GAO-19-631, MILITARY PENSIONS: Servicemembers Need …

United States Government Accountability Office

Report to Congressional Requesters

September 2019

MILITARY PENSIONS

Servicemembers Need Better Information to Support Retirement Savings Decisions

GAO-19-631

Highlights of GAO-19-631, a report to congressional requesters

September 2019

MILITARY PENSIONS

Servicemembers Need Better Information to Support Retirement Savings Decisions

Why GAO Did This Study

What GAO Found

DOD's new retirement system, BRS, provides automatic and matching DOD contributions to servicemembers' individual Thrift Savings Plan accounts but reduces the retirement annuity paid to those who serve at least 20 years. BRS also offers servicemembers the option of taking part of their retirement annuity as a lump-sum payment.

GAO was asked to describe DOD's financial education efforts under BRS. This report examines (1) actions DOD has taken to help servicemembers understand BRS and saving for retirement, (2) what DOD can learn from financial literacy training effective practices and its implementation of BRS training to continue supporting servicemembers in saving for retirement, and (3) how BRS lump-sum payment amounts are determined.

In 2016, the Department of Defense (DOD), along with the military service branches, began a multi-year effort to provide training to help servicemembers make informed decisions about saving for retirement through DOD's new retirement system, the Blended Retirement System (BRS). DOD provided computer-based training to help military supervisors, financial counselors, and eligible servicemembers understand the new retirement system, implemented in 2018, and its impact on saving for retirement. DOD trained financial counselors to provide servicemembers in-person, one-on-one financial counseling and classroom courses on BRS and related topics. In addition, DOD prepared ongoing financial literacy training that servicemembers will take upon reaching specific career and life stages.

BRS trainings met many of the effective practices for financial literacy training identified in prior GAO work, but some DOD trainings do not incorporate the practice of assessing servicemembers' financial literacy. DOD could use such assessments to modify course material to bolster training in areas where servicemembers' comprehension was weaker. Without assessing whether its financial literacy training is effectively conveying course information, DOD may be missing opportunities to better support servicemembers' retirement decisions. Servicemembers also reported challenges in taking the Opt-In Course for BRS that may inform ongoing and future DOD training.

GAO reviewed DOD's efforts to educate servicemembers on retirement decisions, conducted group interviews with senior officers and enlisted servicemembers at five military installations on facilitating the rollout of BRS training to junior servicemembers, and created a lump-sum payment calculator to compare different calculation methods and assumptions on the value of the lump-sum payment.

What GAO Recommends

GAO recommends 1) DOD assess its course evaluations to improve its financial literacy training on retirement for servicemembers, 2) DOD provide key information on the calculation of retirement lump-sum payments, and 3) Federal Retirement Thrift Investment Board explore alternatives for servicemembers to receive their TSP passwords. Both agencies agreed with their respective recommendations.

Examples of Servicemembers' Financial Literacy Challenges on Retirement

? understanding the training due to a low initial level of financial literacy ? relating to long-term goals of retirement due to short-term life goals ? setting up online access to Thrift Savings Plan accounts

Source: GAO interviews with military supervisors and financial educators at five military installations. | GAO-19-631

DOD determines BRS lump-sum payment amounts at retirement by applying an interest rate (or discount rate) to calculate the present value of annuity payments servicemembers forego by taking a lump sum. The BRS discount rate exceeds the rate used by private-sector pension plans, resulting in a lower lump sum than if private-sector rates applied. DOD can take certain steps to help servicemembers understand how to compare the BRS lump-sum payment option with the full annuity option. Without this information, servicemembers may not make informed decisions and potentially risk their retirement savings.

V. iew GAO-19-631. For more information,

contact Charles A. Jeszeck at (202) 512-7215 or jeszeckc@; or Frank Todisco at (202) 512-2700 or todiscof@.

