several types of IRAs, including traditional and Roth, and two  types of employer-sponsored IRAs—Saving Incentive Match Plans for  Employees (SIMPLE) and Simplified Employee Pension (SEP). The  traditional IRA allows eligible individuals to make tax-deductible  contributions and accumulate tax-deferred investment earnings.
Distributions from these accounts are generally subject to tax. The Roth  IRA allows eligible individuals to make after-tax contributions.  Distributions, including investment earnings, are generally tax-free. Under  payroll-deduction IRA programs (also known as payroll-deduction IRAs),  employees establish and contribute to traditional or Roth IRAs via the  employer withholding contributions through payroll deductions and  transmitting the funds to the employee’s IRA. SIMPLE IRAs allow small  employers to either match participating employee contributions or to  contribute a fixed percentage of all eligible employees’ pay. SEP IRAs  allow employers of any size to make voluntary tax deductible  contributions into traditional IRAs for themselves and their employees.  Contributions to all IRAs may not exceed certain limits.
The rapid and continuing growth in IRA assets has raised questions about  the overall role of IRAs in facilitating retirement savings, including  employer-sponsored IRAs and how the federal government oversees the  use of these savings vehicles. To address these questions, you asked us to  report on (1) how IRA assets compare to assets in pension plans, (2) what  barriers may discourage small employers from establishing employer- sponsored IRAs and offering payroll-deduction IRAs to their employees,  and (3) how the Internal Revenue Service (IRS) and the Department of  Labor (Labor) oversee IRAs and the adequacy of oversight and  information on employer-sponsored and payroll-deduction IRAs.
To answer these questions, we compared assets in IRAs and pension plans  using published data from federal agencies and industry associations on  retirement funds. We analyzed demographic data from household surveys  and studies focused on IRA ownership to provide descriptive information  on IRA participants, such as demographic characteristics including age  and income. To determine the barriers that may discourage small  employers from establishing employer-sponsored IRAs and from offering  payroll-deduction IRAs to employees, we interviewed federal agency  officials, industry associations, financial company representatives, small  business and consumer advocacy groups, and retirement and savings  experts. To determine how IRS and Labor oversee IRAs and assess the  adequacy of oversight and information, we interviewed officials at IRS and  Labor and reviewed laws governing agency responsibilities regarding  IRAs. A more detailed discussion of our methodology is provided in  appendix I. We conducted this performance audit from September 2007  through May 2008 in accordance with generally accepted government  auditing standards, which included an assessment of data reliability. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Background
paragraphs: Roughly half of all workers participate in an employer-sponsored  retirement or pension plan. Private sector pension plans are classified  either as defined benefit (DB) or as defined contribution (DC) plans.  DB  plans promise to provide, generally, a fixed level of monthly retirement  income that is based on salary, years of service, and age at retirement,  regardless of how the plan investments perform. In contrast, benefits from  DC plans are based on the contributions to and the performance of the  investments in individual accounts, which may fluctuate in value.  Examples of DC plans include 401(k) plans, employee stock ownership  plans, and profit-sharing plans. The most dominant and fastest growing DC  plans are 401(k) plans, which allow workers to choose to contribute a  portion of their pretax compensation to the plan under section 401(k) of  the Internal Revenue Code.
IRAs were established under the Internal Revenue Code provisions of the  Employee Retirement Income Security Act of 1974 (ERISA). ERISA was  generally enacted to protect the interests of employee benefit plan  participants and their beneficiaries by requiring the disclosure to them of  financial and other information concerning the plan; by establishing  standards of conduct for plan fiduciaries; and by providing for  appropriate remedies and access to the federal courts.  To give IRAs  flexibility in accumulating assets for retirement, Congress designed a dual  role for these accounts. The first role is to provide individuals not covered  by employer-sponsored retirement plans an opportunity to save for  retirement on their own in tax-deferred accounts. The second role was to  give retiring workers or individuals changing jobs a way to preserve assets  in employer-sponsored retirement plans by allowing them to roll over or  transfer plan balances into IRAs.
subsections: section_title: Individual IRAs
paragraphs: Over the past 30 years, Congress has created several types of IRAs  designed with different features for individuals and small businesses. The  types of IRAs geared toward individuals are:    Traditional IRAs: Traditional IRAs allow individuals to defer taxes on  investment earnings accumulated in these accounts until distribution at  retirement. Eligible individuals may make tax-deductible contributions of  earned income to these accounts. Other individuals may make  nondeductible contributions to receive the tax deferral on earnings. Yearly  contribution amounts are subject to limits based on income, pension  coverage, and filing status. Taxpayers over age 70½ cannot contribute and  must begin required minimum distributions from these accounts.  Withdrawals are generally taxable; and early distributions made before age  59½, other than for specific exceptions, are subject to a 10 percent  additional income tax.
Roth IRAs: In the Taxpayer Relief Act of 1997, Congress created the Roth  IRA, which allows eligible individuals to make after-tax contributions to  these accounts. After age 59½, enrollees may take tax-free distributions of  their investment earnings. Withdrawals of investment earnings before age  59½ are subject to a 10 percent additional income tax and other taxes.  Yearly contribution amounts are subject to limits based on income and  filing status. There are no age limits on contributing, and no distributions  are required during the Roth IRA owner’s lifetime. Withdrawals are  generally tax-free after age 59½, as long as the taxpayer held the account  for 5 years; early distributions other than for specific exceptions are  subject to an additional 10-percent income tax.
Traditional and Roth IRAs can also be established as payroll-deduction  IRAs, which requires employer involvement.
Payroll-deduction IRA Programs (also called payroll-deduction  IRAs): Through payroll-deduction IRAs, employees may establish either  traditional or Roth IRAs, and employees may contribute to these accounts  through voluntary deductions from their pay, which are forwarded by the  employer to the employee’s IRA. As long as employers follow guidelines  set by Labor for managing the payroll-deduction IRA, employers are not  subject to the fiduciary requirements in ERISA Title I that apply to  employer-sponsored retirement plans, like 401(k) plans.
section_title: Employer-Sponsored IRAs
paragraphs: Other types of IRAs that are intended to encourage savings through  employers include:    SEP IRAs: In the Revenue Act of 1978, Congress established SEP IRAs,  which were designed with fewer regulatory requirements than traditional  employer pension plans to encourage small employers to offer retirement  plans to their workers. SEP IRAs allow employers to make tax deductible  contributions to their own and each eligible employee’s account. SEP IRAs  have higher contribution limits than other IRAs, but they do not permit  employee contributions. Yearly contributions are not mandatory, but as  with pension plans, they must be based on a written allocation formula  and cannot discriminate in favor of highly-compensated employees.
SIMPLE IRAs: In the Small Business Job Protection Act of 1996,  Congress created SIMPLE IRAs to help employers with 100 or fewer  employees more easily provide a retirement savings plan to their  employees. In this plan, eligible employees can direct a portion of their  salary, within limits, to a SIMPLE IRA and employers may either match the  employees’ contribution up to 3 percent or make nonelective, 2 percent  contributions of each employee’s salary for all employees making at least  $5,000 for the year. This IRA replaced the Salary Reduction Simplified  Employee Pension IRA (SAR-SEP IRA)—-a tax-deferred retirement plan  provided by sole proprietors or small businesses with fewer than 25  employees. New SAR-SEP IRAs could not be established after December  31, 1996, but plans in operation at that time were allowed to continue.  Each of these IRAs have their own eligibility requirements, as shown in  table 1.
