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entitled 'Federal Employees' Group Life Insurance: Retirement Benefit 
and Retained Asset Account Disclosures Could Be Improved' which was 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

November 2011: 

Federal Employees' Group Life Insurance: 

Retirement Benefit and Retained Asset Account Disclosures Could Be 
Improved: 

GAO-12-94: 

GAO Highlights: 

Highlights of GAO-12-94, a report to congressional requesters, 

Why GAO Did This Study: 

The Federal Employees’ Group Life Insurance program (FEGLI), 
administered by the Office of Personnel Management (OPM), insures over 
4 million federal employees and annuitants in the event of an enrollee’
s death. As a result, it is important that the program is clearly 
explained and properly overseen. However, some aspects of FEGLI, such 
as program disclosures and the use of retained asset accounts (RAA)—
financial accounts used to settle life insurance claims—have raised 
questions about the program’s operations. 

GAO was asked to describe and evaluate (1) the FEGLI program’s 
structure and operations, (2) OPM’s administration and oversight of 
the program, and (3) the use of RAAs in FEGLI claims payments. To 
address these objectives, GAO reviewed FEGLI law and regulations, 
interviewed OPM, Metropolitan Life Insurance Company (MetLife), and 
state insurance officials, and met with insurance industry experts. 

What GAO Found: 

OPM, by directing the funding of the Employees’ Life Insurance Fund, 
has effectively allowed the FEGLI program to assume the risk of loss, 
while MetLife provides administrative services for the program. FEGLI 
has some insurance coverage features that most private sector group 
life plans do not, but a lack of disclosure in certain areas may make 
it difficult for employees to make fully informed decisions about 
buying coverage. Generally with private group plans the employer pays 
the full premium for a set amount of basic coverage, but the statute 
that created FEGLI requires that enrolled employees contribute two-
thirds of the premium for Basic coverage. In addition, FEGLI premiums 
include the cost of a portion of retirement coverage, a feature 
generally not found in private sector alternatives, and which can make 
FEGLI coverage more costly than those alternatives. Further, for Basic 
coverage, FEGLI premiums are level over employees’ working lives, so 
that early on premiums may be higher than the actual cost of coverage, 
while later they may be lower. This feature can make FEGLI coverage 
appear to be more costly than private individual plans for certain 
employees. However, the materials that FEGLI provides to employees do 
not disclose either the retirement coverage costs or the level 
premiums. Employees, particularly those who might leave government 
service or stop participating in FEGLI before realizing the benefits 
of these features, may find such disclosures important when deciding 
whether to purchase the insurance. 

OPM oversees FEGLI’s provision of life insurance, but certain 
processes for reviewing program benefits and premiums could be 
improved. OPM administers basic FEGLI functions such as determining 
and collecting premiums, publishing program regulations, and 
overseeing the claims payment processes of MetLife, the insurer 
contracted to provide claims services. Because the program was 
intended to provide a low-cost benefit to federal employees, OPM has 
periodically conducted informal comparisons of FEGLI costs and 
benefits to those of private group life plans. In addition, to better 
ensure that the program charges appropriate premium rates, OPM 
actuaries conduct annual reviews and may recommend rate changes. 
However, OPM does not have documented processes for conducting its 
comparisons or for documenting any recommended rate changes. The lack 
of documented processes in both areas creates a risk that FEGLI 
benefits may not be meeting the needs of federal employees and could 
be priced at inappropriate rates. 

From the mid 1990s until early 2011, RAAs were the default settlement 
option for many FEGLI beneficiaries. While RAAs offer some benefits to 
FEGLI beneficiaries, OPM does not provide beneficiaries with some 
important information on RAA operations and protections. According to 
OPM and some industry officials, RAAs can reduce administrative costs, 
provide guaranteed interest rates, and allow beneficiaries time to 
decide how to use settlement funds. But other industry participants 
and a federal regulator said that beneficiaries might not be fully 
aware of their settlement options or that RAAs are not insured by the 
Federal Deposit Insurance Corporation. OPM has recently improved FEGLI 
disclosures for RAAs, and RAAs are no longer the default settlement 
option. However, the disclosures still lack information on how the 
accounts are established and regulated, and how certain protections 
differ across states. Without this information, beneficiaries may not 
be able to make fully informed decisions when choosing a settlement 
option for their FEGLI claims payment. 

What GAO Recommends: 

GAO recommends that OPM (1) improve disclosures on important FEGLI 
features, (2) develop and implement a more structured process for 
reviewing the FEGLI program and premium rates, and document review 
outcomes, and (3) improve disclosures on RAA protections and 
regulation. OPM concurred with these recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-12-94] for key 
components. For more information, contact Alicia Puente Cackley at 
(202) 512-7022 or cackleya@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Although Similar to Private Sector Plans, FEGLI Has Distinct Employee 
Benefits and Costs That Are Not Clearly Disclosed: 

In Overseeing FEGLI, Processes for Setting Premium Rates Could Be 
Improved: 

RAAs Are No Longer the Default Settlement Option, but Better 
Disclosures Are Needed: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Federal Employees' Group Life Insurance Program Financial 
Information: 

Appendix III: Comments from the Office of Personnel Management: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: Example of a Sample FEGLI RAA Draft: 

Figure 2: FEGLI Funds and Operations: 

Figure 3: FEGLI Assets and Liabilities, 2000-2010: 

Figure 4: State Regulation of RAAs, as of August 2011: 

Figure 5: FEGLI Premiums, Claims Paid, and Interest Income, 2000-2010: 

Abbreviations: 

ACLI: American Council of Life Insurers: 

AD&D: accidental death and dismemberment: 

CSRS: Civil Service Retirement System: 

FEGLI: Federal Employees' Group Life Insurance: 

FERS: Federal Employees Retirement System: 

FDIC: Federal Deposit Insurance Corporation: 

LIFAR: Life Insurance Federal Acquisition Regulation: 

MetLife: Metropolitan Life Insurance Company: 

NAIC: National Association of Insurance Commissioners: 

NCOIL: National Conference of Insurance Legislators: 

OFEGLI: Office of Federal Employees' Group Life Insurance: 

OPM: Office of Personnel Management: 

RAA: retained asset account: 

SFFAS: Statement of Federal Financial Accounting Standards: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

November 10, 2011: 

The Honorable Elijah E. Cummings:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives: 

The Honorable Edolphus Towns:
Ranking Member:
Subcommittee on Government Organization, Efficiency and Financial 
Management:
Committee on Oversight and Government Reform:
House of Representatives: 

Life insurance is an important purchase for many Americans because it 
provides income replacement and financial protection to beneficiaries 
if they lose loved ones. While many Americans obtain life insurance by 
purchasing individual policies in the private market, many also obtain 
such coverage through employer-sponsored group plans, including the 
approximately 4 million federal employees and annuitants who purchase 
life insurance through the Federal Employees' Group Life Insurance 
program (FEGLI). This program, administered by the Office of Personnel 
Management (OPM), involves substantial federal resources. In fiscal 
year 2010, the total amount of FEGLI life insurance coverage in force 
was $824 billion, and the balance in the plan's financial fund--the 
Employees' Life Insurance Fund (FEGLI Fund)--totaled approximately $38 
billion.[Footnote 1] In addition, throughout 2010, FEGLI paid out 
approximately $2.6 billion in insurance claims to beneficiaries of 
federal employees. The program also involves substantial premium costs 
to enrolled federal employees, who pay two-thirds of the premium for 
an initial amount of Basic life insurance and the entire premium for 
any Optional insurance.[Footnote 2] As a result, ensuring that FEGLI 
is properly administered, with appropriately priced policies, and that 
federal employees receive enough information to make an informed 
decision about participating in the program, is important. 

The processes and methods for paying FEGLI life insurance claims 
determine how beneficiaries of federal employees receive insurance 
settlement funds. For the first several decades of the program, 
beneficiaries received settlement funds through a lump-sum check. In 
1994, FEGLI began offering retained asset accounts (RAA) to 
beneficiaries as the default settlement option where the proceeds 
payable were $7,500 or more. With RAAs, the Metropolitan Life 
Insurance Company (MetLife)--the life insurer under contract with OPM 
for the FEGLI program since its creation by Congress in 1954--makes 
claims payments by establishing guaranteed accounts in beneficiaries' 
names, manages the assets backing RAA liabilities created by these 
accounts, determines how to invest RAA funds, guarantees a minimum 
interest rate to be credited to retained funds, and administers the 
accounts that allow beneficiaries to access funds as they choose. 
While some industry participants point to the potential benefits that 
RAAs provide, other participants have raised questions about these 
accounts. For FEGLI, these questions have included whether 
policyholders fully understand their settlement options and their 
associated costs, benefits, and protections.[Footnote 3] 

This report responds to your interest in how FEGLI operates and how it 
uses RAAs. The report describes and evaluates: 

* how FEGLI is structured and operated, 

* OPM's administration and oversight of FEGLI, and: 

* FEGLI's use of RAAs to pay claims. 

To describe and evaluate FEGLI's key operations, we examined the 
program's authorizing statute and associated regulations and reviewed 
its key policy documents, including the contract between OPM and 
MetLife. In addition, we compared FEGLI's coverage and practices with 
those of several large private sector group life insurers. To describe 
and evaluate OPM's administration and oversight of the FEGLI program, 
we reviewed applicable federal and state laws, regulations, policy 
guidance, and materials from consumer advocates, and examined OPM's 
monitoring, reporting, and other oversight activities. We also 
interviewed OPM and MetLife officials and reviewed FEGLI annual 
financial and performance reports to understand how FEGLI operates 
financially and to determine its assets and liabilities. In addition, 
we reviewed the federal budget for information on FEGLI's claims, 
assets, and liabilities. We found FEGLI program information and data 
from OPM and MetLife to be reliable for the purposes of this report. 
To identify any FEGLI regulatory or consumer protection issues, we met 
with industry association representatives, a consumer advocate, and 
other experts. To describe and evaluate the role of RAAs in FEGLI's 
settlement process, we examined key OPM and MetLife policy documents 
and program guidance and interviewed OPM management officials. We 
focused on how RAAs function, what kinds of RAA disclosures FEGLI 
participants receive, and what RAA protections are available to FEGLI 
beneficiaries.[Footnote 4] In addition, we examined how RAAs are 
regulated by focusing on the activities and processes OPM and state 
regulators use to oversee these accounts. In particular, we 
interviewed insurance regulators from California, Florida, New York, 
North Carolina, and Maryland to determine their methods for overseeing 
RAAs. We selected this sample of states because it is geographically 
diverse, has a large number of federal employees, and contains some 
states that have RAA-specific regulations and others that do not. For 
a more detailed description of our scope and methodology, see appendix 
I. 