______________________________________ United States Government Accountability Office

Contents

Letter

Appendix I Appendix II Appendix III Appendix IV Tables

Figures

1

Background

4

DOD Used a Multi-Faceted Approach to Implement BRS Training

and Outreach Campaigns and Is Developing Continuing

Education on Saving for Retirement

10

DOD Training Reflected Many Financial Literacy Effective

Practices, but Servicemembers' Challenges Can Inform Future

Training Efforts

17

Additional Information Explaining BRS Lump-Sum Payment

Options Needed for Servicemembers to Make Informed

Choices

24

Conclusions

32

Recommendations for Executive Action

33

Agency Comments

33

Objectives, Scope, and Methodology

37

Comments from the Department of Defense

44

Comments from the Federal Retirement

Thrift Investment Board

48

GAO Contacts and Staff Acknowledgments

50

Table 1: GAO Assessment of Department of Defense's (DOD)

Blended Retirement System (BRS) Training Courses

19

Table 2: Key Information Identified by GAO that Could Be

Included in Military Blended Retirement System (BRS)

Disclosures on Lump Sums and Annuities

31

Figure 1: Active Component Historical Estimated Probabilities of

Reaching 20 Years of Service, by Entrance Cohort

5

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Figure 2: Comparison of Military Retirement Systems

8

Figure 3: Implementation Timeline for Military's Blended

Retirement System (BRS)

12

Figure 4: Examples of Department of Defense (DOD) and Military

Service Branches Blended Retirement System (BRS)

Outreach Campaigns

14

Figure 5: Examples of the Military Service Branches' Continuing

Efforts on Financial Literacy Education about Retirement

for Servicemembers

16

Figure 6: Active-duty Pay and Resulting Pension Payments for

Servicemembers, With and Without an Optional Lump

Sum Payment

25

Figure 7: Example of Military BRS and ERISA-Based Lump-Sum

Payment Amounts for a Monthly Annuity of $2,000 of

which $1,000 (50 Percent) Is Payable from Retirement

Ages of 40 and 50 to Age 67

29

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Abbreviations

BRS CBO CFPB COLA DB DC DROP DOD ERISA FERS FRA FRTIB GDR IDA IRS MCRMC

NDAA PFC PFM ROTC TSP USAA

Blended Retirement System Congressional Budget Office Consumer Financial Protection Bureau cost-of-living adjustment defined benefit defined contribution deferred retirement option provision Department of Defense Employee Retirement Income Security Act of 1974 Federal Employees Retirement System full retirement age Federal Retirement Thrift Investment Board Government Discount Rate Institute for Defense Analyses Internal Revenue Service Military Compensation and Retirement Modernization Commission National Defense Authorization Act Personal Financial Counselor Personal Financial Manager Reserve Officer Training Corps Thrift Savings Plan United Services Automobile Association

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441 G St. N.W. Washington, DC 20548

Letter

September 19, 2019

The Honorable Richard J. Durbin Ranking Member Subcommittee on Defense Committee on Appropriations United States Senate

The Honorable Patty Murray Ranking Member Committee on Health, Education, Labor, and Pensions United States Senate

The military retirement system traditionally offered only a defined benefit (DB) annuity, providing regular monthly payments for life based on military earnings and years of service.1 However, under this legacy retirement system, only 19 percent of active-duty servicemembers who entered in fiscal year 2013 are estimated to complete the minimum 20 years of service required to receive the DB annuity.2 The National Defense Authorization Act (NDAA) for Fiscal Year 2016 included provisions that created a new military retirement system. This Blended Retirement System (BRS) offers a new defined contribution (DC) benefit in the form of an employer contribution to a personal Thrift Savings Plan (TSP) account that will provide some retirement compensation for a large majority of servicemembers, including those who serve less than 20 years; however, it also reduces the DB annuity paid to those who serve 20 years or more.3 The Department of Defense (DOD) estimates that full implementation of BRS will reduce its annual budget costs by $1.4 billion

1A defined benefit (DB) plan is an employer-sponsored retirement plan that typically provides a benefit for the life of the participant, based on a formula specified in the plan that takes into account factors such as an employee's salary history and years of service.

