a

GAO

United States General Accounting Office

Report to the Chairman, Subcommittee 

on Energy and Water Development, 

Committee on Appropriations, House of 

Representatives

April 2004 DEPARTMENT OF 

ENERGY

Certain 

Postretirement 

Benefits for 

Contractor Employees 

Are Unfunded and 

Program Oversight 

Could Be Improved

GAO-04-539
www.gao.gov/cgi-bin/getrpt?GAO-04-539.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Robert Martin 

at (202) 512-6131 or martinr@gao.gov. 

Highlights of GAO-04-539, a report to the 

Chairman, Subcommittee on Energy and 

Water Development, Committee on 

Appropriations, House of Representatives 

April 2004

DEPARTMENT OF ENERGY 

Certain Postretirement Benefits for 

Contractor Employees Are Unfunded and 

Program Oversight Could Be Improved 

As of September 30, 2003, DOE reported an estimated $13.4 billion in unfunded 

contractor postretirement health and pension benefits. This figure is an estimate

of the present value of all benefits attributed to employee service before 

September 30, 2003, minus the fair market value of assets dedicated to the 

payment of retiree benefits. The unfunded balance has grown over the past 4 

fiscal years as a result of the continuing accumulation of benefits, declining 

interest rates, and negative returns on pension assets. A significant portion of 

the unfunded balance relates to benefit programs at contractor sites that have 

already closed or will close once the work is complete. 

DOE Order 350.1 generally provides that contractors periodically complete selfassessment studies comparing their benefits to professionally recognized 

measures. DOE uses these studies to make decisions about the level of 

contractor benefits. While the most recently completed comparison studies 

suggest that DOE has been successful in offering total contractor benefits that 

are comparable to those of selected competitors, the DOE Order 350.1 studies 

are not performed at a significant number of contractor locations, and 

alternative review procedures performed by DOE personnel are inconsistent 

from one contractor location to another; thus DOE’s ability to evaluate the full 

range of programs is limited. In addition, GAO found that a number of the 

comparison studies did not conform to prescribed and recommended 

methodologies, calling into question the validity and comparability of the results.

Moreover, DOE’s current focus on total benefits rather than individual benefit 

components in evaluating benefits does not fully recognize the differences in 

costs between deferred benefit programs, such as pension and postretirement 

health benefits, and other benefit components. This distinction is important 

because changes to pension and postretirement health benefits can have a 

significant impact on DOE’s long-term costs and budgetary needs. For example, 

a 1 percent increase in a contractor employee’s current year vacation benefits 

has less impact on DOE’s long-term costs and budgetary needs than a 1 percent 

increase in postretirement pension or health benefits, which have a continuous 

and compounding effect as they are paid out in each year of retirement. 

Although reported total contractor benefits are comparable to selected 

competitors, the postretirement health benefits of DOE contractor employees at 

these sites averaged more than 44 percent greater than the average of the 

contractors’ competitors, while defined benefit pension benefits averaged 29 

percent greater. 

The approval and monitoring of DOE contractor employee pension and 

postretirement health benefits is primarily the responsibility of DOE contracting 

officers, who administer contracts at individual contractor locations. 

Management does not systematically review information developed at individual 

contractor locations to identify best practices or areas where benefit 

comparisons do not adhere to agency requirements or guidance. Developing and 

disseminating this information agencywide would enhance DOE’s oversight of 

contractor employee benefits and provide information needed to manage postclosure benefit costs. 

The Department of Energy (DOE), 

which carries out its national 

security, environmental cleanup, 

and research missions through 

extensive use of contractors, faces 

significant costs for postretirement 

health and pension benefits for 

contractor employees. Given 

DOE’s long history of using 

contractors and the rising cost of 

postretirement benefits, you asked 

GAO to (1) analyze DOE’s 

estimated financial obligation for 

postretirement health and pension 

benefits for contractor employees 

at the end of fiscal year 2003, 

(2) determine how DOE evaluates 

its contractor postretirement health 

and pension benefit programs and 

assesses the comparative levels of 

benefits offered by contractors, and 

(3) assess how DOE’s oversight of 

these benefits could be enhanced. 

