Federal Retirement Thrift Investment Board: Due Diligence Over
Administrative Expenses Should Continue and Be Broadened
(14-MAY-07, GAO-07-541).
The Federal Retirement Thrift Investment Board (FRTIB) is charged
with managing the Thrift Savings Plan (TSP)--a key component of
retirement savings for many federal employees--in the interest of
its participants and beneficiaries. As part of a broader request
on oversight of FRTIB, GAO reviewed (1) the administrative
expenses of FRTIB and key components of these expenses, (2)
whether the administrative expenses of FRTIB are the result of
practices consistent with federal regulations and similar
functions at other agencies, and (3) FRTIB's current method of
benchmarking administrative expenses. GAO reviewed FRTIB's
budgets, audited financial statements, a benchmarking study, and
written responses to questions that GAO submitted. GAO also
reviewed the regulations that guide FRTIB's spending.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-541
ACCNO: A69565
TITLE: Federal Retirement Thrift Investment Board: Due Diligence
Over Administrative Expenses Should Continue and Be Broadened
DATE: 05/14/2007
SUBJECT: Administrative costs
Benchmark testing
Beneficiaries
Federal employee retirement programs
Federal employees
Federal employees retirement system
Federal regulations
Program evaluation
Retirement
Thrift savings plan
Expenses
Government agency oversight
Thrift Savings Plan
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GAO-07-541
* [1]Results in Brief
* [2]Background
* [3]Trends and Composition of Administrative Expenses
* [4]Overview of Individual Categories of Expenses and Comparison
* [5]Services Purchased from Private Contractors and Other Federa
* [6]Miscellaneous Expensess
* [7]Compensation
* [8]Rent
* [9]Travel
* [10]FRTIB's Current Practice of Benchmarking Against the Cost of
* [11]Conclusions
* [12]Recommendations for Executive Action
* [13]Agency Comments and Our Evaluation
* [14]Appendix I: Objectives, Scope, and Methodology
* [15]Appendix II: Comments from the Federal Retirement Thrift Inv
* [16]GAO Comments
* [17]Appendix III: GAO Contact and Staff Acknowledgments
* [18]GAO Contact
* [19]Acknowledgments
* [20]Order by Mail or Phone
Report to the Ranking Member, Committee on Oversight and Government
Reform, House of Representatives
United States Government Accountability Office
GAO
May 2007
FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
Due Diligence Over Administrative Expenses Should Continue and Be
Broadened
GAO-07-541
Contents
Letter 1
Results in Brief 2
Background 4
Overview of Individual Categories of Expenses and Comparison of Expenses
Against Other Agencies and Federal Regulations 10
Miscellaneous Expenses 14
FRTIB's Current Practice of Benchmarking Against the Cost of Participating
in Private Sector 401(k) Plans Offers a Limited Means of Evaluating
Administrative Expenses 20
Conclusions 21
Recommendations for Executive Action 22
Agency Comments and Our Evaluation 22
Appendix I Objectives, Scope, and Methodology 25
Appendix II Comments from the Federal Retirement Thrift Investment Board
27
Appendix III GAO Contact and Staff Acknowledgments 35
Figures
Figure 1: Total Administrative Expenses of FRTIB, Fiscal Years 2000-2006 8
Figure 2: Expense Categories Used in This Report 9
Figure 3: Administration Expenses in FRTIB's Budget, Fiscal Year 2006 10
Figure 4: Services Purchased from Private Contractors and Other Federal
Agencies, Fiscal Years 2000-2006 11
Figure 5: Miscellaneous Expenses, Fiscal Years 2000-2006 14
Figure 6: Compensation, Fiscal Years 2000-2006 16
Figure 7: Rent, Fiscal Years 2000-2006 17
Figure 8: Travel Expenses, Fiscal Years 2000-2006 19
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separately.
United States Government Accountability Office
Washington, DC 20548
May 14, 2007
The Honorable Tom Davis
Ranking Member
Committee on Oversight and Government Reform
House of Representatives
The Thrift Savings Plan (TSP)--created in 1986--is a key component of the
Federal Employees' Retirement System (FERS). TSP holds about $200 billion
in retirement assets for more than three and a half million
participants.^1 It is managed by the Federal Retirement Thrift Investment
Board (FRTIB), an independent agency in the executive branch governed by
five Presidentially appointed board members. Similar to private sector
401(k) pension plans, TSP allows federal employees to contribute a portion
of their current compensation through payroll deductions and invest among
a menu of options.
As part of a broader request on the oversight of FRTIB, you asked that we
examine the administrative expenses of FRTIB. Specifically, we reviewed
(1) the administrative expenses of FRTIB and the key components of these
expenses, (2) whether the administrative expenses are the result of
practices consistent with applicable federal regulations, and (3) FRTIB's
current method of benchmarking administrative expenses.
To identify the administrative expenses of FRTIB, we reviewed the
President's budget, FRTIB's audited financial statements, FRTIB's budget
documents from board meeting notes and FRTIB's written responses to
questions we submitted.^2 To analyze the components of administrative
expenses, we used the projections contained in FRTIB's annual budget
documents.^3 FRTIB officials confirmed that these projections were
analogous to what appears in budget documents for other agencies as
"actuals." For the purposes of this review, and consistent with how FRTIB
presented its budget to the board members for approval, we considered all
expenses other than investment expenses to be administrative. We used
budget object classifications to categorize FRTIB's administrative
expenses.^4 These categories can broadly fit into six groups: services
purchased from private contractors, services purchased from government
agencies, miscellaneous expenses, compensation, rental of space, and
travel. There is some overlap in the descriptions. For example, the
mission-related telephone service for the call centers should fall under
services purchased from private contractors rather than miscellaneous
expenses. However, because FRTIB budget data aggregate these expenses with
charges such as postage and other miscellaneous expenses, we were unable
to isolate the specific portion related to telephone services. To judge
whether the administrative expenses of FRTIB are the result of practices
consistent with federal regulations, we identified the regulations that
guide FRTIB's expenses for activities, such as acquisition, and reviewed
the Department of Labor's audits of FRTIB. To analyze FRTIB's current
benchmarking practices, we reviewed a benchmarking study cited by FRTIB,
notes from board meetings, and our relevant related work. We conducted our
work in Washington, D.C. between October 2006 and May 2007 in accordance
with generally accepted government auditing standards. Appendix I
describes the scope and methodology of our work in greater detail.
