oversight

Private Pensions: Better Agency Coordination Could Help Small Employers Address Challenges to Plan Sponsorship

Published by the Government Accountability Office on 2012-03-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Requesters




March 2012
             PRIVATE PENSIONS

             Better Agency
             Coordination Could
             Help Small Employers
             Address Challenges to
             Plan Sponsorship




GAO-12-326
                                               March 2012

                                               PRIVATE PENSIONS
                                               Better Agency Coordination Could Help Small
                                               Employers Address Challenges to Plan Sponsorship
Highlights of GAO-12-326, a report to
congressional requesters




Why GAO Did This Study                         What GAO Found
Because about one-third of private-            Based on available data, about 14 percent of small employers sponsor some
sector employees in the United States          type of retirement plan. Overall, GAO found that the likelihood that a small
work for small employers, Congress and         employer will sponsor a retirement plan largely depends on the size of the
federal agencies have made efforts to          employer’s workforce and the workers’ average wages more than on the industry
encourage small employers to sponsor           in which the employer operates and the geographic region in which the employer
retirement plans for workers. However,         is located. GAO found the greatest likelihood of plan sponsorship was among
federal data show workers’ access to           small employers with larger numbers of employees and those paying an average
plans remains limited, leaving many            annual wage of $50,000 to $99,999. GAO also found that the most common
without a work-based plan to save for
                                               plans sponsored by small employers are 401(k)s and Savings Incentive Match
retirement. For this report, GAO
                                               Plans for Employees (SIMPLE) Individual Retirement Arrangements (IRA)—an
examined (1) characteristics of small
employers that are more or less likely to
                                               employer-sponsored IRA designed for small employers—at 46 percent and 40
sponsor a plan for their employees, (2)        percent, respectively, of total plans. However, IRS currently does not have the
challenges small employers face in             means to collect information on employers that sponsor another type of IRA plan
establishing and maintaining a plan for        designed for small employers, the Simplified Employee Pension (SEP) IRA plan,
their employees, and (3) options to            which limits what is known about employers that sponsor these plans.
address these challenges and attract           Small employers and retirement experts identified several challenges to starting
more small employer plan sponsors.             and maintaining retirement plans. Many small employers said they feel
GAO defined small employers as for-            overwhelmed by the number of retirement plan options, administration
profit firms that employ 100 or fewer          requirements, and fiduciary responsibilities. For example, many are concerned
employees. GAO analyzed Internal               about the potential risks associated with sponsoring a plan. Although federal
Revenue Service (IRS) and Department           agencies conduct education and outreach on retirement plans, a number of small
of Labor (Labor) data, interviewed             employers and other stakeholders said small employers were unaware of these
agency officials and experts, held             initiatives. For example, Labor, IRS, and the Small Business Administration
discussion groups with small employers,        (SBA) collaborate to develop and disseminate information and guidance online
and reviewed relevant federal rules,           but do so through separate websites and in a largely uncoordinated fashion.
literature, and retirement plan proposals.     Small employers and other stakeholders also cited other challenges to plan
What GAO Recommends                            sponsorship, including a lack of financial resources, time, and personnel.
                                               However, some small employers said their employees prioritized health benefits
GAO recommends that Labor convene              over retirement benefits. To address some of the challenges to plan sponsorship,
an interagency task force with Treasury,       some small employers said they use contracted service providers that perform
IRS, and SBA to coordinate existing            plan administration tasks.
research, education, and outreach efforts
to foster small employer plan                  Small employers and other stakeholders offered options for addressing some
sponsorship. GAO also recommends               challenges and reducing the complexity of plan sponsorship for small employers.
that IRS consider modifying tax forms to       Options included simplification of federal requirements for plan administration,
gather complete, reliable information          such as easing or eliminating certain plan testing requirements. Some
about SEP IRAs. Agencies generally             stakeholders said increasing the tax credit for plan startup costs could further
agreed with GAO’s recommendations;             defray costs and help boost plan sponsorship. Some stakeholders also said that
however, Labor disagreed with GAO’s            the federal government could conduct more education and outreach efforts to
recommendation to create a single              inform small employers about plans. Pension reform proposals in the United
webportal for federal guidance. However,       States, along with certain features of pension systems in other countries, may
because federal resources are scattered        provide additional options that could increase plan sponsorship and increase
across different sites, GAO believes           workers’ access to retirement plans. For example, asset pooling is a feature that
consolidating plan information onto one        allows small employers to pool resources for economies of scale, which can
webportal could benefit small employers.
                                               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
View GAO-12-326. For more information,
contact Charles Jeszeck at (202) 512-7215 or
                                               proposals with the goal of mitigating barriers to small employer plan sponsorship.
jeszeckc@gao.gov .
                                                                                       United States Government Accountability Office
Contents


Letter                                                                                       1
                Background                                                                   4
                Number of Employees and Average Pay Level Greatly Influence
                  Plan Sponsorship                                                         10
                Plan Complexity and Resource Constraints Were Most Frequently
                  Cited Barriers to Retirement Plan Sponsorship                            18
                Proposed Options to Spur Plan Sponsorship Target Simplification,
                  Incentives, and Education                                                26
                Conclusions                                                                32
                Recommendations for Executive Action                                       33
                Agency Comments and Our Evaluation                                         34

Appendix I      Objectives, Scope, and Methodology                                         37



Appendix II     Some Retirement Plans Available to Small Employers                         45



Appendix III    IRS Form 5498 IRA Contribution Information                                 49



Appendix IV     Small Employer Plan Sponsorship Rate by Industry                           50



Appendix V      Small Employer Plan Sponsorship Rate by State                              52



Appendix VI     Regression Results                                                         54



Appendix VII    Comments from the Department of Labor                                      60



Appendix VIII   GAO Contact and Staff Acknowledgments                                      63




                Page i                               GAO-12-326 Small Employer Plan Sponsorship
Tables
          Table 1: 5500 Retirement Plan Type and Feature Assignment Order
                   by Pension Benefit Code                                         40
          Table 2: Some Retirement Plans Available to Small Employers              46
          Table 3: Composition of Industry Classifications                         51
          Table 4: Results of Bivariate Analysis                                   54
          Table 5: Results of Multivariate Analysis                                57
          Table 6: Results of Block Test                                           59


Figures
          Figure 1: Small Employer Plan Sponsorship by Number of
                    Employees in 2009                                              12
          Figure 2: Small Employer Plan Sponsorship by Average Annual
                    Employee Wage in 2009                                          13
          Figure 3: Small Employer Plan Sponsorship Rate by Employees’
                    Average Annual Wage and Number of Employees in 2009            14
          Figure 4: Small Employer Plan Sponsorship by State in 2009               15
          Figure 5: Small Employer Plan Sponsorship by Plan Type in 2009           16
          Figure 6: Percentage of Small Employer 401(k) Plan Sponsors and
                    SIMPLE IRA Plan Sponsors by Number of Employees in
                    2009                                                           17
          Figure 7: Percentage of Small Employer 401(k) Plan Sponsors and
                    SIMPLE IRA Plan Sponsors by Average Annual Wages of
                    Employees in 2009                                              17
          Figure 8: Small Employer Plan Sponsorship Rate by Industry Type
                    in 2009                                                        50




          Page ii                            GAO-12-326 Small Employer Plan Sponsorship
Abbreviations
ACT            Advisory Committee on Tax Exempt and Government Entities
AICPA          American Institute of Certified Public Accountants
ASPPA          American Society of Pension Professionals & Actuaries
BLS            Bureau of Labor Statistics
CDW            Compliance Data Warehouse
CPS            Current Population Survey
CRS            Congressional Research Service
DB             defined benefit
DC             defined contribution
EGTRRA         Economic Growth and Tax Relief Reconciliation Act of 2001
EIN            employer identification number
ERISA          Employee Retirement Income Security Act of 1974
IRA            Individual Retirement Arrangement
IRC            Internal Revenue Code
IRP            Information Returns Processing
IRS            Internal Revenue Service
Labor          Department of Labor
NAICS          North American Industry Classification System
NCS            National Compensation Survey
NEST           National Employment Savings Trust
PBGC           Pension Benefit Guaranty Corporation
SARSEP         Salary Reduction Simplified Employee Pension
SBA            Small Business Administration
SEP            Simplified Employee Pension
SIMPLE         Savings Incentive Match Plans for Employees


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Page iii                                     GAO-12-326 Small Employer Plan Sponsorship
United States Government Accountability Office
Washington, DC 20548




                                   March 5, 2012

                                   The Honorable Herb Kohl
                                   Chairman
                                   Special Committee on Aging
                                   United States Senate

                                   The Honorable Michael B. Enzi
                                   Ranking Member
                                   Committee on Health, Education, Labor,
                                     and Pensions
                                   United States Senate

                                   The Honorable Jeff Bingaman
                                   United States Senate

                                   About 42 million workers, or about one-third of all private-sector
                                   employees, work for small employers, and recent federal data suggest
                                   many of these workers lack access to a work-based retirement plan to
                                   save for retirement. An estimated 51 percent to 71 percent of workers at
                                   employers with fewer than 100 workers do not have access to a work-
                                   based retirement plan compared to an estimated 19 percent to 35 percent
                                   of those who work for employers with 100 or more workers. 1

                                   Over the years, the federal government has taken steps to encourage
                                   small employers to sponsor retirement plans, and Congress has enacted
                                   legislation that has established incentives such as plan types with fewer
                                   federal reporting requirements, higher plan contribution limits, and a tax
                                   credit for plan startup costs. The Department of Labor (Labor) and the
                                   Department of the Treasury’s (Treasury) Internal Revenue Service (IRS)
                                   have also increased education and outreach to these employers.
                                   However, small employers continue to face a number of barriers to
                                   starting and maintaining plans for their workers. In 2008, GAO reported
                                   on challenges that can limit small employer sponsorship of Individual



                                   1
                                    The lower percentages in these ranges are Labor’s Bureau of Labor Statistics’ (BLS)
                                   estimates based on 2011 data from the National Compensation Survey. The higher
                                   percentages are the Employee Benefit Research Institute’s (EBRI) estimates based on
                                   2011 data from the Census Bureau’s Current Population Survey. For more information on
                                   these ranges, see appendix I.




                                   Page 1                                    GAO-12-326 Small Employer Plan Sponsorship
Retirement Arrangement (IRA) 2 plans, including administrative costs,
contribution requirements, and eligibility based on employee tenure and
compensation, among others. 3 Other research also suggests that a
difficult economy and concerns about the overall cost of retirement plans
may be factors for some small employers that are less likely to sponsor
plans. For example, a recent survey found that difficult business
conditions were a top reason employers reported for being unlikely to
sponsor a retirement plan. 4

Certain characteristics associated with small employers may also
contribute to the challenges of starting and maintaining a plan. When
compared with large employers, small employers are more likely to
encounter higher rates of employee turnover and higher costs per
employee to comply with federal regulations. Further, small employers—
especially start-ups—rely heavily on owner investment and bank credit,
and operating revenue can be uncertain from year to year. 5 Federal data
suggest that about half of all new businesses (nearly all of which are
small) do not survive for more than 5 years. All these conditions can
make it difficult for small employers to focus on providing retirement
benefits for their workers.




2
 An IRA is a personal retirement savings arrangement that offers certain tax advantages
and allows individuals to set aside money for retirement into an individual account, or
purchase an annuity contract. IRAs can be employer-sponsored or maintained by an
individual.
3
 GAO, Individual Retirement Accounts: Government Actions Could Encourage More
Employers to Offer IRAs to Employees, GAO-08-590 (Washington, D.C.: June 4, 2008).
4
 Transamerica Center for Retirement Studies, 12th Annual Retirement Survey (July
2011).
5
 Previous work by GAO has discussed revenue uncertainty among small employers as a
factor in low rates of plan sponsorship. For more information, see GAO, Pension Plans:
Characteristics of Persons in the Labor Force Without Pension Coverage,
GAO/HEHS-00-131(Washington, D.C.: Aug. 22, 2000).




Page 2                                      GAO-12-326 Small Employer Plan Sponsorship
In light of these ongoing challenges, GAO was asked to examine issues
related to retirement plan sponsorship among small employers. 6 We
answered the following questions:

•   What characteristics are associated with small employers that are
    more likely or less likely to sponsor a retirement plan for their
    employees?

•   What challenges do small employers face in establishing and
    maintaining a retirement plan for their employees? and

•   What options exist to address these challenges and attract more small
    employer plan sponsors?

To answer these research questions, we combined and analyzed
retirement plan data from Labor and IRS data on 5.3 million small
employers. 7 We performed regression analyses to identify characteristics
of small employers that are most likely to sponsor plans. We conducted
literature reviews and interviewed retirement experts, organizations
representing small employers, agency officials, and others on challenges
faced by small employers in establishing and maintaining plans, and
options for addressing those challenges. In addition, we conducted
structured interviews with groups of small employers that did and did not
sponsor plans. These interviews were conducted in five cities, which were
judgmentally selected for geographic diversity. 8 We also reviewed
relevant federal laws and regulations. Additional details regarding our
methodology can be found in appendix I. We conducted this performance
audit from October 2010 to March 2012 in accordance with generally
accepted government auditing standards. 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


6
 GAO limited the scope of this study to employer-sponsored plans and did not examine
work-based retirement plans that are offered through but not sponsored by the employer
or retirement plans maintained by individuals outside of the workplace. Further, since the
report’s focus was on the employer, GAO did not examine the participation rates of the
employees at small employers as this was also considered outside the scope of this
report.
7
 For the purposes of this study, GAO defined a small employer as a for-profit firm with
least 1 employee and no more than 100 employees. For more information, see appendix I.
8
The five cities were Atlanta, Boston, Chicago, Los Angeles, and Washington, D.C.




Page 3                                       GAO-12-326 Small Employer Plan Sponsorship
             audit objectives. We believe that the evidence obtained provides a
             reasonable basis for our findings and conclusions based on our audit
             objectives.


