    Individual Retirement Accounts: Government Actions Could
    Encourage More Employers to Offer IRAs to Employees (04-JUN-08,
    GAO-08-590).

    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.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-08-590
        ACCNO:   A82260
      TITLE:     Individual Retirement Accounts: Government Actions Could
    Encourage More Employers to Offer IRAs to Employees
         DATE:   06/04/2008
      SUBJECT:   401(k) plans
    	     Assets
    	     Cost analysis
    	     Employee incentives
    	     Employee retirement plans
    	     Federal employee retirement programs
    	     Government employees
    	     Government retirement benefits
    	     Income statistics
    	     Individual retirement accounts
    	     Pensions
    	     Performance appraisal
    	     Reporting requirements
    	     Retirement
    	     Retirement benefits
    	     Retirement income
    	     Small business
    	     Government agency oversight

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    GAO-08-590

    This is the accessible text file for GAO report number GAO-08-590
    entitled 'Individual Retirement Accounts: Government Actions Could
    Encourage More Employers to Offer IRAs to Employees' which was released
    on June 4, 2008.

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    Report to the Committee on Ways and Means, House of Representatives:

    United States Government Accountability Office:
    GAO:

    June 2008:

    Individual Retirement Accounts:

    Government Actions Could Encourage More Employers to Offer IRAs to
    Employees:

    GAO-08-590:

    GAO Highlights:

    Highlights of GAO-08-590, a report to the Committee on Ways and Means,
    House of Representatives.

    Why GAO Did This Study:

    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.

    What GAO Found:

    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.

    What GAO Recommends:

    GAO believes Congress should consider whether payroll-deduction IRAs
    should have some direct oversight in response to Labor�s comments that
    it does not have jurisdiction over these IRAs. GAO also recommends
    Labor examine ways to encourage employer sponsorship of IRAs, and
    evaluate ways to determine whether employers offering IRAs are in
    compliance with the law, and ways to collect additional information on
    IRAs. GAO recommends IRS routinely publish and give Labor data on IRAs.
    Neither IRS nor Labor agreed or disagreed with the recommendations.

    To view the full product, including the scope and methodology, click on
    [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-590]. For more
    information, contact Barbara Bovbjerg at (202) 512-7215 or
    bovbjergb@gao.gov.

    [End of section]

    Contents:

    Letter:

    Results in Brief:

    Background:

    IRAs Hold the Most Retirement Assets:

    Comparisons between IRAs and 401(k) Plans Are Difficult:

    Several Barriers May Discourage Small Employers from Offering Payroll-
    Deduction and Employer-Sponsored IRAs to Employees:

    IRS and Labor Share Responsibility for Overseeing IRAs, but Labor Has
    No Process in Place to Monitor IRAs and Data Gaps Exist:

    Conclusions:

    Matter for Congressional Consideration:

    Recommendations for Executive Action:

    Agency Comments and Our Evaluation:

    Appendix I: Objectives, Scope, and Methodology:

    Appendix II: Comments from the Department of Labor:

    Appendix III: Comments from the Internal Revenue Service:

    Appendix IV: GAO Contact and Staff Acknowledgments:

    Tables:

    Table 1: Characteristics of Different IRA Options:

    Table 2: Contribution Limits for IRAs and Traditional 401(k) Plans,
    2008:

    Table 3: Key Differences between Employer-Sponsored IRAs and
    Traditional 401(k) Plans:

    Table 4: Key Advantages of Payroll-Deduction and Employer-Sponsored
    IRAs:

    Figures:

    Figure 1: Retirement Plan Assets, 1995 to 2004:

    Figure 2: IRA Contributions and Rollovers, 1998 to 2004:

    Figure 3: IRA Ownership and 401(k) Participation among U.S. Households,
    2004:

    Figure 4: Persistency in 401(k) and IRA Contributions, 1999 to 2002:

    Figure 5: Access of Certain Workers to an Employer-Sponsored Retirement
    Plan, 2006:

    Figure 6: Primary Responsibilities of IRS and Labor for IRAs:

    Figure 7: IRS Form 5498, IRA Contribution Information:

    Figure 8: IRS Form 1099-R, Distributions from Pension, Annuities,
    Retirement or Profit-Sharing Plans, IRA, Insurance Contracts, etc.

    Figure 9: IRS Form W-2, Wage and Tax Statement:

    Abbreviations:

    DB: defined benefit:

    DC: defined contribution:

    EBSA: Employee Benefit Security Administration:

    ERISA: Employee Retirement Income Security Act of 1974:

    ICI: Investment Company Institute:

    IRA: individual retirement account:

    IRS: Internal Revenue Service:

    Labor: Department of Labor:

    SAR-SEP: Salary Reduction Simplified Employee Pension:

    SCF: Survey of Consumer Finance:

    SEP: Simplified Employee Pension:

    SIMPLE: Savings Incentive Match Plans for Employees:

    SOI: Statistics of Income:

    [End of section]

    United States Government Accountability Office:
    Washington, DC 20548:

    June 4, 2008:

    The Honorable Charles B. Rangel:
    Chairman:
    The Honorable Jim McCrery:
    Ranking Member:
    Committee on Ways and Means:
    House of Representatives:

    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.
    [Footnote 1] 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.[Footnote 2] 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.

    Results in Brief:

    IRA assets exceed those in defined contribution (DC) plans and defined
    benefit (DB) plans, or pensions, which employers offer workers. In
    2004, IRAs held about $3.5 trillion in assets, while DC plans held $2.6
    trillion in assets and DB plans held about $1.9 trillion in assets.
    Similar percentages of households own IRAs and participate in 401(k)
    plans, and IRA ownership is associated with higher educational and
    income levels. Preserving retirement savings was one of the two reasons
    Congress created IRAs, and, in keeping with that idea, rollovers--money
    transferred to IRAs from DC or DB plans--have outpaced IRA
    contributions. Given the amount of assets held in IRAs, they may appear
    to be comparable to 401(k) plans. However, 401(k) plans and other
    pension plans are employer-sponsored retirement savings vehicles,
    whereas most households with IRAs own traditional IRAs established
    outside of the workplace. In addition, most of the assets held in IRAs
    are in traditional IRAs and not in employer-sponsored IRAs.

    Millions of employees of small firms lack access to a workplace
    retirement plan, and several barriers may discourage small employers
    from establishing employer-sponsored IRAs and offering payroll-
    deduction 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's first goal for creating IRAs--to provide individuals
    without retirement plans at work with a tax-preferred account in which
    to save for their retirement. Although employer-sponsored IRAs have
    fewer reporting requirements than 401(k) plans to encourage small
    employers to offer these IRAs to their employees and payroll-deduction
    IRAs have no reporting requirements for employers, experts told us that
    relatively few employers appear to offer or sponsor these IRAs.
    According to IRA providers and small business groups that we
    interviewed, several barriers may discourage employers from offering
    payroll-deduction IRAs. Some examples of such barriers include a
    perceived lack of flexibility for employers seeking to promote these
    IRAs to their employees based on Labor's guidance for these IRAs and
    costs that some employers may incur for offering payroll-deduction
    IRAs. Information is lacking, however, on what the actual costs to
    employers may be for offering payroll-deduction IRAs. Other factors
    that may discourage employers from offering payroll-deduction IRAs are
    limited incentives to employers to offer these IRAs and a lack of
    awareness for how these IRAs work. In addition, several experts raised
    questions on how expanded payroll-deduction IRAs may affect employees.
    Employer-sponsored IRAs may help workers to save, as these IRAs offer
    greater savings opportunities than payroll-deduction IRAs. However,
    employer sponsorship of these IRAs may, in some cases, also be limited
    by costs, including required employer contributions. Retirement and
    savings experts noted that several legislative proposals may encourage
    employer sponsorship of and employee participation in IRAs, but limited
    government actions have been taken to increase the number of employers
    sponsoring employer-sponsored IRAs.