^1 Asset and participant numbers are as of November 2006.
^2 The numbers we use from FRTIB's budget documents were prepared late in
the fiscal year, which ends September 30.
^3 Since the financial statements do not disaggregate data sufficiently
for our purposes, we were not able to use them. We used projections
because the board does not report actual expenses in its budget documents
after the fiscal year is complete.
Results in Brief
FRTIB's administrative expenses ranged from a peak of $101 million in
fiscal year 2000 to $83 million estimated for fiscal year 2006. During
this time period, only the fiscal year 2001 administrative expenses were
lower than the 2006 estimated expenses, and that reflected the termination
of a contract with American Management Systems to develop a record-keeping
system. However, in real terms, FRTIB's administrative expenses in 2006
were at a 7-year low. Throughout this period more than half of FRTIB's
administrative expenses went towards purchasing services from outside
entities--private contractors and other government agencies. This was
followed by miscellaneous expenses, compensation, rent, and travel.
For its administrative activities, FRTIB has established practices that
are consistent with federal regulations. However, it has opportunities to
continue exercising due diligence. FRTIB is bound by federal regulations
that govern acquisition, compensation, and travel. There are some areas,
however, that suggest opportunities for future cost savings. The amount
that FRTIB pays per square foot for rent is consistent with average rates
that the General Services Administration (GSA) cites for nearby available
properties. However, FRTIB rents more space per employee than GSA
recommends. This is in part a reflection of the personnel downsizing that
has occurred in recent years. Consistent with good management practices,
FRTIB has indicated that it will be looking into the possibility of
consolidating its space in 2007. Additionally, telecommunications provide
opportunities to reduce the travel expenses of board members traveling to
Washington, D.C. for monthly meetings.
^4 Budget object classifications are uniform classifications identifying
the obligations of the federal government by the types of goods or
services purchased (such as personnel compensation, supplies and
materials, and equipment) without regard to the agency involved or the
purpose of the programs for which they are used.
FRTIB's current method of benchmarking TSP participants' investment fees
against those charged by 401(k) plans offers incomplete information to
assess administrative expenses. The investment fee is very important for
the participants--and the TSP compares favorably on this measure. However,
looking only at an aggregate measure--whether the investment fee or the
total administrative costs--provides insufficient information to judge
whether individual activities, such as purchased call center services from
private contractors, are being conducted either to achieve the best
performance or in the most efficient manner. Benchmarking by individual
activity permits an organization to compare the performance of its
individual processes/activities--and the way those processes/activities
are conducted--with either standards or "best in class" in a specific
activity. Benchmarking provides a feedback mechanism for continuous
improvement.
To ensure that the FRTIB continues to operate as efficiently as possible,
we recommend that the board direct the Executive Director to continue
monitoring both the square footage and the cost per square foot of office
space in the future to ensure that it is appropriate for its needs. In
addition, FRTIB should consider expanding its use of telecommunications
for its monthly board meetings, as appropriate. Finally, to provide the
board with the most complete and relevant information with which to assess
the expenses and performance of administrative functions of FRTIB, we
recommend that the board direct the Executive Director to move beyond the
comparison of participant costs against those for other 401(k) plans to
benchmarking cost and performance of individual activities--either against
similar activities elsewhere or against validated criteria or standards,
such as federal regulations.
In comments on a draft of this report, FRTIB partially concurred with our
findings and recommendations. While they agreed in concept with our
recommendations, they stated that in-person board meetings are an
extremely important aspect of fulfilling their fiduciary responsibilities
and that the minimal travel costs associated with this decision were far
outweighed by the benefits derived from in-person meetings. Our report
acknowledges that in-person meetings are valuable and may be important for
some discussions. Our recommendation merely states that FRTIB should
consider expanding its use of telecommunications as appropriate.
FRTIB also concurred in concept with the use of benchmarking costs in
appropriate situations. However, it noted that rather than separately
benchmarking each component of its overall costs, it relies on the
competitive procurement process to obtain outstanding performance for TSP
participants at competitive rates. FRTIB's comments reflect a
misunderstanding of our point. Our report does not suggest that the
competitive bidding process be abandoned--we concur that it helps assure
good performance at competitive costs. Nor do we dispute that FRTIB's
processes have led to outstanding performance for TSP participants at
competitive costs. Nonetheless, benchmarking is widely accepted in the
private sector and in much of the public sector as a "best practice" in
evaluating performance of specific activities. It offers a way to compare
a specific function or activity to the same or similar one in other
businesses or agencies. The essence of benchmarking is the process of
identifying the highest standards of excellence for products, services, or
processes, and then making the improvement necessary to reach those
standards--commonly known as best practices. We have developed a body of
work--best practice reviews--that provides guidance to help public sector
organizations become world-class.
Written comments from FRTIB are included and addressed in appendix II. We
have incorporated changes as a result of FRTIB's comments, as appropriate.
Background
The Federal Employees' Retirement System Act of 1986 (FERSA)^5 created the
Thrift Savings Plan (TSP), a retirement savings plan similar to
private-sector 401(k) plans, as a key component of the Federal Employees'
Retirement System (FERS) for federal workers. Membership is open to
federal and postal employees, members of Congress and their staff, members
of the uniformed services, and members of the judicial branch.
Participants are eligible for deferred federal (and in certain cases,
state) income taxes on employee contributions and earnings. For employees
covered by FERS, agencies make contributions to employees' TSP accounts.
Agencies automatically contribute 1 percent of an employee's salary during
each pay period to the TSP. Agency contributions for any employee who
remains employed by the federal government until "vested" become part of
that employee's retirement savings.^6 Some employees are vested after 2
years of service; all other employees are vested at the end of 3 years of
service. Agencies also match FERS employee contributions to the TSP up to
a total of 5 percent of the employee's basic pay. As of November 2006,
FRTIB managed about $200 billion in assets for 3.5 million participants
and beneficiaries.^7
5 Pub. L. No. 99-335, 100 Stat. 514 (June 6, 1986). For details on defined
contribution plans, see GAO, Federal Pensions: DOL Oversight and Thrift
Savings Plan Accountability, [21]GAO-03-400 (Washington, D.C.: Apr. 23,
2003).
