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March 1, 2004
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Chairman Fitzgerald, Ranking Member Akaka, and distinguished Members of the
Committee:
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I appreciate the opportunity to appear before you today to present
information about the Federal Employee Retirement System (FERS), the Thrift
Savings Plan (TSP), and the Labor Department's activities in this area. My
name is Alan Lebowitz. I am the Deputy Assistant Secretary for Program
Operations, of the Employee Benefits Security Administration, U.S.
Department of Labor. Accompanying me is Ian Dingwall, EBSA’s Chief
Accountant.
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Before describing the Labor Department’s activities with the TSP, I would
like to provide you with some background information specifically about the
Employee Benefits Security Administration and our responsibilities.
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EBSA currently oversees approximately 730,000 private pension plans and
millions of private health and welfare plans that are subject to the
Employee Retirement Income Security Act of 1974 (ERISA). The pension plans
under our jurisdiction hold over $4 trillion in assets and cover more than
45 million workers. EBSA employs a comprehensive, integrated approach
encompassing programs for enforcement, compliance assistance, interpretive
guidance, legislation, and research to protect and advance the retirement
security of our nation’s workers and retirees.
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Title I of ERISA consists of provisions that establish standards of
fiduciary conduct for persons who are responsible for the administration and
management of pension and other benefit plans (including group health plans,
life insurance, disability, dental plans, etc.). In addition, it establishes
standards for the reporting of plan related financial and benefit
information to the Department, and the disclosure of essential plan related
information to participants and beneficiaries.
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Under ERISA, fiduciaries are required to discharge their duties solely in
the interest of plan participants and beneficiaries for the exclusive
purpose of providing benefits and defraying reasonable expenses of plan
administration. In discharging their duties, fiduciaries must act prudently
and in accordance with the documents governing the plan. Certain
transactions between an employee benefit plan and “parties in interest,”
including fiduciaries and others who may be in a position to exercise
improper influence over the plan, are prohibited by ERISA. If a fiduciary’s
conduct fails to meet ERISA’s standards, the fiduciary is personally
liable for plan losses attributable to such failure.
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Because of the Department of Labor’s experience and expertise in the
administration and enforcement of Title I of ERISA as it relates to private
sector employee benefit plans, Congress charged the Department with
administering substantially similar provisions of law governing fiduciary
conduct for the TSP under the Federal Employees’ Retirement System Act of
1986 (FERSA).
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In FERSA, Congress created a retirement program for federal employees that
generally follows the private sector model of large employers in providing
retirement benefits through a combination of Social Security, a defined
benefit plan, and a 401(k)-like tax advantaged savings plan, the TSP. For
Federal workers hired after January 1, 1984 FERS takes the place of the old
Civil Service Retirement System. Within FERS, the Labor Department's formal
responsibilities are limited to the TSP.
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Employing agencies contribute one percent of pay to an individual account
for each worker covered by FERS. In addition, covered workers can choose to
make pre-tax employee contributions to the TSP that are matched by employer
contributions up to certain limits. CSRS employees and uniformed service
members may also make pre-tax contributions to the TSP, though there is no
employer match for these contributions. Each contributing employee directs
the investment of contributions to their individual account in four separate
index funds and a U.S. government securities fund, known collectively as the
Thrift Savings Fund.
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The TSP is available to federal and postal workers, Members of Congress,
Congressional employees, members of the Judicial Branch, and uniformed
service members. Since its inception 17 years ago, the TSP has grown into a
large, complex system. For example:
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There are currently more than 3.25 million participants
in the Thrift Savings Plan. The fund balances total over $131 billion.
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The number of participant loans and withdrawal
disbursements has increased from approximately 50,000 in 1988 to 873,000
in 2003.
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Total participant inquiries have increased from
approximately 150,000 in 1989 to 2,631,000 in 2003.
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In enacting FERSA, Congress established the Federal Retirement Thrift
Investment Board (the Board) to administer the TSP. The Board is an
independent agency of the Executive Branch. It has five members appointed by
the President with the advice and consent of the Senate, and an Executive
Director, appointed by the Board. The Board's principal statutory duties are
to set policies for investment of the Thrift Savings Fund's assets and for
administration of the TSP within the requirements of the Act. The Board
selects appropriate indexes for the four index investment funds, but does
not select specific investments. The Executive Director then carries out the
policies established by the Board.
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The Board contracts with Barclays Global Investors, N.A. (BGI) to provide
investment management operations for the TSP's four index funds: (1) the
Fixed Income Investment Fund ("F" Fund), (2) the Common Stock
Index Investment Fund ("C" Fund), (3) the Small Capitalization
Stock Index Investment Fund ("S" Fund), and the International
Stock Index Investment Fund ("I" Fund). As investment manager, BGI
is responsible for safeguarding F, C, S and I Fund investments, for ensuring
that these funds closely track the performance of the investment indices
selected by the Board, and for ensuring that these investments and related
operations comply with FERSA and the provisions of the contract between the
Board and BGI.
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To ensure the integrity of the TSP, FERSA established rules concerning
fiduciary responsibility, prohibited transactions, and bonding requirements.
These standards are substantially similar to rules governing private sector
pension plans under ERISA. The statute specifies that the Board members and
the Executive Director are fiduciaries of the Savings Fund. They and other
fund fiduciaries must discharge their responsibilities prudently and solely
in the interest of the participants and beneficiaries. Certain types of
transactions that may create potential for abuse are prohibited unless they
fall within an exemption provided in the statute or specifically granted by
the Secretary of Labor.
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As in ERISA, the Secretary of Labor has broad investigative and auditing
authority concerning the activities of the Board and other fiduciaries of
the fund. When FERSA was originally enacted in 1986, the Secretary also had
authority similar to that which she has under ERISA; to bring civil actions
against the Fund's fiduciaries for breaches of their fiduciary
responsibilities and to seek injunctive relief as well as recovery of losses
suffered by the fund.