Labor’s Employee Benefits Security Administration (EBSA) shares  responsibility for overseeing the IRA component of ERISA with IRS. EBSA  enforces Title I of ERISA, which specifies, among other standards, certain  fiduciary and reporting and disclosure requirements and seeks to ensure  that fiduciaries operate their plans in the best interest of plan participants.  IRS enforces Title II of ERISA, which provides, among other standards, tax  benefits for plan sponsors and participants, including participant  eligibility, vesting, and funding requirements.
section_title: IRAs Hold the Most Retirement Assets
paragraphs: IRA assets have surpassed DC plan assets and DB plan assets, but the  majority of assets that flow into IRAs come from assets being rolled over  from other accounts, not from contributions. We also found that IRA  ownership is associated with higher education and higher income levels.  The percentage of households that own IRAs is similar to those that  participate in 401(k) plans, and total contributions to IRAs are lower than  contributions to 401(k) accounts. In addition, there are key differences  between the structure of employer-sponsored IRAs and that of 401(k)s.
subsections: section_title: IRA Assets Exceed DC and DB Plan Assets and Largely Come from Rollovers
paragraphs: Since 1998, IRA assets have comprised the largest portion of the  retirement market. As shown in figure 1, in 2004, IRA assets totaled about  $3.5 trillion compared to DC assets of $2.6 trillion and DB assets of $1.9  trillion.
Most assets flowing into IRAs come from the transfer of retirement assets  between IRAs or from other retirement plans, including 401(k) plans, not  from contributions. These “rollovers” allow individuals to preserve their  retirement savings when they change jobs or retire. As shown in figure 2,  from 1998 to 2004, over 80 percent of funds flowing into IRAs came from  rollovers, demonstrating that IRAs play a smaller role in building  retirement savings than they play in preserving retirement savings. IRA  accounts that contain rollover assets also exceeded those without rollover  assets. For example, in 2007, the median amount in a traditional IRA with  rollover assets was $61,000, while the median amount in a traditional IRA  without rollover assets was $30,000.
section_title: Households with IRAs Tend to Have Higher Education, Higher Incomes, and Own Traditional IRAs
paragraphs: Traditional and Roth IRA ownership is associated with higher education  and income levels. In 2004, 59 percent of IRA households were headed by  an individual with a college degree, and only about 3 percent were headed  by an individual with no high school diploma. Over one-third of these IRA  households earned $100,000 or more, and less than 2 percent earned less  than $10,000. Households with IRAs also tend to own their homes.  Research shows that higher levels of education and household income  correlate with a greater propensity to save. Therefore, it is not surprising  that IRA ownership increases as education and income levels increase.  Lastly, IRA ownership is highest among households headed by individuals  aged 45 to 54.
More households own traditional IRAs, which were the first IRAs  established, than Roth IRAs or employer-sponsored IRAs. In 2007, nearly  33 percent of all households owned traditional IRAs, and about 15 percent  owned Roth IRAs. In contrast, about 8 percent of households participated  in employer-sponsored IRAs.
section_title: Similar Percentages of Households Own IRAs and Participate in 401(k) Plans, but IRA Contributions Are Lower Than Contributions to 401(k) Plans
paragraphs: The percentage of households that own IRAs is similar to the percentage  that own 401(k)s, but IRA contributions are less than 401(k) contributions.  In 2004, 29 percent of households owned individually arranged IRAs, and  26 percent participated in 401(k) plans (see fig. 3).  Ten percent of  households own a traditional or Roth IRA and participate in 401(k) plans.
Although contributions to both 401(k) plans and IRAs increased from 2002  to 2004, 401(k) contributions were almost four times greater than those  made to IRAs. Few studies have been done that have compared  contributions by IRA owners and 401(k) participants. However, one study  assessed the consistency of taxpayer annual contributions to traditional  IRAs and to 401(k) plans from tax years 1999 to 2002. As shown in figure  4, the study found that only 1.4 million taxpayers contributed to their  traditional IRAs in all 4 years, while nearly 16 million taxpayers  contributed to their 401(k) accounts in the same time period.
The study found that the persistency in making IRA contributions may  partially be attributed to limits in the tax deductions some owners could  take for their contributions. Certain criteria, including age, income, tax  filing status, and coverage in a work-based retirement plan, affect the tax  deduction taxpayers could take for contributing to an IRA.
In addition, a study by the Investment Company Institute that included  data on contributions by IRA owners shows that more households with  Roth IRAs or employer-sponsored IRAs contribute to their accounts than  households with traditional IRAs. For example, in 2004, more than half of  households with Roth, SAR-SEP, or SIMPLE IRAs contributed to their  accounts, but less than one-third of households with traditional IRAs  contributed to their accounts. This, again, may be partly attributed to the  emerging role of traditional IRAs as a means to preserve rollover assets  more than to build retirement savings. The Investment Company Institute  study also stated that the median household contribution to traditional  IRAs was $2,300 compared to the median contribution to Roth IRAs of  $3,000. The median contribution to SAR-SEP and SIMPLE IRAs was  $5,000. The study noted that this difference may be related to the higher  contribution limits for employer-sponsored IRAs than for traditional IRAs  and Roth IRAs. Table 2 shows contributions limits for the current tax year.
section_title: Comparisons between IRAs and 401(k) Plans Are Difficult
paragraphs: Comprehensive comparisons between IRAs and 401(k) plans are difficult  because of differences in plan structures. 401(k) plans are sponsored by  employers, whereas most households with IRAs own traditional IRAs  established outside of the workplace. In addition, most of the assets in  IRAs are in traditional IRAs that are set up by individuals and provide  individual investors with a vehicle to contribute to their own retirement  savings. Employer-sponsored IRAs, such as SIMPLE and SEP, were  established for small employers who lack the resources to provide a  401(k) plan. In addition, payroll deduction IRA programs enable small  employers to provide employees the opportunity to save for retirement.
Key differences exist between employer-sponsored IRAs and 401(k) plans,  as shown in table 3.
section_title: Several Barriers May Discourage Small Employers from Offering Payroll- Deduction and Employer-Sponsored IRAs to Employees
paragraphs: Several barriers may discourage small employers from offering payroll- deduction and employer-sponsored IRAs to their employees. Although  employer-sponsored IRAs were designed with fewer reporting  requirements to encourage small employers to offer them, few employers  appear to do so. In addition, few employers appear to offer payroll- deduction IRA programs. Retirement and savings experts said payroll- deduction IRAs could help many workers save for retirement and these  IRAs may be the easiest way for small employers to offer a retirement  savings opportunity to their employees. Several barriers, including costs,  may discourage employers from offering them; however, information is  lacking on the actual costs to employers. In addition, several experts  raised questions on how expanded payroll-deduction IRAs may affect  employees. Employer-sponsored IRAs offer greater savings opportunities  than payroll-deduction IRAs, but employer sponsorship of IRAs may also  be hindered by costs, including required employer contributions.  Retirement and savings experts offered several legislative proposals to  encourage employers to offer and employees to participate in IRAs, but  limited government actions have been taken to increase the number of  employers sponsoring employer-sponsored IRAs.
subsections: section_title: Barriers May Discourage Small Employers from Offering IRAs to Employees, and Many of These Employees Lack Access to Workplace Retirement Savings
paragraphs: Employees of small firms are more likely to lack access to a retirement  plan at work than employees of larger firms, and several barriers may limit  small employers from offering payroll-deduction programs and employer- sponsored IRAs to their employees. Although IRAs have been largely  successful at helping individuals preserve their retirement savings through  rollovers, experts told us that IRA participation falls short of Congress’  first goal for creating IRAs—to provide a tax-preferred account for  workers without employer-sponsored retirement plans to save for their  retirement. For example, millions of employees of small firms lack access  to a workplace retirement plan. The Congressional Research Service  found that private-sector firms with fewer than 100 employees employed  about 30.9 million full-time workers between the ages of 25 and 64 in 2006.  About 19.9 million of those workers lacked access to an employer- sponsored retirement plan, as shown in figure 5.