FRTIB--which administers the TSP--is an independent agency in the
executive branch. As of the close of fiscal year 2006, FRTIB employed
about 65 people. Some functions--such as enrollment and training of
participants--are handled by other federal agencies rather than FRTIB.
These other agencies' payroll and personnel offices act as the points of
contact for TSP participants; these offices may assist with enrollment and
alteration of contribution percentages. Additionally, the Office of
Personnel Management has established a training program for retirement
counselors of federal agencies. FRTIB is overseen by five Presidentially
appointed board members and is charged with establishing policies for the
investment and management of TSP funds and with creating administrative
policies for the TSP.
FRTIB's administrative expenses are funded by (1) forfeited agency
contributions and (2) assessments against net earnings of the Thrift
Savings Fund. The 1 percent automatic agency contribution for FERS
employees who leave before vesting are forfeited to the TSP. To finance
the remainder of the FRTIB's administrative expenses, FRTIB assesses fees
against the net earnings of the Thrift Savings Fund. FRTIB is required by
law to use the forfeited funds before assessing fees against the net
earnings of the Thrift Savings Fund.^8 In both 2004 and 2005 these
forfeited agency contributions covered about 13 to15 percent of
administrative expenses; assessments against net earnings of the Thrift
Savings Fund were set at a level to cover the remaining 85 to 87 percent.
^6 Only employees who are "vested" are entitled to keep the contributions
that an agency has made on their behalf. In other words only agency
automatic contributions are affected by vesting; the participant is always
vested in his or her matching contributions.
^7 The investment options in the TSP are the G fund, a government
securities fund; the F Fund, a fixed income securities fund; the C Fund, a
common stock investment fund; the S Fund, a small capitalization stock
investment fund; the I Fund, an international investment fund; and the L
Funds, a series of five life-cycle funds. The L Funds are not separate
funds; they merely consist of asset allocation mechanisms of the existing
five TSP funds.
Outside contractors manage all investment funds other than the G fund.
FRTIB has contracted with Barclays Global Investors (Barclays) to manage
the F, C, S, and I funds. The L funds--which were introduced in August
2005--were designed by another private company, Mercer Investment
Consulting. Consistent with generally accepted accounting principles,
FRTIB's financial statements list these investment expenses as adjustments
to investment income; they are not included in the line item for
administrative expenses.
The cost to participate in a retirement fund is measured as an expense
ratio of the total administrative expenses charged to a fund during a
specific time period, divided by that fund's average balance for that
specific time period.^9 According to a 2005/2006 Deloitte Consulting
401(k) benchmarking survey, the average expense ratio for 401(k) plans was
75 basis points.^10 In comparison, FRTIB charged participants only 4 basis
points in fiscal year 2006.
According to FRTIB, it reviews its administrative expenses regularly
through a variety of means. First, an independent entity audits
administrative expenses as part of a larger financial audit of FRTIB.
Second, the Department of Labor examines administrative expenses as part
of its periodic FRTIB Administrative Staff review, which it conducts
approximately once every 3 years. Third, as required by statute, board
members prepare and submit to the President and Congress an annual
budget.^11 Fourth, each month since 2003, FRTIB has provided monthly
reports to the Executive Director for review. Lastly, according to FRTIB,
it contracts for all major TSP administrative services. Because the
maximum contract length is 5 years, every major activity undergoes review
and competition at a minimum of every 5 years.
^8 5 U.S.C. SS 8432(g), 8437(d).
^9 This expense ratio is expressed in basis points, which are equal to .01
percent of the cost.
^10 Deloitte Consulting, LLP, Annual 401(k) Benchmarking Survey, 2005/2006
Edition. Available at:
http://www.deloitte.com/dtt/article/0%2C1002%2Ccid%25253D124276%2C00.html
(Accessed Feb. 20, 2007).
Trends and Composition of Administrative Expenses
FRTIB's administrative expenses ranged from a peak of $101 million in
fiscal year 2000 to $83 million estimated for fiscal year 2006. During
this time period, only the fiscal year 2001 administrative expenses were
lower than the 2006 expenses, and that reflected the termination of a
contract with American Management Systems to develop a record-keeping
system, which will be discussed in more detail below. However, in real
terms, FRTIB's administrative expenses in 2006 were at a 7-year low. (See
fig. 1 below).
^11 5 U.S.C. S 8472(i).
Figure 1: Total Administrative Expenses of FRTIB, Fiscal Years 2000-2006
Note: Travel expenses--which have been between .10 percent and .24 percent
of administrative expenses from fiscal years 2000 through 2006--are not
included in the graph above because they are too small to be visually
apparent. Investment fees paid to Barclays and Mercer Investment
Consulting are not included in this graph because generally accepted
accounting principles require these expenses to be offset against
investment income and therefore are not classified as administrative
expenses for financial reporting purposes.
There is no standard governmentwide definition of administrative expenses.
For the purposes of this review, and consistent with how FRTIB presented
its budget to the board for approval, we considered all expenses other
than investment expenses to be administrative.
FRTIB purchases most of its administrative services from outside entities.
Until 2005 these were purchased primarily from government agencies--99
percent of which were record-keeping and call center services provided by
the National Finance Center. During fiscal years 2005 and 2006 the
National Finance Center terminated its contracts with FRTIB, which began
purchasing these services from a private contractor. The only remaining
major services purchased from another government agency are personnel and
payroll services provided by the U.S. Department of the Interior.
As discussed before, we used budget object classifications to categorize
FRTIB's administrative expenses into six broad groups.^12 Figures 2 and 3
describe the categories and show the breakout of these expenses in fiscal
year 2006.
Figure 2: Expense Categories Used in This Report
o Services purchased from private contractors is comprised of the
object classes of consultants and commercial contracts. Some of the
services that FRTIB purchases through contracts are record-keeping and
services provided for data and call centers. This does not include fees
paid to manage investment accounts.
o Services purchased from other government agencies is comprised of the
object classes of NFC and other government services. Some of these
services are payroll and personnel services provided by the Department
of the Interior.
o Miscellaneous expenses is comprised of the object classes of
communications, utilities, and miscellaneous charges; printing;
supplies and materials; transportation of things; and furniture and
equipment. The subcategory of communications, utilities, and
miscellaneous charges is primarily comprised of postage, delivery
charges, and telephone service, according to FRTIB. We included
mission-related telephone service for call centers in this category
instead of services purchased from private contractors because the
aggregated data provided by FRTIB did not permit us to isolate these
charges from other miscellaneous expenses.
o Compensation is comprised of full and part-time staff salaries, as
well as benefits.
o Rent is solely comprised of FRTIB's rental payments.
o Travel is comprised of FRTIB staff and TSP board travel.
