Better Agency Coordination Could Help Small Employers Address Challenges to Plan Sponsorship
GAO-12-326: Published: Mar 5, 2012. Publicly Released: Mar 7, 2012.
What GAO Found
Based on available data, about 14 percent of small employers sponsor some type of retirement plan. Overall, GAO found that the likelihood that a small employer will sponsor a retirement plan largely depends on the size of the employers workforce and the workers average wages more than on the industry in which the employer operates and the geographic region in which the employer is located. GAO found the greatest likelihood of plan sponsorship was among small employers with larger numbers of employees and those paying an average annual wage of $50,000 to $99,999. GAO also found that the most common plans sponsored by small employers are 401(k)s and Savings Incentive Match Plans for Employees (SIMPLE) Individual Retirement Arrangements (IRA)an employer-sponsored IRA designed for small employersat 46 percent and 40 percent, respectively, of total plans. However, IRS currently does not have the means to collect information on employers that sponsor another type of IRA plan designed for small employers, the Simplified Employee Pension (SEP) IRA plan, which limits what is known about employers that sponsor these plans.
Small employers and retirement experts identified several challenges to starting and maintaining retirement plans. Many small employers said they feel overwhelmed by the number of retirement plan options, administration requirements, and fiduciary responsibilities. For example, many are concerned about the potential risks associated with sponsoring a plan. Although federal agencies conduct education and outreach on retirement plans, a number of small employers and other stakeholders said small employers were unaware of these initiatives. For example, Labor, IRS, and the Small Business Administration (SBA) collaborate to develop and disseminate information and guidance online but do so through separate websites and in a largely uncoordinated fashion. Small employers and other stakeholders also cited other challenges to plan sponsorship, including a lack of financial resources, time, and personnel. However, some small employers said their employees prioritized health benefits over retirement benefits. To address some of the challenges to plan sponsorship, some small employers said they use contracted service providers that perform plan administration tasks.
Small employers and other stakeholders offered options for addressing some challenges and reducing the complexity of plan sponsorship for small employers. Options included simplification of federal requirements for plan administration, such as easing or eliminating certain plan testing requirements. Some stakeholders said increasing the tax credit for plan startup costs could further defray costs and help boost plan sponsorship. Some stakeholders also said that the federal government could conduct more education and outreach efforts to inform small employers about plans. Pension reform proposals in the United States, along with certain features of pension systems in other countries, may provide additional options that could increase plan sponsorship and increase workers access to retirement plans. For example, asset pooling is a feature that allows small employers to pool resources for economies of scale, which can lower plan costs. In light of the variety of options, Labor, the Department of the Treasury, IRS, and SBA should jointly evaluate existing options and develop new proposals with the goal of mitigating barriers to small employer plan sponsorship.
Why GAO Did This Study
Because about one-third of privatesector employees in the United States work for small employers, Congress and federal agencies have made efforts to encourage small employers to sponsor retirement plans for workers. However, federal data show workers access to plans remains limited, leaving many without a work-based plan to save for retirement. For this report, GAO examined (1) characteristics of small employers that are more or less likely to sponsor a plan for their employees, (2) challenges small employers face in establishing and maintaining a plan for their employees, and (3) options to address these challenges and attract more small employer plan sponsors. GAO defined small employers as forprofit firms that employ 100 or fewer employees. GAO analyzed Internal Revenue Service (IRS) and Department of Labor (Labor) data, interviewed agency officials and experts, held discussion groups with small employers, and reviewed relevant federal rules, literature, and retirement plan proposals.
What GAO Recommends
GAO recommends that Labor convene an interagency task force with Treasury, IRS, and SBA to coordinate existing research, education, and outreach efforts to foster small employer plan sponsorship. GAO also recommends that IRS consider modifying tax forms to gather complete, reliable information about SEP IRAs. Agencies generally agreed with GAOs recommendations; however, Labor disagreed with GAOs recommendation to create a single webportal for federal guidance. However, because federal resources are scattered across different sites, GAO believes consolidating plan information onto one webportal could benefit small employers.
