Currently, there are a number of asset-based IDA demonstrations. To benefit current and future IDA demonstrations, the existing IDA initiatives are being assessed, and the social and economic effects of assets are being evaluated. Yet even if the current IDA demonstrations prove to be extremely successful, real change in the economic participation of impoverished households will not occur unless the current system is broadened. Expansion of community and state IDA systems, including larger numbers of participants, is required if IDAs are to have a significant impact. An administrative structure supporting larger demonstrations must be designed to prepare for continued growth in IDAs.
Expansion of the system can uncover problems that are not discernible under the current system, but will be identified when it is broadened to a larger scale. For example, accounting for participant records may be manageable for some program sponsors at current participation levels, but will be too cumbersome for larger demonstrations, or for those sponsors with small IDA staffs. Many IDA program sponsors are currently receiving from banks or credit unions a monthly account statement for each IDA participant, then keying this financial information into their own database. A spreadsheet is then devised to reflect matching contributions based on participants’ savings, totaling individual and matching contributions, and allocating interest to the matched portion.
The database is also maintained to prepare IDA participant statements (consolidated financial statements that record both individual deposits and matching funds), and to evaluate the IDA program. Although an information-rich database is required to conduct these functions, this redundant process of entering the savings deposits, withdrawals, and interest for each participant into the program sponsor's own system costs time and money. Clearly, a manual process of data entry is not economically feasible for larger scale demonstrations.
Another accounting consideration is the appropriateness of community development organizations’ staff members’ time spent balancing the IDA program records to bank records. "What business are we in, anyway?" is a question employee benefit plan sponsors must ask themselves when considering whether tasks should be performed internally by their own staff or by an outside vendor (Heller, 1995). Similarly, the process by which the IDA database is kept current should be kept as simple as possible, not interfering with the IDA sponsors' ultimate mission.
If there is more than one IDA program in a community or state, perhaps an option would be for IDA sponsors to centralize the participant accounting function to a group of specialists at one IDA program location. The group could oversee the balancing and maintenance of accounts, and provide support to programs which have fewer human resources available. This recommendation would also benefit IDA sponsors that do not have the systems’ capabilities of multi-faceted service organizations.
Financial Institutions' Role
Automation. In today's high-tech society, employer sponsors of 401(k) plans are transferring participant data and financial information electronically over telephone lines. IDA program sponsors will benefit from technology in similar ways. Two alternatives to the current labor-intensive, error-prone accounting methods are for the sponsor to receive from its financial institution a download of deposits, withdrawals, and interest on a diskette, or receive a transmission of this information over telephone lines via modem. These methods should increase operational efficiencies of current IDA initiatives and enable growth for the future. In addition to providing efficiencies for the sponsor, this recommendation is critical to maintaining the program's integrity by facilitiating accurate and timely IDA participant statements.
Financial institutions have the capabilities to support this recommendation for automated data transmission. For example, a local bank has committed to transmitting financial information via telephone lines and to waiving any fees for both the maintenance of the individual savings accounts and the charge for electronic transmission of account information. Another financial institution, which is currently supporting an IDA initiative, will be able to provide the participant financial information on a diskette. In both cases, such technology will eliminate the need for manual input, ensure accuracy, and allow the IDA program sponsor to load financial information into its own database for specific program needs.
Program sponsors may continue to perform participant accounting functions using an Excel spreadsheet, or similar personal computer-based application, if the current use of a single investment fund is maintained. However, if multiple funds are offered to IDA program participants, the complexity of participant accounting increases dramatically. While the short-term nature of current IDA initiatives does not warrant the use of multiple investment strategies such as stock and bond funds, use of employee benefit record keeping technology must be considered if the design is altered to include multiple funds.
Banks and community development credit unions. IDA program sponsors state that they do not experience any particular problems with the financial institutions supporting their IDA programs. Further conversations reveal that the primary reason for their success is that these sponsors already had a close working relationship with the chosen financial institution prior to introducing the IDA program. In fact, one community credit union representative states that the financial institution sees itself as a "sister agency," a partner with the sponsor of the IDA program.