    IRS and Labor share oversight responsibilities for all types of IRAs,
    but gaps exist within Labor's area of responsibility. IRS has
    responsibility for tax rules governing how to establish and maintain
    IRAs, while Labor has sole responsibility for oversight of fiduciary
    standards for employer-sponsored IRAs, and has issued guidance to
    employers related to payroll-deduction IRAs regarding when such an
    arrangement would be a pension plan subject to Labor's jurisdiction.
    Labor does not have jurisdiction to oversee payroll-deduction IRA
    programs that are operated within the conditions of their guidance.
    Oversight ensures the interests of the employee participants are
    protected, that their retirement savings are properly handled, and
    Labor's guidance and the law are being followed. However, because
    payroll-deduction IRA programs do not require employers to report to
    the federal government that they are offering this service to
    employees, and reporting requirements for employer-sponsored IRAs are
    limited, Labor does not have processes in place to identify all
    employers offering IRAs, which affects its ability to ensure that
    employers are following its guidance and are 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 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 establishments in the private and
    State and local government sectors to collect information on employer-
    sponsored benefit plans. However, the National Compensation Survey
    collects limited information on employer-sponsored IRAs and no
    information on payroll-deduction IRAs. In our discussions with Labor
    officials, they said they rely on industry data to obtain information.
    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.

    We believe that Congress should consider determining whether direct
    oversight is needed for payroll-deduction IRAs. We also make several
    recommendations to Labor and IRS that are intended to help increase IRA
    coverage, improve IRA oversight, and provide policymakers with more
    useable information on IRAs. We recommend that Labor: (1) examine ways
    to better encourage employer sponsorship of and employee participation
    in employer-sponsored and payroll-deduction IRAs, (2) evaluate ways to
    better monitor employer-sponsored and payroll-deduction IRAs, and (3)
    evaluate ways to collect more useful information on these IRAs. We
    recommend that IRS (1) provide Labor with summary information on IRAs,
    including employer-sponsored IRAs, and (2) release statistical
    information on all IRAs on an annual basis.

    In written comments on the draft, Labor stated that it does not have
    jurisdiction over payroll-deduction IRAs. Although Labor is responsible
    for oversight of fiduciary standards for employer-sponsored IRAs, Labor
    stated in its comment on our draft report that payroll-deduction IRAs
    are not under Labor's jurisdiction because they are exempt from the
    requirements imposed on plans by Title I of ERISA.[Footnote 3] In our
    report, we describe that IRS's primary responsibility is for tax rules
    governing how to establish and maintain an IRA. After further review we
    agreed with Labor's analysis that payroll-deduction IRAs are not under
    Labor's jurisdiction. We then concluded that there is an absence of
    direct oversight of payroll-deduction IRAs. As a result of agency
    comments, we added a matter for congressional consideration.

    In our first recommendation, we asked Labor to examine ways to better
    encourage employers to offer and employees to participate in payroll-
    deduction IRAs, which would include examining costs to employers,
    developing policy options to help employers defray the cost to
    employers, and evaluating whether its guidance on payroll-deduction
    IRAs need modifications or clarifications. In partial response to this
    recommendation, Labor stated that payroll-deduction IRAs are not under
    its jurisdiction. However, Labor stated that it would consider
    examining the costs of payroll-deduction IRA programs when developing
    its research agenda. Labor also stated that the development of
    additional policy options to defray costs would be more properly
    considered by the Department of the Treasury (Treasury). We believe
    some further examination by Treasury and Labor of this area would be
    appropriate. In addition, Labor stated that it has not received
    feedback from small employers or IRA service providers that its
    guidance on payroll-deduction IRA programs lack clarity. We maintain
    that IRA providers have reported that this guidance does not provide
    employers with adequate flexibility to promote employee participation
    without becoming subject to ERISA Title I requirements. With regard to
    our second recommendation that Labor evaluate ways to better monitor
    employer-sponsored and payroll-deduction IRAs, Labor described its
    enforcement program for employer-sponsored IRAs, and its reliance on
    targeting, and provided information on the number of investigations and
    amount of monetary results obtained in the past three years from these
    investigations. We acknowledge the results that Labor has achieved
    through its enforcement of employer-sponsored IRAs. However, we do not
    believe that this information precludes our recommendation or
    diminishes its validity. Moreover, we maintain that because Labor lacks
    specific information on employers that sponsor such IRAs, including the
    number of employers that do so, Labor relies primarily on employee
    complaints as sources for its investigations. With regard to our third
    recommendation that Labor evaluate ways to collect more useful
    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. However, Labor did not specifically respond to our
    recommendation to evaluate alternative ways to collect useful
    information that would not be overly burdensome to employers, such as
    through the Bureau of Labor Statistics National Compensation Survey.

    In its written comments, IRS recognized the need for federal agencies
    and others to have routine and timely access to information on IRAs and
    will continue to provide such information to Labor and 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.

    Background:

    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;[Footnote 4] 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.

    Individual IRAs:

    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 70�
    cannot contribute and must begin required minimum distributions from
    these accounts. Withdrawals are generally taxable; and early
    distributions made before age 59�, other than for specific exceptions,
    are subject to a 10 percent additional income tax.[Footnote 5]

    * 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 59�, enrollees may take tax-
    free distributions of their investment earnings. Withdrawals of
    investment earnings before age 59� 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
    59�, 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,[Footnote 6] employers are not subject to the fiduciary
    requirements in ERISA Title I that apply to employer-sponsored
    retirement plans, like 401(k) plans.

    Employer-Sponsored IRAs:

    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.[Footnote 7]

    Table 1: Characteristics of Different IRA Options:

    Contribution limits[A]:
    Payroll-deduction IRAs: Applicable limits for traditional and Roth
    IRAs: $4,000 for 2007; $5,000 for 2008 with $1,000 "catch-up"
    contributions for eligible participants over age 50;
    SIMPLE IRAs: Employee: For 2007 and 2008, $10,500, with additional,
    "catch-up" contributions up to $2,500 for participants over age 50;
    Employer: Either 100 percent match of employee contributions up to 3
    percent of employee compensation, with allowances to reduce match to 1
    percent of compensation in any 2 of 5 years; or contribute 2 percent of
    each eligible employee's compensation;
    SEP IRAs: Up to 25% of employee's annual compensation, not to exceed
    $45,000 for 2007 and $46,000 for 2008;
    Roth IRAs: $4,000 for 2007; $5000 for 2008 with $1,000 "catch-up"
    contributions for eligible participants over age 50;
    Traditional IRAs: $4,000 for 2007; $5000 for 2008 with $1,000 "catch-
    up" contributions for eligible participants over age 50.

    Employer eligibility:
    Payroll-deduction IRAs: Any employer with one or more employees;
    SIMPLE IRAs: Any employer with fewer than 100 employees that does not
    offer another retirement plan;
    SEP IRAs: Any employer with one or more employees;
    Roth IRAs: N/A;
    Traditional IRAs: N/A.