Source: GAO analysis.
^12 As discussed earlier, we used budget data because FRTIB's financial
statements did not disaggregate data sufficiently for our purposes. Budget
object classifications are uniform classifications identifying the
obligations of the federal government by the types of goods or services
purchased (such as personnel compensation, supplies and materials, and
equipment) without regard to the agency involved or the purpose of the
programs for which they are used.
Figure 3: Administration Expenses in FRTIB's Budget, Fiscal Year 2006
Overview of Individual Categories of Expenses and Comparison of Expenses Against
Other Agencies and Federal Regulations
For its administrative activities, FRTIB has established practices that
are consistent with federal regulations. However, it has opportunities to
achieve cost savings. To purchase services and goods, FRTIB is required to
follow the Federal Acquisition Regulation (FAR) and employee compensation
is governed by federal pay schedules. For travel, FRTIB is bound by
federal travel regulations. However, this is one place where opportunities
may exist to reduce travel expenses by holding monthly board member
meetings by teleconference where appropriate. FRTIB leases its own space
directly rather than going through GSA. Although the cost per square foot
for its headquarters is comparable to average rates that GSA cites for
nearby available properties, the amount of space FRTIB rents is greater
per employee than GSA recommends.^13
13 To be consistent with the budget documents, we used current year
dollars throughout the report. We confirmed that the analysis and
conclusions would not change if dollars were adjusted for inflation.
Services Purchased from Private Contractors and Other Federal Agencies
The amount that FRTIB spends purchasing services from other entities is at
a 7-year low.^14 (See fig. 4 below.)
Figure 4: Services Purchased from Private Contractors and Other Federal
Agencies, Fiscal Years 2000-2006
Since most administrative services are purchased from outside entities, it
is not surprising that declines in spending on services purchased from
outside entities--both private contractors and other federal
agencies--parallel the declines in administrative expenses during the same
period.
^14 The "services purchased from other entities" category includes two
subcategories: private contractors and services purchased from other
government agencies. Private contractors is comprised of the object
classes of consultants and commercial contracts. Some of the services that
FRTIB purchases through contracts are record-keeping and services provided
for data and call centers. This does not include fees paid to manage
investment accounts. Services purchased from other government agencies is
comprised of the object classes of National Finance Center and other
government services. Some of these services are payroll and personnel
services provided by the Department of the Interior.
Although most administrative services are purchased from outside entities,
the allocation between private contractors and federal agencies has
changed over time. As figure 3 shows, from fiscal year 2000 through fiscal
year 2004 FRTIB spent more money purchasing services from other government
agencies than from private contractors. In shifting the acquisition of
call center services from the National Finance Center to a private
contractor in 2005, the balance was reversed. In 2006, the National
Finance Center terminated all remaining services that it was providing to
FRTIB. With the termination of the National Finance Center contracts, the
only remaining major services purchased from another government agency
were payroll and personnel services provided by the U.S. Department of the
Interior.
Another change within FRTIB's expenses for services purchased from private
contractors occurred in 2001. In 2001, FRTIB terminated a contract with
American Management Systems, Inc., a private sector firm hired to design,
develop, and implement a record-keeping system for the TSP that would
provide daily investment updates.^15 FRTIB then hired Materials,
Communication & Computers, Inc. to complete the work that American
Management Systems was unable to complete.
Although we did not review the reasonableness of FRTIB's individual
contracts, we reviewed its process for acquiring goods and services.
Overall, it follows a process that seeks to assure reasonable expenses.
First, FRTIB is subject to the FAR--which governs acquisition activities.
Second, FRTIB has one contract specialist and one purchasing agent on
staff to ensure that acquisition occurs according to statute and
regulation. Additionally, other staff are responsible for management and
oversight of the individual contracts. For example, the agency's Chief
Information Officer is responsible for managing a record-keeping contract
and the Director of the Office of Participant Services is responsible for
managing the two call center contracts. Each of these individuals monitors
contracts through site visits and remotely.^16 FRTIB plans to send agency
directors for additional monitoring site visits in 2007. The travel
expenses for these monitoring visits are included under travel and
discussed later in this report.
^15 For more information about FRTIB's termination of the American
Management Systems contract, see GAO, Thrift Savings Plan: Delayed
Allocation of Failed System Development Costs to Participant Accounts,
[23]GAO-03-827R (Washington, D.C.: July 22, 2003).
The Department of Labor provides additional oversight of FRTIB's contracts
through its periodic audits. In 2005, the Department of Labor reported
that FRTIB had reexamined service providers to find ways to increase
services while decreasing costs. For example, FRTIB found that it could
cut expenses in half by transferring information technology operations
from the National Finance Center to SI International, a private
contractor. The Department of Labor reviewed one call center in August
2006 and, according to FRTIB, the department is also planning to review
another call center service contract in 2007.
^16 For more information about call center monitoring, see GAO, Federal
Contact Centers: Mechanism for Sharing Metrics and Oversight Practices
along with Improved Data Needed, [24]GAO-06-270 (Washington, D.C.: Feb. 8,
2006).
Miscellaneous Expensess
In the years since 2003, a variety of factors have led to increased
miscellaneous expenses.^17 (See fig. 5 below.)
Figure 5: Miscellaneous Expenses, Fiscal Years 2000-2006
In fiscal year 2004, miscellaneous expenses jumped to about $14 million,
in part because FRTIB updated aging software and hardware. Second, in
fiscal year 2005 FRTIB's printing expenses increased from about $1 million
to about $11 million. FRTIB told us that this was a one-time extra expense
to print information about a series of new TSP funds, the Lifecycle (L)
funds. Lastly, in fiscal year 2006, FRTIB projected a ninefold increase
from about $1 million to about $9 million in expenses for communications.
This was to pay for providing information to TSP plan participants about
new passwords and account numbers to replace the use of Social Security
numbers in the system. FRTIB also said that this spike would permit
increased communications about the L funds. Although overall miscellaneous
expenses began to decrease in 2006, it is unclear if expenses will
continue to decrease or remain elevated.