             To encourage employers to establish and maintain retirement plans for
Background   their employees, the federal government provides preferential tax
             treatment under the Internal Revenue Code (IRC) for plans that meet
             certain requirements. 9 In addition, the Employee Retirement Income
             Security Act of 1974 (ERISA), as amended, sets forth certain protections
             for participants in private-sector retirement plans and establishes
             standards of conduct for those that manage the plans and their assets,
             generally called fiduciaries. 10 To the extent they qualify as fiduciaries
             under the law, 11 plan sponsors assume certain responsibilities and
             potential liability under ERISA. For example, a fiduciary must act
             prudently and solely in the interest of plan participants and their
             beneficiaries, which may require documenting decisions relating to the
             plan, including hiring outside professionals or service providers that
             advise and help administer plans. Small employers may choose a plan for
             their employees from one of three categories: employer-sponsored IRA
             plans; defined contribution (DC) plans; and defined benefit (DB) plans
             (often referred to as traditional pension plans). 12 Appendix II presents


             9
              The Internal Revenue Code (IRC) establishes requirements that private retirement plans
             must satisfy, including minimum coverage and benefits, in order to qualify for favorable tax
             treatment. Employers that sponsor these tax-qualified plans are entitled to a deduction
             (within limits) for the contributions they make, and contributions are not included in an
             employee’s income until benefits are received. IRS enforces the IRC requirements that
             apply to tax-qualified plans.
             10
                 Pub. L. No. 93-406, 88 Stat. 829, 874.
             11
                ERISA requires plans to have at least one named fiduciary who manages plan operation
             and administration, and other individuals may qualify as fiduciaries based on their
             function. For example, a person who exercises any discretionary authority or control over
             the management of the plan or any control over the assets is considered a fiduciary under
             ERISA. 29 U.S.C. § 1002(21); see also 29 C.F.R. § 2510.3-21. For more information
             about the fiduciary requirements, see 29 U.S.C. §§ 1101-14 and 29 C.F.R. part 2550.
             Labor enforces the fiduciary responsibility standards and certain other ERISA
             requirements, such as reporting and disclosure requirements. In 2010, Labor’s Employee
             Benefits Security Administration proposed expanding the regulatory definition of
             “fiduciary,” 75 Fed. Reg. 65,263 (Oct. 22, 2010), but in 2011, the agency announced plans
             to repropose the rule after further analysis and additional public input.
             12
               In this report, we use the term “pension” to refer generally to all types of private
             retirement plans, not just DB plans.




             Page 4                                         GAO-12-326 Small Employer Plan Sponsorship
information provided by Labor and IRS about some of the various types of
retirement savings plans available to small employers.

Employer-sponsored IRA plans: Employer-sponsored IRA plans allow
employers and, in some cases, employees to make contributions for
deposit in separate IRA accounts for each participating employee. These
plans generally have fewer administration and reporting requirements
than other types of plans. Participating employees bear the full
investment risk of their account assets. There are two types of employer-
sponsored IRA plans. Savings Incentive Match Plans for Employees
(SIMPLE) 13 IRA plans require employers to either match their eligible
employees’ voluntary salary reductions (typically up to 3 percent of
compensation) or to contribute 2 percent of compensation for each
eligible employee. The second type is the Simplified Employee Pension
(SEP) IRA plan, 14 which can be sponsored by an employer of any size,
and has higher employer contribution limits than the SIMPLE IRA plan. In
a SEP IRA plan, employer contributions are voluntary and employee
salary reductions are not permitted. 15

Defined contribution plans: DC plans allow employers, employees, or
both to contribute to individual employee accounts that are grouped under
a single plan. Employee salary reductions, if provided under the plan,
may be pretax or after-tax, in some cases. As with employer-sponsored
IRA plans, employees participating in DC plans bear the full risk of
investment and will realize any returns (gains or losses) on those
investments. DC plans tend to have higher limits for employee
contributions but also more rules and reporting requirements than




13
  26 U.S.C. § 408(p). SIMPLE IRA plans are available to employers that do not sponsor
another type of qualified plan and have 100 or fewer employees who meet certain
minimum compensation requirements. All employees who have received at least $5,000 in
compensation during the preceding 2 calendar years and are reasonably expected to
receive at least $5,000 in compensation during the current year must be eligible to
participate.
14
 26 U.S.C. § 408(k).
15
  Employee salary reductions under SEP IRA plans were eliminated beginning in 1997.
However, SEP IRA plans established prior to 1997 whose plan terms permitted salary
reductions—a plan called a Salary Reduction Simplified Employee Pension Plan
(SARSEP)—may continue to offer salary reductions. 26 U.S.C. § 408(k)(6)(H).




Page 5                                    GAO-12-326 Small Employer Plan Sponsorship
employer-sponsored IRA plans. 16 For example, some DC plans may be
required to conduct annual testing in order to ensure that the
contributions or benefits provided under the plan do not discriminate
against rank-and-file workers in favor of highly compensated
employees,. 17 In addition to nondiscrimination testing, some DC plans
may also be subject to top-heavy requirements and be required to
conduct further testing to ensure a minimum level of benefits are provided
to rank-and-file workers in plans that are sponsored by owner-dominated
firms, where the majority of benefits accrue to “key” employees, such as
owners and top executives. 18 As we have previously reported, top-heavy
requirements are intended to address a greater potential for tax-shelter
abuses in such plans. 19 Top-heavy requirements are most likely to affect
smaller plans (fewer than 100 participants), according to the IRS. The




16
  Most tax-qualified plans are required to annually file Form 5500, developed jointly by
Labor, IRS, and the Pension Benefit Guaranty Corporation to satisfy the annual reporting
requirements under ERISA and the IRC. ERISA established a reporting and disclosure
framework, in part, to protect the interests of participants and beneficiaries by requiring
that certain financial and other information be provided to participants and beneficiaries,
as well as to the federal government. Some small plans may be eligible to use a simplified
version of Form 5500. SIMPLE IRA plans and SEP IRA plans that comply with certain
alternative methods of compliance are not required to file Form 5500.
17
 See 26 U.S.C. § 401(a)(4); 26 C.F.R. §§ 1.401(a)(4)-1 through 1.401(a)(4)-4.
18
  26 U.S.C. § 416. In general, a plan is top-heavy if the accumulated contributions or
benefits of key employees exceed 60 percent of the accumulated contributions or benefits
all employees under the plan. Key employees include certain owners and officers of the
employer whose annual compensation exceeds a specified amount. If a plan is
determined to be top heavy, it must make certain adjustments to maintain its tax-qualified
status, such as providing higher minimum contributions to nonkey employees than would
otherwise be required. Other plans subject to top-heavy requirements include DB plans
and SEP IRA plans.
19
  The definition of a key employee for purposes of top-heavy testing—as opposed to the
definition of a highly compensated employee for purposes of general nondiscrimination
testing—emphasizes firm ownership because in small, owner-dominated firms,
compensation may not be a reliable indicator of who controls the firm and the pension
plan design. Without identifying key employees, owners of smaller family-owned firms
could manipulate assignments and salaries to avoid top-heavy status and exclude
nonfamily workers from top-heavy benefits. For more information, see GAO, Private
Pensions: “Top-Heavy” Rules for Owner-Dominated Plans, GAO/HEHS-00-141
(Washington, D.C., Sept. 29, 2000).




Page 6                                       GAO-12-326 Small Employer Plan Sponsorship
most common type of DC plan is a 401(k) plan. 20 In 401(k) plans,
employees can defer a portion of their salary—pretax or after tax, if
permitted by the plan—for deposit into a separate retirement account.
Employers may also choose to make additional contributions (such as
contributing a percentage of each eligible employee’s salary), match the
amount contributed by the employee, or both. One type of 401(k) plan,
the safe harbor 401(k) plan, is not subject to some of the requirements
associated with traditional 401(k)s that generally require annual plan
testing. However, under safe harbor 401(k) plans, employers are required
to make certain contributions to each participant’s account. 21 Another type
of tax-qualified DC plan, the profit sharing plan, gives the employer the
discretion to determine annually whether and how much to pay into the
plan, within certain maximum limits. Employer contributions, if any, are
allocated to each employee according to the terms of the plan.

Defined benefit plans: Unlike employer-sponsored IRA and DC plans,
sponsors of DB plans promise to provide a retirement benefit of a
specified amount that is typically based on factors such as an employee’s
years of service and, often, salary. The benefits in private-sector DB
plans are generally protected against an employer’s inability to pay, within
certain limitations, by federal insurance provided through the Pension
Benefit Guaranty Corporation (PBGC). 22 The employer is generally
responsible for funding the plan 23 and may be responsible for investing
and managing its assets. In a DB plan, the employer bears all investment
risk. DB plans are also generally subject to ERISA reporting




20
  26 U.S.C. § 401(k). Although a 401(k) arrangement is a plan feature, for purposes of this
report we classified it as a plan type. Different features of 401(k) plans are also
available—such as safe harbor 401(k) plans, automatic enrollment 401(k) plans, and
SIMPLE 401(k) plans, which are generally subject to the same requirements as SIMPLE
IRA plans.
21
  26 U,S,C, § 401(k)(12). Safe harbor 401(k) plans require employers to either make a
specified matching contribution to each participating employee’s account or contribute at
least 3 percent of compensation to all nonhighly compensated eligible employees.
22
 The assets held in DC plans and employer-sponsored IRA plans are not insured by the
Pension Benefit Guaranty Corporation.
23
  Employee contributions sometimes are required as well, but the employer is generally
responsible for the balance of the funding requirements, including from the effects of plan
experience differing from the actuarial assumptions. Most private sector DB plans do not
require any employee contributions, while most public sector DB plans do.




Page 7                                        GAO-12-326 Small Employer Plan Sponsorship
requirements, nondiscrimination testing, and top-heavy requirements.
Operating DB plans typically requires the expertise of an actuary.

Over the years, Congress has responded to concerns about lack of
access to workplace retirement plans for employees of small businesses
with legislation to lower costs, simplify requirements, and ease
administrative burden. For example, The Revenue Act of 1978 24 and the
Small Business Job Protection Act of 1996 25 established the SEP IRA
plan and the SIMPLE IRA plan respectively, featuring fewer compliance
requirements than other plan types. The Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA) 26 also included a number of
provisions that affected small businesses. For example, EGTRRA
eliminated top-heavy testing requirements for safe harbor 401(k)s,
increased contribution limits for employer-sponsored IRA plans and
401(k) plans, and created a tax credit for small employers to offset startup
costs, including the cost of educating employees about a new plan. 27
EGTRRA also created a tax credit for individuals within certain income
limits who make eligible contributions to retirement plans. The Pension
Protection Act of 2006, 28 among other changes, made these EGTRRA
provisions permanent and established additional provisions that support
retirement plan participation by rank-and-file employees, such as
automatic enrollment.

To help encourage plan sponsorship, federal agencies conduct education
and outreach activities and provide information about retirement plans for
small employers. Labor, IRS, and the Small Business Administration



24
 Pub. L. No. 95-600, § 152, 92 Stat. 2763, 2791.
25
 Pub. L. No. 104-188, § 1421, 110 Stat. 1755, 1792.
26
 Pub. L. No. 107-16, 115 Stat. 38.
27
  The credit for small employer pension plan startup costs applies to certain startup costs
in connection with the establishment of a new qualified DB plan, DC plan (including 401(k)
plans), SIMPLE IRA plan, or SEP IRA plan. To be eligible, an employer must have no
more than 100 employees who received at least $5,000 of compensation in the preceding
year. The credit equals 50 percent of qualified startup costs, which include administration
costs and employee education, up to a maximum of $500 per year (for the first 3 years of
the plan). 26 U.S.C. § 45E.
28
  Pub. L. No. 109-280, 120 Stat. 780. EGTRRA was set to expire on December 31, 2010,
but the Pension Protection Act of 2006 made permanent EGTRRA’s provisions relating to
pensions and IRAs.




Page 8                                       GAO-12-326 Small Employer Plan Sponsorship
(SBA)—which maintains an extensive network of field offices—have
collaborated with each other and with national and local organizations to
develop information on small employer retirement plans 29 and conduct
outreach with small employers. For example, Labor, IRS, SBA and the
U.S. Chamber of Commerce partnered to create the Choosing a
Retirement Solution Campaign, which targets small employers and their
employees. 30 The campaign’s educational materials, including web-based
retirement plan guidance for small employers, highlight key aspects of
and differences between various plans and features, including tax
benefits for employers and employees. Labor also worked with the
Society for Human Resource Management and the American Institute of
Certified Public Accountants (AICPA) on the Fiduciary Education
Campaign to provide retirement plan fiduciaries with information about
their fiduciary responsibilities under ERISA.

In addition, various private-sector service providers, from individual
accountants, investment advisers, recordkeepers, and actuaries to
insurance companies and banks, assist sponsors with their retirement
plans. Some sponsors hire a single provider that offers a range of plan
services for one fee—sometimes referred to as a “bundled” services
arrangement. Other sponsors hire different providers for individual
services under an “unbundled” arrangement, paying a separate fee for
each service. Plan services include legal, accounting, trustee/custodial,
recordkeeping, investment management, and investment education or
advice. Service providers can also assist with plan administration
functions, including nondiscrimination testing, top-heavy testing, and filing
of government reports. Some providers also include payroll services,
which further centralize an employer’s administrative services through a
single company. Labor provides some guidance for plan sponsors in
selecting and monitoring plan service providers. 31 Further, the American


29
  Labor, IRS, and PBGC have a Memorandum of Understanding on enhancing
coordination with respect to the funding of any pension plan in connection with certain
provisions of ERISA and the IRC, which includes sharing information when coordinated
administrative and enforcement action concerning a specific matter is in the government
interest.
30
  U.S. Department of Labor, Retirement Savings Education Campaign, accessed January
16, 2012, http://www.dol.gov/EBSA/savingmatters.html.
31
  U.S. Department of Labor, Fact Sheet: Tips for Selecting and Monitoring Service
Providers For Your Employee Benefit Plan (disseminated May 2004), accessed January
13, 2012, http://www.dol.gov/ebsa/newsroom/fs052505.html.




Page 9                                      GAO-12-326 Small Employer Plan Sponsorship
                             Society of Pension Professionals & Actuaries (ASPPA) publishes a list of
                             certified firms that adhere to ASPPA’s standards and best practices
                             concerning recordkeeping and administration services for retirement
                             plans.



Number of Employees
and Average Pay Level
Greatly Influence Plan
Sponsorship

More Employees and           GAO found that the number of employees and average wages greatly
Higher Average Wages         influence the likelihood that a small employer will sponsor a retirement
Increase the Likelihood of   plan. 32 Further, the regression analysis using Labor and IRS data found
                             that small employers with larger numbers of employees were the most
Plan Sponsorship
                             likely of all small employers to sponsor a retirement plan, as were those
                             paying average annual wages of $50,000 to $99,999. Conversely,
                             employers with the fewest employees and the lowest average annual
                             wages were very unlikely to sponsor a retirement plan.

                             A separate GAO analysis using Labor and IRS data found an overall
                             small employer sponsorship rate of 14 percent in 2009. 33 However, the
                             sponsorship rate does not include small employers that sponsor SEP IRA
                             plans because IRS currently does not have a means to collect these data,
                             which limits what is known about small employers that sponsor SEP




                             32
                               Several experts stated that a firm’s age could also affect the likelihood of plan
                             sponsorship, with newer employers less likely to sponsor a plan. However, our analysis
                             was unable to address the number of years in operation due to technical challenges. See
                             appendix I for further discussion of the technical challenges.
                             33
                               The sponsorship rate cited in this report is limited to single employers that sponsor a
                             plan. As a consequence, the sponsorship rate does not include small employers that
                             participated only in multiple employer retirement plans or multiemployer retirement plans,
                             which are outside the scope of this report. GAO is currently conducting ongoing work on
                             multiple employer plans and multiemployer plans and their role in the private pension
                             system. For further information on the scope of GAO’s analysis, see Appendix I.