We conducted this performance audit from September 2010 to November 
2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

Established by Congress in the Federal Employees' Group Life Insurance 
Act of 1954[Footnote 5] as a benefit to federal employees and their 
families and administered by OPM, FEGLI offers federal employees the 
opportunity to choose from a range of group term life insurance 
coverage options.[Footnote 6] FEGLI insurance is provided through a 
contract OPM has established with MetLife. MetLife's Office of Federal 
Employees' Group Life Insurance (OFEGLI) adjudicates claims under the 
FEGLI program and makes payments to FEGLI beneficiaries.[Footnote 7] 

FEGLI Insurance Coverage and Costs: 

Most federal employees, including part-time employees, are eligible 
for insurance under FEGLI, and approximately 85 percent purchase FEGLI 
coverage. Upon starting their federal employment, federal employees 
are automatically enrolled in FEGLI's Basic life insurance coverage 
unless they file appropriate paperwork with their employing agency to 
opt out of the program. Basic life insurance coverage equals a federal 
employee's annual salary rounded up to the next even thousand plus two 
thousand dollars, or $10,000, whichever is higher.[Footnote 8] Basic 
insurance also provides an extra benefit to employees under age 45, at 
no additional cost. This extra benefit doubles the amount of Basic 
insurance payable if the employee dies at age 35 or younger. The extra 
benefit decreases 10 percent each year until there is no extra benefit 
at age 45 and above. For Basic coverage, employees pay two-thirds of 
the premium determined by OPM, and the employing agencies pay the 
remaining third.[Footnote 9] The rate all covered employees, 
regardless of age, pay for each $1,000 of Basic insurance is $0.150 bi-
weekly or $0.325 monthly. FEGLI also provides accidental death and 
dismemberment (AD&D) insurance as part of its Basic insurance at no 
additional cost.[Footnote 10] AD&D insurance protects employees in the 
event of a fatal accident or an accident which results in the loss of 
a limb or eyesight. For benefits to be paid, the death or loss must 
occur no later than 1 year from the date of the accident and must be a 
result of bodily injury sustained from that accident. 

Federal employees may also choose to purchase three types of Optional 
insurance in addition to Basic coverage--Options A, B, and C--by 
submitting a Life Insurance Election Form (SF 2817) within 60 days of 
beginning their employment to their human resources office.[Footnote 
11] 

* Option A offers $10,000 of life insurance coverage. Premiums for 
Option A coverage vary by age groups, as determined by OPM. These 
groups start with employees "under age 35," progress in 5-year 
increments until age 59, and finish with a "60 and over" group. Bi-
weekly and monthly costs for Option A coverage range from $0.30 and 
$0.65, respectively, for the "under age 35" group to $6.00 and $13.00, 
respectively, for the "60 and over" age group.[Footnote 12] 

* Option B offers additional Optional insurance coverage in an amount 
of one to five multiples of the employee's annual salary, after 
rounding the salary up to the next even thousand. For Option B 
coverage, age group designations also apply but begin with "under age 
35," continue in 5-year age increments until age 79, and end with an 
"80 and over" age group. Bi-weekly and monthly costs for each $1,000 
in insurance can range from a low of $0.03 and $0.065, respectively, 
for employees under 35 to a high of $2.40 and $5.20, respectively, for 
employees 80 and older. 

* Option C covers eligible family members of an employee or retiree, 
including the enrollee's spouse and eligible dependent children. The 
employee selects one to five times an amount (a "multiple")--$5,000 
for a spouse and $2,500 for each eligible dependent child. If 
employees purchase optional coverage within the 60 days, no medical 
underwriting is necessary. For Option C coverage, the age group 
designations are the same as for Option B, and costs range from bi-
weekly and monthly amounts of $0.27 and $0.59, respectively, per 
multiple for those under 35 to $6.00 and $13.00, respectively, per 
multiple for those 80 and older. 

When federal employees retire, FEGLI also offers Basic and Optional 
life insurance, and employees are able to choose among several 
retirement coverage levels after age 65. For Basic insurance in 
retirement, employees must choose whether to reduce their 
postretirement insurance level by 75 percent, 50 percent, or maintain 
full coverage. Those choosing the 75 percent reduction pay no premiums 
after reaching age 65. Those choosing the 50 percent reduction or full 
coverage option continue to pay premiums in amounts determined by OPM; 
the postretirement premium rates are greater than preretirement rates. 
When the 75 percent reduction in coverage is selected, OPM reduces the 
coverage level by 2 percent per month beginning at age 65, until 25 
percent of the original coverage remains. If the 50 percent reduction 
is selected, the coverage level reduces by 1 percent per month 
beginning at age 65, until 50 percent of the original coverage 
remains. If no reduction is selected, the coverage does not reduce. 

Federal employees may also choose to continue Optional coverage into 
retirement and FEGLI offers several choices. Option A coverage reduces 
2 percent per month beginning at age 65, to 25 percent of the 
preretirement amount, and no premiums are charged in retirement after 
the retiree reaches age 65. For Options B and C, employees desiring 
coverage must elect to continue one to five multiples of coverage into 
retirement, and elect whether to have all of those multiples retain 
full coverage or reduce by 100 percent, at a rate of 2 percent per 
month for 50 months, beginning at age 65. For the 100 percent 
reduction option, once the reduction starts, retirees do not pay 
premiums after reaching age 65. For the full coverage option, retirees 
continue to pay the full premium, as determined by OPM for the 
retiree's specific age group.[Footnote 13] 

The following provides an example of FEGLI premiums for a 48-year old 
federal employee, married with three children, and earning $88,300 per 
year. 

* According to OPM, Basic insurance would cost $13.65 bi-weekly and 
$354.90 annually.[Footnote 14] 

* If the employee seeks to maximize Option B coverage by purchasing 
five times annual pay, Option B coverage would cost $40.05 bi-weekly 
and $1,041.30 annually.[Footnote 15] 

In this example, the employee purchases Basic and Optional life 
insurance coverage totaling $536,000, at an annual cost of $1,396.20. 

If this employee continues full Basic and Option B coverage after 
retirement, by choosing the No Reduction option for both, and retires 
at the age of 65 (assuming the same $88,300 salary), Basic insurance 
would cost $1,998.36 annually and Option B coverage would cost 
$8,330.40 annually.[Footnote 16] The total amount of Basic and 
Optional insurance for the employee at the time they retire would be 
$536,000 at an annual cost to the employee of approximately $10,300. 

Adding or Adjusting FEGLI Coverage: 

Federal employees may add or adjust FEGLI coverage when life events 
such as marriage, divorce, death of a spouse, or the acquisition of an 
eligible child occurs. Federal employees may also add or adjust 
coverage when OPM offers open seasons, although OPM officials noted 
that these periods are rare.[Footnote 17] FEGLI most recently offered 
open seasons in 1999 and 2004. Employees who opted out of FEGLI 
coverage upon starting federal employment may also add coverage during 
these times. Additionally, if at least a year has passed since an 
employee opted out of FEGLI, an employee may request FEGLI coverage by 
providing medical information via a form partially completed by the 
employee's physician. Employees are responsible for any associated 
expenses such as a physician's fee. In addition, certain employees of 
the Department of Defense are eligible to elect FEGLI coverage without 
experiencing a qualifying life event or by providing medical 
information. 

Payment of FEGLI Benefits: 

When a federal enrollee with FEGLI coverage dies, MetLife's OFEGLI 
pays claims to the federal enrollee's designated beneficiary. If no 
beneficiary has been designated, payments will be made roughly in the 
following order pursuant to statute: to the enrollee's surviving 
spouse; if none, to the child or children in equal shares; if none, to 
surviving parents in equal shares; if none, to the executor or 
administrator of the employee's estate; or, if none, to the enrollee's 
next of kin as determined by applicable state laws. The enrollee's 
beneficiary or other survivor must follow a prescribed process for 
filing a claim and receiving payment that begins with contacting the 
human resources office at the insured's agency to report the death, 
submitting a certified death certificate, and submitting a Claim for 
Death Benefits form. 

According to FEGLI materials, beneficiaries may choose a payout by 
receiving a lump-sum check or an RAA. According to the American 
Council of Life Insurers (ACLI), RAAs have existed since 1982, and 
many insurers provide them for both group and individual life 
insurance policies. When an insured person dies, the life insurance 
company that issued the policy may place the death benefit proceeds 
into an RAA, which accrues interest for the beneficiaries from the day 
the account is established for as long as the funds remain in the 
account. Beneficiaries have full and immediate access to their funds 
and can withdraw some or all of the funds at any time without penalty. 
In addition, MetLife pays RAA accountholders a minimum guaranteed 
interest rate that typically is calculated using one of several market 
rate indexes.[Footnote 18] MetLife compounds interest on RAAs daily 
and credits that interest monthly. MetLife issues a book of drafts to 
the beneficiary, allowing immediate access to the funds without 
penalty. Beneficiaries may then use them to meet various financial 
needs, for example to pay bills, make retail purchases (figure 1), or 
transfer funds from the RAA to another account, such as a savings or 
checking account.[Footnote 19] FEGLI beneficiaries, like other life 
insurance beneficiaries, may leave funds in their RAA for as long as 
they wish or withdraw the entire amount at any time, and there are no 
maintenance fees associated with these accounts. By investing the 
assets backing the liabilities of RAAs funded with FEGLI claims 
payments, MetLife may earn a profit in the form of a spread, or the 
difference between the interest it pays beneficiaries and what it 
earns on invested assets backing RAA liabilities less expenses. 
MetLife assumes the investment risk associated with investing these 
assets. 

Figure 1: Example of a Sample FEGLI RAA Draft: 

[Refer to PDF for image: illustration] 

Source: MetLife. 

[End of figure] 

Although Similar to Private Sector Plans, FEGLI Has Distinct Employee 
Benefits and Costs That Are Not Clearly Disclosed: 

Some FEGLI Features Are Similar to Those of Private Sector Group Life 
Insurance: 

FEGLI's Basic life insurance coverage shares several similarities with 
the coverage offered by private sector group plans. First, both FEGLI 
and most private sector plans automatically enroll employees in basic 
coverage, often including AD&D coverage, unless they opt out of the 
program, and both provide options for employees who opted out of the 
program to join later.[Footnote 20] Second, neither FEGLI nor private 
sector basic insurance initially requires employees to provide 
information on their medical condition or history.[Footnote 21] That 
is, any employee can enroll in the program regardless of age or state 
of health at the time that the employee is first eligible to join. 
Third, while some private sector plans offer a flat amount of basic 
insurance ranging from $5,000 to as much $50,000, many offer coverage 
in an amount equal to the employee's salary or a multiple of it, as 
FEGLI does. Finally, FEGLI and private sector programs both typically 
use a composite rate structure to price their basic group life 
benefits; that is, a rate structure where all employees pay the same 
average rate regardless of age or health status. The effect of a 
composite rate is that all employees pay the same rate per $1,000 of 
insurance coverage regardless of characteristics such as age and 
health that impact the cost of life insurance. 

In addition to similarities with respect to basic coverage, FEGLI and 
private sector group plans generally offer some form of optional 
coverage that shares some similarities as well. First, employees in 
both FEGLI and private group plans typically must fund any optional 
coverage with no employer contribution. In addition, both FEGLI and 
private sector employers generally offer optional coverage in 
increments of one to five times the employee's annual salary. Finally, 
both FEGLI and private sector plans generally offer life insurance 
coverage on the employee's dependants. 

Unlike Private Group Life Plans, FEGLI Assumes Most of the Insurance 
Risk: 

Unlike most private sector group life insurance plans, FEGLI, 
according to OPM officials, assumes most of the risk of loss 
associated with the program. In the private sector, according to 
industry experts, employers generally purchase group life insurance 
policies from insurers that then bear the risk of loss.[Footnote 22] 
That is, the insurer bears the risk that the claims associated with 
the policy may exceed the premiums collected from the policyholder. In 
contrast, according to OPM officials, the FEGLI program effectively 
bears all such risk based on the expectation that the FEGLI Fund is 
sufficient to cover claims made by FEGLI beneficiaries. 