    Employee eligibility:
    Payroll-deduction IRAs: Applicable limits for traditional and Roth
    IRAs: any employee, subject to IRA eligibility requirements for either
    traditional or Roth IRAs;
    SIMPLE IRAs: Employers may choose to cover all employees, or only those
    receiving at least $5,000 compensation during any 2 years prior to the
    year the plan was established;
    SEP IRAs: Employers must cover all employees who are at least 21 years
    of age who have performed service in at least 3 of the last 5 years;
    Roth IRAs: Workers with taxable compensation may contribute based on
    income and filing status;
    Traditional IRAs: Any worker with taxable compensation under the age of
    70� may contribute; tax deduction eligibility varies based on pension
    coverage, income, and filing status. Taxpayers over age 70� may not
    contribute to a traditional IRA.

    Contribution options:
    Payroll-deduction IRAs: As determined by the individual, based on
    applicable contribution limits;
    SIMPLE IRAs: Employee decides contribution amount up to $10,500
    annually; employers must either match employee contribution up to 3
    percent of employee's salary, or make nonelective 2 percent
    contributions of each eligible employee's salary;
    SEP IRAs: Employer decides whether to make contributions year-to-year;
    Roth IRAs: As determined by the individual, based on applicable
    contribution limits;
    Traditional IRAs: As determined by the individual, based on applicable
    contribution limits.

    Sources: IRS, Publication 590, Individual Retirement Arrangements
    (IRAs), 2007 and Publication 590, Retirement Plans for Small Business,
    2007.

    [A] The annual total IRA contribution limit applies across payroll-
    deduction, Roth, and traditional IRAs and is not an annual limit for
    each IRA type.

    [End of table]

    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.

    IRAs Hold the Most Retirement Assets:

    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.

    IRA Assets Exceed DC and DB Plan Assets and Largely Come from
    Rollovers:

    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.[Footnote 8]

    Figure 1: Retirement Plan Assets, 1995 to 2004 (Dollars in trillions):

    [See PDF for image]

    This figure is a multiple line graph depicting the following data:

    Year: 1995;
    Defined benefit: $1.44;
    Defined contribution: $1.31;
    IRAs: $1.29.

    Year: 1996;
    Defined benefit: $1.54;
    Defined contribution: $1.52;
    IRAs: $1.47.

    Year: 1997;
    Defined benefit: $1.78;
    Defined contribution: $1.85;
    IRAs: $1.73.

    Year: 1998;
    Defined benefit: $1.95;
    Defined contribution: $2.11;
    IRAs: $2.15.

    Year: 1999;
    Defined benefit: $2.09;
    Defined contribution: $2.27;
    IRAs: $2.65.

    Year: 2000;
    Defined benefit: $1.95;
    Defined contribution: $2.3;
    IRAs: $2.63.

    Year: 2001;
    Defined benefit: $1.71;
    Defined contribution: $2.12;
    IRAs: $2.62.

    Year: 2002;
    Defined benefit: $1.44;
    Defined contribution: $1.82;
    IRAs: $2.53.

    Year: 2003;
    Defined benefit: $1.72;
    Defined contribution: $2.25;
    IRAs: $3.08.

    Year: 2004;
    Defined benefit: $1.87;
    Defined contribution: $2.55;
    IRAs: $3.48.

    Source: Employee Benefit Research Institute.

    [End of figure]

    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.[Footnote 9]

    Figure 2: IRA Contributions and Rollovers, 1998 to 2004 (Dollars in
    billions):

    [See PDF for image]

    This figure is stacked bar graph depicting the following data:

    Year: 1998;
    Rollovers: $160;
    Contributions: $31.4;
    Total: $191.4.

    Year: 1999;
    Rollovers: $199.9;
    Contributions: $33.5;
    Total: $233.4.

    Year: 2000;
    Rollovers: $225.6;
    Contributions: $36.4;
    Total: $262.

    Year: 2001;
    Rollovers: $187.8;
    Contributions: $35.8;
    Total: $223.6.

    Year: 2002;
    Rollovers: $204.4;
    Contributions: $42.2;
    Total: $246.8.

    Year: 2003;
    Rollovers: $205;
    Contributions: $43.9;
    Total: $248.9.

    Year: 2004;
    Rollovers: $213.6;
    Contributions: $48.4
    Total: $262.

    Source: Investment Company Institute.

    Note: IRA contributions include those made to traditional IRAs, Roth
    IRAs, and employer-sponsored IRAs. Figures for 2003 and 2004 include
    estimates and projections.

    [End of figure]

    Households with IRAs Tend to Have Higher Education, Higher Incomes, and
    Own Traditional IRAs:

    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.[Footnote 10] 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.[Footnote
    11] 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.[Footnote 12]

    Similar Percentages of Households Own IRAs and Participate in 401(k)
    Plans, but IRA Contributions Are Lower Than Contributions to 401(k)
    Plans:

    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[Footnote 13] of households owned
    individually arranged IRAs, and 26 percent participated in 401(k) plans
    (see fig. 3).[Footnote 14] Ten percent of households own a traditional
    or Roth IRA and participate in 401(k) plans.

    Figure 3: IRA Ownership and 401(k) Participation among U.S. Households,
    2004:

    [See PDF for image]

    This figure is an illustration of IRA Ownership and 401(k)
    Participation among U.S. Households, 2004, as follows:

    IRA: 29%;
    401(k) plan: 26%;
    Both IRA and 401(k) plan: 10%.

    Sources: Employee Benefit Research Institute; PhotoDisc (images).

    Note: Data does not include employer-sponsored IRAs.

    [End of figure]

    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.[Footnote 15] 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.

    Figure 4: Persistency in 401(k) and IRA Contributions, 1999 to 2002
    (number in millions):

    [See PDF for image]

    This figure is a vertical bar graph depicting the following data:

    Year: 1999 only;
    401(k)s: 26 million;
    Traditional IRAs: 4.1 million.

    Year: 1999 and 2000;
    401(k)s: 21.9 million;
    Traditional IRAs: 2.7 million.

    Year: 1999 to 2001:
    401(k)s: 18.4 million;
    Traditional IRAs: 1.9 million.

    Year: 1999 to 2002;
    401(k)s: 15.7 million;
    Traditional IRAs: 1.4 million.

    Source: Internal Revenue Service.

    [End of figure]

    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.[Footnote 16] 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.

    Table 2: Contribution Limits for IRAs and Traditional 401(k) Plans,
    2008:

    Employee contribution limit[A]:
    Traditional IRA: Up to $5,000;
    Roth IRA: Up to $5,000;
    SEP IRA: Employees cannot contribute;
    SAR-SEP IRA: Up to $15,500;
    SIMPLE IRA: Up to $10,500;
    Traditional 401(k) plans: Up to $15,500.

    Employer contribution limit:
    Traditional IRA: Not applicable;
    Roth IRA: Not applicable;
    SEP IRA: 25 percent of an employee's compensation up to maximum of
    $46,000;
    SAR-SEP IRA: 25 percent of an employee's compensation up to maximum of
    $46,000;
    SIMPLE IRA: A contribution equal to 2 percent of employee's
    compensation or a matching contribution of up to 3 percent of
    employee's compensation[B];
    Traditional 401(k) plans: 100 percent of employee's compensation, or up
    to $46,000.

