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

Letter

Background

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.

Employer-Sponsored IRAs

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.)

IRAs Are Primarily Used to Preserve Savings through Rollovers

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.

Worker Access to Employer-Sponsored and Payroll-Deduction IRAs Appears Limited, and Several Barriers May Discourage Employers from Offering These IRAs

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.

Worker Access to Employer-Sponsored and Payroll-Deduction IRAs Appears Limited

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.

Employer-Sponsored and Payroll-Deduction IRAs Could Help Workers to Save, but Several Barriers May Discourage Employers from Offering These IRAs

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.

Some Proposals Encourage Employers to Offer and Employees to Participate in IRAs

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.

Changes at Labor and IRS Could Help Encourage Employers to Offer IRAs and Improve IRA Information and Oversight

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.

Regulators Lack Information and Consistent Reporting on Employer-Sponsored and Payroll-Deduction IRAs

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.

Labor Has No Process in Place to Monitor Employer-Sponsored IRAs

Given the limited reporting requirements for employer-sponsored IRAs and the absence of requirements for payroll-deduction IRAs, as well as Labor’s role in overseeing 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.

Recent Recommendations Regarding IRAs

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.

Conclusions

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.

Contacts and Acknowledgments

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.

This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.