In light of the fact that community development credit unions specialize in serving low-income people, and are already affiliated with community service agencies, it seems such financial cooperatives could best support an IDA initiative in terms of commitment to IDA program participants. One way to select the appropriate financial institution is for the sponsoring organization to determine what is important for its particular IDA initiative, and its community's needs. In addition to a commitment to the target population, possible criteria for selecting a financial institution include:
Communication. Based on interviews with participating financial institutions, there is a need for specific and regular communication between the sponsoring organization and the financial institution. Some existing areas of concern are the need for better coordination of IDA and financial services, and a better understanding of how the IDA initiative operates. The financial institution will communicate with the participants as frequently as they make deposits; therefore, program communication can either be enhanced or hindered by the institution. If the financial institutions’ employees are well informed about the IDA program design, they may assist participants and respond to basic questions. In contrast, inaccurate or inadequate information about the IDA program can cause misunderstandings. Ongoing, thoughtful communication and coordination of services between financial institutions and program sponsors will enhance IDA demonstrations.
Providing clear, appropriate information to the financial institution can also expand the IDA marketing process. Perhaps the financial institutions will have an incentive to market IDAs and explain the regulations, as was the case prior to the Tax Reform Act of 1986, when IRAs had widespread use (Joint Committee on Taxation, Savings and Investment Act), and financial institutions were competing for IRA deposits. IDA program sponsors would be wise to make use of financial institutions’ marketing efforts.
Mutual Funds’ Systems
A constraint of the current IDA structure is the program sponsor’s administrative responsibilities. The program sponsor is solely responsible for maintaining consolidated participant records, allocating interest to the participant and matching accounts, preparing IDA participant statements, and, if the matching funds and interest on such funds are not tax-exempt, preparing appropriate IRS tax forms.
An economical alternative for state-sponsored IDAs would be to select a single mutual fund investment management company, capable of performing all these functions, to alleviate much of the IDA sponsor’s administrative burden. Ideally, the sponsor would select a management company with experience serving large institutional 401(k) plan accounts. Once chosen, the firm would manage the money and perform administrative record keeping tasks, minimizing IDA administrative costs and increasing the efficiency of calculating and contributing matching funds. It is no surprise, therefore that many defined contribution plan sponsors choose investment managers “based on their record keeping and customer service capabilities and not their historic investment performance” (Hurley, Meers, Bornstein & Strumingher, 1995, p.28).
The benefit of some investment management companies is that they already have sophisticated record keeping systems in place. As a result of existing investments in infrastructure and technology, these investment management companies offer record keeping at little or no cost (Hurley et al., 1995).
In contrast, multiple financial institutions or investment management companies would create an administrative burden to the state-wide IDA system. This option would be cost prohibitive from a record keeping, financial, and administrative standpoint. A single investment management company would eliminate the high costs, coordination difficulties, and increased opportunity for error associated with attempting to consolidate records of different financial institutions or fund managers (Burzawa, 1994). In other words, individuals will continue to make savings deposits at various local financial institutions, yet their contributions would be transferred to a single mutual fund investment management company via monthly automatic deductions from their personal bank accounts. This alternative provides flexibility for the individuals and additional administrative benefits for the IDA program sponsors.
Private Sector Participation
Corporations are perhaps more important than financial institutions to the future of IDA initiatives. One means of greatly enhancing the poor's access to IDAs is to include corporate employers in the process. Companies can play a major role in IDAs for at least two important reasons. First, they can provide salary information to program sponsors so low-income individuals could be targeted to participate in IDAs based on their earnings. Second, employers can facilitate the savings process by withholding funds via automatic payroll deduction and wire transferring such deposits to a central source in the same manner as they currently withhold FICA taxes or salary deferrals for company- sponsored 401(k) plans.
As IDA programs expand, they cannot be sustained solely on the discipline of individual savers to make weekly or monthly deposits. As one employee benefit consultant concludes, money that is taken out of an employee's paycheck can be the easiest means to accomplish financial goals (Langsett, 1995). In addition, a survey conducted by the Employee Benefit Research Institute found that 79% of respondents consider automatic salary deductions as the best way to save money (Institute of Management and Administration, 1995). The structure of automatic payroll deductions will be central to keeping individuals actively participating in their IDAs.