    Source: Internal Revenue Service.

    [A] Employee contribution limits to traditional IRAs, Roth IRAs, SIMPLE
    IRAs, and traditional 401(k) plans are higher for individuals age 50 or
    older (see table 1).

    [B] Employers may reduce the 3 percent contribution limit to a lower
    percentage, but not lower than 1 percent. Employers may not lower the 3
    percent limit for more than 2 calendar years in a 5-year period.

    [End of table]

    Comparisons between IRAs and 401(k) Plans Are Difficult:

    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.

    Table 3: Key Differences between Employer-Sponsored IRAs and
    Traditional 401(k) Plans:

    Reporting requirements:
    Employer-sponsored IRAs: No annual reporting requirements;
    Traditional 401(k) plans: Must report information on plan and plan
    operations to federal government annually; Subject to annual testing to
    ensure contributions to nonmanagerial employees are proportional to
    contributions employers make for themselves and their managers.

    Vesting[A]:
    Employer-sponsored IRAs: Contributions are immediately 100% vested;
    Traditional 401(k) plans: Employee salary reduction contributions are
    immediately 100% vested; employer contributions may be vested over time
    according to plan terms.

    Withdrawals, loans, and payments:
    Employer-sponsored IRAs: Withdrawals permitted anytime subject to
    federal income taxes, early withdrawals subject to an additional tax;
    Traditional 401(k) plans: Withdrawals permitted after specified event
    occurs (e.g., retirement, plan termination, etc.) subject to federal
    income taxes; plan may permit loans and hardship withdrawals; early
    withdrawals subject to an additional tax.

    Sources: Department of Labor and Internal Revenue Service.

    [A] Vesting refers to when a participant has earned a right to a
    benefit that cannot be taken away (i.e., a nonforfeitable right to the
    participant's accrued benefit).

    [End of table]

    Several Barriers May Discourage Small Employers from Offering Payroll-
    Deduction and Employer-Sponsored IRAs to Employees:

    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.

    Barriers May Discourage Small Employers from Offering IRAs to
    Employees, and Many of These Employees Lack Access to Workplace
    Retirement Savings:

    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.[Footnote 17]

    Figure 5: Access of Certain Workers[A] to an Employer-Sponsored
    Retirement Plan, 2006:

    [See PDF for image]

    This figure is a horizontal bar graph depicting the following data:

    All firms:
    Workers with access to a retirement plan: 42.6 million;
    Workers without access to a retirement plan: 31.9 million.

    Firms with fewer than 100 employees:
    Workers with access to a retirement plan: 11 million;
    Workers without access to a retirement plan: 19.9 million.

    Source: Congressional Research Service analysis of the U.S. Census
    Bureau, Current Population Survey, 2006.

    [A] Private sector, full-time, full-year, wage and salary workers,
    between the ages of 25 and 64.

    [End of figure]

    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.

    Table 4: Key Advantages of Payroll-Deduction and Employer-Sponsored
    IRAs:

    Key advantages:
    Payroll-deduction IRAs:
    * Employees contribute through payroll deduction to traditional or Roth
    IRAs;
    * No employer contributions;
    * Not considered employer retirement plan; employers are not subject to
    requirements for such plans;
    * No annual financial reporting requirements;
    Employer-sponsored IRAs: SIMPLE IRAs:
    * Employees contribute through salary reduction;
    * Employers choose to either make up to a 3 percent match of
    participating employee's compensation, or contribute 2 percent of each
    eligible employee's compensation;
    * Employers may be able to claim a tax credit for part of start-up
    costs;
    * No annual financial reporting requirements;
    Employer-sponsored IRAs: SEP IRAs:
    * Only employer contributions allowed;
    * Employers may contribute up to 25 percent of their own and each
    eligible employee's annual compensation to SEP IRAs;
    * Contributions are not mandatory annually;
    * Employers may be able to claim a tax credit for part of start-up
    costs;
    * No annual financial reporting requirements.

    Source: GAO analysis of IRS documents.

    [End of table]

    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.[Footnote 18] 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.[Footnote 19] 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.[Footnote 20] 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.

    Payroll-Deduction IRAs Could Help Workers Save, but Barriers May
    Discourage Employers from Offering a Payroll-Deduction IRA Program:

    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 70� with
    taxable compensation may contribute to a traditional IRA, and many
    individuals could receive a tax deduction for their contribution.
    [Footnote 21] Most low-and middle-income individuals are eligible to
    contribute to Roth IRAs.[Footnote 22] 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.[Footnote 23] 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.[Footnote 24] 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.[Footnote 25]

    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.[Footnote 26]

    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,[Footnote 27] 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.[Footnote 28] 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.
    [Footnote 29]

    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.[Footnote 30] 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.[Footnote 31]
    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.
    [Footnote 32] 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.[Footnote 33] 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.

    Questions Remain on How Expanded Payroll-Deduction IRAs May Affect
    Employees:

    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.

    SIMPLE and SEP IRAs Can Help Workers to Save, but Several Factors May
    Discourage Employer Sponsorship:

    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.[Footnote 34] 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.[Footnote 35] 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.[Footnote
    36]

    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.

    Proposals Exist to Encourage Employers to Offer and Employees to
    Participate in IRAs:

    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.[Footnote 37] 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.[Footnote 38] 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.[Footnote
    39] 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.

    IRS and Labor Share Responsibility for Overseeing IRAs, but Labor Has
    No Process in Place to Monitor IRAs and Data Gaps Exist:

    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;
    [Footnote 40] 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.[Footnote 41] 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.

    IRS and Labor Share Responsibility for Overseeing IRAs:

    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.[Footnote 42] 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.[Footnote 43]

    Figure 6: Primary Responsibilities of IRS and Labor for IRAs:

    [See PDF for image]

    This figure is an illustration of the primary responsibilities of IRS
    and Labor for IRAs, as follows:

    IRS:
    * Issues guidance for setting up traditional, Roth, employer-sponsored,
    and payroll-deduction IRAs.

    * Responsible for rules governing contributions, including contribution
    limits and eligibility, distribution rules, and rollover and conversion
    rules for all IRAs.

    Department of Labor:
    * Issues guidance for setting up traditional, Roth, employer-sponsored,
    and payroll-deduction IRAs.

    * Responsible for rules governing contributions, including contribution
    limits and eligibility, distribution rules, and rollover and conversion
    rules for all IRAs.

    Joint responsibility for overseeing IRA prohibited transactions:
    * Labor has interpretive authority over IRA prohibited transactions.

    * IRS has responsibility for imposing the excise tax on prohibited
    transactions.

    Sources: GAO analysis of Employee Retirement Income Security Act of
    1974 and the Internal Revenue Code; Art Explosion (images).

    [End of figure]

    Labor and IRS also work together to oversee IRA prohibited
    transactions; generally, Labor has interpretive jurisdiction and IRS
    has certain enforcement authority.[Footnote 44] 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.[Footnote
    45] 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.[Footnote 46]

    Reporting Requirements for Employer Sponsored IRAs Are Limited:

    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.

    Figure 7: IRS Form 5498, IRA Contribution Information:

    [See PDF for image]

    This figure is a copy of IRS Form 5498, IRA Contribution Information.

    Source: Internal Revenue Service.

    [End of figure]

    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.