To address the issue of low retirement plan sponsorship among small  employers, Congress created SEP and SIMPLE employer-sponsored IRAs,  and has encouraged employers not offering a retirement plan to offer  payroll-deduction IRAs. These IRAs were designed to have fewer and less  burdensome reporting requirements than 401(k) plans to encourage  participation, and payroll-deduction IRA programs do not have any  employer reporting requirements. Payroll-deduction and employer- sponsored IRAs offer several advantages, as shown in table 4.
Labor issued a regulation under which an employer could maintain a  payroll deduction program for employees to contribute to their IRAs  without being considered a pension plan under ERISA. Through payroll- deduction IRAs, an employer withholds and forwards an amount  determined by the employee directly to an IRA (traditional or Roth)  established by the employee. Although any employer can provide 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 offer their employees the opportunity to contribute to IRAs  through payroll deduction.  Further, Labor and IRS officials told us that  data is limited on how many employers offer payroll-deduction IRAs.   Because there are no reporting requirements for payroll-deduction IRAs,  and very limited reporting requirements for employer-sponsored IRAs—as  discussed later in this report—we were unable to determine exactly how  many employers offer these IRAs to their employees. For example,  because an employer’s responsibility with payroll-deduction IRAs is to  forward employee contributions to IRAs, employers are not required to  report to the federal government that they are providing this service to  employees. Consequently, neither Labor nor IRS is able to determine how  many employers offer payroll-deduction IRAs.
Employee access to SIMPLE and SEP IRAs also appears limited. SIMPLE  IRAs are only available to firms with 100 employees or fewer who do not  already offer another retirement plan; and SEP IRAs are available to  employers of any size, including those who may offer either a DC or DB  plan. The Bureau of Labor Statistics reported that, in 2005, 8 percent of  private sector workers in firms with fewer than 100 employees  participated in a SIMPLE IRA, and 2 percent of workers participated in a  SEP IRA. An IRS evaluation of employer-filed W-2 forms estimated that in  2004, 190,000 employers sponsored SIMPLE IRAs. However, officials told  us that this figure was likely understated, as it does not include accounts  that may be owned by sole proprietors or individuals who own  unincorporated businesses by themselves, who are not required to file W-2  forms. GAO was unable to determine the number of employers  sponsoring SEP plans, but IRS data from 2002 show more taxpayers  owned SEP than SIMPLE IRAs, with 3.5 million SEP accounts compared to  2 million SIMPLE accounts.
section_title: Payroll-Deduction IRAs Could Help Workers Save, but Barriers May Discourage Employers from Offering a Payroll- Deduction IRA Program
paragraphs: Retirement and savings experts reported that increased worker access to  payroll-deduction IRAs could help many workers to save for retirement at  work. Through payroll-deduction IRA programs, employees may either  contribute to traditional or Roth IRAs, depending on the eligibility  requirements of these plans. Any individual under the age of 70½ with  taxable compensation may contribute to a traditional IRA, and many  individuals could receive a tax deduction for their contribution. Most  low- and middle-income individuals are eligible to contribute to Roth  IRAs. In theory, all of the estimated 20 million employees of small firms  mentioned previously who lacked an employer-sponsored retirement plan  in 2006 could be eligible to contribute to a traditional IRA through payroll- deduction; and many of these individuals would be eligible to claim a tax  deduction for their contribution.
According to Labor’s guidance on payroll-deduction IRAs and several  experts we interviewed, individuals are more likely to save in IRAs  through payroll deductions than they are without deductions. Payroll  deductions are a key feature in 401(k) and other DC plans. Economics  literature that we reviewed identifies payroll deduction as a key factor in  the success of 401(k) plans, and participation in these plans is much  higher than in IRAs, which do not typically use payroll deduction.  According to the Congressional Budget Office, in 2003, 29 percent of all  workers contributed to a DC plan, while only 7 percent of all workers  contributed to an IRA. According to recent economics literature that we  reviewed, several papers point to the importance of employment-based  defaults, employer endorsements, and advice from peers as factors that  may influence an employee’s decision to participate in a retirement plan.  The influential role that employers may have in an employee’s decision to  participate in a workplace plan may encourage some employees to also  participate in payroll-deduction IRAs.
Payroll deduction facilitates retirement savings by addressing key  behavioral barriers of procrastination and inertia, or a lack of action,  according to economics literature that we reviewed and experts we  interviewed. Although many individuals have intentions to save for  retirement, some may procrastinate because retirement is seen as a  remote event and more immediate expenses take precedence. Some  individuals also experience inertia because they lack knowledge on how to  save or have difficulty making decisions with a number of complex  options. Literature that we reviewed states that payroll deduction gives  employees a “commitment device” to help them automatically contribute  to retirement before wages are spent, relieving them of making ongoing  decisions to save.
Retirement and savings experts and representatives of small business and  consumer groups told us payroll-deduction IRAs are the easiest way for  small employers to offer their employees a retirement savings vehicle.  According to Labor publications and experts, payroll-deduction IRAs  provide employers with a low-cost retirement benefit for their employees,  because these IRAs do not permit employer contributions. Payroll- deduction IRAs also have fewer requirements for employee  communication than SIMPLE and SEP IRAs, and employers are not  subject to ERISA fiduciary responsibilities so long as they meet the  conditions in Labor’s regulation and guidance for managing these plans.  Finally, payroll-deduction IRAs allow employers to select a single IRA  provider to service the accounts to keep administrative costs down and  simplify the process for employees.
Despite these advantages, payroll-deduction IRAs may present several  limitations which discourage employers from offering a payroll-deduction  IRA program, including: (1) costs to small employers for setting up payroll  deductions, (2) lack of flexibility to promote payroll-deduction IRAs to  employees, (3) lack of incentives to employers, and (4) lack of awareness  about how these IRAs work.
Costs to employers. Additional administrative costs associated with  setting up and managing payroll-deduction IRAs may be a barrier for small  employers, particularly for those without electronic payroll processing.  According to Labor, costs to employers are significantly influenced by the  number of IRA providers an employer must remit contributions to on  behalf of employees. As such, Labor’s guidance allows employers to select  a single IRA provider for all employees. Also, under Labor’s guidance, an  IRA sponsor may reimburse the employer for the actual costs of operating  a payroll-deduction IRA as long as such costs do not include profit to the  employer. Small business groups told us that costs could also be  influenced by the number of employees participating in the program and  whether an employer has a payroll processing system in place to make  automatic deductions and direct deposits to employee accounts. Several  experts told us that many small employers lack electronic, or automatic,  payroll systems, and these employers would be subject to higher  management costs for offering payroll-deduction IRAs. Moreover,  representatives from small business groups and other experts told us that  providing health care insurance is a more pressing issue to many small  employers than providing a retirement savings opportunity.
Although experts reported that payroll-deduction IRAs represent costs to  employers, we found that opinions on the significance of those costs  varied. Experts advocating for expanded payroll-deduction IRAs reported  that most employers would incur little to no costs since most employers  already make payroll deductions for Social Security and Medicare, as well  as federal, state, and local taxes. According to these experts, payroll- deduction IRAs function similarly to existing payroll tax withholdings and  adding another deduction would not be a substantial requirement.  However, other experts reported that costs to employers may be  significant. One report indicated that costs to employers for managing  payroll-deduction IRAs were substantial, particularly for employers  without electronic payrolls; however, the study did not estimate what the  actual costs to employers may be on a per account basis. In our review,  we were unable to identify reliable government data on actual costs to  small employers.