^17 The miscellaneous expenses category is comprised of the object classes
of communications, utilities, and miscellaneous charges; printing;
supplies and materials; transportation of things; and furniture and
equipment, many of which are purchased from outside entities. The
subcategory of communications, utilities, and miscellaneous charges is
primarily comprised of postage, delivery charges, and telephone service,
according to FRTIB. There is some overlap in the descriptions. For
example, the mission-related telephone service for the call centers should
fall under services purchased from private contractors rather than
miscellaneous expenses. However, because FRTIB budget data aggregate these
expenses with charges such as postage and other miscellaneous expenses, we
were unable to isolate the specific portion related to telephone services.
Although we did not review FRTIB's individual contracts, it is required to
follow the same regulations as other federal agencies regarding
acquisition. As discussed above, FRTIB is required to follow the FAR and
is routinely audited by the Department of Labor.^18 Also, FRTIB has the
ability to purchase goods through GSA. Although GSA does not guarantee the
lowest price possible, use of GSA's Federal Acquisition Service ensures
that the prices paid by FRTIB are reasonable and generally consistent with
the prices paid by other agencies.^19
18 In a 2003 audit of FRTIB's procurement practices, the Department of
Labor had no recommendations about ways to improve procurement practices
and controls for compliance with FERSA's fiduciary and prohibited
transaction practices.
^19 For more discussion about the prices of the Federal Acquisition
Service, please refer to GAO, Contract Management: Opportunities to
Improve Pricing of GSA Multiple Award Schedules Contracts, [25]GAO-05-229
(Washington, D.C.: Feb. 11, 2005).
Compensation
FRTIB's compensation expenses have been relatively stable over the past 7
years. (See fig. 6 below.) ^20
Figure 6: Compensation, Fiscal Years 2000-2006
Note: Compensation includes salaries and benefits.
FRTIB compensates employees according to federal pay schedules. Currently,
FRTIB employs about 65 staff members, the majority of whom are paid
according to the General Schedule. About 28 percent of these employees are
compensated at or below the GS-11 level. Accordingly, to the extent that
the composition of FRTIB's staff is appropriate, compensation costs appear
reasonable. The Executive Director is compensated according to level three
of the Executive Schedule.^21 Additionally, 7 staff members are part of
the Senior Executive Service.^22 These Senior Executive Service positions
are all approved by the Office of Personnel Management. Each of the 5
board members--who are not otherwise officers or employees of the federal
government--are compensated at the daily rate of basic pay for level IV of
the Executive Schedule for each day the board member is engaged in
performing a function for FRTIB.^23
20 The compensation category includes salary and benefits.
^21 5 U.S.C. S5314.
^22 FRTIB had an additional five open senior executive positions available
as of September 2006.
Rent
FRTIB's total rent expenses remained relatively constant until fiscal year
2005.^24 (See fig. 7 below.) Rent expenses dropped in 2005 and increased
again in 2006 coinciding with the lease of an emergency facility.
Figure 7: Rent, Fiscal Years 2000-2006
The majority of FRTIB's rental expenses are associated with renting a
headquarters office in Washington, D.C. FRTIB rents its own office space,
which means it does not need to go through GSA. However, GSA rents space
on behalf of many federal agencies and thus has a rich database of local
rent prices. Accordingly, we compared the amount that FRTIB pays per
square foot in fiscal year 2007 with the average rates that GSA cited for
nearby available properties. At $28 per square foot in 2007, the per
square foot rental rate--which includes operating expenses such as
utilities, building security, maintenance, and cleaning--is in line with
average market rates for nearby available properties with comparable
square footage.
^23 5 U.S.C. S 8476(d)(1).
^24 The rent category is solely comprised of rental payments.
Currently, FRTIB rents more than 47,000 square feet. At its present staff
size, FRTIB rents more space per person than GSA would recommend. Based on
FRTIB's mission, a GSA official told us that FRTIB's space needs are
likely similar to a model that proposes 368 rentable square feet per
person. At its current staffing level of 65 employees, FRTIB's
headquarters provides more than 670 square feet per person, about 300
square feet more per person than GSA would recommend. This calculation,
however, is somewhat misleading because of the recent personnel downsizing
at FRTIB. In the 7 years covered by our review, employment at FRTIB peaked
at 111 staff members. Yet, even at its peak staffing, FRTIB rented about
430 square feet per person, about 60 square feet more per person than GSA
would recommend. In light of recent declines in staff numbers, and
consistent with good management practices, at a September 2006 board
meeting FRTIB staff indicated that they would look into consolidating
space at the headquarters location.
Travel
Over the past 7 fiscal years, travel expenses varied considerably, ranging
in current year dollars from a low of about $80,000 in fiscal year 2001 to
a high of about $255,000 in fiscal year 2003.^25 In fiscal year 2006
travel expenses fell slightly above the middle of this range at about
$200,000. (See fig. 8.)
Figure 8: Travel Expenses, Fiscal Years 2000-2006
FRTIB travel is governed by federal travel regulations. The fiscal year
2006 travel we examined was consistent with these regulations and appears
reasonable given federal daily allowances for lodging, meals, and
incidental expenses and current cost trends for common carriers.^26
The largest portion of fiscal year 2006 travel was for contract oversight,
about 38 percent of which was associated with the one-time expense of
transitioning the call center from the National Finance Center to a new
contractor, SI International. Although about 20 percent of FRTIB's trips
were to other federal agencies to conduct training and make presentations,
since the host agency often paid for these trips, they accounted for only
about 5 percent of travel expenses.
^25 The travel category contains travel expenses for FRTIB staff and the
five board members.
^26 FRTIB governs travel by board members and employees under FRTIB
Directive 10D and in accordance with Federal Travel Regulations (FTR). 5
U.S.C. S5701-5760, 41 C.F.R. Ch. 301-304.
In fiscal year 2006, FRTIB spent about $27,000 to bring board members to
Washington, D.C.^27 These expenses are associated with travel from
locations as disparate as Alaska and New York, and require, in general, a
2-night stay in Washington, D.C. Although FRTIB reports that it has not
issued any first or business class tickets to any employee, it has on
occasion issued a first or business class ticket to a board member
traveling from Alaska when coach fares were not available. Although the
law requires monthly meetings, and the practice has generally been to meet
in person, on occasion members of the board have participated in these
meetings by telephone--some more than others. Meetings that occur through
telecommunications rather than in person save money for FRTIB and
sometimes may be appropriate.