                             Page 10                                      GAO-12-326 Small Employer Plan Sponsorship
plans. According to IRS, its Form 5498, “IRA Contribution Information,” 34
includes some SEP information; however, the agency is unable to link this
information to an employer’s employer identification number (EIN). As a
result, IRS can identify participants in SEP plans but not sponsoring
employers. 35 While the IRS Tax Forms and Publication Committee
proposed a change to the form to allow IRS to identify SEP IRA plan
sponsors, officials said the proposal was not adopted.

Further examination of sponsorship rates looking at small employer
characteristics found that those with 26 to 100 employees had the highest
sponsorship rate—31 percent—while small employers with 1 to 4
employees had the lowest rate—5 percent (see fig. 1). Additionally, even
though small employers with 26 to 100 employees made up only 10
percent of the overall small employer population, they sponsored more
retirement plans than employers with 1 to 4 employees.




34
  Plan issuers or trustees of IRA plans submit form 5498 to IRS and to IRA participants
each year to report annual contribution and other information for each account. Form 5498
shows the issuer or trustee’s employer identification number as well as the participant’s
Social Security Number. A copy of IRS Form 5498 can be found in appendix III.
35
  Additionally, whereas IRS collects information from employers about SIMPLE employee
contributions on Form W-2 filed for each employee, employers do not separately identify
SEP information on an employee’s W-2.




Page 11                                     GAO-12-326 Small Employer Plan Sponsorship
Figure 1: Small Employer Plan Sponsorship by Number of Employees in 2009




Looking at the average annual wage characteristics, small employers with
average annual wages of $50,000 to $99,999 had the highest rate of
retirement plan sponsorship at 34 percent while small employers with
average wages of under $10,000 had the lowest sponsorship rate—3
percent (see fig. 2). Further, despite having a smaller overall population,
small employers with average annual wages of $50,000 to $99,999
sponsor almost three times as many retirement plans compared to small
employers paying average wages of under $10,000. As a point of
comparison, the overall annual average wages for employees working for
small employers was about $38,000.




Page 12                                GAO-12-326 Small Employer Plan Sponsorship
Figure 2: Small Employer Plan Sponsorship by Average Annual Employee Wage in 2009




                                      Analysis of the Labor and IRS data examining the interaction between
                                      both characteristics—number of employees and average annual wages—
                                      illustrates how sponsorship rates increase as numbers of employees and
                                      average annual wages increase. For example, the plan sponsorship rate
                                      for employers with 26 to 100 employees and average wages of $30,000
                                      to $49,999 was more than nine times higher than employers with the
                                      same number of employees and wages below $10,000. Further, the
                                      sponsorship rate for small employers with 26 to 100 employees exceeded
                                      75 percent when average wages were $50,000 or higher. In contrast,
                                      small employers with 1 to 4 employees reached their highest sponsorship
                                      rate of 13 percent when average annual wages were $50,000 or more;
                                      however, sponsorship rates were still about one-sixth the rate for small
                                      employers with 26 to 100 employees in the same wage category. Our
                                      analysis showed the sponsorship rate for employers with one to four
                                      employees lowered the overall sponsorship rate in the average annual
                                      wage categories. For example, the figure shows that small employers
                                      with average annual wages of $100,000 or more have an overall
                                      sponsorship rate of 26 percent, but this is much lower than the
                                      sponsorship rates for small employers with five or more employees.
                                      Figure 3 shows small employer sponsorship rates by size of employer
                                      and average annual wage paid.




                                      Page 13                                GAO-12-326 Small Employer Plan Sponsorship
Figure 3: Small Employer Plan Sponsorship Rate by Employees’ Average Annual Wage and Number of Employees in 2009




                                      In examining the geographic distribution of sponsorship rates, small
                                      employers in the Midwest and Northeast were more likely to sponsor
                                      plans, while employers in the West and South were less likely. 36 Further,
                                      in examining data on individual states, Connecticut, Wisconsin, and
                                      Washington, D.C., had the highest rate—with Washington, D.C., showing
                                      the top rate of 23 percent. Florida and Mississippi had the lowest



                                      36
                                       For purposes of this analysis, we used geographic regions used by the Census Bureau.
                                      For a list of states included in each region, see appendix V.




                                      Page 14                                   GAO-12-326 Small Employer Plan Sponsorship
                                        sponsorship rates at fewer than 10 percent. Figure 4 shows the
                                        percentage of small employers that sponsor plans by state. 37

Figure 4: Small Employer Plan Sponsorship by State in 2009




401(k)s and SIMPLE IRAs                 According to GAO analysis of Labor and IRS data, 401(k) and SIMPLE
Were the Most Common                    IRA plans were overwhelmingly the most common types of plans
Plan Types                              sponsored by small employers. Out of slightly more than 712,000 small
                                        employers that sponsored a single type of plan, about 86 percent
                                        sponsored either a 401(k) or a SIMPLE IRA plan. 38 Additionally, non-
                                        401(k) DC plans, which include non-401(k) profit sharing plans, make up
                                        11 percent of the plan type population; SARSEP IRAs are 3 percent,
                                        while DB plans make up only about 1 percent of the small employer



                                        37
                                          For a complete list of sponsorship rates in each state, see appendix V.
                                        38
                                          Three percent of the small employer population sponsored multiple plans; however,
                                        these small employers were excluded from the plan type analysis. For a further discussion
                                        of this limitation, see appendix I.




                                        Page 15                                      GAO-12-326 Small Employer Plan Sponsorship
sponsor population. 39 Figure 5 shows the proportion of plan types
sponsored by small employers.

Figure 5: Small Employer Plan Sponsorship by Plan Type in 2009




Note: Percentages do not add up to 100 due to rounding.


In examining the characteristics of small employers that sponsored the
two most common plan types, SIMPLE IRA plan sponsors outnumbered
401(k) plan sponsors when small employers had fewer employees (see
fig. 6). For example, looking at small employers with 1 to 11 employees
that sponsored plans, there were 43 percent more SIMPLE IRA plans
than there were 401(k) plans. In contrast, for small employers with 12 to
100 employees that sponsored plans, there were 90 percent more 401(k)
plans than SIMPLE IRA plans.




39
  A SARSEP plan is a type of SEP IRA plan set up before 1997 that permits employee
salary reduction contributions. Employee salary reductions under SEP IRA plans were
eliminated beginning in 1997; however, SARSEP plans established prior to 1997 may
continue to offer salary reductions. 26 U.S.C. § 408(k)(6)(H).




Page 16                                         GAO-12-326 Small Employer Plan Sponsorship
Figure 6: Percentage of Small Employer 401(k) Plan Sponsors and SIMPLE IRA Plan Sponsors by Number of Employees in 2009




                                       Similarly, in looking at small employers by average annual wages, there
                                       were 61 percent more SIMPLE IRA plans than 401(k) plans for those with
                                       employees who had average annual wages under $30,000. In contrast,
                                       for employers with employees who had average annual wages of $30,000
                                       or more, there were more than double the numbers of 401(k) plans than
                                       SIMPLE IRA plans. See figure 7 for the percentage of small employer
                                       401(k) plan sponsors and SIMPLE IRA plan sponsors by the average
                                       annual wages of employees.

Figure 7: Percentage of Small Employer 401(k) Plan Sponsors and SIMPLE IRA Plan Sponsors by Average Annual Wages of
Employees in 2009




                                       Page 17                                 GAO-12-326 Small Employer Plan Sponsorship
                          Finally, while SIMPLE IRA plans were the most common plan type along
                          with 401(k) plans, they made up a smaller proportion of the overall plan
                          contributions. Contributions to SIMPLE IRA plans in 2009 amounted to
                          $4.3 billion, or 11 percent of the total contributions made by small
                          employers and their employees into the plan types GAO analyzed. By
                          contrast, 401(k) contributions amounted to $29.2 billion, or 76 percent of
                          all contributions.



Plan Complexity and
Resource Constraints
Were Most Frequently
Cited Barriers to
Retirement Plan
Sponsorship

Many Small Employers      Small employers and other stakeholders 40 identified various plan options,
Find Retirement Plans     administration requirements, fiduciary responsibilities, and top-heavy
Complex and Burdensome    testing requirements as complex and burdensome, often citing these
                          factors as barriers to sponsoring retirement plans or as reasons for
to Start and Administer
                          terminating them.

                          Plan options and administration requirements: Small employers and
                          other stakeholders said that plan options and administration requirements
                          are frequently complex and burdensome and discourage some small
                          employers from sponsoring a plan. For example, some small employers
                          and retirement experts said that the number of plan types and features
                          make it difficult for small employers to compare and choose plans.
                          Representatives of a plan service provider said that too many plan options
                          overwhelmed small employers, making it more difficult for them to choose a
                          plan and, ultimately, less likely that they will sponsor one. Some
                          stakeholders also described the administrative burden of plan paperwork,
                          such as reviewing complicated quarterly investment reports or complying


                          40
                            Stakeholders included small employers, retirement experts, organizations representing
                          small employers, retirement plan service providers, representatives of the accounting
                          profession, and officials at Labor and IRS.




                          Page 18                                     GAO-12-326 Small Employer Plan Sponsorship
with federal reporting requirements—like those associated with required
annual statements—as particularly burdensome. For example, one small
employer with a DB plan described a dense and highly technical quarterly
investment report for his plan that ran 50 pages, making it difficult to glean
summary financial information about the plan. Another small employer who
previously sponsored a 401(k) with a company match said the amount of
required plan paperwork, including generating annual reports, was a key
reason he terminated it. Stakeholders also identified interim amendment
requirements as burdensome for plan administration. Plan sponsors
generally submit plan documentation to IRS periodically to ensure that
plans are up to date and compliant with relevant federal statutes and
regulations. However, when statutes and regulations change, some
sponsors may be required to modify plan documentation and resubmit their
plan documents to IRS. Some stakeholders, including small employers, a
small business advocacy organization, and plan service provider, said that
complying with interim amendment requirements can be costly and time
consuming for small employers. IRS has recognized that interim
amendment requirements pose a burden to plan sponsors. 41 However, an
IRS official noted that most small employer plans are likely based on plan
designs that are preapproved by IRS, and interim amendment
requirements are likely to entail little administrative burden for most small
employer sponsors. 42

Fiduciary responsibilities: A number of stakeholders indicated that
understanding and carrying out a sponsor’s fiduciary responsibilities with
respect to their qualified retirement plans presents significant challenges to
some small employers. Plan sponsors may qualify as fiduciaries under
ERISA, for example, if they have discretionary authority or control over the
management of the plan or control the plan assets. Fiduciaries have a
number of responsibilities, such as the duty to act prudently, in the sole
interest of the participants and beneficiaries, and to diversify the
investments of the plan.43 Some small employer sponsors found the
selection of investment fund options for their plans particularly challenging.
A small employer with a 401(k) plan described the difficulties of selecting


41
  Advisory Committee on Tax Exempt and Government Entities, Ninth Report of the ACT,
June 9, 2010.
42
  According to the IRS official, pre-approved plans are designed to satisfy certain IRS
requirements and have fewer filing requirements.
43
 29 U.S.C. § 1104(a).




Page 19                                      GAO-12-326 Small Employer Plan Sponsorship
appropriate investment options, with an appropriate balance of risk, for a
workforce that includes younger and older workers. A number of small
business advocates and retirement experts said that not all small
employers have an adequate understanding of their fiduciary duties and
are not always aware of all their responsibilities under the law. For
example, a retirement expert said that small employers that do not consult
with plan professionals often lack the time and expertise to understand
complicated fiduciary rules under ERISA. One service provider explained
that some small employers mistakenly believe that all fiduciary
responsibilities and liabilities are transferred to a service provider when
they are hired. Another expert noted that some small employers have an
exaggerated sense of the liabilities that being a fiduciary carries, and may
avoid sponsoring a plan out of fear of being sued by their employees.

Top-heavy requirements: Top-heavy requirements are most likely to
affect smaller plans (fewer than 100 participants), according to IRS. A
number of stakeholders said compliance with the requirements is often
burdensome and poses a major barrier to plan sponsorship for small
employers. Small employers with high employee turnover may face an
even greater likelihood of becoming top-heavy. According to some experts,
employee turnover alone can force some small employers out of
compliance with top-heavy requirements as they replace departing
employees. Over time, rank-and-file employees separate and take their
plan assets with them, while long-term employees, such as business
owners or executives, continue to contribute to the plan, eventually leading
to a top-heavy imbalance of plan assets. For example, one small employer
with a 401(k) plan stated that, because two of the four owners had worked
for the company for about 25 years and their retirement accounts made up
the majority of the total plan assets in the 401(k) plan, the plan had become
top-heavy.

To comply with the top-heavy requirements, sponsors of certain plans 44
are required to test their plans annually. An employer’s failure to make
certain adjustments to a plan deemed top-heavy can result in it losing its
tax-qualified status and the associated tax advantages for the employer
and employees. A number of stakeholders stated that top-heavy
compliance is confusing and can pose significant burdens on some small


44
  Generally, DC plans, DB plans, and SEP IRA plans are subject to the top-heavy rules.
SIMPLE IRA plans and some safe harbor 401(k) plans are exempt. 26 U.S.C. §
416(g)(4)(G) and (H).




Page 20                                     GAO-12-326 Small Employer Plan Sponsorship
                            employers. For example, some retirement experts said that small
                            employers whose plans are found to be top-heavy may encounter a
                            number of additional costs in the effort to make their plans compliant,
                            such as hiring a plan professional to make corrections to the plan
                            document and instituting a minimum top-heavy employer contribution for
                            all participating rank-and-file employees. According to one expert, in
                            some cases, the costs of mandatory contributions to employees’ accounts
                            may prevent owners from making contributions to their own retirement
                            accounts, and may make some small employers reluctant to sponsor a
                            plan, or may drive those that sponsor a plan to terminate it. Sponsors can
                            avoid top-heavy testing by adopting a safe harbor 401(k) plan with no
                            additional contributions, which is not subject to top-heavy requirements.
                            However, safe harbor 401(k) plans require the employer to make either
                            specified matching contributions or a minimum 3 percent contribution to
                            each participant’s account. According to representatives of the accounting
                            professional, the additional cost to the employer of required contributions
                            under a 401(k) safe harbor plan may offset the advantages of sponsoring
                            such a plan.


Federal Guidance Is         Federal agencies provide guidance that can assist small employers in
Available to Address the    addressing some of the challenges of starting and maintaining retirement
Complexities Associated     plans. Labor and IRS, often in collaboration with SBA, have produced
                            publications, conducted workshops, and developed online resources,
with Plan Sponsorship but   among other efforts, to assist small employers in understanding options,
May Lack Visibility among   requirements, and responsibilities of running a plan. For example, Labor
Small Employers             and IRS jointly published a guide that compares various features of
                            different plan types, including IRA, DC, and DB plans. Both agencies have
                            also developed websites and online tools to help small employers navigate
                            plan information and make informed decisions about plan options. For
                            example, IRS’s Retirement Plans Navigator is a key component of its
                            education efforts for small employers and is designed for employers that
                            are less likely to hire a service provider. According to IRS, the navigator is
                            intended to lead a novice through basic information on retirement plans
                            and compliance. Similarly, Labor, in collaboration with the American
                            Institute of Certified Public Accountants (AICPA), developed an interactive
                            website highlighting small employer retirement options. The website
                            introduces employers to a number of plan options from simpler IRA plans
                            to more complex automatic enrollment 401(k) plans, and describes the
                            advantages and features of various plan types. According to Labor,
                            employers with as few as two employees can find options using the tool.