FEGLI's creation contemplated the federal government purchasing group 
life insurance from a private sector group life insurer or insurers 
and mitigating the risk of loss by purchasing reinsurance for those 
insurers. However, as the FEGLI Fund balance has grown over time, OPM 
officials noted, the need for an insurer and reinsurers to assume the 
program's risk of loss has diminished.[Footnote 23] For example, 
according to OPM and MetLife officials, even though OPM has a policy 
with MetLife to provide FEGLI life insurance and makes funds available 
to MetLife for this policy, when FEGLI beneficiaries submit claims, 
MetLife draws upon OPM's FEGLI Fund to make claims payments. In 
addition, according to the same officials, MetLife's exposure to loss 
is currently limited to its role as a reinsurer for the FEGLI program, 
as it covers approximately 85 percent of the FEGLI program's 
reinsurance. However, this exposure would only result in payment after 
the depletion of the entire FEGLI Fund, which has a balance as of 
September 30, 2010, of $37.6 billion, or approximately 14 times the 
amount of FEGLI's annual claims payments. OPM and MetLife both 
consider the possibility of exhausting the FEGLI Fund to be so remote 
that the cost of the reinsurance is negligible. While the program 
initially had about 160 reinsurers, only 10 were participating in 
2011, with MetLife providing about 85 percent of the program's 
reinsurance. OPM pays each of the 10 reinsurers approximately $500 
annually for their participation in the program, and FEGLI has never 
had to use this reinsurance coverage. 

Certain FEGLI Features and Benefits Can Result in Higher Costs for 
Employees Compared with Private Sector Group Term Insurance: 

Compared with private sector group term life plans, FEGLI has certain 
features and benefits that can make premiums for all coverage higher 
for federal employees. First, FEGLI's statute requires enrolled 
federal employees to pay two-thirds of the premium rate for their 
Basic life insurance coverage, while employers in the private sector 
generally cover the full cost of their employees' basic 
coverage.[Footnote 24] According to insurance industry officials, the 
amount of basic coverage that private group plans generally provide 
can be a flat amount or equal to an employee's annual salary or more. 
Whether an employee receives more employer-paid coverage through a 
private plan that pays the entire premium for some amount of coverage 
than through FEGLI would depend on the amount of no-cost coverage the 
private sector employer provides.[Footnote 25] 

Second, according to OPM officials, FEGLI offers federal employees a 
retirement life insurance benefit that is financed, in part, by a 
portion of the premiums charged while employees are working. FEGLI's 
retirement benefit raises FEGLI premiums above those of most private 
sector group plans, which generally do not offer such a benefit. As we 
have seen, FEGLI offers a postretirement benefit for both Basic and 
Optional coverage. According to OPM officials, federal employees who 
participate in FEGLI begin prefunding, or paying in advance for, Basic 
retirement coverage as soon as they begin their FEGLI coverage. 
Prefunding for Basic coverage is necessary because newly retired 
employees over age 65 who choose a 75 percent reduction in this 
coverage are no longer required to pay premiums for the coverage they 
are receiving. With Optional coverage, except for Option A, employees 
begin prefunding the cost of their retirement benefits when they reach 
age 55 and continue to do so until they retire. Newly retired 
employees who choose a 75 percent reduction in their Option A 
coverage, and a 100 percent reduction in Options B and C, coverage no 
longer pay premiums for the Optional coverage they are receiving. In 
addition, life insurance coverage for people of retirement age or 
older can be expensive. According to private sector insurance industry 
participants we spoke with, the cost of postretirement benefits is 
quite high because as employees age, the likelihood of the insurer 
being required to pay a claim also increases. As a result, few private 
sector plans offer such benefits. While OPM has stated that having 
flexible benefits, including life insurance coverage in retirement, 
contributes to employee retention, insurance industry participants 
with whom we spoke said that they have not seen any evidence that 
postretirement coverage attracted or retained employees. 

In addition, for certain individuals, FEGLI Basic coverage may appear 
more costly than private sector basic life insurance. First, FEGLI 
features level premiums that may not be a part of some private 
individual policies. With such a feature, monthly premiums remain the 
same over time instead of increasing with age. Compared to a policy 
without such a feature, level premiums are higher earlier in life and 
then become lower at a certain point. If relatively younger federal 
employees compare FEGLI to private individual coverage without level 
premiums, FEGLI coverage may appear to be more costly, depending on 
their age. Second, because FEGLI is a group life program, all 
individuals pay the same premiums regardless of their health status, 
unlike individual coverage where premiums generally depend on the 
health of the person being insured. As a result, if relatively 
healthier federal employees compare FEGLI to private individual 
coverage, FEGLI coverage could also appear more costly. Finally, 
FEGLI's postretirement coverage, which increases FEGLI premiums but is 
not generally part of private plans, also contributes to FEGLI's cost 
relative to private sector alternatives that do not feature this 
coverage. The possibility that FEGLI coverage may appear more costly 
than private sector alternatives to relatively younger or healthier 
federal employees is mitigated to some extent by the extra amount of 
coverage FEGLI provides federal employees under age 45. However, in 
cases where FEGLI's premiums exceed those for similar coverage in the 
private sector, federal employees may conclude that FEGLI is more 
expensive and choose to opt out of the program. 

Although FEGLI's Disclosures Cover Key Aspects of the Program, They Do 
Not Cover Some Important Features: 

While FEGLI disclosures cover many key aspects of the program, they do 
not cover certain program features that could affect an employee's 
decision to purchase FEGLI coverage. Consistent with OPM's strategic 
goal of helping ensure that federal employees fully understand their 
benefits, and with the National Association of Insurance 
Commissioners' (NAIC) guidance on informative marketing materials, OPM 
provides a significant amount of information on FEGLI through a 
handbook, program booklet (a condensed version of the handbook for 
employees), and website. These disclosures provide information on a 
range of topics, including enrollment, coverage options and costs, 
designation of beneficiaries, claims and claims payments, and 
resources for employees if they have questions or issues. OPM provides 
this information in hard copy and through the FEGLI website, which 
also includes a calculator that allows users to determine premiums for 
various combinations of life insurance coverage. Providing timely and 
informative FEGLI guidance materials to federal agency human resources 
staff is another means through which OPM seeks to ensure that federal 
employees understand their benefits. 

While these disclosures are useful, they do not make employees aware 
of some FEGLI benefits and features that could affect their decision 
to participate in the program. 

* The disclosures do not inform employees that premiums for Basic 
coverage include a postretirement benefit and that employees prefund 
this benefit.[Footnote 26] Employees who are unaware of this 
prefunding element could decide that FEGLI coverage is too expensive, 
decline participation in the program, and not receive FEGLI's 
potentially valuable insurance benefits. Conversely, employees that 
plan to work in the federal government for only a short period, or at 
least not through retirement, could decide to participate in the 
program, not knowing that they would be paying for a benefit they 
would never receive. 

* FEGLI disclosures, while showing a constant premium rate, do not 
make employees aware of the level-premium feature of the program's 
Basic coverage that spreads premiums equally over the duration of the 
policy rather than charging less during early policy years and more in 
later policy years. Employees unaware of this feature could conclude 
that FEGLI coverage is more expensive than alternative private sector 
coverage, particularly in the earlier years of the policy, and decide 
to opt out, foregoing potentially valuable life insurance coverage. 

* The disclosures also do not convey to federal employees that, for 
Basic coverage, FEGLI charges a composite premium that averages the 
cost of insurance for all participants regardless of age or health. 
That is, participants pay the same regardless of whether they pose a 
lesser or greater risk of loss. This averaging can be of great benefit 
to some, especially those who may not be able to obtain coverage 
elsewhere. However, as with the level-premium feature, those not aware 
of this feature could conclude that FEGLI coverage is simply more 
expensive than alternative private sector coverage and forego coverage 
they might not be able to obtain elsewhere. 

In Overseeing FEGLI, Processes for Setting Premium Rates Could Be 
Improved: 

OPM Performs Many of FEGLI's Administrative and Operational Functions 
and Works Closely with MetLife: 

According to OPM officials, OPM performs many FEGLI administrative and 
operational functions, including collecting premiums, overseeing 
FEGLI's claims settlement process (which MetLife administers), and 
publishing FEGLI's regulations and disclosures. The same officials 
said that FEGLI premiums are collected by withholding premiums from 
enrollees' paychecks, annuities, or compensation and collecting agency 
contributions from employing agencies or retirement systems, as 
applicable, for deposit by OPM into the FEGLI Fund. On a monthly 
basis, premiums are moved from the FEGLI Fund which is held by the 
Treasury Department, into a letter of credit account, which is 
administered by a Federal Reserve Bank and from which MetLife can draw 
down funds to pay claims. MetLife's OFEGLI, which is responsible for 
paying claims to beneficiaries, draws money from the FEGLI Fund on a 
monthly basis using the line of credit and transfers claims payments 
to beneficiaries. In addition to its premium collection function, OPM 
officials said OPM is also responsible for investing FEGLI Fund assets 
in government securities and ensuring that investment income on 
program assets is taken into account when determining program costs. 
Funds that flow through FEGLI, according to these officials, 
ultimately begin with employee and agency premiums and end with a 
payout to beneficiaries in the form of a check or an RAA. Figure 2 
illustrates the flow of FEGLI funds between those endpoints, including 
being held in the FEGLI Fund. 

Figure 2: FEGLI Funds and Operations: 

[Refer to PDF for image: illustration] 

Federal agency: Premiums for Basic coverage; 
Federal employee: Premiums for Basic and Optional coverage; 
Go into: 

Employees’ Life Insurance Fund: Administered by OPM and held at the 
U.S.Treasury: 
Investments (U.S. Treasury securities); 
Investment income returned to Fund. 

MetLife-OFEGLI: 
Lump-sum check to Employee's beneficiary; or: 

RAA is established: 
RAA: MetLife general account[A]: 
Investments; 
Investment income returned to account; 
RAA withdrawal and interest: to Employee's beneficiary. 

Sources: OPM; Art Explosion. 

[A] MetLife's general account and the investment income it earns are 
used to meet beneficiaries' RAA withdrawals and the interest MetLife 
guarantees beneficiaries on their RAA accounts. 

[End of figure] 

In addition to managing FEGLI resources, OPM officials said they 
monitor and oversee MetLife's claims settlement processes by receiving 
and reviewing weekly reports on claims activity. In addition to 
managing processes for dispersing FEGLI funds, OPM officials said they 
receive annual financial reports on claims and administrative costs 
that are used to determine the timeliness of payments and, as noted 
earlier, help predict future claims and other expenses.[Footnote 27] 

In addition to producing and updating FEGLI's Handbook, Program 
Booklet, website and forms, OPM officials said that OPM also issues 
FEGLI regulations, including the Life Insurance Federal Acquisition 
Regulation (LIFAR), that guide the program's operations.[Footnote 28] 
The regulations, for example, outline the types of Basic and Optional 
insurance available through FEGLI, the amounts of FEGLI coverage that 
the program offers, eligibility requirements, program costs, and 
beneficiary designation. Additionally, the LIFAR describes the terms 
of the contractual arrangement between OPM and MetLife under the FEGLI 
program, including MetLife's receipt and administration of claims and 
the calculation of administrative costs and profit levels. The LIFAR 
also provides guidance on contract oversight, including requiring 
policies and procedures to help ensure that FEGLI services conform to 
the contract's quality requirements, and an OPM evaluation of 
MetLife's system of internal controls. Additionally, the LIFAR 
requires that MetLife develop a quality assurance program that 
includes procedures to address (1) timeliness of claims payments to 
beneficiaries, (2) quality of services and responsiveness to 
beneficiaries and OPM, and (3) detection and recovery of fraudulent 
claims, among other things. Although FEGLI's statute exempts the 
program from contractual competitive bidding, the LIFAR also provides 
direction on contract modifications and circumstances that would allow 
for contract termination. According to OPM officials, they fulfill 
these requirements by monitoring consumer feedback, tracking the 
timeliness of claims payments, and reviewing external audits of 
MetLife, which include OFEGLI. These officials said that they have not 
received any indication of problems with timeliness or responsiveness, 
or indications of any other deficiencies. 