FRTIB's Current Practice of Benchmarking Against the Cost of Participating in
Private Sector 401(k) Plans Offers a Limited Means of Evaluating Administrative
Expenses
FRTIB's current method of benchmarking its costs by comparing the fees
assessed to TSP participants against the fees assessed to participants in
private 401(k) plans provides important but incomplete information about
its administrative costs and efficiency. This measure is very important
for participants--and the TSP compares favorably on this measure. It does
not, however, provide a complete picture of administrative expenses or
sufficient information for oversight of administrative activities.^28
Looking only at an aggregate measure--whether the investment fee or the
total administrative costs--provides insufficient information to judge
whether individual activities are being conducted either to achieve the
best performance or in the most efficient manner. Disaggregating FRTIB's
activities and benchmarking those individual activities against similar
ones elsewhere would provide the board a better picture of the performance
and efficiency of these activities. Although no other federal agency
performs the same mission as FRTIB, the individual activities it performs
to fulfill that mission can be found in other agencies and outside
government. For example, other agencies--such as the Centers for Disease
Control and Prevention and GSA--purchase call center services from private
contractors. Benchmarking by individual activity permits an organization
to compare the performance of its individual processes/activities--and the
way those processes/activities are conducted--with either standards or
"best in class" in a specific activity. Benchmarking provides a feedback
mechanism for continuous improvement.^29
27 FERSA states that the board "shall meet--(1) not less than once during
each month; and (2) at additional times at the call of the Chairman." 5
U.S.C. 8476(a).
^28 Private sector 401(k) plans report the amount charged to the investor
for participation in the investment fund; for most plans this is not a
measure of administrative expenses.
Conclusions
FRTIB's falling administrative expenses appear to reflect an overall
commitment to manage the TSP in the interest of the participants and
beneficiaries of TSP. Consistent with this commitment FRTIB is looking
into consolidating its office space. We also note that on occasion board
members have elected to participate in the monthly meetings by telephone.
The use of telecommunications has increased throughout both government and
the private sector. Although in-person meetings are valuable and may be
important for some discussions, increasing the use of telecommunications
for monthly meetings could further reduce expenses. For example, if the
board found it appropriate to meet monthly by teleconference and quarterly
in person, travel costs would be reduced.
Since FRTIB follows practices that seek to constrain expenses within
federally regulated parameters, its success in maintaining low expenses is
not surprising. In fact, FRTIB's fiscal year 2006 administrative expenses
were near a 7-year low. Moving beyond comparing costs charged to TSP
participants with costs charged by other 401(k) plans to benchmarking the
cost and performance of individual activities would be consistent with a
commitment to continuous improvement and being alert to opportunities to
further improve performance and/or reduce costs. It would also assist the
board as it seeks to assure that the TSP is managed in the interest of its
participants and beneficiaries.
^29 For a discussion and examples of benchmarking by administrative
function, see GAO, Managing for Results: Critical Actions for Measuring
Performance, [26]GAO/T-GGD/AIMD-95-187 (Washington, D.C.: June 20, 1995);
Public-Private Partnerships: Key Elements of Federal Building and Facility
Partnerships, [27]GAO/GGD-99-23 (Washington, D.C.: Feb. 3, 1999);
Management Reform: Agency Initial Efforts to Restructure Personnel
Operations, [28]GAO/GGD-98-93 (Washington, D.C.: July 13, 1998).
Recommendations for Executive Action
To ensure that FRTIB continues to operate as efficiently as possible, we
recommend that the board direct the Executive Director to continue
monitoring both the square footage and cost per square foot of office
space in the future to ensure that it is appropriate for its needs. In
addition, FRTIB should consider expanding its use of telecommunications
for its monthly board members' meetings, as appropriate.
To provide the board with the most complete and relevant information with
which to assess the expenses and performance of administrative functions
of FRTIB, we recommend that the board direct the Executive Director to
move beyond the comparison of participant costs against those for other
401(k) plans to benchmarking cost and performance of individual
activities--either against similar activities elsewhere or against
validated criteria or standards, such as federal regulations.
Agency Comments and Our Evaluation
In comments on a draft of this report, FRTIB partially concurred with our
findings and recommendations. While they agreed in concept with our
recommendations, they stated that in-person board meetings are an
extremely important aspect of fulfilling their fiduciary responsibilities
and that the minimal travel costs associated with this decision were far
outweighed by the benefits derived from in-person meetings. However,
consistent with FRTIB's commitment to managing the TSP in the interest of
participants and beneficiaries of TSP, we note that use of
telecommunications offers opportunities to further reduce expenses. Our
report acknowledges that in-person meetings are valuable and may be
important for some discussions. Our recommendation merely states that
FRTIB should consider expanding its use of telecommunications as
appropriate. With respect to its square footage, FRTIB said it would
continue to monitor and assess its office space needs and related costs in
relation to projected staffing levels.
FRTIB also concurred in concept with the use of benchmarking costs in
appropriate situations. However, it noted that rather than separately
benchmarking each component of its overall costs, it relies on the
competitive procurement process to obtain outstanding performance for TSP
participants at competitive rates. FRTIB's comments reflect a
misunderstanding of our point. The report does not suggest that
benchmarking would lead to changes in contracts during the contract
period. Nor does our report suggest that the competitive bidding process
be abandoned--we concur that it helps assure good performance at
competitive costs. Nor do we dispute that FRTIB's processes have led to
outstanding performance for TSP participants at competitive costs. To the
contrary, companies and agencies that are viewed as leaders in their
operations use benchmarking.
Benchmarking is widely accepted in the private sector and in much of the
public sector as a "best practice" in evaluating performance of specific
activities. It offers a way to compare a specific function or activity to
the same or similar one in other businesses or agencies. The essence of
benchmarking is the process of identifying the highest standards of
excellence for products, services, or processes, and then making the
improvement necessary to reach those standards--commonly known as best
practices. We have developed a body of work--best practice reviews--that
provides guidance to help public sector organizations become world-class.
Such benchmarking of best practices could be helpful to FRTIB. For
example, as the term of a contract for call center operations nears
completion and FRTIB considers the design of the successor contract, it
could look at the scope or services, performance measures used and
performance attained, and costs of other excellent call centers in
developing the criteria for that next contract.