                            Page 21                                GAO-12-326 Small Employer Plan Sponsorship
However, a number of stakeholders suggested that many small
employers are unaware of federal resources on retirement plans. For
example, the Advisory Committee on Tax Exempt and Government
Entities (ACT) 45 recognized that, despite the numerous IRS retirement
plan resources available, many small employers and other stakeholders
in the small business community are unaware of these resources. 46 ACT
indicated these resources could go a long way in addressing the needs of
the small employers were it not for their lack of visibility. The lack of
visibility of federal guidance on small employer plan options may be due,
in part, to difficulties in finding useful, relevant information across federal
websites. For example, while Labor’s webpage on small employer
retirement plan options contains links to relevant topics, such as
compliance assistance, participants’ rights and fiduciary responsibilities, it
is easy to navigate away from but difficult to return to the content
developed for small employers because there is no consistent page
navigation menu for small employer information. Furthermore, while the
Labor website includes guidance on selecting and monitoring plan service
providers, there is no link to the guidance on the small employer plan
options page. IRS’s Retirement Plans Navigator is located on a separate
website from the rest of the agency’s online plan resources for small
employers. When navigating from the page on small employer retirement
plan resources on IRS’s main portal to the agency’s Retirement Plans
Navigator, a message alerts users that they are leaving the IRS website
and entering another government website. IRS officials noted that small
employers who participated in focus groups on IRS plan resources
reported challenges to understanding plan-based information when
navigating these resources. Furthermore, Labor and IRS present their
online content separately, which makes it necessary for an employer to
navigate both agencies’ websites to gather complete information about
starting and maintaining a retirement plan. For example, to review
information on fiduciary responsibilities, users must visit Labor’s website,
and to review information on nondiscrimination and top-heavy testing,
users must visit IRS’s site. Neither agency maintains a central web portal
for all information relevant to small employer plan sponsorship, though
such portals exist for federal information resources in other areas such as



45
  The ACT was established in 2001 to provide an organized public forum for IRS to
receive regular input on exempt organization and employee plan policy.
46
  Advisory Committee on Tax Exempt and Government Entities, Ninth Report of the ACT
(June 15, 2011).




Page 22                                    GAO-12-326 Small Employer Plan Sponsorship
                             healthcare. 47 Consolidating Internet-based services and information is
                             also consistent with one of the purposes of the E-Government Act of 2002
                             to promote interagency collaboration in providing electronic government
                             services. 48


Small Employers Identified   Small employers that lack sufficient financial resources, time, and
Lack of Financial            personnel may be unwilling or unable to sponsor retirement plans. In
Resources, Time, and         particular, stakeholders stated that plan sponsorship may be impractical
                             for smaller or newer firms that are unable to undertake the commitment to
Personnel as Deterrents to   sponsor a plan. For example, one expert noted that the first priority of a
Sponsoring Retirement        small employer is remaining in business, and this focus may preclude
Plans                        sponsoring a retirement plan as a benefit to employees until the firm
                             becomes more established.

                             Financial resources: Small employers, especially those with lower profit
                             margins or an unstable cash flow, could be less willing or less able to
                             sponsor a retirement plan because of the one-time costs to start a plan
                             and the ongoing costs involved with maintaining the plan. These costs
                             can result from start-up activities, complying with reporting and testing
                             requirements, and fees paid to an outside party for administration tasks.
                             Stakeholders stated that these expenses can make sponsoring a plan
                             unappealing. For example, one small employer stated that as a new
                             business owner, she thinks it is better for her business to proceed
                             cautiously and avoid adding to her fixed cost structure. Additionally, any
                             requirement for small employers to match employee contributions or to
                             make mandatory contributions to an employee’s account can also
                             increase costs. Further, small employers stated that general economic
                             uncertainty makes them reluctant to commit to such long-term expenses
                             and explained that they needed to reach a certain level of profitability
                             before they would consider sponsoring a plan. For example, one small
                             employer stated that he wanted to be able to expect consistent profits
                             over several years before he would consider investing in a plan. Another
                             small employer stated that she wanted to triple her business revenue to a
                             little less than $1 million before she would consider sponsoring a
                             retirement plan.



                             47
                              For example, see: http://www.healthcare.gov/.
                             48
                              Pub. L. No. 107-347, 116 Stat. 2899.




                             Page 23                                    GAO-12-326 Small Employer Plan Sponsorship
                         Time and personnel: Some small employers stated they may not have
                         sufficient time to administer a retirement plan themselves or lacked the
                         personnel to take on those responsibilities. For example, one small
                         employer said that he was not prepared to assume the burden of
                         managing a plan as he thought it would require almost daily attention and
                         did not have the staff to devote to it. Further, a plan service provider
                         described how the focus of the small employer would not be on absorbing
                         the additional time that starting and maintaining a plan would require.
                         Additionally, a plan sponsor employer stated that, since her business did
                         not have a dedicated human resources person or accountant, she
                         performed these duties herself, as she would ultimately be responsible for
                         any mistakes. Further, small employers may not have time to develop the
                         expertise to investigate or choose financial products, select the best
                         investment options, or track their performance. For example, one small
                         employer described how business owners without the financial expertise
                         to compare and select from among different plan options would likely find
                         the experience intimidating.


Small Employers Report   Some small employers stated that they may be less likely to sponsor a
That Insufficient        retirement plan if they do not perceive sufficient benefits to the business
Incentives and Lack of   or themselves. For example, several small employers stated that their
                         firms sponsored retirement plans in order to provide the business owners
Employee Demand          with a tax-deferred savings vehicle. One small employer stated that his
Discourage Plan          firm evaluated the plan annually in order to determine whether it
Sponsorship              continues to benefit the owners. A service provider observed that the cost
                         of mandatory contributions—such as those associated with safe harbor
                         401(k) plans—can discourage small employers, since the cost of the
                         contributions can outweigh the benefit to the owners.

                         Low employee demand for an employer-sponsored retirement plan may
                         also be a challenge for small employers. For example, a number of small
                         employers stated that employees prioritized health care benefits over
                         retirement benefits. One small employer thought that, given the limited
                         funds available to contribute towards benefits, his employees would
                         prefer those resources be applied toward lowering the employees’ share
                         of health insurance premiums. Small employers emphasized that offering
                         health care benefits was necessary to attract quality employees. Further,
                         one small employer stated that his employees perceived a more
                         immediate need for health care benefits, while perceiving retirement
                         benefits as a future concern. Additionally, some small employers, such as
                         those who described having younger workforces, stated that their
                         employees were less concerned about saving for retirement and, as a


                         Page 24                              GAO-12-326 Small Employer Plan Sponsorship
                         result, were not demanding retirement benefits. Other small employers
                         told us that employees, particularly those with low pay, do not have any
                         interest in retirement benefits because they live paycheck to paycheck
                         and are less likely to have funds left over to contribute to a plan. For
                         example, one small employer discontinued his plan when too few of his
                         employees—most of whom he described as low wage—participated in
                         the plan. Another small employer noted that even senior-level managers
                         in his business did not participate in the plan. However, a retirement
                         expert stated that, while some employees might not be interested in
                         participating in a retirement plan, he believed the perceived lack of
                         demand to be exaggerated. He added that he believed some businesses
                         may use lack of employee demand as an excuse when the small
                         employer was not interested in sponsoring a plan.


Plan Service Providers   A number of small employers indicated that they use plan service
Help Small Employers     providers to address various aspects of plan administration, which
Meet Some but Not All    enabled them to overcome some challenges of starting and maintaining a
                         plan. For example, one small employer said his service provider
Retirement Plan Needs    addresses his plan testing requirements and educates employees about
                         the plan. Another employer noted that her business would not have the
                         time or the expertise to administer their plan without a service provider. A
                         third employer stated that he would not be able to administer a plan
                         without the assistance of a service provider to help navigate the
                         complexity of plan administration.

                         Some stakeholders said that service providers offer small employers plan
                         administration solutions by providing basic, affordable plan options. For
                         example, one service provider said a small employer could sponsor a
                         plan for an administrative fee as low as $1,200 annually. They and other
                         retirement industry representatives said they are able to provide plan
                         options at affordable rates because they market and administer IRS pre-
                         approved standard plans in high volume, thereby reducing the costs of
                         administration. Even so, while some small employers said the fees
                         service providers charge were affordable, others said they were too high.
                         Further, some stakeholders pointed to other limitations of using service
                         providers, such as the difficulties of choosing a provider, setting up a new
                         plan through a provider, and switching to a new provider, as well as the
                         significant plan responsibilities that remain with the sponsor. For example,
                         a small employer described the process of finding a service provider and
                         setting up a plan as particularly difficult, especially for an employer with
                         little knowledge of retirement plans or experience in working with a
                         service provider. Another small employer said she was not satisfied with


                         Page 25                               GAO-12-326 Small Employer Plan Sponsorship
                             the services of her current service provider but would not consider
                             switching to a new one because of the administrative hardships that
                             would entail. Finally, as representatives of the accounting profession
                             noted, even with the assistance of a service provider, small employer
                             sponsors often continue to have significant plan responsibilities, such as
                             managing plan enrollments and separations, and carrying out their
                             fiduciary duties.



Proposed Options to
Spur Plan
Sponsorship Target
Simplification,
Incentives, and
Education

Stakeholders Proposed        Stakeholders provided several suggestions targeted at addressing some
Simplifying Requirements     of the administrative and financial challenges they believed inhibited plan
and Increasing Tax Credits   sponsorship. 49 These proposals, which they said could reduce complexity
                             and ease administrative and financial burdens for small employer plan
to Encourage Plan
                             sponsors, included simplifying plan administration rules, revising or
Sponsorship                  eliminating top-heavy testing, and increasing tax credits.

                             Simplify plan administration requirements: Several stakeholders
                             suggested proposals that could simplify plan administration requirements
                             and ease administrative burdens for small employers. For example,
                             representatives of a large service provider stated that there is a need for
                             simplification of existing rules and processes for retirement plans and
                             proposed easing nondiscrimination and top-heavy testing requirements
                             as an example. Similarly, several small employers said that federal
                             regulators should strive for simplicity in requirements governing plan
                             administration. A small employer who sponsored a 401(k) plan suggested
                             reducing the amount of paperwork as an example. Another small


                             49
                               The key proposals discussed in this report are not exhaustive, and we did not attempt to
                             quantify the costs and benefits of each proposal or their potential effectiveness in
                             encouraging small employer plan sponsorship.




                             Page 26                                      GAO-12-326 Small Employer Plan Sponsorship
employer who sponsored a 401(k) plan said federal regulators should
“just keep it simple.” One proposal from a national small business
association would simplify plan requirements by reducing the frequency of
statements sent to certain plan participants, from quarterly to once per
year, and allowing some required disclosures to be made available solely
online. Another proposal, advocated by IRS, would simplify plan
requirements by streamlining interim amendment requirements—an
aspect of plan administration that stakeholders identified as particularly
burdensome for some small employers. 50 Each year since 2004, IRS has
published a cumulative list of changes in plan qualification requirements
that must be incorporated by plan sponsors. An IRS official stated that
IRS is proposing to replace a requirement for some interim amendments
with a requirement for notices to be sent directly to employees. These
notices would explain how a plan intends to comply with changes to
relevant laws and regulations and could reduce the burden for plan
sponsors by reducing the number of times plan documents must be
amended. The amendments that would be subject to the less-stringent
requirement would be those triggered by changes to laws and regulations
but that do not affect plan benefits.

Revise or eliminate top-heavy testing: A number of stakeholders
proposed revising or eliminating top-heavy testing to ease administrative
and financial burdens. For example, representatives of the accounting
profession told us that top-heavy testing is duplicative because there are
other plan testing requirements intended to detect and prevent plan
discrimination against rank-and-file employees. 51 The representatives and
officials of a large service provider told us lack of plan participation or high
turnover among a business’s rank-and file employees frequently cause
plans sponsored by small employers to become top-heavy. 52 As a result,



50
  IRS identified interim amendments as a focus for simplification in its 2011 annual work
plan and is considering proposed changes. See Cumulative List of Changes in Plan
Qualification Requirements reports, IRS Notices 2011-97, 2010-90 and 2009-98.
51
  For example, some plans must conduct nondiscrimination testing—in addition to top-
heavy testing—to ensure that the contributions or benefits provided under the plan do not
discriminate in favor of highly compensated employees. See 26 U.S.C. § 401(a)(4) and 26
C.F.R. §§ 1.401(a)(4)-1 through 1.401(a)(4)-4. GAO did not specifically assess duplication
between top-heavy and nondiscrimination testing requirements.
52
  However, some plans that may be sponsored by small employers, including SIMPLE
IRA plans and certain safe harbor 401(k) plans, are not subject to top-heavy rules. 26
U.S.C. § 416(g)(4)(G) and (H).




Page 27                                      GAO-12-326 Small Employer Plan Sponsorship
the representatives said top-heavy testing should be revised or
eliminated.

Increase tax credits: Some stakeholders believed that tax credits, in
general, are effective in encouraging plan sponsorship and that larger tax
credits could encourage more small employers to sponsor plans.
However, a stakeholder cautioned that the credits must be sufficient to
offset the costs of plan sponsorship, which a service provider said can
amount to $2,000 or more per year. Currently, small employers may claim
an annual tax credit of up to $500 based on plan startup costs for each of
the first 3 years of starting a qualified plan. 53 A national organization
representing small employers cited tax credits as a top factor in an
employer’s decision to sponsor a plan; however, an organization official
said the likelihood of an employer doing so often depends on whether the
tax credit offsets a significant portion of administrative and startup costs
of sponsoring plans. Some small employers stated that larger tax credits
could ease the financial burden of starting a plan by offsetting plan-
related costs, thus creating greater incentives for an employer to sponsor
a plan. Other stakeholders said that existing plan startup tax credits are
insufficient to encourage plan sponsorship. Officials at another national
small business association cautioned that short term tax credits do not
provide sufficient incentives for a small employer to make the long-term
commitment of sponsoring a plan. Similarly, one small employer who
sponsored both 401(k) and DB plans said there needs to be a larger




53
 For information on the credit for small employer pension plan startup costs, see 26
U.S.C. § 45E.




Page 28                                     GAO-12-326 Small Employer Plan Sponsorship
                            incentive for the small employer to sponsor a plan because starting and
                            maintaining plans can be expensive. 54

Stakeholders Said More      Numerous stakeholders agreed that the federal government could
Education and Outreach      conduct more education and outreach to inform small employers about
Are Needed to Increase      plan options and requirements; however, opinions varied on the
                            appropriate role for the federal government in this area.
Awareness of Plan Options
and Requirements            A retirement expert said that the federal government can do more to
                            educate consumers about retirement plans and improve general financial
                            literacy. Officials of a service provider to small businesses stated that,
                            because clients are generally not aware of the retirement plan options
                            available to them, the federal government should provide more education
                            and outreach to improve awareness of the plan types available and rules
                            that apply to each. Another large service provider mentioned the federal
                            government should provide educational materials that help small
                            employers find quality service providers. In addition, in its 2011 report,
                            ACT made numerous recommendations calling for better publicity of IRS
                            resources. According to the report, the committee recommended, among
                            other things, that IRS explore potential partnerships with community
                            organizations and plan service providers to enhance the visibility of IRS
                            resources for small employers.

