Thrift Savings Plan: Delayed Allocation of Failed System	 
Development Costs to Participant Accounts (22-JUL-03,		 
GAO-03-827R).							 
                                                                 
The Thrift Savings Plan (TSP) is a retirement savings and	 
investment plan for federal employees, governed by the Federal	 
Retirement Thrift Investment Board (Board). The TSP is a defined 
contribution retirement plan available to eligible federal	 
employees. The TSP had about 2.6 million participants and held	 
about $100.6 billion in Net Assets Available for Benefits as of  
December 31, 2001, and about 3 million participants and $102.3	 
billion in Net Assets Available for Benefits as of December 31,  
2002. In 1997, the Board awarded a contract to American 	 
Management Systems, Inc. (AMS) to develop and implement a new	 
record-keeping system for the TSP. In 2001, after several	 
implementation delays, the Board terminated the contract, and the
Board's former Executive Director filed a lawsuit against the	 
contractor on behalf of the TSP. On June 20, 2003, 2 days after  
we provided a draft of this report to the Board for its review, a
settlement between the parties was reached. Then, on June 23,	 
2003, the net unrecovered cost from the system development	 
failure was allocated to participant account balances as	 
recommended in our draft report. While the loss has now been	 
allocated to participant accounts, albeit on a belated basis, we 
believe there is value associated with issuing this product in	 
response to the request to illustrate the operative principles	 
and concepts that should govern allocation of costs in the	 
future. Since the TSP is an important component of retirement	 
income for many federal employees, participants must be assured  
of proper accounting of their funds. Therefore, Congress asked us
to examine federal oversight of the TSP and the TSP's accounting 
for its failed system development costs. Our report on federal	 
oversight of the TSP was issued in April 2003. This report	 
addresses whether (1) the TSP's management followed U.S.	 
generally accepted accounting principles (GAAP) in accounting for
the costs associated with the failed development of the new	 
record-keeping system and (2) the TSP should have allocated the  
costs to participants' accounts when the loss occurred. 	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-827R					        
    ACCNO:   A07668						        
  TITLE:     Thrift Savings Plan: Delayed Allocation of Failed System 
Development Costs to Participant Accounts			 
     DATE:   07/22/2003 
  SUBJECT:   Accountability					 
	     Accounting standards				 
	     Allocation (Government accounting) 		 
	     Federal employee retirement programs		 
	     Government retirement benefits			 
	     Losses						 
	     Records management 				 
	     Thrift Savings Plan				 

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GAO-03-827R

GAO- 03- 827R Accounting for TSP Costs United States General Accounting
Office Washington, DC 20548

July 22, 2003 The Honorable Thomas M. Davis Chairman Committee on
Government Reform House of Representatives

The Honorable Danny K. Davis Ranking Minority Member Subcommittee on Civil
Service and

Agency Organization Committee on Government Reform House of
Representatives The Honorable Dave Weldon House of Representatives

Subject: Thrift Savings Plan: Delayed Allocation of Failed System
Development Costs to Participant Accounts The Thrift Savings Plan (TSP) is
a retirement savings and investment plan for federal

employees, governed by the Federal Retirement Thrift Investment Board
(Board). The TSP is a defined contribution retirement plan 1 available to
eligible federal employees. The TSP had about 2.6 million participants and
held about $100.6 billion in Net Assets Available for Benefits as of
December 31, 2001, and about 3 million participants and $102.3 billion in
Net Assets Available for Benefits as of December 31, 2002.

In 1997, the Board awarded a contract to American Management Systems, Inc.
(AMS) to develop and implement a new record- keeping system for the TSP.
In 2001, after several implementation delays, the Board terminated the
contract, and the Board*s former Executive Director filed a lawsuit
against the contractor on behalf of the TSP. 2 On June 20, 2003, 2 days
after we provided a draft of this report to the Board for its

1 Under a defined contribution plan, employees have individual accounts to
which employers, the employees, or both can make periodic contributions.
Defined contribution plan benefits are based on the contributions to and
the investment returns (gains and losses) on individual accounts.

