Summary
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.
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.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director:
Team:
Phone:
Barbara D. Bovbjerg
Government Accountability Office: Education, Workforce, and Income Security
(202) 512-5491
Recommendations for Executive Action
Recommendation: 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, the Secretary of Labor should examine ways to better encourage employers to offer and employees to participate in these IRAs that could include: (1) 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; (2) 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 (3) evaluating whether modifications or clarifications to its guidance on payroll-deduction IRAs are needed to encourage employers to establish payroll-deduction IRA programs.
Agency Affected: Department of Labor
Status: Open
Comments: Labor 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 this recommendation in developing its research agenda on costs and expenses related to retirement programs. Labor said its Interpretive Bulletin 99-1 addresses the costs related to payroll-deduction IRA programs, and that employers can receive payments from an IRA sponsor to cover the actual costs of operating the ion program. However, because we do not know the actual costs of managing a payroll-deduction IRA program, we believe it is hard to determine if these remedies are sufficient. For example, if the actual costs of maintaining such a program are minimal, limiting employees to one IRA provider may discourage some employees from participating in the program unnecessarily. Conversely, if the costs are significant, this allowance may be insufficient to encourage employers to offer such a program. Labor also noted that the Bulletin indicates that employees can receive payments from an IRA sponsor to cover the actual costs of operating the 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 the actual operating costs 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. And without accurate cost estimates and a determination of what constitutes "reasonable compensation," employers may be reluctant to seek compensation from IRA service providers to defray the costs of operating the program. Regarding the second part of our recommendation, Labor stated that the Bulletin 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 the Bulletin are outside of Labor?s jurisdiction. 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 and that any policy options proposed to defray costs to employers should 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 the Bulletin 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 the third part of our recommendation, Labor stated it had not received any input from employers or IRA sponsors about being unable to effectively publicize the availability of payroll-deduction IRAs. We reported on barriers 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. Also, employers indicated they are hesitant to offer payroll-deduction IRAs due to the possibility that ERISA fiduciary responsibilities could apply.
Recommendation: To improve the federal government's ability to regulate employer-sponsored and payroll-deduction IRAs and protect plan participants, the Secretary of Labor should 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.
Agency Affected: Department of Labor
Status: Open
Comments: 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 the Bulletin 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 and that any policy options proposed to defray costs to employers should 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 the Bulletin advises employers on how to defray the costs of operating payroll-deduction IRA programs without subjecting the program to coverage under ERISA.
Recommendation: 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, the Secretary of Labor should 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 (1) information sufficient to identify employers that offer payroll-deduction and employer-sponsored IRAs and (2) the distribution by employer of the number of employees that contribute to payroll-deduction and employer-sponsored IRAs.
Agency Affected: Department of Labor
Status: Open
Comments: Labor stated that any collection of information on employer-sponsored and payroll-deduction IRAs should not impose burdens on employers to report information. Our recommendation is intended to evaluate alternative, less burdensome approaches to obtain important information, such as through the Bureau of Labor Statistics National Compensation Survey. 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.
Recommendation: To supplement information Labor would receive through the Bureau of Labor Statistics National Compensation Survey, the Commissioner of Internal Revenue Service should provide Labor with summary information on IRAs and information collected on employers that sponsor IRAs.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: IRS 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 believe IRS should also consider providing information to Labor and others on employers that sponsor IRAs, such as the number of employers that sponsor Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs, which is currently absent in the information IRS stated it would provide to Labor.
Recommendation: Considering the need for federal agencies, Congress, and the public to have access to timely and useful information on IRAs, the Commissioner of Internal Revenue Service should release its reports on IRA contributions, accumulations, and distributions on a consistent basis, such as annually.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: IRS stated that it recognizes the need for federal agencies and others to have access to routine and timely information on IRAs. Although IRS will be providing summary information on all IRAs to Labor and for public information, we believe IRS should also consider providing information to Labor and others on employers that sponsor IRAs, such as the number of employers that sponsor Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs, which is currently absent in the information IRS stated it would provide to Labor.