2Under the legacy retirement system, only 17 percent of enlisted servicemembers and 49 percent of officers earned a retirement benefit by completing the required minimum 20 years of service, as estimated at 1 year of service for new servicemember entrants who began in fiscal year 2013. Department of Defense (DOD), Valuation of the Military Retirement System, September 30, 2012 (Washington, D.C.: April 2014).

3See Pub. L. No. 114-92, ?? 631-635, 129 Stat. 726, 842-52.

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compared to the legacy retirement system, in 2016 dollars.4 Active-duty servicemembers with fewer than 12 years of military service as of December 31, 2017 were given the 2018 calendar year to make an irrevocable decision on whether to opt into BRS or remain in the legacy retirement system.5 Starting January 1, 2018, all new military personnel were automatically enrolled in BRS.

BRS's shift toward DC benefits means that servicemembers covered by BRS will have more of their retirement security dependent on their financial decisions, including how much to contribute to their TSP account, how to invest their TSP balance, and how to manage their savings upon military retirement. Additionally, for those who complete at least 20 years of service, BRS offers the option to take some of their DB annuity as a lump-sum payment. DOD and the military service branches provide some financial education to servicemembers, but concerns exist about whether servicemembers are able to make the informed decisions about their retirement required by BRS.

You asked us to review how DOD was helping servicemembers make decisions about their retirement. In this report, we examine (1) what actions DOD has taken to help servicemembers understand BRS and, more generally, educate servicemembers on saving for retirement; (2) what DOD can learn from financial literacy training effective practices and the implementation of BRS training to continue supporting servicemembers in saving for retirement; and (3) how lump-sum payment amounts are determined under BRS and how they compare to the methods used by the private-sector pension plans that offer them.

To answer these questions, we conducted interviews with officials from the DOD, the Federal Retirement Thrift Investment Board (FRTIB), and the Consumer Financial Protection Bureau (CFPB). We also conducted group interviews with senior officers and enlisted servicemembers at five military installations. Though these interviews did not yield information

4DOD's savings estimates are projected in the "steady state," which represents the point in the future when all servicemembers are covered under the Blended Retirement System (BRS).

5All servicemembers in a pay status in the National Guard or Reserve with fewer than 4,320 retirement points as of December 31, 2017 were also eligible to opt into BRS. Reservists' retirement eligibility and benefits are not based on years of service but on retirement points, which they earn by participating in various military activities, such as active service, drills, or taking qualifying military correspondence courses.

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that was generalizable to all senior officers and enlisted servicemembers, they did provide insight into their experiences facilitating the rollout of BRS training to junior servicemembers. Finally, we reviewed and compared DOD's financial literacy trainings to the financial literacy training effective practices published in a prior GAO report.6 To

understand how BRS lump-sum payments are determined, we reviewed DOD documents and relevant federal law. We also interviewed DOD officials to understand what issues they considered when designing BRS's lump-sum feature, how DOD determines the discount rate, or interest rate, that it uses for lump-sum payments, and how the rate relates to personal discount rates, which derive from research on observed choices people make between receiving certain sums of money in the future versus receiving smaller sums sooner. We interviewed stakeholders knowledgeable about other pension plans to understand how the discount rate in BRS differs from the discount rate used by those plans. We also created a lump-sum payment calculator to run simulations of various lump-sum calculations--including those used in the private sector as required by the Employee Retirement Income Security Act of 1974, as amended (ERISA)--to show the effect of different calculation methods and assumptions on the value of the lump-sum payment.7

We conducted this performance audit from March 2018 to September 2019 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.

6GAO, Financial Literacy: The Role of the Workplace, GAO-15-639SP (Washington, D.C.: July 2015). See appendix I for more information on how GAO selected these financial literacy training effective practices from our prior work.

7See Pub. L. No. 93-406, 88 Stat. 829. Among other things, the Employee Retirement Income Security Act of 1974, as amended (ERISA), establishes certain requirements and minimum standards for most private-sector retirement plans and is the federal statute that sets standards for determining minimum lump-sum payments for private-sector pension plans that offer them.

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