Although OPM has numerous administrative and oversight 
responsibilities for FEGLI, MetLife, according to its officials, has a 
central role in several key FEGLI financial and claims administration 
functions. First, officials said that MetLife works with OPM on an 
annual basis to develop a monthly premium amount. This premium is the 
amount made available to MetLife to pay claims, MetLife's 
administrative expenses, and MetLife's service charge. MetLife 
annually conducts a review of claims paid and recommends a premium 
amount to OPM based on the projected level of claims and expenses for 
the upcoming fiscal year. Officials noted that OPM and MetLife then 
agree on a total annual premium level for FEGLI, which OPM then uses 
to determine rates for employees and federal agencies. Second, OPM 
officials said that MetLife plays a key role in receiving life 
insurance claims from FEGLI beneficiaries, processing these claims, 
and ensuring that beneficiaries receive their life insurance 
settlements. On a daily basis, MetLife officials said that they 
determine how much they need to withdraw from the letter of credit 
account to meet expenses associated with beneficiaries' use of their 
RAAs. 

In addition, OPM officials said MetLife prepares weekly and annual 
financial reports on its FEGLI claims that provide important 
information on the flow of funds from the FEGLI Fund to MetLife and 
from MetLife to beneficiaries. OPM reimburses MetLife for its 
administrative expenses for FEGLI, including its claims and financial 
functions. OPM officials said that most of these expenses are the 
result of MetLife's OFEGLI, through which MetLife processes and pays 
claims. In 1997, according to MetLife officials, OPM and MetLife 
entered into an agreement that capped MetLife's direct administrative 
expenses for FEGLI at $6.1 million and indirect expenses at 20 percent 
of that ceiling. This ceiling is adjusted annually by the Urban 
Consumer Price Index. In addition to administrative expenses, 
officials said that MetLife receives a service charge for adjudicating 
and administering FEGLI claims. This service charge is calculated 
using the profit analysis factors found in the LIFAR. For fiscal year 
2011, according to OPM officials, MetLife's service charge was 
$965,000.[Footnote 29] 

Under OPM's Administration, FEGLI Funding Has Been Sufficient to Pay 
Claims and Meet Program Liabilities: 

Under OPM's administration of the FEGLI program, according to OPM 
officials, program funds have been sufficient to pay life insurance 
claims and meet program liabilities. According to OPM officials, one 
of their key responsibilities is to determine FEGLI's liability for 
current and future life insurance coverage and to take steps to ensure 
that sufficient assets are available to meet these potential 
liabilities. Various factors affect how these liabilities are 
calculated, including changes in the mortality of federal employees, 
federal salaries, and interest rates. OPM actuaries said that they use 
these factors as part of an actuarial valuation model to make annual 
estimates of FEGLI's current and future liabilities. The actuaries 
then estimate the funds needed from premiums to cover these 
liabilities and program expenses, taking into account interest on 
retained funds and the FEGLI Fund balance. In addition, according to 
OPM officials, OPM actuaries monitor and annually review the claims 
experience for each FEGLI insurance coverage option, by age group and 
gender, and make recommendations to OPM senior management on the 
premium rates employees and their agencies should pay. 

According to OPM officials, the FEGLI program is adequately funded if 
FEGLI revenues meet or slightly exceed program costs and the program's 
assets meet or exceed its liabilities. Figure 3 shows OPM data on 
FEGLI's assets and liabilities from 2000 to 2010, and appendix II 
provides additional information on FEGLI's annual premiums, claims, 
and investment income. In particular, OPM reported in its 2010 annual 
report that the program's liabilities as of September 30, 2010, were 
approximately $43.9 billion and that its assets totaled $39.2 
billion.[Footnote 30] According to OPM officials, while the reported 
data would appear to indicate that the program was underfunded, they 
believe FEGLI's financing is adequate because the overall liability 
amount reported above does not take into account employee 
contributions for optional insurance coverage, which has the effect of 
making the liability appear to be larger than it actually is.[Footnote 
31] According to OPM, they take these funds into account in other 
internal analyses, and these analyses show that the program's assets 
sufficiently meet the program's liability when employee contributions 
are considered.[Footnote 32] 

Figure 3: FEGLI Assets and Liabilities, 2000-2010: 

[Refer to PDF for image: multiple line graph] 

Nominal dollars in billions: 

Calendar year: 2000; 
Assets: $23.1 billion; 
Liabilities: $25.1 billion. 

Calendar year: 2001; 
Assets: $24.6 billion; 
Liabilities: $26.7 billion. 

Calendar year: 2002; 
Assets: $26.2 billion; 
Liabilities: $28.1 billion. 

Calendar year: 2003; 
Assets: $27.7 billion; 
Liabilities: $29.9 billion. 

Calendar year: 2004; 
Assets: $29.0 billion; 
Liabilities: $31.5 billion. 

Calendar year: 2005; 
Assets: $30.5 billion; 
Liabilities: $32.9 billion. 

Calendar year: 2006; 
Assets: $32.1 billion; 
Liabilities: $34.2 billion. 

Calendar year: 2007; 
Assets: $33.7 billion; 
Liabilities: $35.9 billion. 

Calendar year: 2008; 
Assets: $35.4 billion; 
Liabilities: $37.5 billion. 

Calendar year: 2009; 
Assets: $37.3 billion; 
Liabilities: $39.7 billion. 

Calendar year: 2010; 
Assets: $39.2 billion; 
Liabilities: $44.0 billion. 

Source: OPM Agency Financial Reports and Performance and 
Accountability Reports. 

[End of figure] 

OPM's Processes for Achieving the Goal of Providing a Low-Cost Benefit 
to Federal Employees Lacked Clarity: 

The legislation that created FEGLI intended the program to offer a low-
cost insurance benefit to federal employees and their families. 
Specifically, the statute that created FEGLI described the program as 
an insurance benefit for federal employees that provides insurance at 
rates OPM determines are generally consistent with the lowest basic 
premium rates for new policies issued to large employers. Further, 
FEGLI's legislative history suggests that the program's purpose is to 
provide low-cost group life insurance to federal employees. In 
addition, OPM's most recent strategic plan calls for ensuring that 
available benefits, including life insurance benefits, align with 
employees' needs. 

As we have seen, however, FEGLI has features--some required by 
statute--that can make its coverage more expensive for federal 
employees compared with the type of coverage generally offered by 
private group life insurance programs. For example, as noted earlier, 
FEGLI requires an employee contribution for Basic insurance, something 
generally not required in private sector plans. In addition, the 
program features a postretirement benefit that, although not generally 
found in private sector plans, does increase the premiums that FEGLI 
participants must pay. OPM officials told us that they periodically 
compare FEGLI to other large group life insurance plans, primarily in 
terms of coverage levels, and have concluded that the features and 
benefits FEGLI offered are on par with those offered by private sector 
plans. In addition, OPM officials noted that key FEGLI characteristics 
such as coverage levels, the portion of the cost paid by federal 
employees, and the structure of Basic premiums are determined by 
FEGLI's statute, and as a result, changing the program can involve 
statutory changes that require congressional action. They further 
noted that because of the program's size, the limited number of OPM 
staff available to administer the program, the amount of 
administrative work involved in making a change to the program, and 
the potential need for the FEGLI statute to be changed, altering 
program processes is not a simple task. OPM officials said that 
because of various concerns, such as the length of time required for 
legislative changes, inherent costs incurred with structural program 
modifications, and their interest in preserving program continuity, 
requests for significant changes are minimal and made only after 
careful consideration. However, OPM is able to make changes to FEGLI 
premium rates paid by federal employees and agencies, as well as other 
changes including options available to beneficiaries for receiving 
claims payments. Nevertheless, OPM did not appear to have a systematic 
or documented process, or requirements, for comparing FEGLI with 
private sector plans. In addition, OPM did not have a methodology or 
criteria with appropriate benchmarks or measures for consistently 
comparing FEGLI benefits with those provided by the private sector. 
The results of such analyses could be used, for example, to make 
changes to the program within OPM's authority or, potentially, suggest 
legislative changes to Congress. 

OPM Lacked Clear, Documented Processes for Considering FEGLI Premium 
Rate Changes: 

Since the last premium adjustment, OPM actuaries have recommended 
changes--both increases and decreases--to FEGLI premium rates. As we 
have seen, each year OPM actuaries review and analyze FEGLI's assets 
and liabilities to determine the sufficiency of program assets to 
cover life insurance benefit costs for all FEGLI enrollees. In 
addition, the actuaries analyze the claims experience associated with 
each type of coverage and age band and determine appropriate premium 
rates, which may be higher or lower than the existing rates. OPM 
actuarial and financial officials present the results of these 
analyses and any rate change recommendations in an annual meeting with 
OPM management that includes the FEGLI contracting officer, actuaries, 
financial staff, and other OPM senior management. According to OPM 
officials, OPM senior management then has the authority to decide 
whether to raise, lower, or hold constant the rates that employees and 
agencies pay for FEGLI insurance. However, according to OPM officials, 
OPM management decided not to make these rate changes because they 
believed they introduced more complexity for FEGLI participants and 
entailed administrative changes that, at the time, were not practical 
given the significant resources required.[Footnote 33] 

Standards for internal control in the federal government state that 
policies and procedures should exist for ensuring that findings from 
any audits or reviews are promptly resolved and that all transactions 
and other significant events are clearly documented.[Footnote 34] 
OPM's annual actuarial reviews are effectively an internal control 
designed to help ensure the accuracy and adequacy of premium rates. 
However, OPM does not appear to have a documented process providing 
guidance on what to include in the annual actuarial reviews and 
recommendations to management. In addition, it does not have a process 
for documenting management's decisions with respect to those 
recommendations, including any accompanying rationale. Management's 
decisions on the actuarial findings are significant events because of 
their potential effect on the financial condition of the program and 
its ability to pay claims to beneficiaries. Without documented 
processes for actuarial and financial reviews and their disposition, 
OPM risks compromising the efficiency and the effectiveness of these 
reviews and being unable to help ensure premiums are consistent with 
program experience. 

RAAs Are No Longer the Default Settlement Option, but Better 
Disclosures Are Needed: 

RAAs Were the Default Option from 1994 to 2011: 

RAAs had been the default method used from 1994 until February 2011 
for many FEGLI beneficiaries to receive their life insurance 
settlements. RAAs became the default option in 1994 for payments over 
$7,500 after MetLife requested that OPM allow RAAs to be used in 
addition to lump-sum check payments. OPM granted the request under 
certain conditions, including RAAs be provided as additional benefits 
to FEGLI beneficiaries at no additional cost. OPM officials noted that 
the change to RAAs reduced administrative costs, including for staff 
time and materials that were associated with issuing lump-sum checks. 