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Recommendations for Executive Action
Comments: In December 2013, Labor reported that it continues to coordinate with representatives from Treasury, IRS, SBA, and other agencies to analyze and address challenges facing small business retirement security. The agency stated that it has partnered with SBA in conducting research concerning small business retirement plan availability and factors affecting plan sponsorship. Further, Labor indicated it plans to work with other relevant agencies to consolidate small business retirement plan education and outreach materials on a dedicated page or section of SBA's website and to present such materials in a user-friendly manner. While we commend Labor for its existing coordination efforts and plans to consolidate and streamline federal agencies' retirement information for small businesses, we continue to believe that there are additional benefits to be gained through the creation of an interagency task force on small business retirement plan sponsorship and centralizing plan education and outreach information on a single web portal. In February 2015, Labor reported that it continued to partner with other agencies to provide information about retirement plan options for small employers but that it had not completed work on making this information available on a single web portal. Further, Labor had not indicated that it had taken steps to create an interagency task force on small business retirement plan sponsorship. In September 2015, Labor reported that it continued to partner with other agencies to provide information about retirement plan options for small employers. It also reported that it made progress but had not completed developing web pages on businessUSA.gov that will provide retirement plan resources targeted to small employers. Labor stated that businessUSA.gov serves as a centralized, one-stop platform to make it easier for small employers to navigate the federal government. We commend Labor for taking actions to implement this component of our recommendation but we cannot consider it implemented until web-based retirement plan resources relevant to small employers are publicly available. Labor did not indicate that it had taken steps to create an interagency task force on small business retirement plan sponsorship, a key component of our recommendation.
Recommendation: To address the need to strengthen the retirement security of employees at small businesses and to build on interagency data-sharing agreements already in place, the Secretary of Labor should convene an interagency task force with representatives from Treasury, IRS, and SBA, and other agencies deemed appropriate, to review, analyze, and address the challenges facing small business retirement security in the United States. The aim of this taskforce would be to develop strategies and arrangements for the agencies to routinely and systematically coordinate their existing research, education, and outreach efforts to foster smallemployer plan sponsorship. Specifically, this body should focus on, but not be limited to, the following goals: (1) Conduct plan research on the characteristics associated with smallbusinesses that are more or less likely to sponsor a retirement plan (including employer-sponsored IRA plans) to support agencies' education and outreach efforts to small employers and provide Congress and the public with information about plan coverage among them. (2) Evaluate and develop proposals for mitigating barriers to small employer retirement plan sponsorship, including an assessment of the cost effectiveness of existing plan designs-with regard to the expansion of coverage, and the potential to provide an adequate retirement income, as necessary--and the appropriateness of alternative plan designs. (3) Create a single web portal to centralize federal agencies' retirementplan information to enhance the visibility and usefulness of federalguidance on plans for small employers.
Agency Affected: Department of Labor
Comments: Treasury did not supply written comments on the recommendation. In April 2016, Treasury stated that it was not willing to consider changes to IRS tax forms that would allow IRS to gather complete, reliable information on SEP IRA sponsorship. In particular, it noted that by checking each Form 1040 (Schedule C) and Form W-2 associated with the social security number for individuals identified in Form 5498 (IRA Contribution Information) filings, the IRS can approximate the number of employers that maintain SEPs. We do not think that this approach would yield reliable information on SEP sponsorship among small employers. In particular, we reported that the IRS Tax Forms and Publication Committee proposed a change to the Form 5498 to allow IRS to identify SEP IRA plan sponsors, but IRS officials noted that the proposal was not adopted. Further, IRS officials told us that some small business employees work for multiple companies, making identifying employers that sponsor SEP IRAs difficult. We continue to believe that Treasury should consider modifications to tax forms, such as Forms W-2 or 5498, to support the IRS's ability to collect complete and reliable information on SEP IRA plan sponsors.
Recommendation: Considering the lack of information on the number and characteristics of sponsors of SEP IRA plans, as well as their performance in improving retirement security, the Secretary of the Treasury should direct the Commissioner of the Internal Revenue Service to consider modifications to tax forms, such as Forms W-2 or 5498, that would allow IRS to gather complete and reliable information about these plans.
Agency Affected: Department of the Treasury