Flexibility to Promote Payroll-Deduction IRAs. According to IRA  providers, some employers are hesitant to offer a payroll-deduction IRA  program because they find Labor’s guidance limits their ability to  effectively publicize the availability of payroll-deduction IRAs to  employees for fear of being subject to ERISA requirements. Labor  officials told us they issued this guidance to make it easier for employers  to understand the guidelines to follow in order to maintain the safe harbor  that applies to payroll-deduction IRAs. This guidance explains the  conditions under which employers can offer payroll-deduction IRAs and  not be subject to the ERISA reporting and fiduciary responsibilities, which  apply to employer retirement plans, like 401(k) plans. Labor officials said  they have not received any feedback from employers or IRA providers on  the clarity of the guidance since it was issued in 1999.  However, at the  time the guidance was issued, some employers had indicated to Labor that  they were hesitant to offer payroll-deduction IRAs due to ERISA fiduciary  responsibilities.  IRA providers told us that employers need greater  flexibility in Labor’s guidance to promote payroll-deduction IRAs and  provide a greater sense of urgency to employees to save for retirement.   However, Labor told us that it has received no input from IRA providers as  to what that flexibility would consist of, and Labor officials note that  Interpretive Bulletin 99-1 specifically provides for flexibility.
Lack of savings incentives for small employers. Small business  member organizations and IRA providers said that the contribution limits  for payroll-deduction IRAs do not offer adequate savings incentives to  justify the effort to offer these IRAs. Because the contribution limits to  these IRAs are significantly lower than those that apply to SIMPLE and  SEP IRAs, employers seeking to provide a retirement plan to their  employees would be more likely to choose other options, which allow  business owners to contribute significantly more to their own retirement  than payroll-deduction IRAs allow.
Lack of awareness. One reason payroll-deduction IRA programs have not  been widely adopted by employers may be a lack of awareness about how  payroll-deduction and other IRAs work. Representatives from small  business groups said many small employers are unaware that 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, and one Labor official told us that that Labor  has received positive feedback from small businesses for their efforts.  IRA  providers told us they experience challenges in marketing IRAs because  varying eligibility requirements make it difficult to communicate IRA  benefits to a mass market. Instead, providers said it is more efficient to  market IRAs to current customers and focus advertising budgets on  capturing rollover IRAs.
section_title: Questions Remain on How Expanded Payroll- Deduction IRAs May Affect Employees
paragraphs: Some experts questioned whether increased worker access to payroll- deduction IRA programs will in fact lead to increased participation and  retirement savings for many workers. For example, IRA providers and  experts expressed concerns that low- and moderate-income workers may  choose not to participate in payroll-deduction IRAs because they lack  discretionary income. Many low- and moderate-income workers are  already eligible to contribute to IRAs, but have chosen not to do so  because they lack sufficient income to save for retirement. Experts raised  doubts that payroll-deduction IRA programs would lead to adequate  retirement savings, as low-income individuals would be unable to  contribute to these IRAs consistently. Further, experts said that  individuals with low-balance IRAs would be inclined to make early  withdrawals and be subject to additional income taxes. Experts also  reported that because the incentives for tax-deferred IRA contributions  are based on marginal tax rates, lower-income individuals receive a lower  immediate tax subsidy than higher income individuals. Two experts told  us that policymakers should begin their evaluation of payroll-deduction  IRAs by calculating how much savings is required for an adequate  standard of living in retirement, and then determine what role payroll- deduction IRAs could play in reaching that level.
section_title: SIMPLE and SEP IRAs Can Help Workers to Save, but Several Factors May Discourage Employer Sponsorship
paragraphs: We found that employer-sponsored SEP and SIMPLE IRAs can help small  employers and their workers to save for their retirement, but several  factors may discourage small employers from offering these IRAs to their  employees. Experts said the higher contribution limits and flexible  employer contribution options of SEP and SIMPLE IRAs offer greater  savings benefits to employers and employees than payroll-deduction  IRAs. For example, the 2007 SIMPLE contribution limit of $10,500 per  year for individuals under age 50 is more than twice the amount allowed in  2007 in payroll-deduction IRAs. In 2007, SEP IRAs allowed employers to  contribute the lesser of 25 percent of an employee’s compensation or up to  $45,000. Moreover, because SIMPLE IRAs require employers to match the  contributions of participating employees or to make “nonelective”  contributions to all employee accounts, employees are able to save  significantly more per year in SIMPLE accounts than they are in payroll- deduction IRAs. Under SEP rules, employers must set up SEP IRAs for all  employees working for them in at least 3 of the past 5 years who have  reached age 21 and received at least $500 in compensation in 2007, and  employees may not contribute to their own accounts. Annual employer  contributions are not mandatory; however, if an employer decides to  contribute, they must make contributions to the SEP IRAs of all employees  performing services in that year. Because annual contributions are not  mandatory for SEP IRAs, employers have the flexibility to adjust  contributions depending on business revenues. Employers offering  SIMPLE IRAs must either make a nonelective contribution of 2 percent of  each eligible employee’s compensation or a minimum of a 1 percent match  to the SIMPLE IRAs of those employees who choose to contribute to their  accounts.
Certain factors may limit employer sponsorship of SIMPLE and SEP IRAs.  Small business groups told us that the costs of managing SEP and SIMPLE  IRAs may be prohibitive for small employers. Experts also pointed out that  contribution requirements for SIMPLE and SEP plans may, in some cases,  limit employer sponsorship of these plans. For example, because SIMPLE  IRAs require employers to make contributions to employee accounts,  some small firms may be unable to commit to these IRAs. Small business  groups and IRA providers told us that small business revenues are  inconsistent and may fluctuate greatly from year to year, making required  contributions difficult for some firms. In addition, employers offering  SIMPLE IRAs must determine before the beginning of the calendar year  whether they will match employee contributions or make nonelective  contributions to all employees’ accounts. According to IRA providers, this  requirement may discourage some small employers from offering these  IRAs, and if employers had the flexibility to make additional contributions  to employee accounts at the end of the year, employers may be  encouraged to contribute more to employee accounts.
With regard to SEP IRAs, two experts said small firms may be discouraged  from offering these plans because of the requirement that employers must  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.
section_title: Proposals Exist to Encourage Employers to Offer and Employees to Participate in IRAs
paragraphs: Retirement and savings experts reported that several legislative proposals  could encourage employers to offer and employees to participate in IRAs.  While several bills have been introduced in Congress to expand worker  access to payroll-deduction IRAs, limited government actions have been  taken to increase the number of employers sponsoring employer- sponsored 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 budget. Other experts told  us that automatically enrolling workers into payroll-deduction and  SIMPLE IRAs could increase employee participation; however, small  business groups and IRA providers said that mandatory automatic  enrollment could be burdensome to small employers. 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, which can result in additional  income taxes. Experts also said increasing public awareness of the  importance of saving for retirement and educating individuals how to do  so could increase IRA participation. Several experts reported the growth  of DC plans and IRAs has resulted in individuals bearing greater  responsibility for their own retirement and earlier and more frequent  information about retirement savings could encourage IRA participation.