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In 1988, in response to the lack of available fiduciary liability insurance,
Congress amended the Act to specifically exclude suits by the Secretary
against the Board members or the Executive Director. Participants and other
fund fiduciaries may still sue the Board and the Executive Director, but the
1988 amendments do not permit any monetary recovery against these
individuals. In addition, the 1988 amendments treat actions for recovery of
losses to the Fund brought by participants and beneficiaries against Board
members and the Executive Director as tort actions against the United
States, which are defended by the Attorney General. The Department may,
however, still bring actions for recovery of losses against other TSP
fiduciaries, such as investment managers.
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Section 8477(g) of FERSA specifically directs the Secretary of Labor to
establish a program to carry out audits to determine the level of compliance
with the Act's fiduciary standards and prohibitions on certain types of
transactions. Under the statute, the Secretary may either contract with a
qualified non-government organization, or may conduct the audit in
cooperation with the Comptroller General of the United States. The
Department has always elected to contract with a reputable accounting firm.
Currently, KPMG LLP conducts the audits under supervision of the EBSA Chief
Accountant.
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The Labor Department's program for fiduciary compliance audits of the TSP is
designed to determine: (1) whether the plan's fiduciaries are acquiring,
protecting, and using plan resources prudently, efficiently, and solely in
the interest of participants and beneficiaries; (2) whether the fiduciaries
have complied with FERSA and applicable laws and regulations; (3) whether
the desired results or benefits established by FERSA are being achieved; (4)
whether the plan program activities, functions, and organization are cost
effective and efficient; and (5) whether the Department's previous plan
compliance and control audit recommendations have been adequately addressed.
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To guide the auditors, the Department has developed a strategic Fiduciary
Oversight Program that uses detailed guides to test for compliance. These
audit program guides cover all significant activities of the Fund, including
the Board's policy formulation and administration; record keeping functions
handled by the Agriculture Department's National Finance Center; functions
of Federal agencies related to contributions and employee participation
programs; and the CIA's separate system for its employees. The audits
include on-site reviews of the Fund's principal service providers.
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The Fiduciary Oversight Program includes provisions for testing and
commenting on the controls in place at the TSP Investment Manager, BGI, that
ensure the accuracy of financial information, compliance with FERSA, and
operational efficiency and management effectiveness. The Department also
examines whether BGI complied with provisions of the contract under which it
was retained. The BGI management fee is reviewed for consistency with fees
charged by other similar institutions and that such fees conform to
contractual agreements.(1)
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At the conclusion of each audit, the Department issues a report for formal
response by the Executive Director on behalf of the Board. The Department's
representative and the contract auditor meet with the Board members at least
once a year to highlight significant issues from the audit, to present the
Department's future compliance audit schedule, and to answer Board members'
questions.
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The Department’s audit recommendations range from statutory matters
related to FERSA fiduciary compliance to economy and efficiency issues that
may provide cost-saving opportunities for the TSP. Most significantly, the
Department communicated many recommendations over several years addressing
TSP system and software control weaknesses, which influenced the TSP Board’s
decision to replace the TSP record keeping system in June 2003.
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At the June 2003 implementation of the new TSP record keeping system, the
Department provided on site audit oversight of the data conversion and
reconciliation processes from the “legacy” to the new system, where we
noted no significant deficiencies in the data conversion. The Department’s
TSP audit plan through fiscal year 2007 calls for a comprehensive audit of
the new system within 3 years, including an examination of participants’
concerns surrounding the responsiveness of the new online system.
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Although FERSA does not require the Board and Executive Director to adopt
the Department’s recommendations, disagreements are rare and generally are
due to the timing or the form of implementation rather than to outright
refusal. Since the inception of the audit program, the Department has made
more than 800 recommendations, 95 percent of which have been accepted. The
remaining recommendations chiefly address controls for the TSP’s new
record keeping system. This high rate of acceptance is due in large part to
the longstanding and positive working relationship between the Department
and the TSP service providers and fiduciaries throughout all phases of the
FERSA compliance audit program.
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Certain abusive practices within the mutual fund industry, namely “market
timing” and “late trading,” which have recently come to light, have
raised concerns and prompted the Department to take certain steps. The
Department recently performed a limited review of BGI’s collective trust
funds in which the TSP has equity investments to determine whether further
investigation is warranted. This review included an examination of documents
provided by the Board and BGI and discussions with key personnel at the
Board and at BGI. We also communicated with the Office of the Comptroller of
the Currency (OCC), which is the primary regulator of BGI. Based upon this
preliminary review, we do not believe that TSP participants are adversely
exposed to the costs and investment risks due to “late trading” and “market
timing.”
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The Department recently announced that it is conducting reviews of mutual
funds, similar pooled investment funds, and service providers to such funds
to determine whether there have been any violations of ERISA. The results of
these reviews will be used to later determine if any FERSA issues require
further investigation.
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We are working very cooperatively with Chairman Saul, and Executive Director
Amelio and the members of the Board. We anticipate continuing a free and
candid exchange of views that should benefit the TSP participants and
beneficiaries, and help us to fulfill our oversight responsibility.
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This concludes my prepared remarks. Thank you for the opportunity to testify
before you today regarding this important matter. We look forward to working
with the members of this Committee and the Thrift Savings Plan fiduciaries
in this endeavor, and I will be happy to answer any questions you may have.
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Our FY 03 TSP compliance audit report,
the scope of which was June 1, 2001, through January 31, 2003, noted
that TSP investment activities satisfactorily comply with the related
contract between the Board and BGI.
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