                            Although several small employers agreed on the need for more education
                            and outreach about plan options and requirements, opinions varied on the
                            extent to which the federal government should provide these services.
                            For example, a representative of a small employer believed the federal



                            54
                              However, any increase in tax incentives would have to be balanced by the loss of
                            revenue to the federal government. Increasing tax credits to subsidize retirement plan
                            sponsorship costs for small employers would generally reduce the amount of federal tax
                            revenue collected. For example, the Administration’s fiscal year 2013 budget proposed a
                            system of automatic IRAs that would offer small employers who adopt an automatic IRA a
                            tax credit of up to $500 for the first year and $250 for the second year. These employers
                            would be entitled to an additional credit of $25 per enrolled employee, up to $250 for 6
                            years. In addition, the Administration’s 2013 budget included a proposal to double the
                            maximum tax credit for small employer plan startup costs, from $500 to $1,000 per year,
                            for 3 years, and also extend the duration of the tax credit from 3 years to 4 years if a small
                            employer also adopts a new qualified retirement plan, SEP, or SIMPLE during the first 3
                            years of starting an automatic IRA arrangement. This proposal would increase the
                            potential maximum tax credit from $1,500 to $4.000. According to Administration’s
                            estimates, these proposals were projected to represent about $15 billion in reduced
                            revenue over 10 years, starting in 2013.




                            Page 29                                        GAO-12-326 Small Employer Plan Sponsorship
                          government could provide more educational materials that are easy to
                          understand. Another small employer said the federal government should
                          focus education and outreach on service providers instead of on small
                          employers. Conversely, some small employers said the federal
                          government should have a limited role or no role in providing education
                          and outreach efforts.


Other Options to          There are a number of domestic pension reform proposals from public
Encourage Plan            policy organizations, as well as practices in other countries, that include
Sponsorship Would         features, such as asset pooling, that potentially reduce administrative and
                          financial burdens and could boost retirement plan sponsorship among
Require Broader Reforms   small employers. By pooling funds, small employers realize economies of
                          scale because plan administration is simplified and administrative costs
                          and asset management fees are reduced. Pooling also creates larger
                          plans, which are more likely to attract service providers that previously
                          may have found it uneconomical to service smaller individual plans. One
                          proposal by the Economic Policy Institute, which incorporates the concept
                          of asset pooling, would create a federally managed and federally
                          guaranteed national savings plan. 55 Generally, participation in the
                          program would be mandatory for workers, 56 and employers and
                          employees would be required to make equal contributions totaling 5
                          percent of employees’ earnings. Funds would be pooled and
                          professionally managed, and benefits would be paid out in the form of
                          annuities to ensure that workers do not outlive their savings. 57 In addition,
                          Automatic IRAs—which are individual IRAs instead of employer-
                          sponsored plans—are another proposal that draws from several elements
                          of the current retirement system: payroll-deposit saving, automatic
                          enrollment, and IRAs. The automatic IRA approach would provide



                          55
                           Teresa Ghilarducci, Guaranteed Retirement Accounts Toward Retirement Income
                          Security, Economic Policy Institute, Briefing Paper #204 (Nov. 20, 2007).
                          56
                            Under this proposal, workers participating in equivalent or better employer DB plans
                          where contributions are at least 5 percent of earnings and benefits take the form of life
                          annuities would be exempt from participating in the guaranteed retirement accounts
                          program.
                          57
                             Recent legislation introduced in Congress, the Small Businesses Add Value for
                          Employees Act (SAVE Act), would also build on the concept of asset pooling by
                          establishing multiple employer plans for small employers, in which separate small
                          employers would pool their resources to offer a single plan. See H.R. 1534, 112th Cong.
                          (introduced Apr. 14, 2011).




                          Page 30                                       GAO-12-326 Small Employer Plan Sponsorship
employers that do not sponsor any retirement plans with a mechanism
that allows their employees to save a portion of their pay in an IRA. For
most employees, payroll deductions would be made by direct deposit,
and enrollment would be automatic unless employees choose to opt out
of participation. 58

However, as we reported in 2009, some of these proposals that call for
broader systemic reforms pose other trade-offs. 59 For example, proposals
that mandate participation would increase plan sponsorship and coverage
for workers. However, mandatory participation may create burdens for
some employers, and employers might compensate for the costs of
contributing to workers’ retirement plans by reducing workers’ wages and
other benefits. Proposals that guarantee investment returns can protect
workers from market fluctuations and can ensure a minimum level of
benefits; however, significant costs to the government might result if the
guarantee were unsustainable. In addition, proposals that simplify and
centralize 401(k) plans may require new regulatory and oversight efforts,
and compliance-related costs could be passed on to employers, workers,
and taxpayers in general.

Retirement systems in other countries also use asset pooling and other
features that reduce administrative and financial burdens for small
employers and could spur plan sponsorship. For example, the United
Kingdom’s National Employment Savings Trust (NEST), launched in
2011, features low fees for participating employers and employees and
default investment strategies for plan participants. NEST also permits
plan participants to take their retirement accounts with them throughout
their working life, which eliminates ongoing administration of those
accounts by former employers when a worker leaves a company. As we
previously reported, the predominant pension systems in the Netherlands
and Switzerland pool plan assets into pension funds for economies of
scale and for lower plan fees. 60 Denmark’s pension system also pools




58
 J. Mark Iwry and David C. John, Pursuing Universal Retirement Security Through
Automatic IRAs, Retirement Security Project, No. 2009-03 (2009),
59
  GAO, Private Pensions: Alternative Approaches Could Address Retirement Risks Faced
by Workers but Pose Trade-offs, GAO-09-642 (Washington, D.C.: July 24, 2009).
60
 GAO-09-642.




Page 31                                   GAO-12-326 Small Employer Plan Sponsorship
              plan assets 61 and uses existing tax data to calculate plan contributions,
              further lowering administrative costs for small employers.


              Despite efforts by the federal government to develop new plan designs
Conclusions   and to increase tax incentives to spur plan formation and retirement
              saving generally, sponsorship remains low among small employers. To
              some extent, it would be expected that sponsorship rates for small
              employers would be somewhat lower than for larger employers partly
              because of the heavy “churn” of small business formation and dissolution.
              However, small employers’ sponsorship rates remain far below those of
              larger firms. If a complete picture of sponsorship by small employers were
              available—including information on small employers that sponsor SEP
              IRA plans, which is lacking because IRS currently does not have a means
              to collect these data—IRS and Labor would be better able to target their
              research and outreach efforts.

              Small employers continue to face a variety of challenges to starting and
              maintaining retirement plans, including obtaining useful information about
              the large menu of available plan options, managing administrative
              requirements that small employers reported as burdensome and overly
              complex, and drawing upon small employers’ often limited resources to
              administer and finance a plan. While increased competition among plan
              service providers may result in more affordable options and plans that are
              easier to start and maintain, options for many small employers may
              remain out of reach.

              Federal agencies have a key role to play in understanding and
              addressing the barriers to plan sponsorship and to spur sponsorship
              among small employers by conducting research and conducting
              education and outreach to small employers. Labor and IRS already
              provide small employers with a great deal of online information. However,
              much of the information is scattered among a variety of websites and
              portals in a largely uncoordinated fashion. A small employer with little
              knowledge of retirement plan options is forced to navigate multiple
              sources to retrieve relevant information and may be discouraged from
              doing so. Increased collaboration and more comprehensive strategic



              61
               GAO Private Pensions: Changes Needed to Better Protect Multiemployer Pension
              Benefits, GAO-11-79 (Washington, D.C.: Oct. 18, 2010).




              Page 32                                  GAO-12-326 Small Employer Plan Sponsorship
                      planning between these agencies could enhance outreach and education
                      efforts to more small employers. For example, Labor and IRS could reach
                      out to small employers by utilizing SBA’s extensive network of field offices
                      and by entering into partnerships with public and private organizations.
                      More fundamentally, a coordinated review by the relevant agencies of
                      existing plan designs and their effectiveness in spurring plan sponsorship
                      and participation could help agencies evaluate and develop options that
                      mitigate the barriers to small employer plan sponsorship.



Recommendations for
Executive Action

Department of Labor   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, we recommend that the Secretary of Labor 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 small
                      employer plan sponsorship. Specifically, this body should focus on, but
                      not be limited to, the following goals:

                      •   Conduct plan research on the characteristics associated with small
                          businesses 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.

                      •   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.




                      Page 33                               GAO-12-326 Small Employer Plan Sponsorship
                     •   Create a single web portal to centralize federal agencies’ retirement
                         plan information to enhance the visibility and usefulness of federal
                         guidance on plans for small employers.


Department of the    Considering the lack of information on the number and characteristics of
Treasury             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.


                     We provided a draft of the report to Labor, Treasury, IRS, Commerce,
Agency Comments      and SBA for review and comment. Agencies generally agreed with our
and Our Evaluation   recommendations. Only Labor provided a written response (see app. VII).
                     Labor, Treasury, IRS, and SBA also provided technical comments, which
                     we incorporated as appropriate. Commerce did not provide comments.

                     In its written response, Labor generally agreed with the findings and
                     conclusions of the report. Labor also noted that, since 1995, the agency
                     has developed various initiatives to provide education and outreach to the
                     small business community—particularly in the context of retirement
                     saving and financial literacy—by partnering with SBA, the U.S. Chamber
                     of Commerce, and other entities to target small employers. Labor cited
                     these and other efforts as progress in response to of our recommendation
                     for a taskforce that would analyze and address the challenges facing
                     small business retirement security, stating that Labor remains committed
                     to continuing its existing coordination efforts with respect to plan research
                     and developing proposals for mitigating barriers to small business plan
                     sponsorship.

                     However, Labor disagreed with our recommendation to create a unified
                     web portal to centralize retirement plan information for small employers,
                     expressing concerns about its necessity. Specifically, Labor noted that an
                     SBA website, http://www.business.gov, currently serves as the central
                     portal for information—including information about retirement plans—
                     relevant to small employers. However, none of the stakeholders we
                     interviewed during this report—including Labor and SBA officials—
                     identified http://www.business.gov as a resource of retirement plan
                     information for small employers. Further, in reviewing
                     http://www.business.gov, we found the retirement plan information
                     consisted primarily of links that send users to websites maintained by


                     Page 34                               GAO-12-326 Small Employer Plan Sponsorship
Labor. We did not find links to or information regarding any IRS retirement
plan guidance, including the Retirement Plans Navigator—the agency’s
key online retirement plan tool for small employers—or
http://www.choosingretirementsolution.org, Labor’s online retirement plan
tool for small employers. However, even if http://www.business.gov
contained links to all available federal guidance on retirement plans for
small employers, it is not clear how it would increase the visibility of the
guidance among small employers because so few small employers and
other stakeholders we spoke with appeared to be aware of its existence.
Thus, while we commend Labor for its existing coordination efforts, we
continue to believe that there are additional benefits to be gained by
consolidating information on retirement plans for small employers into a
single, easy-to-use source—an initiative that would also appear to be
consistent with the administration’s interest in information technology
consolidation and in encouraging agencies to conduct their missions
more effectively.

Finally, in its written response, Labor cited BLS’s 2010 National
Compensation Survey, which found that an estimated 45 percent of
establishments employing fewer than 100 workers offered a retirement
plan to their workers. This is not necessarily inconsistent with our
estimate of 14 percent of small employers sponsoring some form of
retirement plan, given the different units of analysis used. While the
National Compensation Survey used “establishment” as its unit of
analysis, we chose to use “firms” for the purposes of this study. There are
important differences between an establishment and a firm. For example,
according to BLS’s definition, an establishment is a single economic unit
at a single physical location. Thus, an establishment can be a business at
a single physical location or a branch of a larger company operating
multiple branches and the characteristics of each branch is measured as
a separate business instead of in the aggregate. On the other hand, for
this study, we defined a firm as a complete, for-profit, independent
business with 1 to 100 employees. As a result, Labor’s estimate
comprises a broader population of employers beyond the small
employers we examined. Further discussion of our methodology can be
found in appendix I.


As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to the Secretary of Labor,
Secretary of the Treasury, the Secretary of Commerce, the SBA



Page 35                              GAO-12-326 Small Employer Plan Sponsorship
Administrator, and other interested parties. This report will also be
available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions regarding this report, please
contact Charles Jeszeck at (202) 512-7215 or jeszeckc@gao.gov.
Contact points for our Offices of Congressional Relations and Public
Affairs can be found on the last page of this report. Key contributors are
listed in appendix VIII.