2 The Executive Director who filed the related litigation resigned from
his post on November 18, 2002.

GAO- 03- 827R Accounting for TSP Costs Page 2 review, a settlement between
the parties was reached. 3 Then, on June 23, 2003, the

net unrecovered cost from the system development failure was allocated to
participant account balances as recommended in our draft report. While the
loss has now been allocated to participant accounts, albeit on a belated
basis, we believe there is value associated with issuing this product in
response to the request to illustrate the operative principles and
concepts that should govern allocation of costs in the future.

Since the TSP is an important component of retirement income for many
federal employees, participants must be assured of proper accounting of
their funds. Therefore, you asked us to examine federal oversight of the
TSP and the TSP*s accounting for its failed system development costs. Our
report on federal oversight of the TSP was issued in April 2003. 4 This
report addresses whether (1) the TSP*s management followed U. S. generally
accepted accounting principles (GAAP) in accounting for the costs
associated with the failed development of the new recordkeeping system and
(2) the TSP should have allocated the costs to participants* accounts when
the loss occurred.

Results in Brief

The TSP*s write- down of $41 million in failed system development costs,
as an expense on its 2001 income statement and balance sheet was
consistent with GAAP. However, the decision not to allocate those costs to
participant accounts at the same time was not consistent with the TSP*s
practice of allocating expenses on a monthly basis or with its accounting
treatment of the expenses on the financial statements. In prior accounting
periods, the TSP had recorded administrative expenses on its financial
statements and reduced participant accounts for the expenses when
incurred. The effect of not concurrently allocating the expenses
attributable to the system write- down to individual accounts was that
each then- existing participant account was overstated by a pro rata
amount.

This differing treatment for financial statements and account balances
resulted in aggregate reported TSP assets being $41 million less than the
sum of individual accounts from the end of July 2001 through the most
recent June 23, 2003, posting of the expense to accounts and allowed those
who have withdrawn from the TSP since 2001 to not share in those costs. If
the $41 million had been allocated to participants* accounts in 2001, the
TSP expense ratios would, on average, have been approximately one-
twentieth of 1 percent more* or about 41 cents per $1,000 account balance.
Thus, the amounts chargeable to individual accounts would have been
minimal* ranging from virtually nothing for new employees to roughly $400
for an account of $1 million.

The reason given by the Executive Director for not allocating the $41
million to account balances at the time of the asset write down was
confidence that the TSP would prevail in the court action and that, in the
final analysis, the TSP would not 3 The lawsuit brought by the Board is
still pending before the U. S. Court of Appeals for the District of
Columbia Circuit. While the parties have notified the Court that they have
agreed to a settlement, as of July 16, 2003, the Court has not dismissed
the case.

4 U. S. General Accounting Office, Federal Pensions: DOL Oversight and
Thrift Savings Plan Accountability, GAO- 03- 400 (Washington, D. C.: Apr.
23, 2003).

GAO- 03- 827R Accounting for TSP Costs Page 3 suffer any losses due to the
system development failure. The TSP*s former and

current independent auditors reviewed and concurred with this treatment.
Given uncertainties inherent in any court action and the fact that
significant numbers of account holders enroll and depart annually, in our
view, allocating the $41 million to account balances when the loss
occurred would have been more prudent, as well as being acceptable
treatment under GAAP. In particular, allocation at the time the loss
occurred would have met two underlying concepts of accounting* consistency
and conservatism.

Background

The TSP was authorized by Congress under the Federal Employees* Retirement
System Act of 1986 (FERSA). 5 As of December 31, 2002, the Board reported
that the TSP fund had approximately 3 million federal employee
participants and $102.3 billion in Net Assets Available for Benefits,
making it one of the largest retirement savings plans in the United
States. The TSP is available to federal and postal employees, members of
Congress and congressional employees, members of the uniformed services,
and members of the judicial branch. The TSP provides federal (and, in
certain cases, state) income tax deferral on employee contributions and
related earnings. The TSP*s assets and earnings on these assets generally
cannot be used for any purpose other than providing benefits to
participants and their beneficiaries, and paying TSP administrative
expenses. From December 2001 through February 2003, approximately 720,000
new participants joined the TSP, while approximately 510,000 participants
withdrew. 6 In 1997, the Board awarded a contract to AMS to develop a new
TSP record- keeping