    Figure 8: IRS Form 1099-R, Distributions from Pension, Annuities,
    Retirement or Profit-Sharing Plans, IRA, Insurance Contracts, etc.

    [See PDF for image]

    This figure is a copy of IRS Form 1099-R, Distributions from Pension,
    Annuities, Retirement or Profit-Sharing Plans, IRA, Insurance
    Contracts, etc.

    Source: Internal Revenue Service.

    [End of figure]

    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.

    Figure 9: IRS Form W-2, Wage and Tax Statement:

    [See PDF for image]

    This figure is a copy of IRS Form W-2, Wage and Tax Statement.

    Source: Internal Revenue Service.

    [End of figure]

    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.[Footnote 47] 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.

    Labor Has No Process in Place to Monitor Employer-Sponsored and Payroll-
    Deduction 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 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;[Footnote 48] 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.

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

    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.

    Conclusions:

    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.

    Matter for Congressional Consideration:

    Given the absence of direct oversight of payroll-deduction IRAs,
    Congress may wish to consider whether payroll-deduction IRAs should
    have some direct oversight.

    Recommendations for Executive Action:

    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:

    * 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.

    * 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.

    Agency Comments and Our Evaluation:

    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 [hyperlink,
    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.

    Signed by:

    Barbara D. Bovbjerg:
    Director, Education, Workforce and Income Security Issues:

    [End of section]

    Appendix I: Objectives, Scope, and Methodology:

    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.

    [End of section]

    Appendix II: Comments from the Department of Labor:

    U.S. Department of Labor:
    Assistant Secretary for Employee Benefits Security Administration:
    Washington, D.C. 20210:

    May 22, 2008:

    Ms. Barbara D. Bovbjerg:
    Director, Education, Workforce, and Income Security Issues:
    United States Government Accountability Office:
    Washington, DC 20548:

    Dear Ms. Bovbjerg:

    We have reviewed the Government Accountability Office's (GAO) draft
    report entitled "Individual Retirement Accounts: Government Actions
    Could Encourage More Employers to Offer IRAs to Employees" (GAO-08-
    590).

    The Department is dedicated to supporting the growth of the private
    benefit system and to encouraging retirement income savings. There are
    approximately 700,000 employer-sponsored retirement plans currently
    under the jurisdiction of the Employee Benefits Security Administration
    (EBSA). Employers enjoy an array of retirement plan design options that
    Congress created to encourage employer sponsorship of plans.

    As stated in the draft report, some of these options specifically
    address the concerns of small employers. Employer-sponsored IRAs have
    fewer reporting requirements than other types of employee benefit
    plans. In addition, small employers may provide payroll-deduction
    programs that simply enable employees to make voluntary contributions
    to IRAs. These payroll-deduction IRAs are not employer-sponsored plans
    and are not subject to the requirements imposed on plans by Title I of
    ERISA. EBSA provides guidance to help employers ensure that payroll-
    deduction IRAs are not subject to Title I requirements,[Footnote 49] if
    that is the employer's goal, and to understand the differences among
    the various types of plans and non-employer sponsored programs.
    In this regard, the Department has devoted significant resources to
    assist small employers in choosing a retirement program, through
    comprehensive education and outreach [Footnote 50] and regulatory
    programs. EBSA's education and outreach program focuses on providing
    information on the various retirement savings options to small
    businesses with no retirement plan. These initiatives include
    publications as well as seminars, a DVD providing the peer perspective
    from employers that sponsor the most popular plans, such as SIMPLE IRAs
    and SEPs, and an interactive website. Specific publications include
    "Choosing a Retirement Solution for Your Small Business," "Payroll
    Deduction IRAs for Small Business," "SEP Retirement Plans for Small
    Business," and "SIMPLE IRA Plans for Small Business." The Department
    partners with the American Institute of Certified Public Accountants to
    reach accountants of small businesses to assist them in their role in
    the small business owner's decision to set up a plan. The Department
    also works with local Chambers of Commerce and other organizations to
    reach small businesses directly.

    Recommendation: The Secretary of Labor should examine and determine 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.

    The draft report states that 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. Some of the costs listed depend on whether an employer has
    a payroll processing system in place to make automatic deductions and
    direct deposits, and the number of employees participating in the
    program. The draft report also states that opinions regarding the
    significance of these costs varies.

    EBSA's Interpretive Bulletin 99-1 addresses the costs related to
    payroll-deduction IRA programs. The guidance clarifies that employers
    may select one IRA sponsor to receive payroll contributions to keep
    administrative costs down and simplify the process for employees. The
    guidance also states that employers can receive payments from an IRA
    sponsor to cover the actual costs of operating the IRA payroll-
    deduction program.

    While payroll-deduction IRAs are not under the jurisdiction of the
    Department, as part of its broad program of research, the Department
    studies costs and expenses related to retirement programs. While these
    studies examine a range of retirement programs, they generally
    emphasize employer-sponsored plans under the Department's jurisdiction.
    We will consider this recommendation as we develop our research agenda.

    Recommendation: The Secretary of Labor should develop feasible policy
    options to help employers defray the costs associated with establishing
    payroll-deduction IRA programs, while taking into consideration the
    potential costs to taxpayers.

    The Department generally pursues policies to help employers defray the
    costs associated with establishing employer-sponsored retirement plans.
    In addition, EBSA's 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. Payroll-deduction IRAs
    operated in accordance with this guidance fall outside the Department
    of Labor's jurisdiction. Thus, the development of additional policy
    options may be more properly considered by the Secretary of the
    Treasury.

    Recommendation: The Secretary of Labor should evaluate whether
    modifications or clarifications to its guidance on payroll-deduction
    IRAs are needed to encourage employers to establish payroll-deduction
    IRA programs.

    We appreciate that the draft report on page 20 explains that the
    Department has taken steps to promote payroll-deduction IRAs in issuing
    Interpretive Bulletin 99-1. The Interpretive Bulletin provides
    employers a "safe harbor" and easy-to-use guidance to avoid coverage as
    a plan under Title I of ERISA. Under the guidance, if an employer
    limits its involvement to collecting deducted amounts and remits them
    to the IRA, the IRA will not be an ERISA covered plan. The guidance
    also details the requirements for the maintenance of employer
    neutrality with respect to the IRA sponsor and through example details
    what it means for an employer to endorse the program.

    The draft report states that according to IRA providers, some employers
    are hesitant to offer payroll-deduction IRA programs because they find
    the Interpretive Bulletin limits their ability to effectively publicize
    the availability of payroll-deduction IRAs to employees for fear of
    being subject to ERISA requirements. Other than this perceived lack of
    flexibility for employers seeking to promote IRAs, the draft report
    does not provide any other specifics regarding why employers believe
    they cannot effectively publicize the availability of payroll-deduction
    IRAs. The safe harbor states that an employer may encourage an employee
    to save for retirement through payroll withholding and contribution to
    an IRA, and provide informational materials written by the IRA sponsor
    without making the IRA a pension plan subject to Title I of ERISA. The
    Department has not received any input from employers or IRA sponsors
    stating the guidance does not permit them to effectively publicize the
    availability of payroll-deduction IRAs.

    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, while taking
    employer burden into account.

    Ensuring the security of retirement benefits is a core mission of EBSA.
    In the draft report the GAO is concerned that EBSA is unable to monitor
    whether all employers are in compliance with the law and recommends
    that the Department evaluate ways to determine whether employers who
    establish employer-sponsored IRAs and offer payroll-deduction IRAs are
    in compliance with the law.