Charles Jeszeck
Director, Education, Workforce
  and Income Security




Page 36                               GAO-12-326 Small Employer Plan Sponsorship
Appendix I: Objectives, Scope, and
                            Appendix I: Objectives, Scope, and
                            Methodology



Methodology

Information Regarding the   In the body of this report, we present a range for the rate of employee
Rates of Small Business     access to retirement plans. According to the Congressional Research
Employees Who Do Not        Service (CRS), the differences in the estimates regarding employee
                            access to retirement plans between information obtained from Bureau of
Have Access to a            Labor Statistics (BLS) and the Census Bureau may stem from the
Retirement Plan, Based on   different populations used in the surveys. BLS’s National Compensation
BLS and Census Data         Survey (NCS) is conducted among a nationally representative sample of
                            private-sector business establishments. The term establishment usually
                            refers to a single place of business at a particular location. An
                            establishment might be a branch or a small operating unit of a larger firm.
                            The Census Bureau’s Current Population Survey (CPS) is conducted
                            among a nationally representative sample of households. Employer
                            characteristics are reported at the level of the firm, which may include
                            more than one establishment. CRS has reported that, in any given year,
                            the NCS can reasonably be expected to show a higher rate of retirement
                            plan participation than the CPS because the business owners and
                            benefits specialists who are interviewed for the NCS might have greater
                            knowledge about the retirement benefits they sponsor than the household
                            members who are interviewed for the CPS. However, CRS has noted that
                            the gap in Census and BLS estimates has grown over time, further
                            complicating the process of estimating both the proportion of workers
                            without employer-sponsored retirement plans and the trend in retirement
                            plan participation rates. 1


Data Sources and            To perform this work, we combined and analyzed 2009 data from the
Development of the          Department of Labor’s (Labor) Form 5500 database, the Internal
Analytic Data Set           Revenue Service’s (IRS) Information Returns Processing (IRP) database,
                            and the IRS Compliance Data Warehouse database (CDW) to obtain
                            information on what would make a small employer more or less likely to
                            sponsor a retirement plan, descriptive statistics on small employer
                            retirement plan sponsors and nonsponsors, and descriptive statistics on
                            the types of retirement plans sponsored by small employers. The Form
                            5500 database provided information on defined benefit (DB) and defined
                            contribution (DC) plans, and the publicly available data was downloaded
                            directly from Labor’s website: http://www.dol.gov/ebsa/foia/foia-5500.html.
                            The IRP database provided information on employer-sponsored SIMPLE



                            1
                             John J. Topoleski, Pension Sponsorship and Participation: Summary of Recent Trends,
                            Congressional Research Service (Washington, D.C.: September 2009)




                            Page 37                                   GAO-12-326 Small Employer Plan Sponsorship
Appendix I: Objectives, Scope, and
Methodology




IRA and SARSEP IRA plans and was provided by the IRS officials in the
Tax-Exempt Governmental Entity Employment Plans division. The CDW
database provided the characteristics regarding the universe of small
employers with 100 or fewer employees and was provided by IRS officials
with the Statistics of Income (SOI) division. We assessed the reliability of
the Form 5500, the IRP, and the CDW data generally and of data
elements that were critical to our analyses and determined that they were
sufficiently reliable for our analyses.

Our unit of analysis was the small employer, as identified by its employer
identification number (EIN). For the purposes of this study, we defined a
small employer as an independently owned and operated for-profit firm
with at least 1 employee and no more than 100 employees. This definition
excluded agricultural businesses, such as farms, as well as tax-exempt
organizations, such as nonprofits and government entities. This definition
also excluded subsidiary for-profit firms.

To prepare the Form 5500 data in advance of combining the data with the
other datasets, we screened out any plans that were not entered in the
Form 5500 or Form 5500-SF as “single employer plans,” those that did
not have a plan year beginning date in 2009, as well as screened out any
plans that had entries in the Welfare Benefit Codes. Our analysis did not
consider small employers that only participated in multiple employer
plans, in which two or more employers maintain a single plan, or
multiemployer plans, in which a joint plan is maintained under a collective
bargaining agreement between at least one employee organization and
more than one employer. As individual employers are not considered
sponsors of multiple employer plans and multiemployer plans, including
these plans was considered beyond the scope of this report. 2 We then
matched the Form 5500 data and the IRP data with the CDW data using
the EIN in common. Any matches between a small employer in the CDW
database and a plan in either the Form 5500 or IRP database classified
the small employer as one that sponsored the plan while any small
employers that did not match with a plan were classified as nonsponsors.




2
 Under Title I of ERISA, a plan sponsor “in the case of a plan established or maintained by
two or more employers or jointly by one or more employers and one or more employee
organizations” is “the association, committee, joint board of trustees, or other similar group
of representatives of the parties who establish or maintain the plan.” 29 U.S.C. §
1002(16)(B)(iii).




Page 38                                       GAO-12-326 Small Employer Plan Sponsorship
                             Appendix I: Objectives, Scope, and
                             Methodology




Data Analysis of Small       We developed bivariate and multivariate regression models to estimate
Employer Plan                the likelihood that a small employer would sponsor a retirement plan
Sponsorship                  using the following small employer characteristics: the number of
                             employees, the annual average wage of the employees, the industry
                             using the 2007 North American Industry Classification System (NAICS)
                             with a depth of two digits, and the region in which the small employer
                             resided as defined by the Census Bureau. For results of the regression
                             model, see appendix VI. The regression model did not include the age of
                             the business as a variable in the model. It is difficult to measure this
                             variable because, over time, a small employer may change its EIN. For
                             example, some small employers change their business structure, 3 which
                             may also require the business to obtain a new EIN. It would be
                             challenging to track businesses over time with changes to the EIN.

                             In addition to the regression model, we produced a descriptive statistical
                             analysis of small employer characteristics using cross-tabulations of the
                             following characteristics: the number of employees, the annual average
                             salary of the employees, the industry using the NAICS with a depth of two
                             digits, and the state in which the small employer is located. The ranges
                             used for the characteristics identifying the number of employees and
                             average annual wages were established using the statistical spreads
                             identified by the regression model.


Data Analysis of Plan Type   In order to categorize the plan type for plans in the Form 5500 database,
                             we took an approach similar to a model followed by Labor. 4 We ranked
                             the Pension Benefit Codes using the order established by Labor and
                             assigned a plan type according to the first ranked code found in the
                             Pension Benefits Code variable string using the following order:




                             3
                              Business structures may include a sole proprietorship, a partnership, a corporation, an S
                             corporation, or a limited liability company (LLC).
                             4
                              U.S. Department of Labor, Retirement Private Pension Plan Bulletin: Abstract of 2008
                             Form 5500 Annual Reports (December 2010).




                             Page 39                                      GAO-12-326 Small Employer Plan Sponsorship
                                       Appendix I: Objectives, Scope, and
                                       Methodology




Table 1: 5500 Retirement Plan Type and Feature Assignment Order by Pension Benefit Code

Category                      Plan type                                 Characteristic code                         Variable
Defined benefit (DB)          Cash Balance Plan                         1C
                              Other DB Plan                             1D,1F,IG                                    5500:
                                                                                                                    TYPE_PENSION_BNFT_CODE
                                                                                                                    SF 5500 (short form):
                                                                                                                    SF_TYPE_PENSION_BNFT_CODE
Defined contribution (DC)     Profit Sharing Plan                       2E
                              Stock Bonus Plan                          2I
                              Target Benefit Plan                       2B
                              Money Purchase Plan                       2C
                              Other DC plans                            2F, 2D, 2O, 2P, 2R
Feature                       401(k)                                    2J
                                       Source: GAO analysis of Labor Form 5500 pension plan characteristic codes.



                                       To categorize any remaining plans, we performed a string search of the
                                       plan names using the Plan Name variable in each form as follows:

                                             •      If “cash balance,” then Cash Balance Plan.

                                             •      If “defined benefit,” then “Other DB.”

                                             •      If “profit sharing,” then Profit Sharing Plan.

                                             •      If “stock bonus,” then Stock Bonus Plan.

                                             •      If “target benefit,” then Target Benefit Plan.

                                             •      If “money purchase,” then Money Purchase Plan.

                                             •      If “401(k),” then Profit Sharing Plan.

                                             •      If “employee stock” or “stock ownership” or “ESOP,” then “other
                                                    DC plan.”

                                       Finally, with any further unassigned plans, we examined the Participant
                                       Account Balance variable for the Form 5500 and Form 5500-SF and
                                       assigned any plans with balances greater than “0” as “Other Defined
                                       Contribution.”




                                       Page 40                                                         GAO-12-326 Small Employer Plan Sponsorship
                      Appendix I: Objectives, Scope, and
                      Methodology




                      Once all of the Form 5500 plans had been assigned a plan type, an
                      additional search occurred to look through all of the plans to find those
                      with a plan characteristic code 2J or variations on the string search
                      “401(k)” in the plan name. The additional search produced a breakdown
                      of which plan types had the 401(k) plan feature. 5

                      After combining the CDW data with the IRP and Form 5500 data and after
                      categorizing each matched plan in the Form 5500 database, matched
                      small employers were categorized as sponsoring a type of DC plan or DB
                      plan from the Form 5500 database or a SIMPLE IRA or a SARSEP IRA
                      from the IRP database. We produced a frequency count of each plan type
                      sponsored by a small employer that sponsored a single plan. Any small
                      employers that sponsored multiple plans were excluded from the plan
                      type frequency count due to challenges in identifying the correct plan to
                      assign that small employer or in double counting the small employer. 6
                      Additionally, we produced descriptive statistics identifying the plan types
                      sponsored by small employers using the small employer characteristics of
                      number of employees, average annual salary, industry type, and state of
                      residence. Finally, we produced descriptive output information on the plan
                      contributions categorized by the plan type, as well as cross tabulated with
                      the small employer characteristics.


Analysis of Small     To examine challenges encountered by small employers when starting
Employer Challenges   and maintaining retirement plans, we interviewed 27 small employers
                      across the country. Nineteen employers sponsored a retirement plan, and
                      8 employers did not sponsor a plan. We held nine small group interviews
                      in five major cities across the country: Atlanta, Boston, Chicago, Los
                      Angeles, and Washington, D.C. We also held individual interviews with
                      five employers that were not able to attend group interviews in those
                      cities. We selected these cities for the purposes of geographic dispersion,
                      which allowed us to leverage GAO field office resources in planning and
                      conducting interviews. To identify our interview sites, we selected urban
                      centers instead of less-populated areas because a wider variety of
                      businesses and industries are located in or near cities.




                      5
                      For this study, we classified 401(k) as a plan type.
                      6
                       About 19,000 small employers sponsored multiple plans, which represent about 3
                      percent of the overall sponsor population.




                      Page 41                                      GAO-12-326 Small Employer Plan Sponsorship
Appendix I: Objectives, Scope, and
Methodology




To select small employers, stakeholders recommended that we contact
local Chambers of Commerce to identify and invite local small employers
for interview participation. We discussed our study and details of our
planned group interviews with officials at the Small Business
Administration and the U.S. Chamber of Commerce. Chamber officials
assisted us in contacting local Chambers of Commerce in the cities
identified above. We discussed our study and details of the group
interviews with local chamber officials, who agreed to help us with our
data collection and host the interviews. We worked with the local chamber
contacts to obtain lists of chamber members who were small employers,
and we invited these members—through e-mail messages and phone
calls—to participate in our group interviews. The local chambers hosted
the interviews and allowed us to use their facilities and conference rooms.

Our interview protocols also sought to identify and interview small
employers of varying sizes. The small employers that participated in our
interviews represented businesses of varying sizes, up to 65 employees,
from various industries and sectors of the economy, including consulting,
architecture, health care, light manufacturing, law, marketing, service, and
banking. Findings from our interviews with small employers are qualitative
in nature and were not meant to be representative of the overall
population of small employers nationwide.

In conducting our interviews, we held separate interviews with small
employers that sponsored plans and that did not sponsor plans. The
interview protocol for both groups was the same. However, the structured
data collection instrument—our interview questions—differed between
sponsors and nonsponsors. For plan sponsors, our questions focused on
factors that influenced their decisions to sponsor retirement plans and
challenges they encountered in maintaining retirement plans. For
nonsponsors, our questions focused on factors that influenced their
decisions not to sponsor retirement plans and challenges that prevented
them from starting retirement plans.

To ensure that our questions were easy to understand and captured the
necessary information, we conducted pretests with small employers that
were members of the Washington, D.C., Chamber of Commerce. In
addition, we tested our interview protocols to ensure that participation
would not be burdensome for small employers. Using the pretest results,
we consolidated some of our questions. However, because no
substantive changes were made to our interview questions, we included
results from the pretests in the results obtained from the interviews in
other cities to formulate our findings.


Page 42                              GAO-12-326 Small Employer Plan Sponsorship
                           Appendix I: Objectives, Scope, and
                           Methodology




                           Our examination of challenges encountered by small employers when
                           starting and maintaining retirement plans also included interviews with
                           retirement experts, including individuals representing public policy research
                           organizations and attorneys specializing in retirement benefits,
                           organizations representing small employers, retirement plan service
                           providers, representatives of the accounting profession, as well as federal
                           agency officials.

Analysis of Proposed       To compile options that could address challenges encountered by small
Options to Address Small   employers when starting and maintaining retirement plans for their workers,
Employer Challenges        in addition to interviews with small employers throughout the country, we
                           interviewed a range of retirement experts, including individuals
                           representing public policy research organizations and attorneys
                           specializing in retirement benefits, organizations representing small
                           employers, retirement plan service providers, and representatives of the
                           accounting profession. Stakeholders also included officials at Labor and
                           IRS, who provided information on the role of federal agencies in conducting
                           oversight of federal plan requirements. In our interviews with stakeholders,
                           we gathered information on proposed options that could address small
                           employers’ plan-related challenges. In addition, we reviewed relevant
                           portions of federal laws and regulations and proposed legislation on new
                           plan types. The key proposals discussed in our report are not exhaustive,
                           and we did not attempt to quantify the costs and benefits of each proposal
                           or their potential effectiveness in encouraging small employer plan
                           sponsorship.

                           To identify domestic pension reform proposals that could address
                           challenges encountered by small employers in sponsoring plans, we
                           conducted a review of available literature and proposals published by
                           public policy organizations. We selected examples that included a plan
                           feature—asset pooling—that was common across many proposals. To
                           identify examples of proposed legislation on new types of retirement
                           plans, we searched electronic databases for proposed federal legislation
                           that included provisions related to retirement plans for small employers
                           and selected a recent proposal that builds on the concept of asset
                           pooling. For examples of international retirement plan features that
                           address challenges to small employer plan sponsorship, we drew from
                           prior GAO reports on international retirement plan systems and selected
                           examples that included features that could assist small employers.

                           We conducted this performance audit from October 2010 to March 2012
                           in accordance with generally accepted government auditing standards.
                           Those standards require that we plan and perform the audit to obtain


                           Page 43                               GAO-12-326 Small Employer Plan Sponsorship
Appendix I: Objectives, Scope, and
Methodology




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.




Page 44                              GAO-12-326 Small Employer Plan Sponsorship
Appendix II: Some Retirement Plans
              Appendix II: Some Retirement Plans Available
              to Small Employers



Available to Small Employers

              Table 2 is based on guidance produced by Labor and the IRS to educate
              small employers about their retirement plan options. This guidance, titled
              “Choosing a Retirement Solution for Your Small Business,” can be found
              at http://www.dol.gov/ebsa/pdf/choosing.pdf. The content of this table is
              reproduced from the Labor/IRS publication without alteration, with the
              following exceptions: GAO updated some dollar amounts to reflect
              changes made for 2012, where applicable (specifically, the maximum
              annual contributions to the defined contribution plans and SEP IRA plans,
              and the maximum compensation upon which contributions to non-DB
              plans may be based), reordered the columns, and omitted information
              about payroll deduction IRA plans, which are beyond the scope of this
              review. GAO did not independently verify the legal accuracy of the
              information contained in the table.