In February 2011, OPM changed the FEGLI life insurance settlement 
process, requiring beneficiaries to choose between receiving a lump-
sum check or an RAA when receiving a settlement. Specifically, OPM 
revised the form that FEGLI beneficiaries submit for a life insurance 
claim, removing the default option and requiring beneficiaries to 
affirmatively choose a lump-sum payment or an RAA for settlement 
amounts over $5,000.[Footnote 35] OPM officials said that they made 
this change after reviewing RAA practices and procedures and published 
concerns about RAA practices. Two major life insurers with whom we 
spoke said that making the RAA payment method optional can have a 
considerable effect on consumers. When consumers have the option to 
choose between RAAs and lump-sum check payments, the overwhelming 
majority choose lump-sum check payments. 

Industry Views Vary on the Benefits and Consumer Protection Concerns 
from RAAs: 

According to several insurance companies and OPM, RAAs can benefit 
beneficiaries, but others expressed concerns about the extent of RAA 
disclosures and consumer protections. Industry participants cited 
flexibility and a guaranteed interest rate as the primary benefits of 
RAAs. For example, some said RAAs offer beneficiaries flexibility 
during a difficult time and loss to determine how best to use or 
invest the life insurance proceeds, which are often sizeable sums. 
While deciding how to use the funds, beneficiaries with RAAs receive a 
guaranteed minimum interest rate on their RAA account. According to 
MetLife officials, for FEGLI, each beneficiary's minimum interest rate 
is based on when the RAA was opened and is guaranteed for as long as 
the beneficiary maintains the RAA. According to the same officials, 
the guaranteed interest rates are 3.0 percent for RAAs opened before 
April 2003, 1.5 percent for RAAs opened April 2003 to April 2009, and 
0.5 percent for RAAs opened after April 2009. The officials noted that 
even the most recent interest rate paid on RAAs is competitive 
compared to what beneficiaries could currently earn on similar 
alternative investments. For example, as of September 26, 2011, the 
best available rates for a money market account ranged from .10 
percent to 1.10 percent.[Footnote 36] In addition, they said that RAAs 
provide beneficiaries the ability to access their funds at any time, 
including the opportunity to withdraw either partial amounts or the 
entire amount. 

Despite these benefits, RAA disclosures in general do not convey some 
important information to consumers, including information on options 
beneficiaries have for receiving their life insurance settlement 
funds. For example, the disclosures do not clearly indicate that OPM 
considers life insurance claims to be closed, and its relationship 
with beneficiaries ended--as it is with a lump-sum payment--once a 
beneficiary chooses an RAA as a settlement option. In addition, 
beneficiaries may not understand that RAAs involve a separate contract 
with MetLife that is not part of the FEGLI program and is regulated by 
states rather than the federal government. Regulatory officials we 
interviewed from one state said that consumer choice and product 
understanding is critically important to consumers and that that 
state's law, in force since the mid-1990s, requires companies to offer 
beneficiaries a choice of life insurance settlement options at the 
time life insurance claims are submitted. The same officials noted 
that RAAs cannot be the default life insurance settlement vehicle in 
their state. Three other states' regulators were concerned about how 
well beneficiaries understood RAAs and one of these states had 
recently passed a bill that required RAA disclosures to include 
information on settlement options available to beneficiaries. Another 
part of the bill prevents insurance companies from offering RAAs as 
their default settlement option. Regulatory officials from another of 
these states said that their office had undertaken a regulatory review 
and was developing guidance for insurance companies on using RAAs. 

In addition to concerns about RAA disclosures, some industry 
participants and a federal regulator expressed concern about the kinds 
of protections that apply to RAAs and how well beneficiaries 
understand them. For example, they indicated that while RAAs are not 
insured by the Federal Deposit Insurance Corporation (FDIC), the use 
of drafts that closely resemble checkbooks offered by banks could give 
the appearance that FDIC insurance protects RAAs.[Footnote 37] Others 
noted that whether state guaranty funds were adequate to fully protect 
those with RAAs is unclear. Industry officials we spoke with noted 
that state guaranty funds typically protect RAAs up to a limit of 
$300,000, although in some states that limit may be as high as 
$500,000. An insurance industry expert explained that beneficiaries 
who have RAA assets that exceed state guaranty fund limits may not be 
fully protected. According to OPM, approximately 25 percent of federal 
employees covered by FEGLI have insurance in force of $300,000 or 
more. Other officials noted that state guaranty fund protections are 
not the same as FDIC insurance. Each FDIC-insured account is 
protected; therefore, consumers with multiple accounts can be 
protected above the $250,000 FDIC limit in the aggregate. Conversely, 
state guaranty funds limit an individual's payout protection to the 
statutory ceiling so consumers with multiple retained asset accounts 
are not protected beyond it. 

Insurance Industry Organizations Have Issued Guidance to Improve RAA 
Regulation: 

In late 2010, NAIC and the National Conference of Insurance 
Legislators (NCOIL) addressed concerns about RAAs by issuing guidance 
intended to improve disclosures to consumers. In December 2010, NAIC 
issued a model bulletin for use by state insurance regulators to 
establish standards for disclosing information about the payment of 
life insurance benefits with RAAs.[Footnote 38] For example, under the 
bulletin, disclosures should clearly state that choosing an RAA 
involves establishing a supplemental contract with an insurance 
company that is distinct from the life insurance policy. The bulletin 
also notes that the supplemental policy should also provide clear 
disclosures of the rights of the beneficiaries and the obligations of 
insurers. Other key provisions in the bulletin included making sure 
disclosures explain: 

* available settlement options for beneficiaries, 

* applicability of FDIC protections, 

* applicable RAA fees charged by insurers, 

* guaranteed interest rates associated with RAAs, 

* provision and use of draft books, 

* frequency of financial statements to beneficiaries, and: 

* policies for inactive RAA accounts. 

* Around the same time, NCOIL released its Beneficiaries' Bill of 
Rights, a document which was intended to improve not only disclosures 
associated with RAAs but also transparency and accountability. NCOIL's 
new standards echoed many of NAIC's proposed improvements and also 
included provisions that, if adopted, would require insurers to: 

* refer beneficiaries to their state insurance departments if they had 
further questions about RAAs, 

* immediately return to beneficiaries remaining RAA balances if 
accounts became inactive during a 4-year period, 

* make clear that any violation of NCOIL's Bill of Rights would 
constitute a violation of states' unfair trade practices law, 

* identify any financial institution or entity that administers RAAs 
on the insurer's behalf, and: 

* report annually to state regulators on the number and dollar amount 
of RAAs held, RAA structure and investment earnings, interest rates 
paid to beneficiaries, and numbers and dollar amounts of RAAs that go 
through state unclaimed property processes. 

Some states already have regulations in place that specifically 
address RAAs and others have recently taken action to address concerns 
about the accounts. For example, according to NAIC, as of August 2011, 
26 states had RAA-related statutes that allowed insurance companies to 
establish RAAs for beneficiaries and hold life insurance assets in 
these accounts. In addition, according to NAIC, 22 states had RAA-
specific regulatory protections and disclosures, including many of the 
provisions found in NAIC's model bulletin. According to NAIC, many 
states either enacted or updated RAA regulations since the beginning 
of 2010. Figure 4 provides information on how states have approached 
regulating RAAs. 

Figure 4: State Regulation of RAAs, as of August 2011: 

[Refer to PDF for image: illustrated U.S. map] 

States with RAA-related statutes: 
Alaska: 
Arizona: 
Arkansas: 
Florida: 
Hawaii: 
Idaho: 
Louisiana: 
Michigan: 
Mississippi: 
Oklahoma: 
Oregon: 
South Dakota: 
Utah: 
Washington: 
Wisconsin: 
Wyoming: 

States with RAA regulations: 
California: 
Colorado: 
Connecticut: 
Indiana: 
Kansas: 
Maryland: 
Nebraska: 
New Hampshire: 
North Carolina: 
North Dakota: 
Ohio: 
Rhode Island: 

States with RAA statutes and regulations: 
Delaware: 
Illinois: 
Montana: 
Nevada: 
New Jersey: 
Minnesota: 
Missouri: 
Virginia: 
West Virginia: 

States with no RAA-related statutes or regulations: 
Alabama: 
Georgia: 
Massachusetts: 
New Mexico: 
New York: 
Pennsylvania: 
South Carolina: 
Tennessee: 
Texas: 
Vermont: 

States that have enacted or updated RAA-related regulations since 
January 2010: 
California: 
Delaware: 
Illinois: 
Indiana: 
Iowa: 
Kentucky: 
Maine: 
Massachusetts: 
Montana: 
Nebraska: 
New Hampshire: 
Ohio: 
Rhode Island: 
Virginia: 
West Virginia: 

Source: NAIC (data); MapInfo (map). 

[End of figure] 

Recently Improved FEGLI RAA Disclosures Still Lack Important 
Information: 

While OPM recently revised and improved the FEGLI RAA disclosures 
beneficiaries receive, the disclosures still lack some important 
information. In February 2011, OPM improved FEGLI disclosures, 
particularly the form that beneficiaries must use to file a claim. 
FEGLI disclosures now inform beneficiaries that they have settlement 
options and include language stating that beneficiaries have an 
important choice to make in choosing between a lump-sum check and an 
RAA and indicating their choice on their claims form. In particular, 
the new form explicitly states that MetLife offers a guaranteed 
minimum interest rate that may be better or worse than the market's 
prevailing interest rate and, unlike in the previous version, clearly 
informs beneficiaries that MetLife may profit from RAAs. OPM further 
improved disclosures by more clearly explaining that beneficiaries can 
access the total amount of their funds at any time with no cost and by 
improving the information on applicable protections. For instance, the 
disclosures now explicitly state that RAAs are not bank accounts and 
are not insured by FDIC or any other federal agency. They also explain 
that MetLife guarantees all RAA accounts, including interest earned, 
and that this guarantee is backed by state insurance guaranty 
associations. 

Despite OPM's improved disclosures, they continue to lack some 
important information. In addition to failing to mention the 
aforementioned separate RAA contract between FEGLI beneficiaries and 
MetLife, OPM's revised disclosures: 

* do not tell beneficiaries how to identify and contact the proper 
state department of insurance regulation should they have any 
questions or concerns about their RAAs. FEGLI beneficiaries may not 
clearly understand that OPM oversees all aspects of FEGLI prior to 
settlement but that state regulators become responsible thereafter. In 
the event that beneficiaries have questions or face issues with an 
RAA, they may not know where to turn for regulatory assistance. 
Further, there may be differences of opinion among regulators about 
who is the responsible regulator, making such guidance even more 
important to beneficiaries: 

* do not provide information on how to identify the relevant state 
guaranty fund and its applicable limits, or where to find additional 
information on a particular state's fund.[Footnote 39] According to 
the National Organization of Life and Health Guarantee Associations, 
beneficiaries whose RAA accounts contain more than their state 
guarantees may be at risk of leaving some funds unprotected. 