section_title: IRS and Labor Share Responsibility for Overseeing IRAs, but Labor Has No Process in Place to Monitor IRAs and Data Gaps Exist
paragraphs: IRS and Labor share oversight for all types of IRAs, but Labor lacks a  process to monitor all IRAs and data gaps exist. IRS is responsible for tax  rules on establishing and maintaining IRAs, while Labor is responsible for  oversight of fiduciary standards for employer-sponsored IRAs. Payroll- deduction IRAs are not under Labor’s jurisdiction; however, Labor does  provide guidance to help ensure such a retirement program is not subject  to the Title I requirements of ERISA. Reporting requirements for employer- sponsored IRAs are limited. Under Title I, there is no reporting  requirement for SIMPLE IRAs, and an alternative method available for  reporting of employer-sponsored SEP IRAs.  Labor does not have  processes in place to identify all employers offering IRAs, numbers of  employees participating, and employers not in compliance with the law.  Obtaining information about employer-sponsored and payroll-deduction  IRAs is also important to determine whether these vehicles help workers  without pensions and 401(k) plans build retirement savings. Although IRS  publishes some IRA data, IRS has not consistently produced IRA reports.
subsections: section_title: IRS and Labor Share Responsibility for Overseeing IRAs
paragraphs: IRS and Labor share responsibility for overseeing IRAs. IRS has primary  responsibility for tax rules governing how to establish and maintain an  IRA, as shown in figure 5. Labor has sole responsibility for overseeing  ERISA’s fiduciary standards for employer-sponsored IRAs. Fiduciaries  have an obligation, among others, to make timely contributions to fund  benefits. When contributions are delinquent for those IRAs subject to  Labor’s jurisdiction, Labor investigates and takes action to ensure that  contributions are restored to the plan. Labor also issues guidance related  to payroll-deduction IRAs. In 1999, Labor issued an interpretive bulletin  that consolidated Labor regulations and various advisory opinions on  payroll-deduction programs for IRAs into one set of guidance. Specifically,  the bulletin sets out Labor’s safe harbor under which an employer may  establish a payroll-deduction IRA program without inadvertently  establishing an employee benefit plan subject to all of the ERISA  requirements.
Labor and IRS also work together to oversee IRA prohibited transactions;  generally, Labor has interpretive jurisdiction 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 has interpretive authority over  prohibited transactions and may grant administrative exemptions on a  class or individual basis for a wide variety of proposed transactions with a  plan. IRS has responsibility related to imposing an excise tax on parties  that engage in a prohibited transaction.
section_title: Reporting Requirements for Employer Sponsored IRAs Are Limited
paragraphs: Reporting requirements for employer-sponsored IRAs are limited.  Currently, the financial institution/trustee handling the employer- sponsored IRA provides the IRS and participants with annual statements  containing contribution and fair market value information on IRS Form  5498, IRA Contribution Information, as shown in figure 7.
Distributions from that same plan are reported by the financial institution  making the distribution to both IRS and the recipients of the distributions  on IRS Form 1099-R, Distributions from Pension, Annuities, Retirement or  Profit-Sharing Plans, IRA, Insurance Contracts, etc., as shown in figure 8.
Information on retirement plans are also reported annually by employers  and others to IRS on its Form W-2, which contains the amounts deducted  from wages for contributions to pension plans, as well as codes that  provide more details on the kinds of plans, such as employer-sponsored  IRAs, where the contribution was made, as shown in figure 9.
Employers who offer payroll-deduction IRAs have no reporting  requirements, and consequently, there is no reporting mechanism that  captures how many employers offer payroll-deduction IRAs. Although IRS  receives information reports for all traditional and Roth IRAs, those data  do not show how many of those IRAs were for employees using payroll- deduction IRAs. In our discussions with Labor and IRS officials, they  explained that the limited reporting requirements for employer-sponsored  IRAs were put in place to try to encourage small employers to offer their  employees retirement plan coverage by reducing their administrative and  financial burdens.
According to Labor officials, IRS does not share the information it receives  with Labor because it is confidential tax information. IRS clarified that it  does not share tax information involving specific employers or employees  with Labor because it is confidential. Consequently, Labor does not have  information on employer-sponsored IRAs. Labor also does not receive  information, such as annual financial reports, from such employers, as it  does from private pension plan sponsors. For example, pension plan  sponsors must file Form 5500 reports with Labor on an annual basis,  which provides Labor with valuable information about the financial health  and operation of private pension plans. Labor’s Bureau of Labor  Statistics (BLS) National Compensation Survey surveys employee benefit  plans in private establishments, receiving information on access,  participation, and take-up rates for DB and DC plans. The BLS survey,  however, collects less information on employer-sponsored IRAs.
section_title: Labor Has No Process in Place to Monitor Employer-Sponsored and Payroll-Deduction 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 these IRAs, a minimum level of oversight is  important to ensure that employers are acting in accordance with the law.  Yet, Labor officials said that they are unable to monitor (1) whether all  employers are in compliance with the prohibited transaction rules and  fiduciary standards, such as by making timely and complete 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.  For example, according to Labor officials, about 90 percent of its IRA  investigations were the result of participant complaints. However, while  Labor has other processes in place for private pension plan oversight, such  as computer searches and targeting to identify ERISA violations, Labor  does not have other processes for IRA investigation leads. Unlike its  oversight of pension plans, Labor is at a greater risk of not being able to  ensure that all IRA sponsors are in compliance with the laws designed to  protect individuals’ retirement savings.
Payroll-deduction IRAs: Through payroll-deduction IRAs, employees  may establish either traditional or Roth IRAs, and employees may  contribute to these accounts through voluntary deductions from their pay,  which are forwarded by the employer to the employee’s IRA. As long as  employers meet the conditions in Labor’s regulation and guidance,  employers are not subject to the fiduciary requirements in ERISA Title I  that apply to employer-sponsored retirement plans, such as 401(k) plans.  According to Labor officials, if they become aware of an employer  operating a payroll-deduction IRA that may not be following agency  guidance, Labor will conduct an investigation to determine if the IRA  should be treated as an ERISA pension plan. The IRA may be become  subject to the requirement of Title I of ERISA, which includes filing a  detailed annual report (Form 5500) with Labor. Labor officials said this  was done in an effort to ensure that plans are being operated and  maintained in the best interest of plan participants.
Labor officials told us that they are not aware of employers improperly  relying on the safe harbor regarding payroll-deduction IRAs. However,  without a process to monitor payroll-deduction IRAs, Labor cannot be  certain of the extent or nature of certain employer activities which may  fall outside of the guidance provided by Labor.  For example, Labor does  not know the extent to which employers are sending employee  contributions to IRA providers, exercising any influence over the  investments made or permitted by the IRA provider, or receiving any  compensation in connection with the IRA program except reimbursement  for the actual cost of forwarding the payroll deduction. In addition, Labor  does not have information on the number of employers that are operating  payroll-deduction IRAs.
section_title: Regulators Lack Information and Consistent Reporting on Employer-Sponsored and Payroll-Deduction IRAs
paragraphs: Ensuring that information is obtained about employer-sponsored and  payroll-deduction IRAs by regulators is one way to help them and others  determine the status of these IRAs and whether those individuals who lack  employer-sponsored pension plans are able to build retirement savings  through employer-sponsored and payroll-deduction IRAs. However, key  information on IRAs is currently not reported, such as information that  identifies employers offering payroll-deduction IRAs, distribution by  employers of the number of employees that contribute to payroll- deduction IRAs, and distribution by employer of the type of payroll- deduction IRA account offered (traditional or Roth) and the total  employee contributions to these accounts. Experts that we interviewed  said that, without information on the distribution by employer of the type  of payroll-deduction IRA offered and the total employee contributions to  these accounts, they are unable to determine how many employers and  employees participate in payroll-deduction and the extent to which these  IRAs have contributed to the retirement savings of its participants. In  addition, the limited reporting requirements prevent information from  being obtained about the universe of employers that offer employer- sponsored and payroll-deduction IRAs. Also, without information on the  distribution by employer of the type of payroll-deduction IRA offered, and  the total employee contributions to these accounts, it is difficult to  determine the extent to which payroll-deduction IRAs are being used and  to determine ways to increase retirement savings for workers not covered  by an employer-sponsored pension plan. This information can be useful  when determining policy options to increase IRA participation among  uncovered workers because it provides a strong foundation to assess the  current extent to which these IRAs are being utilized and information  about the people that are participating in these plans.
