Thrift Savings Plan:

Delayed Allocation of Failed System Development Costs to Participant Accounts

GAO-03-827R: Published: Jul 22, 2003. Publicly Released: Aug 22, 2003.

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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.

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 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.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: On June 20, 2003, the Federal Retirement Thrift Investment Board (FRTIB) and American Management Systems, Inc. (AMS) settled a lawsuit related to the failed system development for $36 million. On June 23, 2003, the $36 million in failed system development costs were allocated to participant accounts. This action closes GAO's recommendation because now (1) the Thrift Savings Plan consistently reports the costs in its financial statements and on individual participant accounts and (2) aggregate reported Thrift Savings Plan assets equal the sum of individual participant accounts.

    Recommendation: 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 Thrift Savings Plan and not sharing in the system failure costs, the Federal Retirement Thrift Investment Board should require the Executive Director to allocate the loss as soon as possible to participant accounts in the most equitable and efficient manner.

    Agency Affected: Federal Retirement Thrift Investment Board


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