It is important for beneficiaries to be able to identify the relevant 
state insurance regulator and guaranty fund in case they have 
questions or issues regarding their RAAs and associated guarantee fund 
protection. However, identifying the appropriate regulator is 
challenging because some regulators differed on what type of 
instruments RAAs are, as well as who regulates them. For example, 
according to two state regulators and NAIC officials, RAAs are 
supplemental insurance contracts between beneficiaries and insurance 
companies. However, two other states' regulators classified them as 
settlement options. Yet another state's regulator said that RAAs were 
both supplemental contracts and settlement payouts of existing life 
insurance policies. States also differed on the time frame for 
considering insurance contracts and settlements settled. OPM officials 
said that FEGLI life insurance claims were satisfied as soon as 
beneficiaries established RAAs, and two of the five state regulators 
with whom we spoke shared that view. However, regulatory officials we 
interviewed from one state said that the original insurance contract 
was not satisfied until all funds were withdrawn from the RAA. The 
state insurance regulators and some industry officials with whom we 
spoke also differed on which state's regulator oversees a particular 
RAA account and, as a result, which state's guaranty fund would apply. 
For example, two states' regulatory officials and NAIC representatives 
said that the relevant regulator would be the one from the state where 
the beneficiary resided. However, two other states' officials said it 
would be the state where the original group life insurance policy was 
issued, and yet another state regulator as well as officials from the 
National Organization of Life and Health Guaranty Associations said it 
would be the state where the group life insurer was domiciled. A 
representative from a life insurance industry association with whom we 
spoke said that the appropriate regulator could be the one from the 
state where the insurance contract was established, where the 
beneficiary resided, or both. 

Without clarity on which state insurance regulator has jurisdiction 
over an RAA held by a FEGLI beneficiary, or which state guaranty fund 
might apply, beneficiaries may not know where to turn to find answers 
to RAA-related questions on the extent of protections applicable to 
their RAA. For example, the underlying FEGLI policyholder (the federal 
government) is located in Washington, D.C.; the RAA provider (MetLife) 
is domiciled in New York; and federal employees and their 
beneficiaries can live anywhere in the United States. Identifying 
which state has jurisdiction over a MetLife RAA contract, and which 
state guaranty fund applies, could be difficult, especially if the 
state regulators themselves might not agree on the proper 
jurisdiction. And as we have seen, state guaranty funds provide 
varying levels of protection. According to OPM officials, determining 
the appropriate state regulator for RAAs is technically beyond their 
purview because their involvement ends once the RAA is funded with the 
FEGLI claim payment. However, OPM does work with MetLife to create the 
disclosures that provide beneficiaries with information that helps 
them determine whether or not they wish to select an RAA as their 
settlement option. Information concerning the relevant state regulator 
and guaranty fund would be important to have in deciding whether or 
not to choose an RAA because it could determine the amount of 
protection available to the beneficiary. In addition, it could also 
inform the beneficiary of potential challenges in seeking regulatory 
assistance if, for example, the beneficiary is located in one state 
but the relevant regulator is located in a different state. 

OPM Does Not Consider the Investment Income Earned on RAAs in Setting 
Premium Levels: 

In contrast to some private insurers with whom we spoke, OPM does not 
consider any of the income MetLife earns on FEGLI RAAs when 
determining premium rates for FEGLI coverage. Some insurance company 
representatives we interviewed said that they considered all 
investment income, including income earned on RAAs, when determining 
the premium rates for their life insurance policies, and that this 
income typically had the effect of reducing the premiums insurers 
charge or defraying other related costs. While officials from two 
companies with whom we spoke said that they considered RAA earnings 
when pricing their overall group life insurance plans, other insurers 
suggested that investment income from their RAA accounts was too small 
to affect their rate-setting calculations. 

Because OPM contracts with MetLife for settlement services, RAAs 
funded with FEGLI claims payments are established and operated by 
MetLife. As a result, MetLife retains investment gains and losses 
earned on these accounts, as do most private insurers. According to 
OPM officials, because OPM considers a FEGLI claim to be fully paid 
when a MetLife RAA is established, OPM has no connection to the RAA 
accounts or any of their funds. In addition, OPM does not track any 
data related to MetLife's FEGLI-based RAAs. However, these RAAs are 
established with FEGLI claims payments, and by not considering the 
income earned on the accounts by MetLife, OPM may be missing an 
opportunity to offset program expenses and potentially reduce premium 
rates. 

While MetLife officials said that they could not specifically 
determine the amount of investment gains and losses on FEGLI-funded 
RAAs, they did say that as of December 31, 2010, RAAs maintained for 
FEGLI beneficiaries totaled approximately $3.5 billion. According to 
MetLife's 2010 annual financial statements, the company had a total of 
approximately $12 billion in FEGLI and non-FEGLI RAA accounts at year 
end and had earned approximately $267 million in net investment income 
on those accounts. The same officials also said that the company must 
meet costs and expenses associated with these RAAs, including the 
payment of guaranteed interest rates to FEGLI beneficiaries, and that 
by guaranteeing the minimum rates previously noted, MetLife has 
assumed financial risk. The same officials noted that these guaranteed 
rates are higher than most rates of return beneficiaries could 
currently receive through a bank or other liquid investment vehicle. 
In addition, MetLife would pay and has paid interest at a higher rate 
than the guaranteed minimum rates in more favorable interest rate 
environments, and according to officials, approximately 40 percent of 
FEGLI RAAs have been open for 5 or more years. This higher retention 
percentage, they said, may be partially due to advantageous rates 
MetLife is paying those beneficiaries. In contrast, several other life 
insurers with whom we spoke said that RAAs are often a short-term 
option for beneficiaries, and that beneficiaries typically close their 
RAAs within 1 to 2 years. 

Conclusions: 

Because life insurance is an important purchase for those seeking to 
protect their dependents, prospective buyers need to fully understand 
the details of the policy they are considering. Although OPM provides 
significant information on its life insurance program, some 
information that could influence federal employees' decision to buy 
FEGLI coverage is lacking. First, although FEGLI offers federal 
employees postretirement coverage, a benefit not commonly found in 
private sector group plans, FEGLI disclosures do not explain the 
effect of this benefit on premium levels, particularly the fact that 
federal employees begin prepaying for this coverage as part of their 
Basic insurance when they begin their employment. As a result, 
employees may be unaware that their premiums may be higher than those 
of group plans that do not offer such coverage. Second, the 
disclosures do not discuss FEGLI's level-premium and composite rate 
structure for Basic coverage. Because these features can make FEGLI 
premiums look more expensive than private individual coverage without 
them, especially to younger and healthier individuals, some employees 
might conclude that FEGLI coverage is not a beneficial choice and pass 
up a potentially valuable benefit. Conversely, someone planning to 
work for the federal government for a short period of time might 
purchase FEGLI coverage without realizing that the coverage includes a 
retirement benefit they may not receive and will likely cost more than 
a group policy without such a benefit. 

Since FEGLI's inception, OPM has sought to provide life insurance 
benefits that meet federal employees' needs at reasonable costs. While 
OPM has conducted some periodic comparisons of FEGLI benefits and 
premiums with those found in other group life plans, without formal, 
documented processes for these comparisons, OPM risks that FEGLI may 
not meet employees' needs, that its premiums may exceed prices charged 
for similar benefits in the private sector, or even that it may be 
offering features that it does not need to offer to be competitive 
with private sector group plans. For example, many private sector 
employers no longer offer postretirement benefits in their group life 
plans because of the cost. To help ensure that FEGLI premium rates are 
appropriate, OPM officials said that OPM actuaries annually review and 
assess FEGLI's claims experience across different plans and age 
groups, recommending rate changes when they believe such changes are 
necessary. However, OPM lacks documented processes for making such 
recommendations and documenting management's disposition of any rate 
change recommendations. Without a clear and consistent process for 
making, reviewing, and implementing rate change recommendations, OPM 
risks that needed changes may not be made and that the premiums 
charged to federal employees may not reflect the coverage they are 
receiving. 

FEGLI now offers two settlement options--a lump-sum check payment or 
an RAA--and it is important for beneficiaries to be able to choose the 
option that best meets their needs and to know where to turn to 
resolve any issues they might have. While RAAs may offer benefits that 
some beneficiaries appreciate, such as certain flexibilities and a 
guaranteed interest rate, they also have certain characteristics that 
need to be fully disclosed. OPM has recently revised its disclosures 
to beneficiaries to provide more information on RAAs, but the 
disclosures still do not contain some important information. For 
instance, they do not explicitly state that RAAs involve a new 
contract between beneficiaries and MetLife that is regulated by states 
rather than the federal government and that involves state-based 
protections with certain limitations. As a result, FEGLI beneficiaries 
may be unaware that new contractual terms and conditions govern their 
RAAs. They also may not fully understand how their RAAs are protected 
and what the limitations of that protection might be. Finally, the 
disclosures do not provide the information that beneficiaries need to 
find the proper regulator should they have questions about their 
accounts--a problem that is complicated by the fact that the 
regulators themselves may disagree over which one has jurisdiction. 

Recommendations for Executive Action: 

To help better ensure that federal employees have all the information 
they need when deciding whether to purchase life insurance through 
FEGLI, we recommend that the Director of the Office Personnel 
Management take steps to ensure that FEGLI disclosures include 
complete and accurate information on key benefits and features, 
including the program's postretirement coverage, composite rates, and 
level-premium structure. 

To help ensure that FEGLI provides relevant benefits that meet the 
needs of federal employees at a reasonable and appropriate cost, we 
recommend that the Director of the Office of Personnel Management 
develop and implement a more structured process for comparing FEGLI 
with private sector group life insurance plans and for documenting OPM 
actuaries' rate recommendations and any management decisions 
concerning those recommendations. 

To help ensure that FEGLI beneficiaries are provided with information 
on all relevant aspects of selecting an RAA as a FEGLI settlement 
option, we recommend that the Director of the Office of Personnel 
Management include more complete information on financial protections 
and regulatory oversight in program disclosures, working as necessary 
with MetLife and NAIC to determine the appropriate state regulator for 
beneficiaries and their RAAs. 

Agency Comments and Our Evaluation: 

On October 7, 2011, we provided a draft of the report to OPM for 
comment. On October 28, 2011, OPM provided written comments, which are 
reproduced in full in appendix III. OPM concurred with the 
recommendations in the report and also provided technical comments, 
which we incorporated as appropriate. 

OPM concurred with our first recommendation that it take steps to 
ensure FEGLI disclosures include complete and accurate information on 
FEGLI's key benefits and features, including postretirement coverage, 
composite rates, and level-premium structure. Specifically, OPM stated 
that it strives for FEGLI transparency and will take steps to provide 
more information on key FEGLI features to ensure federal employees 
have the information they need to make an informed benefit decision. 

OPM also concurred with our second recommendation that OPM develop and 
implement a more structured process for comparing FEGLI with private 
sector group life insurance plans and for documenting OPM actuaries' 
rate recommendations and any management decisions concerning those 
recommendations. Specifically, OPM stated that it believes that 
benchmarking federal benefits programs, including FEGLI, with other 
employer-provided benefits is essential to ensuring that the federal 
government can recruit, retain, and honor a world-class workforce. 

Finally, OPM concurred with our third recommendation that OPM include 
more complete information on financial protections and regulatory 
oversight, working as necessary with MetLife and NAIC to determine the 
appropriate state regulator for beneficiaries and their RAAs. 
Specifically, OPM stated that it has updated the FEGLI claims form and 
website to provide more information about the choice for FEGLI 
beneficiaries to receive a lump-sum check or RAA and will ensure that 
the best information is available to assist beneficiaries in their 
decision-making process. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to appropriate congressional committees, the Director of the U.S. 
Office of Personnel Management, and the Chief Executive Officer of the 
National Association of Insurance Commissioners. In addition, the 
report will be available at no charge on GAO's website at [hyperlink, 
http://www.gao.gov]. 