Although IRS does publish some of the information it receives on IRAs  through its Statistics of Income program (SOI), IRS does not produce IRA  reports on a consistent annual basis. IRS officials told us that they are  currently facing three major challenges that affect their ability to publish  IRA information on a more consistent basis. First, IRS relies, in part, on  information returns to collect data on IRAs, which are not due until the  following year after the filing of the tax return. IRS officials said that these  returns have numerous errors, making it difficult and time-consuming for  IRS to edit them for statistical analysis. They also said that the IRA rules,  and changes to those rules, make it difficult for some taxpayers,  employers, and trustees to understand, which contributes to filing errors.  Second, IRS’s reporting of IRA data is not a systematic process. In the  past, the production of IRS reports on IRAs was done on an ad hoc basis.  IRS officials told us that they recognize this problem and are in the early  stages of determining ways to correct it. Third, in the past, one particular  IRS employee, who has recently retired, took the lead for developing a   statistical analysis on IRAs. Since IRS does not have a process in place to  train another employee to take over this role, a knowledge gap was  created that IRS is trying to fill.
Labor officials and retirement and savings experts told us that without the  consistent reporting of IRA information by IRS, they use studies by  financial institutions and industry associations for research purposes,  which include assessing the current state of IRAs and future trends. These  experts said that although these studies are helpful, some may double  count individuals because one person may have more than one IRA at  different financial institutions. They also said that more consistent  reporting of IRA information could help them ensure that their analyses  reflect current and accurate information about retirement assets, such as  the fair market value of IRAs. Since IRS is the only agency that has data on  all IRA participants, consistent reporting of these data could give  policymakers and others a comprehensive look at the IRA landscape.
section_title: Conclusions
paragraphs: Thirty years ago, when Congress created IRAs, these accounts were  designed, in part, to help workers who do not have pensions or 401(k)  plans save for their retirement. Currently, IRAs play a major role in  preserving retirement assets but a very small role in creating them.  Although studies show that individuals find it difficult to save for  retirement on their own, millions of U.S. workers have no retirement  savings plan at work. Employer-sponsored and payroll-deduction IRAs  afford an easier way for workers, particularly those who work for small  employers, to save for retirement. They also offer employers less  burdensome reporting and legal responsibilities than defined benefit  pension plans and defined contribution plans, such as 401(k) plans.  Yet, encouraging employers to offer IRAs to their employees will not be  productive if Congress and regulators do not make sure that there is also  adequate information and improved oversight of employer-sponsored and  payroll-deduction IRAs. Given that limited reporting requirements for  employer-sponsored IRAs and the absence of reporting requirements for  payroll-deduction IRAs were meant to encourage small employers to offer  retirement plans to employees, providing more complete and consistent  data on IRAs would help ensure that regulators have the information they  need to make informed decisions about how to increase coverage and  facilitate retirement savings. Currently, IRS collects information on  employer-sponsored IRAs that it does not share with Labor because it is  confidential tax information, but IRS does report summary information on  employer-sponsored IRAs that could be useful for Labor to have on a  consistent basis. Without IRS sharing such information, data on IRAs will  continue to be collected on an episodic basis, and mapping the universe of  IRAs, especially employer-sponsored IRAs, will continue to be difficult.
Steps must be taken to improve oversight of payroll-deduction IRAs and  determine whether direct oversight is needed.  Currently, neither Labor  nor IRS is able to determine how many employers are offering their  employees the opportunity to contribute to traditional or Roth IRAs  through payroll-deduction IRA programs, and Labor has no process in  place—nor responsibility—to monitor employers offering payroll- deduction IRAs.  Consequently, Labor is unable to determine the universe  of employers offering payroll-deduction IRAs, the prevalence and nature  of activities that fall outside Labor’s safe harbor, and the impact on  employees. As a result, Labor lacks key information on employers who  offer payroll-deduction IRAs.  Without information on the number of  employers offering these IRAs to employees, and the number of employees  participating in these programs, neither Labor nor IRS is able to determine  the effectiveness of payroll-deduction IRAs in facilitating retirement  savings for workers lacking an employer-sponsored pension. Moreover,  given that payroll-deduction IRAs currently lack direct oversight, it is  important to decide whether such oversight is needed.  Without direct  oversight, employees may lack confidence that payroll-deduction IRAs will  provide them with adequate protections to participate in these programs,  which is particularly important given the current focus in Congress on  expanding payroll-deduction IRAs.  However, any direct oversight of  payroll-deduction IRAs should be done in a way that does not pose an  undue burden on employers or their employees.
Although the limited reporting requirements for employer-sponsored IRAs  and the absence of reporting requirements for payroll-deduction IRAs  were meant to encourage small employers to offer retirement savings  vehicles to employees, there is also a need for those responsible for  overseeing retirement savings vehicles to have the information necessary  to do so.  This will help ensure that there is a structure in place to help  protect individuals’ retirement savings if they choose either employer- sponsored or payroll-deduction IRAs. If current oversight vulnerabilities  are not addressed, future problems could emerge as more employers and  workers participate in employer-sponsored and payroll-deduction IRAs.  However, any improvements to plan oversight and data collection should  be done in a way that does not pose an undue burden on employers or  their employees.
section_title: Matter for Congressional Consideration
paragraphs: Given the absence of direct oversight of payroll-deduction IRAs, Congress  may wish to consider whether payroll-deduction IRAs should have some  direct oversight.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Labor take the following three  actions:  1.  To increase retirement plan coverage for the millions of workers not  covered by an employer-sponsored pension plan and the possibility  that payroll-deduction IRAs can help bridge the coverage gap, examine  ways to better encourage employers to offer and employees to  participate in these IRAs that could include:    examining and determining the financial and administrative costs to  employers for establishing payroll-deduction IRA programs, especially  for those employers that do not have an automatic payroll system in  place;   developing policy options to help employers defray the costs  associated with establishing payroll-deduction IRA programs, while  taking into consideration the potential costs to taxpayers and small  employers; and   evaluating whether modifications or clarifications to its guidance on  payroll-deduction IRAs are needed to encourage employers to establish  payroll-deduction IRA programs. 2.  To improve the federal government’s ability to regulate employer- sponsored and payroll-deduction IRAs and protect plan participants,  evaluate ways to determine whether employers who establish  employer-sponsored IRAs and offer payroll-deduction IRAs are in  compliance with the law and the safe harbor provided under Labor’s  regulations and Interpretive Bulletin 99-1, while taking employer  burden into account.  3.  To improve the federal government’s ability to better assess ways to  improve retirement plan coverage for workers who do not have access  to an employer-sponsored retirement plan, and to provide Congress,  federal agencies, and the public with more usable and relevant  information on all IRAs, evaluate ways to collect additional  information on employer-sponsored and payroll-deduction IRAs, such  as adding questions to the Bureau of Labor Statistics National  Compensation Survey that provide:  information sufficient to identify employers that offer payroll- deduction and employer-sponsored IRAs and the distribution by employer of the number of employees that  contribute to payroll-deduction and employer-sponsored IRAs.