system to provide participants with the ability to make investment changes
and to view updates of their account balances daily. Prior to the recent
system upgrade announced in mid- June 2003, participants* interfund
transfers could take up to 45 days to implement, and participants could
only view monthly updates of their account balances. In July 2001, after
numerous implementation delays and disappointing interim results, the
Board terminated the 1997 AMS contract for development of the new system
and awarded a new contract to a different contractor. At the time the
contract with AMS was terminated, the TSP wrote off $41 million of its
capital assets as a result of the failed system development. At the same
time, a suit was filed on behalf of the TSP against AMS, seeking $50
million 7 in actual damages and $300 million in punitive damages. Then,
AMS filed a contract termination settlement claim against the Board for
improper contract termination

5 Pub. L. No. 99- 335, 100 Stat. 514 (1986) (codified as amended largely
at 5 U. S. C. S:8351 and S:S: 8401 * 8479). 6 Withdrawals from the TSP
include withdrawal of funds upon retirements from the federal government,
withdrawal of funds upon resignation from the federal government, and any
other removal of previously contributed funds from the TSP. 7 The $50
million in actual damages being sought includes $30 million in invoices
paid to the contractor,

$12 million in salaries and benefits paid for TSP staff and other
contractors related to the system implementation, $9 million in other
start- up costs of the system implementation, and less $1 million paid for
off- the- shelf software that had future use to the TSP.

GAO- 03- 827R Accounting for TSP Costs Page 4 seeking $58 million in
damages. 8 On June 20, 2003, 2 days after we provided a draft of

this report to the Board for its review, a settlement was reached between
the parties. The net result of the settlement required AMS to pay $5
million to the TSP, thus reducing the amount of the loss from $41 million
to $36 million. On June 23, 2003, the $36 million was allocated to the
participant accounts on a pro rata basis, based on respective investment
fund balances.

The TSP prepares and reports its financial statements using GAAP. The
TSP*s annual financial statements are audited and have received
unqualified or *clean* audit opinions since its inception in 1987.
Statement on Auditing Standards No. 69 (SAS 69), The Meaning of *Present
Fairly in Conformity with Generally Accepted Accounting Principles,*
provides a definition of GAAP and discusses a hierarchy of guidance that
is to be followed. The statement describes four categories of
authoritative guidance, referred to as the GAAP hierarchy, which are
listed in table 1.

Table 1: GAAP Hierarchy of Guidance Category Guidance

A (most authoritative) Financial Accounting Standards Board (FASB)
Statements of Financial

Accounting Standards and Interpretations

Accounting Principles Board (APB) Opinions American Institute of Certified
Public Accountants (AICPA) Accounting Research Bulletins B FASB Technical
Bulletins

Certain AICPA Industry Audit and Accounting Guides

AICPA Statements of Position C Certain AICPA Accounting Standards
Executive Committee Practice Bulletins

Positions of the FASB Emerging Issues Task Force D (least authoritative)
AICPA accounting interpretations and implementation guides

Other practices that are widely recognized and prevalent Source: SAS 69.

In the absence of guidance in the four categories on a particular
transaction, SAS 69 allows for consideration of other relevant accounting
literature, such as FASB Statements of Financial Accounting Concepts;
AICPA Issue Papers; and Federal Accounting Standards Advisory Board
Statements, Interpretations, and Technical Bulletins.

Scope and Methodology

In order to determine if the TSP followed GAAP in accounting for the costs
of the failed systems development and whether the costs should have been
allocated to 8 The $58 million in actual damages included $26 million of
unpaid invoices and $32 million of other costs to close the contract.

