Annette Nellen

Rethinking IRAs

Despite the availability of IRAs, millions of individuals have no retirement savings. How can this 1970s retirement vehicle be improved to serve today’s workers?

July 24, 2008
by Annette Nellen, CPA/Esq.

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.



DB (private)


30 million
19 million
22 million
57 million
26.7% decrease
200% increase

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.
    • From 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)).
    • From 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)).
    • For 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.


    Number taxpayers


    % of eligible

    Contribution (000)



    $0 105,045 0.7 13.4 $339,361 0.7 $3,231
    < $10,000 457,638 3.1 2.2 $878,336 1.8 $1,919
    < $20,000 752,288 5.1 3.8 $1,286,603 2.6 $1,710
    < $30,000 1,250,381 8.5 7.1 $2,498,356 5.1 $1,998
    < $40,000 1,310,584 8.9 8.9 $3,052,654 6.3 $2,329
    < $50,000 1,401,947 9.6 11.4 $3,677,978 7.5 $2,623
    < $75,000 2,977,444 20.2 12.3 $7,932,144 16.3 $2,664
    < $100,000 2,370,275 16.1 15.3 $7,503,213 15.4 $3,166
    < $200,000 3,005,607 20.5 19.8 $12,982,307 26.7 $4,319
    > $200,000 1,074,851 7.3 28.9 $8,577,702 17.6 $7,980
    Total 14,706,060 100.0 10.1 $48,728,654 100.0 $3,314

    Participation 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 employer:





    70 60 85
    31 23 73
    Goods producer
    70 61 86
    Service provider
    58 48 83
    < 100 workers
    45 37 82
    > 100 workers
    78 66 85
    Avg. wage < $15/hour
    47 36 75
    Avg. wage > $15/hour

    76 69 90
    61 51 84
    * Percent of workers with access who participate.

    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).
    • In 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:

    • Costs
    • 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 to save.

    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 of 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.

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    Annette Nellen, CPA/Esq., is a tax professor and Director of the MST Program at San José State University. She is also a fellow with the New America Foundation. Nellen is an active member of the tax sections of the AICPA and ABA. She has several reports on federal and state tax reform and a blog.