We also recommend the Commissioner of the Internal Revenue Service  take the following two actions:  1.  To supplement information Labor would receive through the Bureau of  Labor Statistics National Compensation Survey, provide Labor with  summary information on IRAs and information collected on employers  that sponsor IRAs.  2.  Considering the need for federal agencies, Congress, and the public to  have access to timely and useful information on IRAs, release its  reports on IRA contributions, accumulations, and distributions on a  consistent basis, such as annually.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Secretary of Labor, the Secretary  of the Treasury, and the Commissioner of Internal Revenue.  We obtained  written comments from the Assistant Secretary of Labor and from the  Commissioner of Internal Revenue, which are reproduced in appendixes II  and III.  Both agencies neither agreed nor disagreed with our  recommendations, and provided more information about what each  agency was currently doing.  Treasury and both EBSA and BLS within  Labor provided technical comments, which were incorporated in the  report where appropriate.
Labor clearly stated in its comments that payroll-deduction IRAs are not  under Labor’s jurisdiction.  We agree with Labor and have revised our  report to reflect Labor’s authority.  As stated in our report, Labor does  provide guidance to help ensure that payroll-deduction programs are not  subject to the Title I requirements of ERISA.  In addition, we described in  our report that IRS’s responsibility over IRAs is to provide tax rules  governing how to establish and maintain an IRA. As previously described  in the report, several bills have been introduced to Congress to expand  worker access to payroll-deduction IRAs. However, without direct  oversight of payroll-deduction IRAs, employees may lack confidence that  payroll-deduction IRAs will provide them with adequate protections to  participate in such programs, which is particularly important given the  increasing role that IRAs have in retirement savings.  Given that Labor and  IRS do not have direct oversight over payroll-deduction IRAs, we added  the matter for congressional consideration to the report suggesting that  Congress may wish to consider whether payroll-deduction IRAs should  have some direct oversight.
In response to our first recommendation that Labor should examine and  determine the financial and administrative costs to employers for  establishing payroll-deduction IRA programs for their employees, Labor  neither agreed nor disagreed with the recommendation and stated that   payroll-deduction IRAs are not under its jurisdiction.  However, as a part  of its broad program of research, Labor studies costs and expenses related  to retirement programs and said it will consider GAO’s recommendation in  developing its research agenda on costs and expenses related to  retirement programs.
Labor also stated that its Interpretive Bulletin 99-1 addresses the costs  related to payroll-deduction IRA programs, which states that employers  may select one IRA sponsor to receive payroll contributions to keep  administrative costs down, and that employers can receive payments from  an IRA sponsor to cover the actual costs of operating the IRA payroll- deduction program.  Even though Labor’s Interpretive Bulletin addresses  some costs related to payroll-deduction programs, because we do not  know the actual costs of managing a payroll-deduction IRA program, it is  difficult to determine if these remedies are sufficient.  For example, if the  actual costs of maintaining such a program are minimal—as some experts  have suggested—limiting employees to one IRA provider may discourage  some employees from participating in the program unnecessarily. On the  other hand, if the costs of managing these programs are significant—as  other experts have suggested—this allowance may be insufficient to  encourage employers to offer a payroll-deduction IRA program.
Labor also noted that Interpretive Bulletin 99-1 indicates that employees  can receive payments from an IRA sponsor to cover the actual costs of  operating the IRA payroll-deduction program.  However, employers may  not receive any consideration beyond “reasonable compensation for  services actually rendered in connection with payroll deductions.”    Without an accurate assessment of what the actual costs of operating  these programs are to employers, Labor may be unable to readily  determine whether such programs fall outside the safe harbor and may be  considered to have become ERISA Title I programs.  Furthermore, without  accurate cost estimates and a determination of what constitutes  “reasonable compensation” to employers, employers may be reluctant to  seek compensation from IRA service providers to defray the costs of  operating a payroll-deduction IRA program.
In response to our recommendation that Labor should develop policy  options to help employers defray the costs associated with establishing  payroll-deduction IRA programs, Labor stated that Interpretive Bulletin 99- 1 advises employers on how to defray the costs of operating payroll- deduction IRA programs without subjecting the program to coverage  under ERISA, but also noted that payroll-deduction IRAs operated in  accordance with Interpretive Bulletin 99-1 are outside of Labor’s  jurisdiction.  Consequently, Labor suggested that the development of  additional policy options to help employers defray costs may be more  properly considered by the Secretary of Treasury.  We believe some  further examination by Treasury and Labor of this area would be  appropriate.  We believe that any policy options proposed to defray costs  to employers should, in fact, be based on an accurate assessment of what  the actual costs to employers of managing such programs. Efforts to  identify appropriate policies to defray costs would be most efficiently  executed if coordinated with the process of determining the actual costs  of managing payroll deduction programs, and that responsibility may lie  more with Labor.   Proposals designed to defray employer costs that are  not determined by an accurate accounting of actual costs to employers’  risks providing either an excessive or insufficient benefit to employers.    Labor stated that Interpretive Bulletin 99-1 advises employers on how to  defray the costs of operating payroll-deduction IRA programs without  subjecting the program to coverage under ERISA.
In response to our recommendation that Labor evaluate whether  modifications or clarifications to its guidance on payroll-deduction IRAs  are needed, Labor stated that the draft report does not provide specifics  regarding why employers believe they cannot effectively publicize the  availability of payroll-deduction IRAs, and stated that Labor had not  received any input from employers or IRA sponsors about being unable to  effectively publicize the availability of payroll-deduction IRAs.  Our report  includes a discussion of the barriers identified by retirement and savings  experts that may discourage employers from offering payroll-deduction  IRAs to employees.  IRA providers told us that Labor’s guidance lacks  adequate flexibility for employers to promote these IRAs to their  employees, without operating outside of the safe harbor and potentially  becoming subject to ERISA Title I requirements.  In addition, as we noted  in our report, employers have indicated that they are hesitant to offer  payroll-deduction IRAs due to the possibility that ERISA fiduciary  responsibilities could apply.
In response to our second recommendation that Labor evaluate ways to  determine whether employers who establish employer-sponsored IRAs  and offer payroll-deduction IRAs are in compliance with law, while taking  employer burden into account, Labor simply described its enforcement  program and its reliance on targeting, and stated that during the past three  fiscal years, 170 SIMPLE IRAs and SEP plans had been investigated with  approximately $1.2 million obtained in monetary results.
We acknowledge that Labor’s enforcement program for employer- sponsored IRAs has led to investigations and has produced monetary  results.  However, as indicated in our report, Labor has primarily relied on  the complaints of participants as sources for its investigations, as about 90  percent of its investigations into employer-sponsored IRAs were the result  of participant complaints.  In addition, our report indicates that because of  the limited reporting requirements for employer-sponsored IRAs, Labor  does not have specific information on employers that sponsor such IRAs,  or even how many there are.  Because Labor lacks such information, it is  unable to target and investigate potential ERISA violations for employer- sponsored IRAs.  We do not believe the information provided by Labor on  its enforcement activities precludes our recommendation and we believe  our recommendation remains valid.
Regarding our third recommendation that Labor evaluate ways to collect  additional information on employer-sponsored and payroll-deduction  IRAs, Labor’s comments focused on statutory requirements and policy  considerations, and stated that any collection of information on employer- sponsored and payroll-deduction IRAs should not impose burdens on  employers to report information. The intent of our recommendation was  to evaluate alternative, less burdensome approaches to obtain important  information, such as through the Bureau of Labor Statistics National  Compensation Survey.  As we noted in our report, key information on  IRAs is currently not reported and ensuring that such information is  obtained can help determine valuable information about whether  employers are choosing to sponsor employer-sponsored IRAs or offer  payroll-deduction IRAs, and whether individuals are able to build  retirement savings through these vehicles.  We do not believe the  information provided by Labor makes our recommendation less important  and we believe our recommendation remains valid.