    EBSA operates an aggressive enforcement program to protect the benefits
    of workers, retirees and their families. In FY 2007 alone, EBSA's
    activities yielded S1.5 billion in monetary results; and EBSA's
    investigations led to the indictment of 115 persons for criminal
    activity related to employee benefit plans. Since 2001, EBSA has
    achieved nearly $11 billion in monetary results and more than 800
    criminal indictments.

    EBSA relies on targeting to focus its enforcement resources in an
    effective manner. "Targeting" is the process whereby specific
    individuals or entities are identified for investigation because of
    some indication that an ERISA violation may have occurred or may be
    about to occur. On the national level, we identify broad topic areas
    which have been shown to involve a number of potential violations. Each
    region then bases its enforcement activities on both national
    initiatives and regional initiatives. We believe that these methods of
    selecting cases have been very successful, as EBSA has consistently
    reported enforcement results nearly double those of just a few years
    ago.

    The draft report specifies that a minimum level of oversight is
    important to ensure that employers are acting in accordance with the
    law. Targeting permits EBSA to provide this level of oversight. During
    the past three fiscal years, EBSA was able to maintain this level of
    oversight by investigating 170 SIMPLE IRA and SEP plans and obtaining
    monetary results of approximately $1.2 million.

    Recommendation: To improve the federal governments' 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:

    * information sufficient to identify employers that offer payroll-
    deduction and employer-sponsored IRAs;

    * the distribution by employer of the number of employees that
    contribute to payroll-deduction and employer-sponsored IRAs.

    In creating IRAs, Congress weighed the benefits of promoting retirement
    savings and the burdens of reporting requirements, and decided to limit
    reporting requirements for employer-sponsored IRAs. Under section
    101(h)(1) of ERISA, reports are not required by an employer maintaining
    any simple retirement account established pursuant to section 408(p) of
    the Internal Revenue Code. In the case of a SEP described in section
    408(k) of the Internal Revenue Code, Department regulations [Footnote
    51] provide for an alternative method of compliance with the reporting
    and disclosure requirements of Title I of ERISA by using simple IRS
    Form 5305-SEP. Payroll-deduction IRAs are not Title I ERISA covered
    plans and have no reporting obligations under ERISA. Given the
    statutory requirements, and the policy consideration to encourage small
    employers to provide retirement programs, EBSA agrees that any
    collection of information on employer-sponsored and payroll-deduction
    IRAs should not impose burdens on employers to report information.

    Conclusion:

    EBSA is committed to protecting the employer-sponsored benefits of
    American workers, retirees, and their families, and to promoting
    policies to encourage retirement savings. We will continue to strive to
    improve our outreach programs to educate employers and the public on
    retirement savings programs, as well as our enforcement program to
    deter, detect and correct violations of ERISA. We appreciate having had
    the opportunity to review and comment on the draft report. Please do
    not hesitate to contact us if you have questions concerning this
    response or if we can be of further assistance.

    Sincerely,

    Signed by:

    Bradford P. Campbell:
    Assistant Secretary:

    [End of section]

    Appendix III: Comments from the Internal Revenue Service:

    Department Of The Treasury:
    Internal Revenue Service:
    Washington, D.C. 20224:

    May 23, 2008:

    Ms. Barbara D. Bovbjerg:
    Director, Education, Workforce and Income Security Issues:
    U.S. Government Accountability Office:
    Washington, DC 20548:

    Dear Ms. Bovbjerg:

    Thank you for the opportunity to comment on the Government
    Accountability Office's draft report on: Individual Retirement
    Accounts: Government Actions Could Encourage More Employers to Offer
    IRAs to Employees (GAO-08-590). Our comments are shown below:

    * The IRS recognizes the needs for federal agencies, Congress, and the
    public to have access to routine and timely information on Individual
    Retirement Accounts (IRAs). As such, the IRS regularly has made
    information available on the statutory adjustment to income claimed by
    taxpayers for contributions to IRAs as well as total taxable IRA
    distributions reported on Forms 1040 and 1040A as a part of its annual
    Statistics of Income -- Individual Income Tax Returns, Publication
    1304. The first data in the annual series were available for Tax Year
    1975 and the most recent annual published information is for Tax Year
    2005. Data for Tax Year 2006 will be available later this summer.

    * The IRS has regularly made available in the Statistics of Income
    Bulletin, statistical information for IRAs from information returns and
    documents filed with the IRS such as Form 5498, IRA Contributions. Data
    for Tax Year 2000 are available in the Spring 2004 edition (Publication
    1136 -- Volume 23, Number 4). Data for Tax Years 2001 and 2002 are
    available in the Spring 2006 edition (Publication 1136 -- Volume 25,
    Number 4) while data for Tax Year 2004 will be available in the soon to
    be released Spring 2008 edition (Publication 1136 -- Volume 27, Number
    4). In addition, the IRS has made data available on this subject as
    part of the Statistics of Income Division's participation in meetings
    of the American Statistical Association, National Tax Association and
    other professional forums. Papers resulting from these activities are
    routinely published in the SOI Division's annual Paper Series (formerly
    called the Special Studies in Federal Tax Statistics series). All of
    these data are also available in electronic format as part of the Tax
    Stats home page on the IRS web site at [hyperlink, http://www.irs.gov].

    * The IRS plans to continue providing IRA data in the annual
    Publication 1304 (Individual Income Tax Returns), as well as the
    periodic information in Publication 1136 (SOI Bulletin), and the SOI
    Paper Series. The IRS will also ensure that the Department of Labor
    receives information on IRAs on the same day that such information is
    published or otherwise made available to the public.

    If I can further assist you, please call me or contact Thomas B.
    Petska, Director, Statistics of Income Division, at (202) 874-0700.

    Sincerely,

    Signed by:

    Douglas H. Shulman:

    [End of section]

    Appendix IV: GAO Contact and Staff Acknowledgments:

    GAO Contact:

    Barbara Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov:

    Staff Acknowledgments:

    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.

    [End of section]

    Footnotes:

    [1] Taxpayers ineligible for the deduction can make nondeductible
    contributions to take advantage of the deferral on investment earnings.
    Distributions are partially taxable. Distributions received before age
    59� are subject to an additional 10-percent income tax unless they meet
    certain requirements or are used for specific purposes, including the
    purchase of a first home or for higher education expenses.

    [2] Employers must have 100 or fewer employees who earned $5,000 or
    more during the preceding calendar year.

    [3] As long as employers follow guidelines set by Labor for managing
    payroll-deduction IRAs, employers are not subject to the fiduciary
    requirements in ERISA Title I that apply to employer-sponsored
    retirement plans, such as 401(k) plans. As a consequence payroll-
    deduction IRAs that are operated within the conditions of Labor's
    guidance are not under its jurisdiction.

    [4] ERISA defines fiduciaries as persons who (1) exercise discretionary
    authority or control over the management of a private sector employee
    benefit plan or the plan's assets, (2) render investment advice for a
    fee or other compensation with respect to plan assets, or (3) have any
    discretionary authority or responsibility to administer the plan. Under
    ERISA, fiduciaries are required to act prudently and exclusively in the
    interest of plan participants and beneficiaries.

    [5] Early withdrawals are generally subject to an additional income
    tax. However, withdrawals in certain instances, for example,
    withdrawals for the purchase of a first-time residence or related to
    payments for higher education, are not subject to additional tax, as
    provided under specific tax rules.