Finally, corporations can educate employees regarding IDAs by efficiently providing program information to participants. Companies can be responsible for program communication by distributing educational materials such as payroll stuffers or posting bulletin board notices, and by allowing trained individuals to conduct lunch hour education sessions. Topics for such sessions could include IDA program features and benefits for eligible employees, economic literacy, budgeting, etc.
Pilot program. In order to promote IDAs for use by the working poor, states sponsoring IDA initiatives could join forces with employers whose work force is comprised primarily of low-paid workers eligible to receive IDA matching funds. A pilot program partnership might begin with companies interested in developing their human capital. This proposal would ensure that participant contributions are being made from earned income, as required by the current welfare reform bill. A pilot IDA program might be designed as follows:
This recommendation has two possible drawbacks that must be considered. These are (1) less interaction with financial institutions by the program participants, and (2) corporate reluctance to participate in the pilot program. IDA pilot program participants would not interact with a financial institution because contributions would be withheld via payroll deduction mechanisms. Because an essential element of IDA programs is to provide participants with a way to interact with the economic system, it is important that alternative opportunities for economic education be available. One idea, mentioned earlier, is the lunch hour information session with a representative of a financial institution.
Some employers may be reluctant to participate in the program if they are already offering a 401(k) plan of their own, for fear that low-paid employees might choose to stop participating in the current company sponsored plan. Since the most common matching formula in 401(k) plans is 50 cents per $1 saved (Hewitt Associates, 1995), and IDAs match $1 or more for every $1 saved, it is likely that 401(k) participants eligible to receive IDA matching funds would switch to the IDA. This would pose a problem for many 401(k) plan sponsors because of government requirements to pass certain non- discrimination tests. Failure of the appropriate non-discrimination test can occur as a result of the lack of participation among non-highly compensated employees, placing limits on the amount of contributions made by the highly-compensated employees. However, as of the end of 1994 only 25% of companies with 50 to100 employees, and only 11% of companies with fewer than 50 employees, had an existing defined contribution plan (Hurley et al., 1995).
Centralized resources. Although IDA initiatives will vary from site to site, a state model program outlining standard features and providing quality materials will be essential to saving the program sponsors’ time, money, and resources. Although IDAs are designed to be controlled locally to meet community needs, it is crucial to centralize and standardize certain IDA materials, particularly successful training materials currently used for home ownership and microenterprise programs. A core framework of standard materials, allowing for individual program flexibility, could provide economies of scale without ignoring the diversity of the individual communities and target populations.
An example of a centralized communication effort exits in the joint collaboration of the U.S. Department of Labor and the private sector. The two groups recently created the American Savings Education Council (ASEC) to educate citizens about retirement planning. Acting as a central clearinghouse, the ASEC coordinates its members' resources and education efforts and creates advertisement slogans, develops educational materials, etc. (Sargent, 1996). This coordinated effort is in response to the need for quality, widespread retirement education materials.
Matching funds and IDA participation. Some IDA sponsors respond in interviews that they have problems recruiting participants for their programs. A survey conducted by the Institute of Management and Administration (IOMA) managing 401(k) plans (1995) cited the following as reasons why employees participate in 401(k) plans: tax deferral benefits, 79%; provision of a retirement vehicle, 74%; and company match, 69%. Although a means of deferring taxes is found to be the most common reason to participate in 401(k) plans, people with low wages are not inclined to save for such reasons. For example, In 1985 only 2.3% of wage earners making less than $10,000 took advantage of the tax deferral benefits of Individual Retirement Accounts (IRAs), as compared to 56.5% of wage earners in the $50,000 - $75,000 range, and 76% of wage earners making over $100,000. (U.S. House, 1993) IDAs and 401k plans have many similarities in application and savings incentives; however, tax savings clearly will not be the number one reason for IDA program participation. Program sponsors should encourage IDA participation by capturing eligible participants' attention with communication materials which demonstrate the benefits of matching dollars.