In response to our recommendation that IRS provide Labor with summary  information on IRAs and information collected on employers that sponsor  IRAs, and release its reports on IRA contributions, accumulations, and  distributions on a consistent basis, IRS stated that it recognizes the need  for federal agencies and others to have access to routine and timely  information on IRAs and then listed the information it currently provides.   IRS also stated that it will continue to provide data and ensure that Labor  receives information on IRAs on the same day that such information is  published or otherwise made available to the public.  Although IRS will be  providing summary information on all IRAs to Labor and for public  information, we stand by our recommendation that IRS should also  consider providing information to Labor and others on employers that  sponsor IRAs, such as the number of employers that sponsor SEP and  SIMPLE IRAs, which is currently absent in the information IRS stated it  would provide to Labor.
We are sending copies of this report to the Commissioner of Internal  Revenue, the Secretary of Labor, the Secretary of the Treasury;  appropriate congressional committees; and other interested parties. We  will also make copies available to others on request. In addition, the report  will be available at no charge on GAO’s Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact me at  (202) 512-7215 or bovbjergb@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report.  GAO staff who made significant contributions to this report  are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: During our review, our objectives were to (1) compare individual  retirement account (IRA) assets to assets in pension plans, (2) describe  the barriers that may discourage small employers from offering employer- sponsored and payroll-deduction IRAs to their employees, and (3)  describe how the Internal Revenue Service (IRS) and the Department of  Labor (Labor) oversee IRAs and assess the adequacy of oversight and  information of employer-sponsored and payroll-deduction IRAs.
To identify how IRA assets compare to assets in pension plans and to  describe the demographic characteristics of IRA owners, we reviewed  reports with published data from the Federal Reserve’s Survey of  Consumer Finance (SCF), Statistics of Income (SOI), and relevant industry  surveys. The following is a list of the studies we reviewed:    Copeland, Craig. “Individual Account Retirement Plans: An Analysis of  the 2004 Survey of Consumer Finances.” Issue Brief, no. 293  (Washington, D.C., Employee Benefit Research Institute, May 2006).  This report is based on analysis of data from the 2004 SCF. SCF is a  triennial survey that asks extensive questions about household income  and wealth components. In 2004, it sampled 4,522 households. The  Employee Benefit Research Institute (EBRI) is a private nonprofit  organization that conducts public policy research on economic security  and employee benefits issues. Its membership includes a cross-section  of pension funds, businesses, trade associations, labor unions, health  care providers and insurers, government organizations, and service  firms.
Holden, Sara and Michael Bogdan. “The Role of IRAs in U.S.
Households’ Saving for Retirement.” Research Fundamentals, vol. 17,  no. 1 (Washington, D.C., Investment Company Institute, January 2008).  The demographic and financial information of IRA owners come from  the May 2007 IRA Owners Survey. The 599 randomly selected  respondents are representative of U.S. households owning traditional  or Roth IRAs. The standard error for the total sample is ± 4 percentage  points at the 95 percent confidence level. The Investment Company  Institute (ICI) used the American Association for Public Opinion  Research #4 method to calculate its response rate and believes it  achieved a response rate in line with comparable industry surveys. ICI  is a national association of U.S. investment companies, including  mutual funds, closed-end funds, exchange-trade funds, and unit  investment trusts. Its research department collects and disseminates  industry statistics, and conducts research studies relating to issues of  public policy, economic and market developments, and shareholder  demographics.  “The U.S. Retirement Market, Second Quarter 2007.” Research  Fundamentals, vol. 16, no. 3-Q2 (Washington, D.C., Investment  Company Institute, December 2007). The information on total IRA  market assets comes from tabulations of total IRA assets provided by  the IRS SOI for tax years 1989, 1993, and 1996 through 2004. The  tabulations are based on a sample of IRS returns. See information  above for a description of ICI.
Holden, Sara and Michael Bogdan. “Appendix: Additional Data on IRA  Ownership in 2007.” Research Fundamentals, vol. 17, no. 1A  (Washington, D.C., Investment Company Institute, January 2008).  Information on the number of households owning IRAs is based on  data from the U.S. Bureau of the Census Current Population Reports.  See information above for a description of ICI.
Sailer, Peter, Victoria L. Bryant, and Sara Holden, Internal Revenue  Service, “Trends in 401(k) and IRA Contribution Activity, 1999-2002 –  Results from a Panel of Matched Tax Returns and Information  Documents.” (Washington, D.C., 2005). This study is based on SOI’s  database of over 71,000 individual taxpayers who filed for tax years  1999 through 2002. The analysis is limited to those taxpayers who filed  for all 4 years in the study. The weighted file represents 143.2 million  taxpayers, or about 81 percent, of the original 177 million who filed for  1999.
West, Sandra and Victoria Leonard-Chambers. “The Role of IRAs in  Americans’ Retirement Preparedness.” Research Fundamentals, vol.  15, no. 1 (Washington, D.C., Investment Company Institute, January  2006). The demographic and financial information of IRA owners come  from the May 2005 survey of 595 randomly selected representative U.S.  households owning IRAs, including traditional IRAs, Roth IRAs,  Savings Incentive Match Plans for Employees (SIMPLE), Simplified  Employee Pensions (SEP), and Salary Reduction Simplified Employee  Pension (SAR-SEP) IRAs. The standard error for the total sample is ±4  percentage points at the 95 percent confidence level. ICI used the  American Association for Public Opinion Research #4 method to  calculate its response rate and believes it achieved a response rate in  line with comparable industry surveys. See information above for a  description of ICI.
To describe barriers that may discourage employers from offering  employer-sponsored and payroll-deduction IRAs, we interviewed  retirement and savings experts, including individuals representing public  policy research organizations, small business member organizations,  consumer and employee advocacy groups, financial industry associations,  IRA service provider companies and a pension professional member  association. We also interviewed officials at Labor and IRS to gather the  perspective of officials of federal agencies with responsibility for payroll- deduction and employer-sponsored IRAs. In our interviews with these  experts, we gathered information on challenges that small employers face  in offering IRAs to their employees and challenges that employees face in  participating in IRAs. In these interviews, we also gathered information on  proposals that exist to encourage employers to offer and employees to  participate in IRAs. In addition, we reviewed available economics  literature and research conducted by federal agencies, public policy  organizations, and academic researchers on the factors affecting employer  sponsorship of and employee participation in IRAs and other retirement  savings plans.
To describe how the IRS and Labor oversee IRAs and to assess the  adequacy of oversight and information on employer-sponsored and  payroll-deduction IRAs, we obtained and reviewed information about  Labor’s and IRS’s oversight practices and responsibilities regarding IRAs.  To accomplish this, we interviewed Labor and IRS officials about the steps  they take to monitor IRA plans. However, we did not assess the  effectiveness of IRS and Labor compliance and enforcement efforts. We  also reviewed the agencies’ statutory responsibilities in the Internal  Revenue Code and the Employee Retirement Income Security Act of 1974  (ERISA) for overseeing IRAs. We analyzed Labor and IRS oversight  processes to identify any gaps that may exist.
We conducted this performance audit from September 2007 through May  2008 in accordance with generally accepted government auditing  standards, which included an assessment of data reliability. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Comments from the Department of Labor
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact above, Tamara Cross, Assistant Director; Raun  Lazier; Susan Pachikara; Matt Barranca; Joseph Applebaum, Susan  Aschoff; Doreen Feldman; Edward Nannenhorn; MaryLynn Sergent; Roger  Thomas; Walter Vance; and Jennifer Wong made important contributions  to this report.