    [6] See 29 C.F.R. � 2509.99-1 (also known as Interpretive Bulletin 99-
    1).

    [7] In addition to SEP and SIMPLE IRAs, employers may offer "deemed
    IRAs" to their employees, which allow employees to keep IRA assets in
    their employer's tax-qualified retirement plan as a separate,
    traditional or Roth IRA. Employees may make voluntary contributions to
    the deemed IRA, subject to IRA rules. According to the Department of
    the Treasury, few such IRAs exist.

    [8] Craig Copeland, "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).

    [9] Sara Holden 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).

    [10] Additional analysis of the Federal Reserve's Survey of Consumer
    Finance (SCF) by the Employee Benefits Research Institute, Craig
    Copeland, "Individual Account Retirement Plans: An Analysis of the 2004
    Survey of Consumer Finances."

    [11] Sara Holden, Kathy Ireland, Victoria Leonard-Chambers, and Michael
    Bogdan, "The Individual Retirement Account at Age 30: A Retrospective,"
    Perspective, vol. 11, no. 1 (Washington, D.C., Investment Company
    Institute, February 2005).

    [12] Sara Holden 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).

    [13] This figure does not include employer-sponsored IRAs. Other
    industry data indicates that 8 percent of households participated in
    employer-sponsored IRAs in 2004.

    [14] Survey of Consumer Finance (SCF) data is based on a sample of
    households, and estimates from the SCF survey have associated sampling
    errors. Therefore, it is not known whether the 29 percent and 26
    percent point estimates represent statistically significant differences
    in the underlying populations. Additional analysis of the SCF by the
    Employee Benefit Research Institute, Craig Copeland, "Individual
    Account Retirement Plans: An Analysis of the 2004 Survey of Consumer
    Finances."

    [15] Peter Sailer, Victoria Bryant, and Sara Holden, "Trends in 401(k)
    and IRA Contribution Activity, 1999-2002 - Results from a Panel of
    Matched Tax Returns and Information Documents," Internal Revenue
    Service, Washington, D.C.

    [16] Sandra West 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).

    [17] Patrick Purcell, Pension Sponsorship and Participation: Summary of
    Recent Trends, CRS Report for Congress, Order Code RL30122 (Washington,
    D.C., Congressional Research Service, Sept. 6, 2007).

    [18] Labor and IRS have taken steps to promote these plans. For
    example, in 1975, Labor issued a regulation describing the conditions
    under which payroll-deduction IRA programs offered by employers are not
    considered a pension plan under Title I of ERISA. See 29 C.F.R.� 2510.3-
    2(d). Through this regulation--and several other advisory opinions and
    an Interpretive Bulletin issued in 1999--Labor provided employers with
    a "safe harbor" from reporting and disclosure requirements, fiduciary
    duties, and enforcement rights under ERISA Title 1 that apply to
    employer-sponsored pensions. 29 C.F.R.� 2509.99- 1 (also known as
    Interpretive Bulletin 99-1). See 64 Fed. Reg. 33000 (June 18, 1999). In
    1999, IRS issued an announcement providing information to employees and
    employers on payroll-deduction contributions for Roth and traditional
    IRAs. See Internal Revenue Bulletin 1999-2, at 44 (Jan. 11, 1999).

    [19] U.S. Department of Labor, U.S. Bureau of Labor Statistics,
    National Compensation Survey: Employee Benefits in Private Industry in
    the United States, 2005, Bulletin 2589 (May 2007).

    [20] IRS was also unable to estimate the number of SEP IRAs sponsored
    by sole proprietors.

    [21] Eligibility for a full or partial deduction for traditional IRA
    contributions depends on whether a taxpayer or spouse is covered by an
    employer plan, as well as limits on modified adjusted gross income
    (AGI) and filing status. For example, a single worker not covered by an
    employer plan is eligible for the full deduction regardless of income,
    and a married taxpayer filing jointly whose spouse is covered by an
    employer plan can take the full deduction if the couple's modified AGI
    is $159,000 or less for 2008. Other individuals may be eligible for
    partial deductions, and even those ineligible for any deduction can
    still make nondeductible contributions to a traditional IRA.

    [22] An individual's eligibility to contribute to Roth IRAs is based on
    their modified AGI and their tax filing status. For example, in 2008,
    single, head-of-household, and married individuals filing separately
    with a modified AGI of less than $101,000 could contribute up to $5,000
    ($6,000 if age 50 or older.) Individuals with an AGI that is more than
    $101,000 but less than $116,000 could contribute at reduced limits, and
    individuals making $116,000 or more could not contribute to Roth IRAs.
    Individuals that are married, filing jointly, or qualified widowers
    with a modified AGI less than $159,000 could contribute up to the
    $5,000 limit ($6,000 for age 50 or older). Couples with income between
    $159,000 and $169,000 could contribute at lower levels, and those
    making more than $169,000 cannot contribute.

    [23] Congressional Budget Office, "Utilization of Tax Incentives for
    Retirement Saving: Update to 2003," Background Paper (Washington, D.C.,
    March 2007).

    [24] John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian,
    "The Importance of Default Options for Retirement Savings Outcomes:
    Evidence from the United States," Working Paper 12009 (Cambridge,
    Mass., National Bureau of Economic Research, January 2006); Ester Duflo
    and Emmanuel Saez, "The Role of Information and Social Interactions in
    Retirement Plan Decisions: Evidence from a Randomized Experiment,"
    Quarterly Journal of Economics, Vol 68. (2003).

    [25] Under Labor's Interpretive Bulletin 99-1, an employer may
    encourage its employees to save for retirement by providing general
    information on the payroll-deduction program and other educational
    materials that explain the advisability of retirement savings without
    converting the payroll-deduction program into a plan covered under
    Title I of ERISA.

    [26] Steven F. Venti, "Choice, Behavior, and Retirement Saving," in The
    Oxford Handbook of Pensions and Retirement Income, Eds. Gordon C.
    Clark, Alicia H. Munnell, J. Michael Orszag (Oxford, Great Britain,
    2006) 603-17 and Olivia Mitchell and Stephen Utkus, "Lessons from
    Behavioral Finance for Retirement Plan Design," Pension Research
    Council Working Paper, PRC WP 2003-6 (Philadelphia, Pa., 2003).

    [27] For example, SIMPLE IRAs require employers to provide employees
    with a summary plan description and an annual election notice. SEP IRAs
    require employers to provide employees with written statements that
    explain the terms of the pension, how changes are made, and when
    employees will receive information about contributions to their
    accounts.

    [28] Further, employers are not required to determine an employee's
    eligibility status for Roth contributions or tax-deferred contributions
    to traditional IRAs, which may vary based on the employee's modified
    adjusted gross income or tax filing status. These responsibilities
    would fall on the employee.

    [29] If one or more of the conditions are not met, the employer may be
    considered to have established or maintained a pension plan.

    [30] Mary M. Schmitt and Judy Xanthopoulos, "Automatic IRAs: Are They
    Administratively Feasible, What Are the Costs to Employers and the
    Federal Government, and Will They Increase Retirement Savings?"
    Preliminary Report Prepared for AARP, Optimal Benefit Strategies, LLC
    (Mar. 8, 2007.)

