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July 24, 2003 |
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Chairman Davis, Ranking Member Waxman, and
distinguished Members of the Committee: 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 are Timothy Hauser,
Associate Solicitor of Labor for Plan Benefits Security, and William H. Bailey,
Chief, FERSA Compliance. |
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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 governs 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 FERS, which generally
follows the private sector model of providing retirement benefits through the
combination of a modest defined benefit, Social Security, 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 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
million participants in the Thrift Savings Plan. The fund balances total over
$113 billion.
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The number of participant loans
and withdrawal disbursements has increased from approximately 50,000 in 1988 to
685,000 in 2002.
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Total participant inquiries
have increased from approximately 150,000 in 1989 to 2,037,000 in
2002.
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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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To ensure the integrity of the TSP, FERSA
established rules for fiduciary responsibility, prohibited transactions, and
bonding requirements. These standards are substantially similar to rules
governing private sector pension plans under ERISA. The rules specify 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 what she has under ERISA; to bring
civil actions against the Fund's fiduciaries for breaches of their fiduciary
responsibilities. |
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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 by 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
acted upon. |
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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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In response to concerns recently expressed about
access to the TSP’s website, we are planning in next year’s audit
cycle to review the TSP’s customer service, loan and withdrawal
subsystems. |
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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 culminated
in the TSP Board entirely replacing the TSP record keeping system in June
2003. |
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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 over 800 recommendations and received 95
percent compliance. The remaining recommendations chiefly address future
controls for the TSP’s new record keeping system as it moves past its June
2003 implementation. This high compliance rate with audit recommendations 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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However, as you are no doubt aware, there have
been some issues about which we and the prior Board have disagreed. These
issues arose in the context of the Board’s 2001 lawsuit against American
Management Systems (AMS) alleging failure to perform and fraud in connection
with its contract to provide new record keeping software. (AMS subsequently
filed suit against the Board in the U.S. Court of Federal Claims claiming
wrongful discharge.) The disagreements were the decision by the prior Board to
retain, at considerable expense to the plan, outside counsel to represent it in
this litigation and the accounting of the costs for the failed systems
development. Though unable to take direct enforcement action on these matters,
the Department referred its findings to the GAO and OMB, and discussed the
issues with the Congressional Committees of jurisdiction, including this
Committee's Civil Service Subcommittee. |
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We look forward to working with the recently
appointed Executive Director, Mr. Gary A. Amelio, and the members of the Board,
most of whom were recently appointed by the President. The new Board has been
very cooperative with the Department, and we anticipate continuing a free and
candid exchange of views that will greatly benefit the TSP participants and
beneficiaries, not to mention helping to fulfill the responsibility of the
Department of Labor. |
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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
Investment Board in this endeavor, and I am happy to answer any questions you
may have. |
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