In addition to these key comments, FRTIB provided technical comments. The
full written comments from FRTIB are included and addressed in appendix
II. We have incorporated changes as a result of these comments, as
appropriate.
As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution of it until 30 days
from the date of this letter. At that time, we will send copies of this
report to the Executive Director of FRTIB and interested congressional
committees. This report will also be available at no charge on the GAO Web
site at http://www.gao.gov.
Please contact me on (202) 512-9142 if you or your staff have any
questions about this report. Contact points for our Office of
Congressional Relations and Public Affairs may be found on the last page
of this report. Other contacts and staff acknowledgments are listed in
appendix III.
Sincerely yours,
Susan J. Irving
Director, Federal Budget Analysis Strategic Issues
Appendix I: Objectives, Scope, and Methodology
To identify the administrative expenses of the Federal Retirement Thrift
Investment Board (FRTIB) we reviewed the President's budget, FRTIB's
audited financial statements, FRTIB's budget documents from meeting notes
of the board members, and FRTIB's written responses to our questions. To
analyze the components of administrative expenses, we used the projections
contained in the board members' annual budget documents. The numbers we
used from FRTIB's budget documents were prepared late in the fiscal year,
which ends September 30. FRTIB officials confirmed that the projections
were analogous to what appears in budget documents for other agencies as
"actuals." We reviewed FRTIB's audited financial statements for
information about FRTIB's financial contractual commitments. The
administrative expenses listed in the financial statements were not
disaggregated sufficiently for our purposes. As a result, they did not
provide the detail that we needed for our analysis. To be consistent with
the budget documents, we used current year dollars throughout the report.
We confirmed that the analysis and conclusions would not change if dollars
were adjusted for inflation.
To judge whether the administrative expenses of FRTIB are the result of
practices consistent with federal regulations, we identified the
regulations that guide FRTIB's expenses for activities such as
compensating employees. To analyze the applicability of the Federal
Acquisition Regulation (FAR) to FRTIB's acquisition activities, we
reviewed statutory requirements and court cases. We also reviewed GAO
guidance for assessing the acquisition function at federal agencies.^1 To
compare the rent that FRTIB pays for its headquarters office with the
amount that other federal agencies would pay for downtown office spaces we
reviewed FRTIB's current lease. We then compared the parameters of the
lease with a database of properties from the General Services
Administration (GSA). Because GSA rents office space for other agencies,
it has access to a rich database of available properties and current
rents. To review the compensation of FRTIB staff members, we analyzed the
Office of Personnel and Management's Central Personnel Data File, a file
of all personnel actions in the federal government. This allowed us to
identify the pay plans that FRTIB uses to compensate employees, the
positions held by FRTIB staff, as well as actual staffing levels for the
time period covered by our analysis. To analyze travel expenses, we
compared the travel records that FRTIB gave to us for fiscal year 2006 to
expected travel expenses for locations given standard per diem rates and
negotiated air fares. We also reviewed FRTIB's responses to questions we
submitted.
^1 GAO, Framework for Assessing the Acquisition Function at Federal
Agencies, [29]GAO-05-218G (Washington, D.C.: September 2005).
To analyze FRTIB's current benchmarking practices, we reviewed a
benchmarking study cited by FRTIB,^2 notes from the board members'
meetings, relevant GAO work, and FRTIB responses to questions we
submitted.
We conducted our work in Washington, D.C., between October 2006 and May
2007 in accordance with generally accepted government auditing standards.
^2 We reviewed a benchmarking study from Deloitte Consulting, Inc. that
compares the basis points charged by various 401(k) plans.
Appendix II: Comments from the Federal Retirement Thrift Investment Board
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
See comment 1.
See comment 3.
See comment 2.
See comment 4.
See comment 11. Now on p. 10.
See comment 10. Now on pps. 5 and 6.
See comment 9.
See comment 8.
See comment 7.
See comment 6.
See comment 5.
See comment 16.
See comment 17. Now on p. 13.
See comment 15.
See comment 13.
See comment 12. Now on p. 8.
See comment 14. Now on pps. 8 and 9.
GAO Comments
1. Our report states that FRTIB leases its own space directly
rather than going through GSA--we did not indicate nor imply that
FRTIB is required to use GSA for leasing services.
2. Our report acknowledges that in-person meetings are valuable
and may be important for some discussions. However, consistent
with FRTIB's commitment to managing the TSP in the interest of
participants and beneficiaries of TSP, we note that use of
telecommunications offers opportunities to further reduce
expenses. Our recommendation states merely that FRTIB should
consider expanding its use of telecommunications as appropriate.
3. The FRTIB's comments on our benchmarking recommendation reflect
a misunderstanding of our point. Our report notes that
benchmarking should go beyond a comparison of TSP's investment
fees (cost to participants) with those of other 401(k) plans. It
does not suggest that benchmarking would lead to changes in
contracts during the contract period. Nor does our report suggest
that the competitive bidding process be abandoned--we concur that
it helps assure good performance at competitive costs. Further, we
do not dispute that the FRTIB's processes have led to outstanding
performance for TSP participants at competitive costs. Nor should
the mention of call centers as one example of an activity in which
other agencies also engage be read as a criticism of FRTIB's call
center operations. To the contrary, companies and agencies that
are viewed as leaders in their operations use benchmarking.
Benchmarking is widely accepted in the private sector and in much
of the public sector as a "best practice" in evaluating
performance of specific activities. It offers a way to compare a
specific function or activity to the same or similar one in other
businesses or agencies. The essence of benchmarking is the process
of identifying the highest standards of excellence for products,
services, or processes, and then making the improvement necessary
to reach those standards--commonly known as best practices. We
have developed a body of work--best practice reviews--that
provides guidance to help public sector organizations become
world-class.
Such benchmarking of best practices could be helpful to FRTIB. For
example, as the term of a contract for call center operations
nears completion and the FRTIB considers the design of the
successor contract, it could look at the scope or services,
performance measures used and performance attained, and costs of
other excellent call centers in developing the criteria for that
next contract.
4. Our report states that looking only at investment fees offers
an incomplete picture of administrative expenses and that looking
at total administrative expenses in the aggregate provides
incomplete information for judging whether individual activities
are being conducted in the most efficient matter. We did not
discuss or opine on FRTIB's disclosure of administrative expenses.
