A Department of Labor retirement guide
notes: “For many Americans, retiring in this new century is a mystery.”
They’re living longer, they’re more personally responsible for their
own retirement savings and they have many more savings options than
previous generations did, which exacerbate the confusion. In June 2008,
a House Ways and Means Subcommittee hearing
explored options for expanding IRA participation. This article presents
data about the mystery and IRA participation, highlights of the hearing
and considerations for reform.
For general information about IRAs see IRS Publication 590 (PDF) and IRS FAQs.
- In 1974 when IRAs were created, life expectancy was 71.9 years (PDF) while in 2006 it was 78.1 years (Centers for Disease Control and Prevention).
are working longer. About 70 percent of baby boomers (born 1946 to
1964) expect to keep working during normal retirement years (AARP, Reimagining America, 2005). From 1995 to 2006, the employment rate of individuals ages 55 to 64 increased 7.4 percentage points (California Budget Project, More Californians Are Working Later in Life
(PDF), April 2007). Reasons for the change include greater longevity,
insufficient retirement assets and personal desire.
2004, $3.5 trillion in assets was held in IRAs while defined
contribution (DC) plans held $2.6 trillion and defined benefit plans
(DB) held $1.9 trillion (GAO (PDF), June 2008).
- Plan participation: (Labor Secretary Elaine L. Chao, June 2007)
In the same speech in which she provided this data, Secretary Chao noted:
- Every year about one-third of workers change jobs.
- Today’s workers are highly mobile.
1998 to 2004, less than 20 percent of IRA contributions were new
retirement savings; over 80 percent of contributions were rollovers
from other retirement accounts (GAO (PDF)).
1999 to 2002, 1.4 million individuals contributed to their traditional
IRA each year while about 16 million individuals made annual
contributions to their 401(k) plan (GAO (PDF)).
2004, 79 percent of all taxpayers were eligible to make an IRA
contribution (about 145 million taxpayers), but only 10 percent (14.7
million taxpayers) actually did. Participation was highest among
taxpayers with $200,000 or more of AGI and that group also made the
largest average contribution. For eligible taxpayers with positive AGI,
participation was greater among higher income taxpayers.
% of eligible
and contributions were also greater for older taxpayers. In 2004, 4.5
percent of eligible taxpayers under age 30 contributed an average of
$1,875 while 16.8 percent of eligible taxpayers ages 60 to 69
contributed an average of $3,849 (Bryant, Accumulation and Distribution of IRAs (PDF), IRS, 2004).
- A 2007 Department of Labor
(DOL) compensation survey found variances in retirement benefits
available to private industry workers based on the type of work and
* Percent of workers with access who participate.
< 100 workers
> 100 workers
Avg. wage < $15/hour
Avg. wage > $15/hour
Looking from the provider perspective, 46 percent of
employers in the private sector offer retirement benefits. Just 44
percent of employers with less than 100 workers offer retirement
benefits compared to 85 percent for those with 100 or more workers
(DOL, National Compensation Survey (PDF)).
- In 2005, only about one in four (27%) individuals with IRAs contributed the maximum allowable amount (Employee Benefit Research Institute, Notes (PDF), May 2008).
2001, 60 percent of taxpayers either had assets in, or income from an
IRA or employer-sponsored plan. Thus, 40 percent of taxpayers have no
retirement accounts although they may have other assets for retirement (Sailer & Holden, IRS, 2004 (PDF)).
The June 2008 congressional hearing focused on a GAO
(PDF) report on IRAs, the role IRAs play in the retirement system and
proposals for improvements to employer-provided IRAs. One such
proposal, H.R. 5160
(110th Congress), calls for various simplifications to
employer-established IRAs as well as reduced restrictions and allowance
of automatic enrollment.
The GAO report explains some of the barriers that prevent small
employers from providing IRA options to employees — either ones that
are employer-sponsored (Simplified Employee Pension plan (SEP) or
Savings Incentive Match Plan for Employees (SIMPLE)) or a
payroll-deduction IRA. These barriers include:
- Confusion about the employer’s role in encouraging IRA contributions
- Insufficient incentive for employers
- Lack of awareness
The DOL (PDF) and Treasury (PDF) pointed out that they provide publications, seminars and model plans. The DOL’s Interpretive Bulletin 99-1
(PDF) provides guidance on the actions an employer can take with a
payroll deduction IRA so as to avoid becoming subject to ERISA rules.
Also, the employer may be reimbursed by the IRA sponsor for the
reasonable costs of managing the program.
While those testifying tended to agree that automatic enrollment
would help increase participation, additional problems were noted with
the current system. These included complexity due to varying types of
IRA plans, some contribution limits being too restrictive, tax benefits
skewed to higher income individuals, high account management fees for
individual accounts and risk.
Retirement Considerations for the 21st Century
The 21st century workforce will challenge traditional
notions of retirement savings arrangements. Employer costs, business
competition and employee turnover will continue to make DC plans the
preferred retirement benefit. Worker mobility and turnover though will
continue to challenge access and effective participation in
employer-sponsored plans. Increased options and desire to work past the
traditional retirement age will challenge individuals to know how much
New thinking is needed given the number of workers without
employer-provided access to retirement savings opportunities, low
participation by those eligible to contribute to IRAs and greater
retirement savings needs caused by greater longevity. The old models
are not working effectively today. Minor changes may not be enough to
adequately serve either employers or workers.
Consideration must be given to how existing tax breaks for
retirement savings can be utilized to lead to broader coverage in a
more equitable and simple manner. Individuals will need greater
understanding of investments, savings strategies and budgeting as they
take on greater responsibility for managing their own retirement assets.
The American workforce’s dearth or retirement saving knowledge and
participation presents many opportunities for CPAs. Policymakers need
help understanding where existing rules fail to generate adequate
retirement savings and cause challenges for employers. The growing
number of individuals managing their own retirement plan and savings
decisions will require a higher level of financial literacy than most
workers needed years ago. More individuals may turn to the CPA
profession for help in creating and maintaining their retirement plans.
Yet, the data indicate that many individuals may not know they need to
take charge of their retirement planning or how to do it.