              Page 45                                        GAO-12-326 Small Employer Plan Sponsorship
                                                                       Appendix II: Some Retirement Plans
                                                                       Available to Small Employers


Table 2: Some Retirement Plans Available to Small Employers

                                   IRA-Based Plans                                                       Defined Contribution Plans                                               Defined Benefit
                                                                                                                            Automatic
                      SEP                      SIMPLE IRA Plan         Traditional 401(k)        Safe Harbor 401(k)         Enrollment 401(k)          Profit Sharing
Key                   Easy to set up and       Salary reduction        Permits high level of     Permits high level of      Provides high level of     Permits employer to        Provides a fixed,
Advantage             maintain.                plan with little        salary deferrals by       salary deferrals by        participation and          make large                 pre-established
                                               administrative          Employees.                employees without          permits high level of      contributions for          benefit for
                                               paperwork.                                        annual discrimination      salary deferrals by        employees.                 employees.
                                                                                                 testing.                   employees. Also safe
                                                                                                                            harbor relief for
                                                                                                                            default investments.
Employer              Any employer with        Any employer with       Any employer with one Any employer with              Any employer with          Any employer with          Any employer with
Eligibility           one or more              100 or fewer            or more employees.    one or more                    one or more                one or more                one or more
                      employees.               employees that                                employees.                     employees.                 employees.                 employees.
                                               does not currently
                                               maintain another
                                               retirement plan.
Employer’s            May use IRS Form         May use IRS Forms       No model form to          No model form to           No model form to           No model form to           No model form to
Role                  5305-SEP to set up       5304-SIMPLE or          establish this plan.      establish this plan.       establish this plan.       establish this plan.       establish this plan.
                      the plan. No annual      5305-SIMPLE to set      Advice from a financial   Advice from a              Advice from a              Advice from a              Advice from a
                      filing requirement for   up the plan. No         institution or employee   financial institution or   financial institution or   financial institution or   financial institution
                      employer.                annual filing           benefit adviser may be    employee benefit           employee benefit           employee benefit           or employee
                                               requirement for         necessary. Annual         adviser may be             adviser may be             adviser may be             benefit adviser
                                               employer. Bank or       filing of Form 5500 is    necessary. A               necessary. Annual          necessary. Annual          would be
                                               financial institution   required. Requires        minimum amount of          filing of Form 5500 is     filing of Form 5500 is     necessary. Annual
                                               handles most of the     annual non-               employer                   required. Some plans       required.                  filing of Form 5500
                                               paperwork.              discrimination testing    contributions is           require annual non-                                   is required. An
                                                                       to ensure plan does       required. Annual filing    discrimination testing                                actuary must
                                                                       not discriminate in       of Form 5500 is            to ensure they do not                                 determine annual
                                                                       favor of highly           required.                  discriminate in favor                                 contributions.
                                                                       compensated                                          of highly
                                                                       employees.                                           compensated
                                                                                                                            employees.
Contributors To The   Employer                 Employee salary         Employee salary           Employee salary            Employee salary            Annual employer            Primarily funded by
Plan                  contributions only.      reduction               reduction contributions   reduction                  reduction                  contribution is            employer.
                                               contributions and       and maybe employer        contributions and          contributions and          discretionary.
                                               employer                contributions.            employer                   maybe employer
                                               contributions.                                    contributions.             contributions.




                                                                       Page 46                                                                     GAO-12-326 Small Employer Plan Sponsorship
                                                                        Appendix II: Some Retirement Plans
                                                                        Available to Small Employers


                                    IRA-Based Plans                                                        Defined Contribution Plans                                            Defined Benefit
                                                                                                                              Automatic
                        SEP                     SIMPLE IRA Plan         Traditional 401(k)         Safe Harbor 401(k)         Enrollment 401(k)          Profit Sharing
Maximum Annual          Up to 25% of            Employee: $11,500       Employee: $17,000 in       Employee: $17,000          Employee: $17,000          Up to the lesser of     Annually
Contribution (per       compensationa but       in 2012. Additional     2012. Additional           in 2012. Additional        in 2012. Additional        100% of                 determined
participant).           no more than            contributions up to     contributions can be       contributions can be       contributions can be       compensationa or        contribution.
See                     $50,000 for 2012.       $2,500 can be made      made by participants       made by participants       made by participants       $50,000 in 2012.
http://www.irs.gov/ep                           by participants age     age 50 or over up to       age 50 or over up to       age 50 or over up to       Employer can deduct
for annual updates.                             50 or over.             $5,500.                    $5,500.                    $5,500.                    amounts that do not
                                                Employer: Either        Employer/Employee          Employer/Employee          Employer/Employee          exceed 25% of
                                                match employee          Combined: Up to the        Combined: Up to the        Combined: Up to the        aggregate
                                                contributions 100%      lesser of 100% of          lesser of 100% of          lesser of 100% of          compensation for all
                                                of first 3% of          compensationa or           compensationa or           compensationa or           participants.
                                                compensation (can       $50,000 for 2012.          $50,000 for 2012.          $50,000 for 2012.
                                                be reduced to as        Employer can deduct        Employer can deduct        Employer can deduct
                                                low as 1% in any 2      (1) amounts that do not    (1) amounts that do        (1) amounts that do
                                                out of 5 yrs.); or      exceed 25% of              not exceed 25% of          not exceed 25% of
                                                contribute 2% of        aggregate                  aggregate                  aggregate
                                                each eligible           compensation for all       compensation for all       compensation for all
                                                employee’s              participants and (2) all   participants and (2) all   participants and (2) all
                                                compensationb.          salary reduction           salary reduction           salary reduction
                                                                        contributions.             contributions.             contributions.
Contributor’s           Employer can            Employee can            Employee can decide        Employee can decide        Employees, unless       Employer makes             Employer generally
Options                 decide whether to       decide how much to      how much to contribute     how much to                they opt otherwise,     contribution as set by     required to make
                        make contributions      contribute. Employer    pursuant to a salary       contribute pursuant to     must make salary        plan terms.                contribution as set
                        year to- year.          must make               reduction agreement.       a salary reduction         reduction                                          by plan terms.
                                                matching                The employer can           agreement. The             contributions specified
                                                contributions or        make additional            employer must make         by the employer. The
                                                contribute 2% of        contributions, including   either specified           employer can make
                                                each employee’s         matching contributions     matching                   additional
                                                compensation.           as set by plan terms.      contributions or a 3%      contributions,
                                                                                                   contribution to all        including matching
                                                                                                   participants.              contributions as set
                                                                                                                              by plan terms.
Minimum Employee        Must be offered to      Must be offered to      Generally, must be         Generally, must be         Generally, must be         Generally, must be      Generally, must be
Coverage                all employees who       all employees who       offered to all             offered to all             offered to all             offered to all          offered to all
Requirements            are at least 21 years   have earned income      employees at least 21      employees at least 21      employees at least 21      employees at least 21   employees at least
                        of age, employed by     of at least $5,000 in   years of age who           years of age who           years of age who           years of age who        21 years of age
                        the employer for 3 of   any prior 2 years,      worked at least 1,000      worked at least 1,000      worked at least 1,000      worked at least 1,000   who worked at
                        the last 5 years and    and are reasonably      hours in a previous        hours in a previous        hours in a previous        hours in a previous     least 1,000 hours
                        had compensation        expected to earn at     year.                      year.                      year.                      year.                   in a previous year.
                        of $550 for 2012.       least $5,000 in the
                                                current year.




                                                                        Page 47                                                                      GAO-12-326 Small Employer Plan Sponsorship
                                                                     Appendix II: Some Retirement Plans
                                                                     Available to Small Employers


                                  IRA-Based Plans                                                            Defined Contribution Plans                                            Defined Benefit
                                                                                                                               Automatic
                     SEP                     SIMPLE IRA Plan         Traditional 401(k)              Safe Harbor 401(k)        Enrollment 401(k)         Profit Sharing
Withdrawals, Loans   Withdrawals             Withdrawals             Withdrawals permitted           Withdrawals permitted     Withdrawals permitted     Withdrawals permitted     Payment of
& Payments           permitted anytime       permitted anytime       after a specified event         after a specified event   after a specified event   after a specified event   benefits after a
                     subject to federal      subject to federal      occurs (e.g.,                   occurs (e.g.,             occurs (e.g.,             occurs (e.g.,             specified event
                     income taxes, early     income taxes, early     retirement, plan                retirement, plan          retirement, plan          retirement, plan          occurs (e.g.
                     withdrawals subject     withdrawals subject     termination, etc.)              termination, etc.)        termination, etc.)        termination, etc.)        retirement, plan
                     to an additional tax.   to an additional tax.   subject to federal              subject to federal        subject to federal        subject to federal        termination, etc.).
                                                                     income taxes. Plan              income taxes. Plan        income taxes. Plan        income taxes. Plan        Plan may permit
                                                                     may permit loans and            may permit loans and      may permit loans and      may permit loans and      loans; early
                                                                     hardship withdrawals;           hardship withdrawals;     hardship withdrawals;     hardship withdrawals;     withdrawals
                                                                     early withdrawals               early withdrawals         early withdrawals         early withdrawals         subject to an
                                                                     subject to an additional        subject to an             subject to an             subject to an             additional tax.
                                                                     tax.                            additional tax.           additional tax.           additional tax.
Vesting              Contributions are       Employee salary         Employee salary                 Employee salary           Employee salary           May vest over time        May vest over time
                     immediately 100%        reduction               reduction contributions         reduction                 reduction                 according to plan         according to plan
                     vested.                 contributions and       are immediately 100%            contributions and         contributions are         terms.                    terms.
                                             employer                vested. Employer                most employer             immediately 100%
                                             contributions are       contributions may vest          contributions are         vested. Employer
                                             immediately 100%        over time according to          immediately 100%          contributions may
                                             vested.                 plan terms.                     vested. Some              vest over time
                                                                                                     employer                  according to plan
                                                                                                     contributions may         terms.
                                                                                                     vest over time
                                                                                                     according to plan
                                                                                                     terms.
                                                                     Sources: Department of Labor and IRS.
                                                                     a
                                                                      Maximum compensation on which 2012 contributions can be based is $250,000.
                                                                     b
                                                                      Maximum compensation on which 2012 employer 2 % nonelective contributions can be
                                                                     based is $250,000.




                                                                     Page 48                                                                         GAO-12-326 Small Employer Plan Sponsorship
Appendix III: IRS Form 5498 IRA
              Appendix III: IRS Form 5498 IRA Contribution
              Information



Contribution Information




              Page 49                                        GAO-12-326 Small Employer Plan Sponsorship
Appendix IV: Small Employer Plan
                                        Appendix IV: Small Employer Plan
                                        Sponsorship Rate by Industry



Sponsorship Rate by Industry

                                        In analyzing small employer retirement plan sponsorship by industry, we
                                        found that small employers in heath care and manufacturing were most
                                        likely to sponsor a retirement plan, while small employers in the food and
                                        hospitality industry were least likely to sponsor a plan. See figure 8 for the
                                        sponsorship rate by industry and table 3 for a sample list of businesses
                                        contained within each industry type.

Figure 8: Small Employer Plan Sponsorship Rate by Industry Type in 2009




                                        Note: All employers counted in the table employed from 1 to 100 employees.




                                        Page 50                                          GAO-12-326 Small Employer Plan Sponsorship
                                         Appendix IV: Small Employer Plan
                                         Sponsorship Rate by Industry




Table 3: Composition of Industry Classifications

Industry category                        Examples
Scientific/technical/ professional       Legal services, accounting, architecture, engineering, computer systems design, scientific
                                         research, advertising, public relations
Other services                           automotive repair and maintenance, barber shops and beauty salons, civic and
                                         professional organizations, funeral homes, laundry services, personal goods repair and
                                         maintenance
Retail trade                             Automobile dealers, book and music stores, building material and garden equipment
                                         dealers, clothing stores, electronics and appliance stores, food and beverage stores,
                                         gasoline stations, sporting good stores
Construction                             Construction of buildings, heavy and civil engineering construction, specialty trade
                                         contractors
Heath care/social assistance             Child day care services, hospitals, nursing and residential care facilities, offices of health
                                         care practitioners (physicians, dentists, chiropractors, optometrists, etc), outpatient and
                                         home health care centers
Food and hospitality                     Restaurants and taverns, accommodation services
Real estate and rental and leasing       Real estate agents and brokers, automotive equipment rental and leasing, consumer good
                                         rental
Wholesale trade                          Durable and nondurable goods wholesalers, wholesale electronics market
Manufacturing                            Computer and electronic product manufacturing, food manufacturing, machinery and
                                         metal product manufacturing, petroleum and chemical manufacturing, textile product mills
Administrative support and waste         Office administrative services, employment services, travel arrangement and reservation
management and remediation services      services, waste collection, waste treatment and disposal
Finance and insurance                    Commercial banking, funds and trusts, savings institutions, securities and commodities
                                         exchanges, insurance carriers
Transportation and warehousing           Air transportation, couriers and messengers, postal service, sightseeing transportation,
                                         transit and ground passenger transportation, water transportation, warehousing and
                                         storage
Arts, entertainment, and recreation      Spectator sports, amusement parks, gambling, promoters and agents
Information and communication            Broadcasting, data processing, motion picture and sound recording, publishing industries,
                                         telecommunications
Education                                Computer and management training, educational support services, technical and trade
                                         schools
Agriculture, forestry, fishing/hunting   Animal and crop production, fishing, forestry, hunting, trapping
Mining, quarrying, and oil and gas       Mining, oil and gas extraction
extraction
Utilities                                Electric power, natural gas distribution, water and sewage
Management                               Management of companies and enterprises, offices of bank holding companies
                                         Source: U.S. Bureau of Labor Statistics, 2007 North American Industry Classification System, last revised February 28, 2011.

                                         Note: This list contains examples for illustrative purposes and is not a complete list.




                                         Page 51                                                           GAO-12-326 Small Employer Plan Sponsorship
Appendix V: Small Employer Plan
              Appendix V: Small Employer Plan Sponsorship
              Rate by State in 2009



Sponsorship Rate by State in 2009


                                                              Sponsorship
               State                                           percentage            Census region
               Alabama                                                 11.7          South
               Alaska                                                  14.0          West
               Arizona                                                 12.1          West
               Arkansas                                                10.6          South
               California                                              13.0          West
               Colorado                                                13.3          West
               Connecticut                                             19.7          Northeast
               Delaware                                                17.3          South
               District Of Columbia                                    22.5          South
               Florida                                                  9.5          South
               Georgia                                                 11.4          South
               Hawaii                                                  16.0          West
               Idaho                                                   12.6          West
               Illinois                                                14.4          Midwest
               Indiana                                                 15.4          Midwest
               Iowa                                                    18.1          Midwest
               Kansas                                                  15.5          Midwest
               Kentucky                                                14.4          South
               Louisiana                                               13.3          South
               Maine                                                   14.2          Northeast
               Maryland                                                17.6          South
               Massachusetts                                           19.2          Northeast
               Michigan                                                16.2          Midwest
               Minnesota                                               18.0          Midwest
               Mississippi                                              9.8          South
               Missouri                                                13.4          Midwest
               Montana                                                 13.8          West
               Nebraska                                                16.8          Midwest
               Nevada                                                  10.1          West
               New Hampshire                                           18.0          Northeast
               New Jersey                                              14.3          Northeast
               New Mexico                                              11.9          West
               New York                                                12.8          Northeast
               North Carolina                                          12.8          South
               North Dakota                                            16.4          Midwest
               Ohio                                                    18.1          Midwest



              Page 52                                       GAO-12-326 Small Employer Plan Sponsorship
Appendix V: Small Employer Plan Sponsorship
Rate by State in 2009




                                                Sponsorship
 State                                           percentage            Census region
 Oklahoma                                                11.6          South
 Oregon                                                  15.5          West
 Pennsylvania                                            16.9          Northeast
 Rhode Island                                            16.4          Northeast
 South Carolina                                          11.5          South
 South Dakota                                            14.6          Midwest
 Tennessee                                               11.7          South
 Texas                                                   10.5          South
 Utah                                                    10.2          West
 Vermont                                                 18.1          Northeast
 Virginia                                                14.9          South
 Washington                                              13.8          West
 West Virginia                                           11.9          South
 Wisconsin                                               19.6          Midwest
 Wyoming                                                 12.6          West
 Puerto Rico                                              5.0          NA
 Other U.S. territories                                   5.5
 American Samoa                                                        NA
 Federated States Of Micronesia                                        NA
 Guam                                                                  NA
 Northern Mariana Islands                                              NA
 Virgin Islands                                                        NA
 National Small Employer                                 13.8          NA
 Average, including Puerto Rico and
 other U.S. territories
Source: GAO analysis of Labor and IRS data.