GAO- 03- 827R Accounting for TSP Costs Page 5 participant accounts when
the contract was terminated, we reviewed relevant laws

and regulations, including FERSA and applicable federal regulations. We
reviewed accounting guidance associated with accounting for defined
contribution plans, systems development capitalization, and asset
impairment, including Financial Accounting Standard 121 (FAS 121),
Accounting for the Impairment of Long- Lived Assets and for Long- Lived
Assets to Be Disposed Of; AICPA*s Audit and Accounting Guide, Audits of
Employee Pension Benefit Plans; and Statement of Financial Accounting
Concepts No. 2 (SFAC 2), Qualitative Characteristics of Accounting
Information. We also reviewed the TSP*s audited financial statements for
calendar years 2000, 2001, and 2002; literature published by the TSP; and
minutes of Board meetings. In addition, we interviewed officials from the
TSP, the Department of Labor (DOL), and another defined contribution plan
provider. We requested and received written comments from the Executive
Director of the Board. These comments are discussed in the Agency Comment
and Our Evaluation section and are reprinted in the enclosure. We
conducted our work from January 2003 through May 2003 in accordance with
generally accepted government auditing standards.

Accounting Treatment for System Write- Down Was Acceptable

The TSP*s financial statement treatment of writing down the capitalized
costs of its failed system development costs was consistent with GAAP. FAS
121 provides authoritative guidance (category A) for properly accounting
for an impaired asset. FAS 121 requires that when the carrying amount of
an impaired asset exceeds its fair value, the impaired asset must be
written down to its fair value. 9 The difference between the asset*s
carrying amount and its fair value is to be recognized as an impairment
loss and a reduction of income from continuing operations. Therefore, the
TSP*s write- down of the failed system development costs, by recording an
expense of that amount and likewise reducing the asset value, was
consistent with FAS 121.

At the time the systems development contract with AMS was terminated, the
TSP had recorded a capitalized asset on its books for $65 million in
systems development costs. This amount represented contractor invoices
totaling $53 million and $12 million of internal development costs. Of the
$53 million in contractor invoices, $23 million had not yet been paid and
was reflected as an account payable. Upon contract termination, the Board
rejected the $23 million in unpaid invoices and decreased the capitalized
asset by the same amount, resulting in a residual recorded cost of
approximately $42 million. This capitalized asset was considered impaired
and written down from approximately $42 million to an estimated fair value
of $1 million. 10 The $41 million write- down of the asset to its net
realizable value was reported on the Statement of Changes in Net Assets
Available for Benefits as a component of administrative expenses. Table 2
summarizes the systems development write- down that resulted in a $41
million impairment loss on the capitalized asset. While the write- down
was not separately classified as an impairment loss, its

9 FAS 121 defines fair value as *the amount at which the asset could be
bought or sold in a current transaction between willing parties.* 10 The
remaining $1 million represents a recoverable asset that the TSP
determined, in conjunction with the new contractor, to be of future use.
The asset is off- the- shelf software that was used by the new contractor
in the system improvements.

GAO- 03- 827R Accounting for TSP Costs Page 6 inclusion in administrative
expenses resulted in a reduction of income from

continuing operations. 11 Table 2: TSP System Development Write- down
Resulting in $41 Million Impairment Loss on Capitalized Asset

Contractor invoices (paid at time of contract termination) $30 million

Contractor invoices (not paid at time of contract termination) $23 million

Internal cost of system development $12 million Original capitalized asset
$65 million Less: invoices rejected $23 million Capitalized asset $42
million Less: estimated fair market value of capitalized asset $1 million
Impairment loss on capitalized asset $41 million Sources: TSP and the 2001
Financial Statements of the Thrift Savings Fund.

At that time, these record- keeping system development costs constituted
most of the TSP*s recorded fixed assets. The write- down of the $41
million resulted in the TSP*s total fixed assets being reduced from $50
million to $9 million. It also was a major cause of the increase in
administrative expenses from $62 million in fiscal year 2000 to $106
million for fiscal year 2001. Nonallocation to Individual Accounts Was
Inconsistent with Prior Practices

The decision not to allocate the expenses related to the failed system
development to participant accounts when the loss occurred was not
consistent with the TSP*s practice of allocating expenses on a monthly
basis or with the accounting treatment

of the expenses on the financial statements. 12 Under FERSA, the Executive
Director is charged with prescribing regulations governing the TSP's
allocation of net earnings, net losses, and administrative expenses to
participants' accounts. In prior accounting periods, the TSP had recorded
administrative expenses on its financial statements and reduced
participant accounts for the expenses when incurred.