5. Our report notes that benchmarking should go beyond a
comparison of TSP's investment fees (cost to participants) with
those of other 401(k) plans. It does not suggest that it is
FRTIB's responsibility to ensure that private sector 401(k) plans
adopt similar levels of public disclosure.
6. See comment 3.
7. We agree that telephone services for the call centers are
mission-related services. However, because budget data provided by
the FRTIB aggregates such expenses with charges such as postage
and other miscellaneous expenses, we were unable to separate these
expenses from others in this category. Nonetheless, we have
clarified the report to indicate that expenses associated with
telephone service for call centers, although mission-related, were
included under miscellaneous expenses.
8. We revised the report text as suggested.
9. We revised the report text as suggested.
10. We revised the report text as suggested.
11. We disagree with FRTIB's comment that it is not subject to the
federal procurement rules. First, FRTIB is an executive agency
under 41 U.S.C. S 405(a) and thus subject to the FAR. Moreover, we
are unaware of any, and FRTIB has not identified any, express
exclusion for FRTIB. Second, FRTIB cites as support a 1987
internal memo that states "One of the most important criteria
applied by the courts and agencies, in determining the
applicability of acquisition regulations is the source of funds
being expended." The memo concludes that FRTIB does not pay its
administrative expenses with appropriated funds. In a 2002
contract dispute with one of its contractors, the United States
Court of Federal Claims rejected each one of FRTIB's arguments
that its administrative expenses are not payable out of
appropriated funds.^1 Since the FAR applies to acquisitions by
contract with appropriated funds, and the FRTIB has not addressed
the court's ruling, we stand by the position that FRTIB is subject
to the FAR.
12. We revised the report text as suggested.
13. We revised the report text as suggested.
14. See comment 12.
15. We revised the report text as suggested.
16. See comment 7.
17. Clarified text to indicate it is a call center service
contract.
^1American Management Systems v. United States, 53 Fed. Cl. 525, 529
(2002).
Appendix III: GAO Contact and Staff Acknowledgments
GAO Contact
Susan J. Irving, (202) 512-9142 or [email protected]
Acknowledgments
In addition to the contact named above, Carol Henn, Mallory Barg Bulman,
John P. Stradling, and Farahnaaz H. Khakoo made significant contributions
to this report. Barbara D. Bovbjerg, Tamara E. Cross, Lara Lee Laufer,
Ramona L. Burton, Matthew J. Saradjian, Patrick G. Bernard, Michael R.
Volpe, Adam Vodraska, Andrew J. Stephens, Richard S. Krashevski, Gregory
H. Wilmoth, Donald R. Neff, William T. Woods, and Ruth DeVan also provided
key assistance.
(450554)
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www.gao.gov/cgi-bin/getrpt?GAO-07-541 .
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Highlights of [38]GAO-07-541 , a report to the Ranking Member, Committee
on Oversight and Government Reform, House of Representatives
May 2007
FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
Due Diligence Over Administrative Expenses Should Continue and Be
Broadened
FRTIB's administrative expenses ranged from a peak of $101 million in
fiscal year 2000 to $83 million estimated for fiscal year 2006. Only the
2001 administrative expenses were lower, reflecting the termination of a
key contract. In real terms, FRTIB's administrative expenses in 2006 were
at a 7-year low. Throughout this period more than half of FRTIB's
administrative expenses went towards purchasing services from outside
entities--private contractors and other government agencies. The next
largest share of FRTIB's budget was for miscellaneous expenses, such as
printing and information technology. Additional administrative expenses
were spent on compensation of FRTIB's 65 employees, rent, and travel.
Total Administrative Expenses of FRTIB, Fiscal Years 2000-2006
Note: Travel expenses--which have been between .10 and .24 percent of
expenses--are not included in the graph above because they are too small
to be visually apparent.
FRTIB has established practices that are consistent with federal
regulations--for acquisition, compensation, and travel. There are some
areas, however, that suggest opportunities for future savings. The amount
FRTIB pays per square foot is consistent with average rental rates that
the General Services Administration (GSA) cites for nearby available
properties. However, FRTIB rents more space per employee than GSA would
recommend. Given recent downsizing, FRTIB has begun looking into
consolidating its office space. Additionally, opportunities exist to
reduce the travel expenses of TSP board members traveling to Washington,
D.C.
FRTIB's current method of benchmarking TSP participants' investment fees
against those charged by 401(k) plans is a very important measure for
participants--and the TSP compares favorably on this measure. However,
looking only at an aggregate measure provides insufficient information to
judge whether individual activities are being conducted either to achieve
the best performance or in the most efficient manner. Benchmarking by
individual activity permits an organization to compare its performance
with standards or "best in class" in a specific activity.
The Federal Retirement Thrift Investment Board (FRTIB) is charged with
managing the Thrift Savings Plan (TSP)--a key component of retirement
savings for many federal employees--in the interest of its participants
and beneficiaries. As part of a broader request on oversight of FRTIB, GAO
reviewed (1) the administrative expenses of FRTIB and key components of
these expenses, (2) whether the administrative expenses of FRTIB are the
result of practices consistent with federal regulations and similar
functions at other agencies, and (3) FRTIB's current method of
benchmarking administrative expenses. GAO reviewed FRTIB's budgets,
audited financial statements, a benchmarking study, and written responses
to questions that GAO submitted. GAO also reviewed the regulations that
guide FRTIB's spending.
[39]What GAO Recommends
GAO recommends that the board members direct the Executive Director to
continue exercising due diligence by identifying opportunities for
continued cost savings, specifically in the areas of rent and travel. GAO
also recommends that FRTIB expand its benchmarking practices to comparable
individual activities. FRTIB partially concurred with our recommendations.
References
Visible links
21. http://www.gao.gov/cgi-bin/getrpt?GAO-03-400
23. http://www.gao.gov/cgi-bin/getrpt?GAO-03-827R
24. http://www.gao.gov/cgi-bin/getrpt?GAO-06-270
25. http://www.gao.gov/cgi-bin/getrpt?GAO-05-229
26. http://www.gao.gov/cgi-bin/getrpt?GAO/T-GGD/AIMD-95-187
27. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-99-23
28. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-98-93
29. http://www.gao.gov/cgi-bin/getrpt?GAO-05-218G
38. http://www.gao.gov/cgi-bin/getrpt?GAo-07-541
*** End of document. ***