Individual Retirement Accounts
Government Actions Could Encourage More Employers to Offer IRAs to Employees
GAO-08-590, Jun 4, 2008
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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.
Status Legend:
Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
- In Process
- Open
- Closed - implemented
- Closed - not implemented
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: Closed - Implemented
Comments: The Department of Labor's Employee Benefits Security Administration (EBSA) has taken steps to examine ways to better encourage employers to offer and employees to participate in payroll deduction IRAs. According to ESBA, the Administration?s budget includes a proposal to require employers who do not currently offer a retirement plan to offer automatic enrollment in an IRA to all of their employees, effective for taxable years beginning after December 31, 2011. Second, EBSA partnered with the Small Business Administration and provides educational materials and outreach for small businesses establishing a retirement plan.
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: In FY08, 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. In FY11, 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. Labor reported that it has resolved numerous complaints and recovered funds. However, it did not report taking any steps to address our recommendation.
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: The Department of Labor's Employee Benefits Security Administration defers to the Bureau of Labor Statistics (BLS) regarding recommendations for changes to the BLS National Compensation Survey.
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.