If you or your staffs have any questions regarding this report, please 
contact me at (202) 512-7022 or cackleya@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff that made major 
contributions to this report are listed in appendix IV. 

Signed by: 

Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Scope and Methodology: 

To describe and evaluate the Federal Employees' Group Life Insurance 
(FEGLI) program's key operational and financial components, we 
examined FEGLI's authorizing statute and associated regulations, 
including the Life Insurance Federal Acquisition Regulation (LIFAR). 
In addition, we reviewed the program's key policy documents, including 
the FEGLI Handbook, FEGLI Program Booklet for Federal Employees, FEGLI 
website, and the contract between the Office of Personnel Management 
(OPM) and the Metropolitan Life Insurance Company (MetLife). We 
focused on how FEGLI provides life insurance coverage to federal 
employees and their families and the cost of that insurance to federal 
employees and their respective agencies. Interviews with OPM and 
MetLife officials provided additional information on FEGLI operations, 
including the program's coverage options; how the government, MetLife, 
and reinsurers bear insurance risk; and how the Employees' Life 
Insurance Fund--FEGLI's main financial fund--is used for paying life 
insurance claims and other program costs. We reviewed data from OPM 
annual financial reports and performance and accountability reports 
from 2000 to 2010 to analyze FEGLI's assets and liabilities. In 
addition, we reviewed information in the U.S. Budget on FEGLI from 
fiscal years 2002 to 2012 to analyze FEGLI premiums, claims payments, 
and investment income. We also reviewed MetLife financial statements 
to determine the total dollar amount of MetLife's retained asset 
accounts (RAA) and the total investment income MetLife derives from 
its RAA investments. Because these are audited documents and financial 
statements, with unqualified audit opinions, we found data from these 
documents and summary statistics from OPM and MetLife to be reliable 
for the purposes of this report. In addition, to determine how FEGLI's 
structure and operations compare to large private sector group life 
insurance plans, we compared FEGLI to plans offered by six large 
private sector group life insurers. Our comparison focused on 
insurance coverage options, processes for determining premiums, 
available settlement options, and methods for establishing capital or 
surplus levels. We selected these insurers based on various insurer 
characteristics including their group life insurance market share, 
number of group life policies and certificates issued, and whether or 
not they provided group life insurance to federal employees. We also 
interviewed officials from the National Association of Insurance 
Commissioners (NAIC) and the American Council of Life Insurers (ACLI) 
to gain their perspective on group life insurance plans, finances, and 
operations. For additional information on how private sector group 
life plans are structured and the insurance they offer, we met with 
insurance regulators and benefits administrators from the states of 
California, Florida, New York, North Carolina, and Maryland. We 
selected this sample of states because it is geographically diverse, 
includes states of domicile for several large insurance companies that 
sell a significant number of the industry's group life insurance 
policies, has a large number of federal employees, and contains some 
states that have RAA regulations and others that do not. In addition, 
we met with representatives from two private companies with experience 
in insurance brokerage, and human capital and benefits consulting. 

To describe and evaluate OPM's oversight of the FEGLI program, we (1) 
reviewed FEGLI's authorizing statute and regulations, including the 
LIFAR, (2) reviewed OPM's program monitoring, reporting, and other 
oversight activities, (3) interviewed OPM and MetLife officials, and 
(4) met with industry association representatives. We focused on the 
steps OPM takes to periodically monitor and review FEGLI's financial 
condition, and on OPM processes for overseeing MetLife functions for 
receiving, adjudicating, and paying claims to FEGLI beneficiaries. In 
addition, to identify possible regulatory and consumer protection 
issues with group life insurance plans and settlement vehicles, we met 
with representatives from NAIC, ACLI, and a consumer advocate from the 
Center for Economic Justice. To determine how states generally 
regulate group life insurance plans, we met with insurance regulators 
from the five states described earlier and compared FEGLI oversight 
with state regulation of private group life insurers and identified 
similarities and differences. 

To describe and evaluate the role of RAAs in FEGLI's settlement 
process, we examined key OPM disclosures, including the FEGLI 
Handbook, FEGLI Program Booklet for Federal Employees, FEGLI website, 
and Strategic Plan, 2010-2015, and we interviewed OPM officials. To 
understand the kinds of information beneficiaries receive on life 
insurance settlement processes, we also reviewed MetLife's Welcome Kit 
for RAAs and interviewed MetLife officials. We focused on (1) what 
RAAs are, how they function, and how they are funded, (2) the kinds of 
RAA disclosures OPM and MetLife provide and how clearly they help 
beneficiaries understand their use, and (3) what RAA protections apply 
to FEGLI beneficiaries. In addition, we examined how RAAs are 
regulated by focusing on the activities and processes OPM and state 
regulators use to oversee these accounts. With respect to state RAA 
oversight and to determine what kinds of regulatory and consumer 
protection requirements states have for insurance companies that offer 
RAAs, we chose a small number of states as described earlier, some of 
which have RAA-specific regulation, and others that do not. In 
addition, we compared FEGLI's use of RAAs to their use in the private 
sector and looked for any similarities, differences, and emerging 
issues. We also looked to the insurance industry for any applicable 
best practices with respect to RAAs that might be used to improve the 
FEGLI program. To better understand protections associated with RAAs, 
we contacted officials from the Federal Deposit Insurance Corporation, 
state regulators from our sample, and officials from the National 
Organization of Health and Life Insurance Guaranty Associations and 
the Center for Economic Justice. We also reviewed information on RAA 
guidance from the National Conference of Insurance Legislators. 

We conducted this performance audit from September 2010 to November 
2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Federal Employees' Group Life Insurance Program Financial 
Information: 

[End of section] 

This appendix provides information on the dollar amount of premiums 
the FEGLI program has collected from enrolled federal employees and 
their respective agencies. It also shows the dollar amount of claims 
the program has paid to beneficiaries of federal employees. In 
addition, the figure shows the dollar amount of interest income 
derived from investing FEGLI Fund assets in U.S. Treasury securities. 
From 2000 to 2010, the dollar amount of premiums collected and claims 
paid has grown, while the dollar amount of interest income has 
declined slightly. 

Figure 5: FEGLI Premiums, Claims Paid, and Interest Income, 2000-2010: 

[Refer to PDF for image: multiple line graph] 

Nominal dollars in billions: 

Calendar Year: 2000; 
Premiums paid: $1.8 billion; 
Claims paid: $1.9 billion; 
Interest income: $1.4 billion. 

Calendar Year: 2001; 
Premiums paid: $2.0 billion; 
Claims paid: $2.1 billion; 
Interest income: $1.4 billion. 

Calendar Year: 2002; 
Premiums paid: $2.1 billion; 
Claims paid: $2 billion; 
Interest income: $1.4 billion. 

Calendar Year: 2003; 
Premiums paid: $2.1 billion; 
Claims paid: $2.0 billion; 
Interest income: $1.4 billion. 

Calendar Year: 2004; 
Premiums paid: $2.2 billion; 
Claims paid: $2.2 billion; 
Interest income: $1.3 billion. 

Calendar Year: 2005; 
Premiums paid: $2.4 billion; 
Claims paid: $2.2 billion; 
Interest income: $1.2 billion. 

Calendar Year: 2006; 
Premiums paid: $2.6 billion; 
Claims paid: $2.2 billion; 
Interest income: $1.3 billion. 

Calendar Year: 2007; 
Premiums paid: $2.7 billion; 
Claims paid: $2.5 billion; 
Interest income: $1.3 billion. 

Calendar Year: 2008; 
Premiums paid: $2.9 billion; 
Claims paid: $2.5 billion; 
Interest income: $1.1 billion. 

Calendar Year: 2009; 
Premiums paid: $3.0 billion; 
Claims paid: $2.5 billion; 
Interest income: $1.3 billion. 

Calendar Year: 2010; 
Premiums paid: $3.2 billion; 
Claims paid: $2.6 billion; 
Interest income: $0.9 billion. 

Source: U.S. Budget Appendix for OPM, Fiscal Years 2002-2012. 

[End of figure] 

[End of section] 

Appendix III: Comments from the Office of Personnel Management: 

United States Office Of Personnel Management: 
The Director: 
Washington, DC 2(1415: 

October 28, 2011: 

Ms. Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 
U.S. Government Accountability Office (GAO): 
441 G Street NW: 
Washington DC 20548: 

Dear Ms. Cackley: 

Thank you for providing the U.S. Office of Personnel Management (OPM) 
the opportunity to comment on the Government Accountability Office 
draft report "Federal Employees' Group Life Insurance: Retirement 
Benefit and Retained Asset Account Disclosures Could Be Improved-.
We appreciate the opportunity to provide you with comments about this 
report. 

Recommendation 1: 

To help better ensure that Federal employees have all the information 
they need when deciding whether to purchase life insurance through 
FEGLL we recommend that the Director of the Office of Personnel 
Management take steps to ensure that FEGLI disclosures include 
complete and accurate information on key benefits and features, 
including the program's postretirement coverage, composite rates, and 
level-premium structure. 

OPNI Response: 
We concur. We are pleased that your thorough review of the FEGLI 
Program has shown that it is a sound program that has served the 
Federal workforce for over 50 years, providing life insurance to over 
four million Federal employees and retirees. We strive for 
transparency of our program and will provide more information about 
the level-premium structure. including the composite rates and post 
retirement coverage, to ensure Federal employees have what they need 
to make an informed benefit decision. 

Recommendation 2: 

To help better ensure that FEGLI provides relevant benefits that meet 
the needs of Federal employees at a reasonable and appropriate cost, 
we recommend that the Director of the Office of Personnel Management 
develop and implement a more structured process for comparing FEGLI 
with private sector group life insurance and for documenting OPM 
actuaries' rate recommendations and any management decisions 
concerning those recommendations.  

OPM Response:  

OPM concurs with GAO's recommendation to develop and implement a more 
structured process for evaluating the FEGLI program. OPM believes that 
periodic benchmarking of the Federal Benefits Programs. including the 
FEGLI Program. with other employer-provided benefits is essential to 
ensuring that the Federal government is able to recruit, retain and 
honor a world-class workforce.  

Recommendation 3:  

To help ensure that FEGLI beneficiaries are provided with information 
on all relevant aspects of selecting an RAA as a FEGLI settlement 
option, we recommend that the Director of the Office of Personnel 
Management include more complete information on financial protections 
and regulatory oversight. working as necessary with MetLife and NAIC 
to determine the appropriate state regulator for beneficiaries and 
their RAAs.  
 
OPM Response: 

We concur. OPM has updated the FEGLI claim forms and website to 
provide more information about the choice for beneficiaries between a 
lump sum check and a Total Control Account. We want knowledgeable and 
informed beneficiaries to make the best financial decision during a 
difficult time. We will ensure that the best information available is 
posted to assist beneficiaries in their decision making process.  

OPNI appreciates the opportunity to respond to information in the 
draft report.  

Sincerely, 

Signed by: 

John Berry: 
Director:  

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Alicia Puente Cackley (202 512-7022 or cackleya@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Patrick Ward (Assistant 
Director), Joe Applebaum, Jan Bauer, Emily Chalmers, Marc Molino, Alan 
Rozzi, Steve Ruszczyk, Mel Thomas, and Frank Todisco made key 
contributions to this report. 