The effect of not concurrently allocating the expenses attributable to the
system write- down to individual accounts was that each then- existing
participant account was overstated by a pro rata amount, and was thus not
the most conservative

11 The TSP classified the $41 million impairment loss as administrative
expenses on its financial statements since the amount was considered
immaterial in relation to the TSP*s total assets of about $100. 6 billion.

12 See 5 U. S. C. S: 8439( a)( 3) and 5 C. F. R. S: 1645. 4.

GAO- 03- 827R Accounting for TSP Costs Page 7 treatment available.
Accounting guidance 13 we reviewed related to private pension

plans and another defined contribution plan service provider 14 we
contacted stated that the sum of participant accounts should be equal to
total net assets. Under this approach, the TSP loss should have been
allocated to accounts when the loss occurred. However, neither the
guidance nor the other service provider offered any insights related to
allocation of expenses when such expenses might be recovered as a result
of pending litigation.

The decision not to allocate the expenses when the loss occurred, as was
discussed with the Board and documented in the February, April, and May
2002 minutes of the Board meetings, was based on the belief that it was
preferable to defer allocation until after the outcome of the pending
litigation against the original contractor was resolved. The former
Executive Director expected to prevail in the litigation and stated that
expenses from the failed systems development would be netted against the
anticipated recovery from the contractor. Nonallocation of these expenses
was disclosed in the TSP Fund*s 2001 financial statements, which received
an unqualified audit opinion. In a June 2002 letter, DOL suggested that
the TSP obtain competent advice concerning the propriety of the
nonallocation procedure disclosed in the financial statements. The TSP
requested that another external auditing firm review the accounting
treatment; that firm reported in August 2002 that the treatment was
reasonable.

We were unable to locate any specific guidance on the proper accounting
treatment in cases for which expenses incurred by a defined contribution
plan may be recovered through a pending lawsuit. The AICPA*s Audit and
Accounting Guide,

Audits of Employee Benefit Plans (category B guidance in the GAAP
hierarchy), which provides accounting and auditing guidance for private
sector defined benefit and defined contribution plans, states that
individual participants* account information *should necessarily be in
agreement with the aggregate participant account information contained in
the basic books and records.* Applying this criterion, the $41 million
should have been allocated to participants* accounts when the loss
occurred. However, this guidance applies to private sector plans and not
federal plans such as the TSP. Instead, under FERSA, the Executive
Director is charged with prescribing regulations governing the TSP's
allocation of administrative expenses to participants' accounts. We did
not find anything in the guidance or the TSP regulations to suggest that
the accounting treatment should be different depending on any unusual
circumstances, such as situations involving pending litigation with a
potential recovery.

Since this accounting event was unusual, we contacted another large
defined contribution plan service provider to determine what it might have
done in a similar situation. The large defined contribution plan we
contacted has net plan assets of approximately $140 billion. The
representative we spoke with explained that that plan had never been in a
similar situation but that the plan allocates all expenses and investment
gains and losses to plan participants daily. Most of this plan*s expenses

13 The accounting guidance we reviewed included the AICPA*s Audit and
Accounting Guide, Audits of Employee Benefit Plans.

14 The other service plan provider we contacted is also a large defined
contribution plan with approximately $140 billion in net plan assets
available for benefits.

GAO- 03- 827R Accounting for TSP Costs Page 8 are for services provided by
third parties, and the plan remits payment for these services each day.