Page 53                                       GAO-12-326 Small Employer Plan Sponsorship
Appendix VI: Regression Results
                                            Appendix VI: Regression Results




Table 4: Results of Bivariate Analysis

                                                                              Percentage of
                                                                                businesses
                                                                                sponsoring
                                                             Percentage of       retirement   Odds ratio from   Significance
Category                                                       businesses         programs    bivariate model   of odds ratio
Overall U.S. small business                                         100.0%           13.8%               1.00
                                                             (N=5,344,369)      (N=735,098)
Employee count
1 to 4                                                               51.9%            5.5%               0.20              **
5 to 11                                                              24.9%           17.6%               1.49              **
12 to 25                                                             13.6%           25.9%               2.60              **
25 to 100                                                             9.7%           31.3%               3.39              **
Average wage per employee
Less than $10,000                                                    31.8%            2.8%               0.12              **
$10,000 - $29,999                                                    43.6%           12.6%               0.84              **
$30,000 - $49,999                                                    15.0%           28.4%               3.16              **
$50,000 - $99,999                                                     7.2%           34.5%               3.81              **
$100,000 or greater                                                   2.5%           25.8%               2.23              **
NAICS
11 = Agriculture, Fishing, Foresting                                  0.9%            9.1%               0.63              **
21 = Mining                                                           0.4%           14.4%               1.05               *
22 = Utility                                                          0.2%           12.8%               0.92              **
23 = Construction                                                    11.5%           13.2%               0.95              **
31 = Manufacturing (incl. 33 and 34)                                  4.2%           25.3%               2.21              **
42 = Whole Sale Trade                                                 4.3%           18.9%               1.49              **
44 = Retail Trade (incl. 45)                                         11.8%           10.0%               0.67              **
48= Transportation/Warehousing                                        2.6%           9.20%               0.63              **
51 = Information                                                      1.2%           15.3%               1.14              **
52 = Finance and Insurance                                            3.7%           21.8%               1.80              **
53 = Real Estate and Rental and Leasing                               4.9%            8.2%               0.55              **
54 = Professional, Scientific, and Technical Services                13.1%           21.9%               1.96              **
55 = Management of Companies and Enterprises                          0.1%           16.9%               1.28              **
56 = Administrative and Support and Waste                             3.8%           10.1%               0.70              **
Management and Remediation Services
61 = Education Services                                               1.0%            8.4%               0.57              **
62 = Healthcare                                                      10.1%           27.5%               2.73              **
71 = Art, Entertainment, and Recreation                               1.9%            7.3%               0.49              **
72 = Accommodation and Food Service                                   6.9%            2.7%               0.16              **




                                            Page 54                                GAO-12-326 Small Employer Plan Sponsorship
                                      Appendix VI: Regression Results




                                                                        Percentage of
                                                                          businesses
                                                                          sponsoring
                                                       Percentage of       retirement   Odds ratio from   Significance
Category                                                 businesses         programs    bivariate model   of odds ratio
81 = Other Services                                            12.2%            7.0%               0.44              **
99 = Invalid                                                    0.2%            1.7%               0.11              **
00 = Missing                                                    0.4%            1.6%               0.10              **
Census Bureau regions and divisions
Region 1 = Northeast                                           20.0%           15.3%               1.17              **
   Division 1: New England                                      5.3%           18.4%               1.45              **
   CT                                                           1.2%           19.7%               1.55              **
   ME                                                           0.6%           14.2%               1.04               *
   MA                                                           2.3%           19.2%               1.51              **
   NH                                                           0.5%           18.0%               1.38              **
   RI                                                           0.4%           16.5%               1.23              **
   VT                                                           0.3%           18.1%               1.39              **
   Division 2: Middle Atlantic                                 14.7%           14.2%               1.05              **
   NJ                                                           3.3%           14.3%               1.05              **
   NY                                                           7.4%           12.8%               0.91              **
   PA                                                           4.0%           16.9%               1.29              **
Region 2 = Midwest                                             21.8%           16.3%               1.30              **
   Division 3: East North Central                              14.3%           16.4%               1.28              **
   IN                                                           1.9%           15.4%               1.15              **
   IL                                                           4.3%           14.4%               1.06              **
   MI                                                           3.0%           16.2%               1.22              **
   OH                                                           3.3%           18.1%               1.40              **
   WI                                                           1.9%           19.6%               1.54              **
   Division 4: West North Central                               7.5%           16.1%               1.22              **
   IA                                                           1.1%           18.1%               1.39              **
   KS                                                           1.0%           15.5%               1.15              **
   MN                                                           2.0%           18.0%               1.39              **
   MO                                                           2.0%           13.4%               0.97              **
   NE                                                           0.7%           16.8%               1.27              **
   ND                                                           0.3%           16.4%               1.23              **
   SD                                                           0.4%           14.6%               1.07              **




                                      Page 55                                GAO-12-326 Small Employer Plan Sponsorship
                                    Appendix VI: Regression Results




                                                                      Percentage of
                                                                        businesses
                                                                        sponsoring
                                                     Percentage of       retirement   Odds ratio from   Significance
Category                                               businesses         programs    bivariate model   of odds ratio
Region 3 = South                                             33.6%           11.9%               0.78              **
   Division 5: South Atlantic                                19.0%           12.2%               0.85              **
   DE                                                         0.3%           17.3%               1.31              **
   DC                                                         0.2%           22.5%               1.82              **
   FL                                                         6.7%            9.5%               0.65              **
   GA                                                         2.8%           11.4%               0.81              **
   MD                                                         1.8%           17.6%               1.35              **
   NC                                                         2.8%           12.8%               0.92              **
   SC                                                         1.3%           11.5%               0.82              **
   VA                                                         2.5%           14.9%               1.10              **
   WV                                                         0.5%           11.9%               0.85              **
   Division 6: East South Central                             4.8%           12.1%               0.85              **
   AL                                                         1.3%           11.7%               0.83              **
   KY                                                         1.2%           14.4%               1.06              **
   MS                                                         0.7%            9.8%               0.68              **
   TN                                                         1.6%           11.7%               0.83              **
   Division 7: West South Central                             9.8%           11.0%               0.76              **
   AR                                                         0.9%           10.6%               0.74              **
   LA                                                         1.3%           13.3%               0.96              **
   OK                                                         1.2%           11.6%               0.82              **
   TX                                                         6.5%           10.5%               0.72              **
Region 4 = West                                              24.0%           13.0%               0.92              **
   Division 8: Mountain                                       7.6%           12.2%               0.86              **
   AZ                                                         1.7%           12.1%               0.86              **
   CO                                                         2.1%           13.3%               0.96              **
   ID                                                         0.6%           12.6%               0.90              **
   NM                                                         0.6%           11.9%               0.85              **
   MT                                                         0.6%           13.8%               1.00
   UT                                                         1.0%           10.2%               0.71              **
   NV                                                         0.7%           10.1%               0.71              **
   WY                                                         0.3%           12.6%               0.90              **




                                    Page 56                                GAO-12-326 Small Employer Plan Sponsorship
                                            Appendix VI: Regression Results




                                                                                          Percentage of
                                                                                            businesses
                                                                                            sponsoring
                                                                    Percentage of            retirement   Odds ratio from   Significance
Category                                                              businesses              programs    bivariate model   of odds ratio
    Division 9: Pacific                                                         16.4%            13.4%               0.97              **
    AK                                                                            0.3%           14.0%               1.02
    CA                                                                          11.8%            13.0%               0.93              **
    HI                                                                            0.4%           16.0%               1.20              **
    OR                                                                            1.5%           15.5%               1.15              **
    WA                                                                            2.4%           13.8%               1.00
                                            Source: GAO analysis of Labor and IRS data.

                                            ** denotes p-value < 0.01.
                                            * denotes p-value < 0.05.



Table 5: Results of Multivariate Analysis

                                                                                                      95 percent Wald    95 percent Wald
                                                          Odds ratio from                                 Confidence         Confidence
Category                                                multivariate model                  p-value     Limits (lower)     Limits (upper)
Employee count
1 to 4                                                                        0.23           <.0001               0.22              0.23
5 to 11                                                                       Ref.
12 to 25                                                                      1.92           <.0001               1.91              1.94
26 to 100                                                                     3.13           <.0001               3.10              3.15
Average wage per employee
Less than $10,000                                                             0.23           <.0001               0.23              0.23
$10,000 - $29,999                                                             Ref.
$30,000 - $49,999                                                             2.58           <.0001               2.56              2.60
$50,000 - $99,999                                                             3.62           <.0001               3.59              3.66
$100,000 or Greater                                                           3.23           <.0001               3.19              3.28
NAICS
11 = Agriculture, Fishing, Foresting                                          0.98           0.2414               0.95              1.01
21 = Mining                                                                   1.12           <.0001               1.07              1.17
22 = Utility                                                                  0.71           <.0001               0.66              0.76
23 = Construction                                                             Ref.
31 = Manufacturing (incl. 33 and 34)                                          1.63           <.0001               1.60              1.65
42 = Whole Sale Trade                                                         1.45           <.0001               1.43              1.47
44 = Retail Trade (incl. 45)                                                  1.05           <.0001               1.04              1.06
48 = Transportation/Warehousing                                               0.77           <.0001               0.75              0.78




                                            Page 57                                            GAO-12-326 Small Employer Plan Sponsorship
                                               Appendix VI: Regression Results




                                                                                                            95 percent Wald    95 percent Wald
                                                             Odds ratio from                                    Confidence         Confidence
Category                                                   multivariate model                p-value          Limits (lower)     Limits (upper)
51 = Information                                                                 1.20         <.0001                   1.17               1.23
52 = Finance and Insurance                                                       2.70         <.0001                   2.66               2.74
53 = Real Estate and Rental and Leasing                                          1.04         <.0001                   1.02               1.06
54 = Professional, Scientific, and Technical                                     2.39         <.0001                   2.36               2.41
Services
55 = Management of Companies and Enterprises                                     1.32         <.0001                   1.22               1.42
56 = Administrative and Support and Waste                                        1.03          0.0007                  1.01               1.05
Management and Remediation Services
61 = Education Services                                                          0.60         <.0001                   0.59               0.63
62 = Healthcare                                                                  2.59         <.0001                   2.56               2.61
71 = Art, Entertainment, and Recreation                                          0.86         <.0001                   0.84               0.88
72 = Accommodation and Food Service                                              0.29         <.0001                   0.29               0.30
81 = Other Services                                                              0.75         <.0001                   0.74               0.76
89 = Services, Not Elsewhere Classified                                          0.35         <.0001                   0.30               0.41
00 = Missing                                                                     0.41         <.0001                   0.36               0.45
Census Bureau regions and divisions
   Division 1: New England                                                       1.37         <.0001                   1.35               1.39
   Division 2: Middle Atlantic                                                   Ref.
   Division 3: East North Central                                                1.28         <.0001                   1.26               1.29
   Division 4: West North Central                                                1.50         <.0001                   1.48               1.52
   Division 5: South Atlantic                                                    0.88         <.0001                   0.87               0.89
   Division 6: East South Central                                                0.83         <.0001                   0.82               0.85
   Division 7: West South Central                                                0.67         <.0001                   0.66               0.68
   Division 8: Mountain                                                          0.92         <.0001                   0.91               0.93
   Division 9: Pacific                                                           0.89         <.0001                   0.88               0.90
                                               Source: GAO analysis of Labor and IRS data.

                                               Note: “Ref.” denotes a reference (or an omitted) category.




                                               Page 58                                            GAO-12-326 Small Employer Plan Sponsorship
Appendix VI: Regression Results




Table 6: Results of Block Test

                                         -2*Log- Model explanatory power       Contribution of
                                      likelihood             (Pseudo-R2)       block (percent)
 Intercept only                     4,280,669.8
 Full model                         3,190,599.3                      0.34
 Models with one block
 deleted
 Size                               3,656,960.9                      0.17                14.62
 Average wage                       3,507,782.2                      0.22                 9.94
 Industry classification            3,316,274.3                      0.29                 3.94
 (NAICS)
 Geographic location                3,214,590.3                      0.33                 0.75
Source: GAO analysis of Labor and IRS data.




Page 59                                              GAO-12-326 Small Employer Plan Sponsorship
Appendix VII: Comments from the
             Appendix VII: Comments from the Department
             of Labor



Department of Labor




             Page 60                                      GAO-12-326 Small Employer Plan Sponsorship
Appendix VII: Comments from the Department
of Labor




Page 61                                      GAO-12-326 Small Employer Plan Sponsorship
Appendix VII: Comments from the Department
of Labor




Page 62                                      GAO-12-326 Small Employer Plan Sponsorship
Appendix VIII: GAO Contact and Staff
                  Appendix VIII: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Charles Jeszeck, (202) 512-7215 or jeszeckc@gao.gov
GAO Contact
                  In addition to the contact named above, individuals making key
Staff             contributions to this report include David Lehrer, Assistant Director;
Acknowledgments   Edward Bodine, Analyst-in-Charge; Curtis Agor; Kun-Fang Lee; and
                  David Reed. Susan Aschoff, Susan Baker, James Bennett, Michael
                  Brostek, Sarah Cornetto, Cynthia Grant, Catherine Hurley, Anna Kelley,
                  Gene Kuehneman, Karen O’Conor, Dae Park, MaryLynn Sergent, Aron
                  Szapiro, Frank Todisco, James Ungvarsky, and Walter Vance also
                  provided valuable assistance. SOI (IRS) provided valuable assistance in
                  extracting small employer data from the CDW.




(131034)
                  Page 63                                GAO-12-326 Small Employer Plan Sponsorship
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