[End of section] 

Footnotes: 

[1] This is the fund OPM uses for the FEGLI program to pay for life 
insurance settlements, administrative costs, and compensation to 
MetLife for adjudicating and paying FEGLI claims. 

[2] For the purposes of this report, "Basic" coverage refers to FEGLI 
coverage while "basic" refers to life insurance offered in the private 
sector. We treat FEGLI's "Option A, B, and C" and the private sector's 
"optional" coverage similarly. 

[3] In this report, we use the term "industry participants" to refer 
to those entities with a role in the insurance industry, including 
state insurance regulators and benefit administrators, actuaries, 
consumer advocates, and insurance industry associations. 

[4] For the purposes of this report we use the term disclosures to 
include the FEGLI Handbook, Employee Program Booklet, website, and 
life insurance claim form. 

[5] Pub L. No. 83-598. 68 Stat. 736 (Aug 17, 1954). 

[6] In addition to FEGLI, the Civil Service Retirement System (CSRS) 
and Federal Employees Retirement System (FERS) provide survivor 
benefits under certain conditions to current and former spouses and 
children in the event a federal employee dies. Under CSRS, survivors 
may receive 55 percent of the accrued disability annuity for which the 
employee would have been eligible. Under FERS, survivors of employees 
who had at least 18 months of service may receive a lump-sum payment 
(a fixed amount that is adjusted each year for inflation), plus the 
greater of half of the employee's high-3 average pay or half of the 
employee's annual rate of pay at death. According to OPM, high-3 
average pay is determined by finding the highest average basic pay 
over any 3-year period. The 3 years must be consecutive. Generally, 
the final 3 years of service include the highest pay, but pay from an 
earlier period can be used if it was higher. In addition to this lump-
sum payment, FERS survivors of employees who had at least 10 years of 
service may receive an annuity equal to 50 percent of the employee's 
accrued benefit. Under both CSRS and FERS, there are also benefits 
payable to survivors of former employees and to survivors of retirees. 

[7] Group life insurance protects a group of people and is usually 
issued to an employer for the benefit of its employees. Each group 
member holds a certificate as evidence of his or her insurance. Group 
life insurance generally does not require individuals to demonstrate 
medical proof of insurability and may be less expensive than 
individual policies that require medical underwriting, depending on 
the health of the individual. Term insurance is generally defined as 
covering the insured for a certain period of time (the "term"). Term 
policies provide death benefits only if the insured dies during the 
term, which can be 1, 5, 10, or even 30 years, with group life 
policies generally having a term of 1 year. Term policies generally do 
not have any cash, or paid-up value, and those with term policies 
cannot get loans by borrowing from this insurance. 

[8] These premium amounts, as well as many aspects of the FEGLI 
program, including for example, the percentage of the premium paid by 
each employee, the amount of coverage for accidental death and 
dismemberment (AD&D) coverage, and the existence and amount of 
optional insurance coverage, are mandated by the FEGLI statute. See 5 
U.S.C. §§ 8701-8716. 

[9] According to OPM, the United States Postal Service pays the entire 
cost of FEGLI Basic insurance for its employees. 

[10] AD&D insurance is also included in Option A insurance coverage at 
no additional cost. 

[11] In addition, federal employees can elect Basic and Options A, B, 
and C within 60 days of experiencing a qualifying life event. 
Qualifying life events include marriage, divorce, the death of a 
spouse, or acquisition of an eligible child. 

[12] These premium rates are for the full $10,000 of Option A 
coverage, not per $1,000 of coverage as the rates for Basic and Option 
B coverage are quoted. 

[13] For Option B coverage, these rates can range from $.065 per month 
for each $1,000 of coverage for those under age 35 to $5.20 per month 
for those 80 years of age and older. For Option C coverage, these 
rates can range from $.59 per month for each multiple of coverage 
selected for those under age 35 to $13.00 per month for those 80 years 
and older. 

[14] For Basic insurance, the employee's salary would be rounded up to 
$91,000. Basic insurance cost would be 91 x $0.150, or $13.65 biweekly 
and $354.90 annually. 

[15] For Option B insurance, the salary would be rounded to $89,000 x 
5 multiples of annual salary, or $445,000 in coverage. Option B 
insurance cost would be 445 x $0.09, or $40.05 biweekly and $1,041.30 
annually. 

[16] This example assumes that the employee retires at age 65, is an 
annuitant, and chooses the No Reduction option for Basic insurance and 
five multiples of Option B coverage. The preretirement premium for 
Basic insurance stops at age 65, but the employee pays an extra 
premium for the Basic Insurance No Reduction option. The rate for 
Basic insurance with No Reduction option is $1.83 per $1,000 of 
coverage per month for an annual total cost of $1,998.36. Having 
chosen the No Reduction option for five multiples of Option B coverage 
in retirement at age 65 would cost the employee $8,330.40 annually 
(445 x $1.560 x 12 months). 

[17] An open season is a time designated by OPM during which federal 
employees can assess their benefits and potentially change their 
benefits enrollment without undergoing a medical examination or 
qualifying life event. 

[18] MetLife sets RAA interest rates by referencing two indexes: the 
iMoneyNet Money Fund Report Averages/Government 7-Day Simple Yield (a 
leading index of government money market mutual fund rates) and the 
Bank Rate Monitor National Money Market Rate Index (a leading index of 
rates paid by the 100 large banks and thrifts on money market 
accounts). 

[19] A draft is a payment order in writing that directs a second 
party--in the case of RAAs, the insurance company--to pay a specified 
sum to a third party, for example, a retailer. A check is a bank draft 
that is payable when presented. 

[20] For FEGLI, Basic coverage equals an employee's salary amount 
rounded up to the next even thousand, plus two thousand dollars, or 
$10,000, whichever is higher. According to industry officials, for 
private plans basic coverage typically can be a flat dollar amount, 
the amount of an employee's salary, or up to two times an employee's 
salary. 

[21] According to OPM, for FEGLI, employees enrolling as new hires or 
during an open season do not need to provide information on their 
medical condition or history. 

[22] Some large private sector employers may share in the risk of loss 
through certain arrangements with an insurer, such as receiving back 
from the insurer a portion of premiums paid in excess of claims or 
paying additional premiums if claims exceed a specified amount. 

[23] A policy contract between OPM and MetLife established MetLife as 
FEGLI's insurer. In addition to FEGLI's insurer, the program also has 
additional insurance companies that provide reinsurance. According to 
the ACLI, reinsurance involves the transfer of some or all risk to 
another insurer. The company transferring the risk is called the 
"ceding company" and the company receiving the risk is called the 
"life assuming company" or "reinsurer." 

[24] For employees of the U.S. Postal Service, Basic life insurance 
for enrollees under FEGLI is free, as the U.S. Postal Service pays for 
100 percent of this cost. 

[25] For example, a private employer may offer $50,000 in basic life 
insurance coverage without any premiums for employees. FEGLI may offer 
$100,000 in Basic coverage, but federal employees must pay two-thirds 
of the premium. So in essence, FEGLI employees who are over age 45 and 
not receiving the program's extra benefit coverage are getting one-
third, or approximately $33,300 in employer-paid coverage. 

[26] FEGLI disclosures characterize retirement coverage as "free" when 
certain reduction options are selected after age 65. 

[27] In addition to financial management and oversight by OPM's 
actuarial and financial staff, OPM's Inspector General audits the 
FEGLI program every 2 years. MetLife's auditors also audit 
administrative and other expenses charged to the FEGLI program. 

[28] The purpose of the LIFAR is to implement and supplement the 
Federal Acquisition Regulation specifically for acquiring and 
administering a contract, or contracts, for life insurance under 
FEGLI. 48 C.F.R. § 2101.101(b). The part of the Federal Acquisition 
Regulation that specifies contractual competition requirements does 
not apply to FEGLI because the statute that created FEGLI, 5 U.S.C 
Chapter 87, exempts the FEGLI program from competitive bidding. 

[29] According to the LIFAR, OPM applies a weighted guidelines method 
to determine the service charge for FEGLI. The profit analysis factors 
include contractor performance, contract cost risk, federal 
socioeconomic programs, capital investments, cost control, independent 
development, and transitional services. 

[30] In past reports we have noted the importance of federal agencies 
determining the liability created by their insurance programs and 
ensuring the availability of funds to meet those liabilities. See GAO, 
Federal Emergency Management Agency: Action Needed to Improve 
Administration of the National Flood Insurance Program, [hyperlink, 
http://www.gao.gov/products/GAO-11-297] (Washington, D.C.: June 9, 
2011) and Budget Issues: Budgeting for Federal Insurance Programs, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-97-16] (Washington, 
D.C.: Sept. 30, 1997). 

[31] According to OPM officials, they calculate FEGLI's actuarial 
liability using methods that are consistent with guidance established 
by the Federal Accounting Standards Accounting Board's Statement of 
Federal Financial Accounting Standards (SFFAS) 5: Accounting for 
Liabilities of the Federal Government. They also use SFFAS 33: 
Pensions, Other Retirement Benefits, and Other Post-Employment 
Benefits: Reporting Gains and Losses from Changes In Assumptions and 
Selecting Discount Rates and Valuation Dates. When they perform 
FEGLI's liability calculations following these standards, FEGLI's 
total liability exceeds program assets. However, FEGLI's total 
liability does not account for employee contributions for Optional 
coverage. 

[32] OPM provided us with the results of these internal analyses. We 
did not verify them, both because of the potentially significant costs 
involved and because of the program's history of meeting its claims 
payment responsibilities in every year of its operation. 

[33] The most recent changes to FEGLI premium rates took place in 2002 
and were phased in between 2003 and 2005. 

[34] See GAO, Standards for Internal Control in the Federal 
Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.: 
November 1999). 

[35] As stated in OPM's official death claim form from February 2011, 
if the proceeds exceed $5,000 and no box is checked, beneficiaries 
will receive an RAA. 

[36] Money market account interest rate information is according to 
Bankrate.com. 

[37] FDIC is an independent agency of the United States government 
that provides protection against the loss of deposits if an FDIC-
insured bank fails. FDIC insurance covers all deposit accounts at 
insured banks, including checking accounts, Negotiable Order of 
Withdrawal (NOW) accounts, savings accounts, money market deposit 
accounts, and certificates of deposit (CDs). The FDIC does not insure 
money invested in stocks, bonds, mutual funds, life insurance 
policies, annuities, or municipal securities, even if these products 
were purchased from an insured bank. FDIC insurance is backed by the 
full faith and credit of the United States government. Since the 
FDIC's creation in 1933, no depositor has ever lost money on FDIC-
insured deposits. 

[38] According to NAIC, model bulletins are documents produced by NAIC 
that are generally used by state insurance departments to notify 
companies and/or insurance producers on how state insurance 
departments intend to interpret various issues or developments. 
Bulletins do not generally carry the force of state law, though they 
may be used to notify interested parties of adoptions or changes to 
existing state law. 

[39] FEGLI disclosures, however, now alert beneficiaries that RAAs, 
including interest, are fully guaranteed by MetLife and that MetLife's 
guarantee is further backed by state insurance guaranty funds. In 
addition, the disclosures state that maximum limits on guarantees that 
protect beneficiaries' RAAs vary across states. 

[End of section] 

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