    [31] Labor's guidance on payroll-deduction IRAs is summarized in
    Interpretive Bulletin 99-1, Payroll Deduction Programs for Individual
    Retirement Accounts, 29 C.F.R � 2509.99-1.

    [32] In the explanation section of the Federal Register notice in which
    Labor issued Interpretive Bulletin 99-1, Labor stated that "some
    employers have indicated that they are reluctant to create payroll
    withholding programs for individual retirement accounts because they
    are concerned that such programs would be considered pension plans
    covered by ERISA and therefore subject to the requirements of Title I
    of ERISA." 64Fed. Reg. 33000 (June 18, 1999).

    [33] In 2008, eligible individuals were allowed to contribute a total
    of $5,000 to one or more traditional and Roth IRAs, and individuals
    older than age 50 could contribute $6,000.

    [34] SIMPLE IRAs require that employers contribute to their employees'
    IRAs by either making "nonelective" 2 percent contributions to the
    accounts of all employees, or by matching the salary-reduction
    contributions of participating employees up to 3 percent of the
    employee's compensation, up to $10,500 in 2007. Individuals over age 50
    at the end of the 2007 calendar year could make an additional "catch-
    up" contribution of $2,500 to their SIMPLE IRAs. Under a SEP, employers
    contribute directly to SEP-IRAs for all employees, including the
    employer, with contributions up to 25 percent of each employee's pay,
    but no more than $45,000 in 2007.

    [35] Compensation generally does not include contributions to the SEP.

    [36] According to IRS Publication 560, employers sponsoring SIMPLE IRAs
    who elect to match employee contributions may not match less than 3
    percent for more than 2 years in a 5-year period. See IRS, Retirement
    Plans for Small Business, Publication 560 (2006).

    [37] The currently available "Tax Credit for Small Employer Pension
    Plan Startup Costs" applies to eligible employers who offer SEP,
    SIMPLE, and qualified plans. This credit is intended to cover costs to
    set up, administer, and educate employees about the plan for up to a
    maximum of $500 per year for each of the first 3 years of the plan. It
    should be noted that providing a similar tax credit for employers
    offering payroll-deduction IRAs would have revenue implications for the
    federal budget.

    [38] Currently, the saver's credit provides a nonrefundable tax credit
    to low-and moderate-income savers of up to 50 percent of their annual
    IRA or 401(k) contributions up to $2,000. In 2007, the credit was
    available to single and married individuals filing separate income tax
    returns who make no more than $26,000 and to married couples filing
    jointly who make no more than $52,000. Depending on income and filing
    status, taxpayers may claim a credit as high as 50 percent or as low as
    10 percent of their contributions. The saver's credit was designed to
    provide greater savings incentive to low-and moderate-income workers
    who, because of their lower marginal tax rates, receive lower tax
    subsidies by saving in tax-preferred accounts, such as IRAs, than
    higher income individuals.

    [39] Several studies show that 401(k) plans with automatic enrollment
    features have increased participation rates, especially among young and
    lower income workers who are less likely to participate in these plans.
    However, as previously mentioned, 401(k) plans are different from IRAs
    with different incentives. One study of a large firm found that
    automatic enrollment increased participation by eligible employees from
    57 percent to 86 percent in one year for new hires. Brigitte C. Madrian
    and Dennis F. Shea, "The Power of Suggestion: Inertia in 401(k)
    Participation and Savings Behavior," The Quarterly Journal of
    Economics, vol. 116, issue 4 (November 2001).

    [40] 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, such as 401(k) plans.

    [41] Section 101(h)(1) of ERISA Title I provides that no report shall
    be required for qualified salary reduction arrangements under section
    408(p) of the Internal Revenue Code (SIMPLE IRAs). In addition, Labor
    provides an alternative method of compliance for reporting SEP
    arrangements through IRS Form 5305-SEP.

    [42] IRS issues guidance for setting up traditional and Roth IRAs
    through its Publication 590, Individual Retirement Arrangements, and
    similar guidance for employer-sponsored IRAs can be found in IRS's
    Publication 560, Retirement Plans for Small Business. These
    publications include information on the type of financial institutions
    that can be used to establish an IRA, and the requirements that a
    taxpayer must meet to establish such an account.

    [43] Labor's guidance explains that an employer that establishes a
    payroll-deduction IRA program (traditional or Roth) is not considered
    to have established an employee retirement plan subject to ERISA if the
    following are satisfied: (1) in employee communications regarding the
    program, the employer maintains neutrality with respect to IRA
    investment options available; (2) if the employer establishes
    limitations on the number of IRA investment options available, the
    program discloses any costs or limitations on employees' ability to
    rollover to other IRAs; (3) the employer does not pay any
    administrative, investment management, or other fees which the IRA
    sponsor would require an employee to pay for establishing or
    maintaining the IRA; (4) the employer does not receive any
    consideration for operating the program.

    [44] Generally, prohibited transactions include any improper use of an
    IRA by the account holder or any disqualified person, which includes
    the individual who established the IRA, members of the individual's
    family, and fiduciaries with respect to the IRA. Examples of prohibited
    transactions with an IRA include: borrowing money from an IRA, selling
    property to it, receiving unreasonable compensation for managing the
    account, using the account as security for a loan, and buying property
    for personal use with IRA funds. Treasury retains authority only with
    respect to transactions that are exempted by subsection 404(c) of ERISA
    from the application of the prohibited transaction provisions of Title
    I of ERISA.

    [45] The statutory exemptions generally include loans to participants,
    the provision of services needed to operate a plan for reasonable
    compensation, loans to employee stock ownership plans, and investment
    with certain financial institutions regulated by other state or federal
    agencies. Reorganization Plan No. 4 of 1978 transferred the Treasury
    Department's authority over prohibited transaction exemptions to Labor,
    with certain exceptions.

    [46] A provision of the Internal Revenue Code directly imposes an
    excise tax against disqualified persons, including employee benefit
    plan sponsors and service providers, who engage in prohibited
    transactions with tax-qualified pension and profit sharing plans. The
    IRS must coordinate with Labor regarding the imposition of the excise
    tax under section 4975 of the Internal Revenue Code. In place of the
    imposition of an excise tax under the Internal Revenue Code, if the
    prohibited transaction involves the IRA owner, the IRA is disqualified
    from favorable tax treatment.

    [47] The Form 5500 has multiple parts and various schedules. The main
    part of the form provides basic information to identify the plan and
    type of plan. Form 5500 schedules are used to collect more in-depth
    information, including data on assets, liabilities, insurance, and
    financial transactions. These schedules can be separated into two
    distinct groups: those that contain financial information on the plan
    and those that contain information on the benefits that the plan
    expects to pay out. Information from the financial schedules helps to
    provide a picture of a plan's financial condition, while the benefit
    schedules collect information on the contributions to and distributions
    made from the plan in the current and future years.

    [48] Section 406(b) of ERISA and �4975 of the Internal Revenue Code
    prohibit a plan fiduciary from engaging in self-dealing, which is
    described as conduct by fiducaries that consists of taking advantage of
    their position in a transaction and acting for their own interests
    rather than for the interests of the beneficiaries of the plan.

    [49] Interpretive Bulletin 99-1 (29 CPR 2509.99-1).

    [50] Section 516 of ERISA requires the Department to maintain a program
    designed to effectively promote retirement income savings by the
    public, including information on the forms of retirement income
    savings.

    [51] 29 CPR 2520.104-48.

    [End of section]

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