Notwithstanding the lack of specific guidance on the proper accounting
treatment of allocating a loss to participant accounts in a defined
contribution plan when there is a pending lawsuit with a potential
recovery, financial accounting concepts suggest that the TSP accounting
treatment was not applied in accordance with the accounting concepts of
consistency and conservatism. According to SFAC 2, accounting treatment
across accounting periods should be consistent in order to increase the
informational value of accounting data. The decision not to allocate the
administrative expenses related to failed systems development as the TSP
had allocated all other administrative expenses when the loss occurred and
in prior accounting periods was inconsistent. In addition, not allocating
the loss to plan participants in 2001 was inconsistent with the financial
statement accounting

treatment. SFAC 2 also addresses the concept of conservatism. The
statement indicates that in determining the appropriate accounting
treatment when there are uncertainties, the preferable method is one that
does not overstate assets or understate expenses and therefore does not
overstate operating results. By recording the loss on the financial
statements, but not allocating administrative expenses related to the
failed systems development, individual plan participants* assets were
overstated and thus did not reflect the most conservative method of
accounting. Given uncertainties inherent in any court action and the fact
that significant numbers of account holders enroll and depart annually, in
our view, allocating the loss to account balances when the loss occurred
would have been more prudent, as well as being acceptable treatment under
GAAP. In particular, allocation would have met two underlying concepts of
accounting* consistency and conservatism.

Because these expenses were not allocated, the sum of all participants*
plan accounts was more than the Net Assets Available for Benefits reported
on the financial statements from when the loss occurred to June 2003 when
the lawsuit was settled. Although the loss in relation to the $100.6
billion fund balance as of December 2001 (approximately .04 percent) is
insignificant, the timing of the allocation to individual accounts may be
sensitive to some plan holders. If the $41 million loss had been allocated
in 2001, plan holders would have been charged approximately onetwentieth
of 1 percent*- or about 41 cents more per $1,000 in their account
balances. Thus, the amounts chargeable to individual accounts would have
been minimal* ranging from virtually nothing for new employees to about
$400 for an account of $1 million. Given that the average account balance
in 2001 was approximately $39,000 (i. e., $100.6 billion in Net Assets
Available for Benefits divided by 2.6 million participants), the average
additional charge for administrative expenses for the year would have been
about $16.

As a result of the settlement between the parties related to the system
development, the TSP recovered approximately $5 million, which partially
offsets the $41 million in previously recorded but unallocated
administrative expenses. We confirmed that the resulting $36 million net
loss was allocated to participants* accounts on June 23, 2003.

GAO- 03- 827R Accounting for TSP Costs Page 9

Conclusion

The financial statement treatment of writing down the failed system
development costs was consistent with GAAP; however, we believe it would
have been prudent to also write down the participants* accounts when the
loss occurred. Not allocating the loss to individual participant accounts
when it occurred was based on a premise of recovery for which there was no
certainty. It also marked a departure from routine cost allocation
practices, and in this situation, a significant number of account holders
have departed from the TSP and were not allocated a share of these costs.
Although we would hope that the Board does not have to face unusual
circumstances similar to this again, it is important that consistency and
conservatism principles and concepts govern future accounting and
allocation decisions.

Recommendation for Executive Action

To be consistent with the financial statement treatment and its routine
allocation practices, in light of uncertainties involving the litigation,
and to prevent a growing percentage of account holders from departing the
TSP and not sharing in the system failure costs, we recommend that the
Federal Retirement Thrift Investment Board require the Executive Director
to allocate the loss as soon as possible to participant accounts in the
most equitable and efficient manner.

Agency Comments and Our Evaluation

In commenting on a draft of our report, the Executive Director discussed
the June 20, 2003, settlement and the resulting $36 million allocation to
participant accounts on June 23, 2003. We verified that the allocation was
made, thus implementing the recommendation in this report.

- - - - - As agreed with your offices, unless you release its contents
earlier, we plan no further distribution of this report until 30 days
after its date. At that time, we will send copies to interested
congressional committees as well as the Executive Director of

the Federal Thrift Retirement Investment Board and the Secretary of Labor.
We will also make copies available to others on request. In addition, the
report will be available at no charge on the GAO Web site at http:// www.
gao. gov.

If you have any questions concerning this report, please contact me at
(202) 512- 6906 or Casey Keplinger at (202) 512- 9323. Heather Dunahoo
also made major contributions to this report.

McCoy Williams Director Financial Management and Assurance

Enclosure

GAO- 03- 827R Accounting for TSP Costs Page 10 Enclosure

Comments from the Federal Retirement Thrift Investment Board (195007)

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