GAO recommends four executive 

actions: (1) institute systematic 

management review of pertinent 

data from each contractor location; 

(2) extend, as practical, DOE 

comparison study requirements to 

contractors not currently covered 

by them; (3) where the extension of

the order is not practical, perform 

appropriate alternative procedures; 

and (4) incorporate into DOE’s 

oversight a focus on the long-term 

costs and budgetary implications of 

decisions pertaining to each 

component of contractor benefit 

programs. In written comments on 

a draft of this report, DOE agreed 

with these recommendations. 
Page i GAO-04-539 Department of Energy

Contents

Letter 1

Results in Brief 2

Background 3

Scope and Methodology 11

Reported Unfunded Balances for Contractor Postretirement 

Benefits Are Significant, and Amounts for Post-Closure Benefits 

Are Increasing 13

Evaluation of Contractor Benefits Could Be Improved 19

Increased Management Review Would Help DOE Oversee Its 

Contractor Employee Benefits Program 25

Conclusions 29

Recommendations for Executive Action 30

Agency Comments and Our Evaluation 30

Appendixes

Appendix I: DOE Contractor Locations with Pension and Postretirement 

Health Liabilities as of September 30, 2003 32

Appendix II: Comparison of DOE and DOD Contractor Benefit 

Programs 34

Appendix III: Comments from the Department of Energy 36

Appendix IV: GAO Contact and Staff Acknowledgments 37

GAO Contact 37

Acknowledgments 37

Tables Table 1: Reported Funded Status for DOE Contractor Pension and 

Postretirement Health Benefits at the End of Fiscal Years 

1999 through 2003 15

Table 2: DOE Reimbursements for Contractor Pension 

Contributions and Postretirement Health Payments for 

Fiscal Years 1999 through 2003 17

Table 3: Summary Statistics for DOE Order 350.1 Benefit Value and 

Cost Comparison Studies (Results Compared to an 

Average Comparator Index of 100.0) 20

Table 4: Summary Statistics for Total Benefits, Defined Benefit 

Pension Benefits, and Postretirement Health Benefits in 

DOE Contractor Value Studies (Results Compared to an 

Average Comparator Index of 100.0) 28
Contents

Page ii GAO-04-539 Department of Energy

Table 5: Comparison of DOE and DOD Contractor Benefit 

Programs 35

Figures Figure 1: Relationship between DOE, Contractors, Third-Party 

Administrators, and Contractor Employees 7

Figure 2: DOE Reimbursements for Postretirement Benefits Sorted 

by the Applicability of DOE Order 350.1 Comparison 

Studies 22

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Page 1 GAO-04-539 Department of Energy

United States General Accounting Office

Washington, D.C. 20548

A

April 15, 2004 Letr

The Honorable David L. Hobson

Chairman, Subcommittee on Energy and Water Development

Committee on Appropriations

House of Representatives

Dear Mr. Chairman:

The Department of Energy (DOE) carries out its national security, 

environmental cleanup, and scientific and technological innovation 

missions through the extensive use of third-party contractors, including 

universities and private companies. These contractors, in many cases, 

incur costs for pension and postretirement health benefits that are 

reimbursed by DOE under the terms of their contracts. Contractor pension 

and postretirement health benefits represent significant costs for both 

research and environmental cleanup efforts. The current methodology 

used to fund these costs may result in the need for DOE to reimburse 

contractor benefit payments well after current operating contracts are 

terminated or cleanup sites are completed. 

We, along with DOE’s Office of Inspector General (IG), have issued several 

reports during recent years on the challenges DOE faces in the area of 

contract management and the extent of environmental cleanup costs.1

Since 1990, we have included DOE’s contract management, which is 

broadly defined to include contract administration and project 

management, as a high-risk area. Given DOE’s long history of using 

contractors in its research and cleanup missions and the rising cost of 

providing employee postretirement health benefits, it is important that the 

management of short-term and long-term contractor employee benefits 

obligations ensures both the successful completion of cleanup and 

research objectives and the cost-effective use of government resources.

In this context, you requested that we review DOE’s contractor employee 

benefits to (1) analyze the department’s estimated financial obligation for 

1

U.S. General Accounting Office, Major Management Challenges and Program Risks: 

Department of Energy, GAO-03-100 (Washington, D.C.: January 2003), and Contract 

Reform: DOE Has Made Progress, but Actions Needed to Ensure Initiatives Have 

Improved Results, GAO-02-798 (Washington, D.C.: Sept. 13, 2002). U.S. Department of 

Energy, Office of Inspector General, Management Challenges at the Department of Energy, 

DOE/IG-0626 (Washington, D.C.: November 2003).
Page 2 GAO-04-539 Department of Energy

pension and postretirement health benefits for contractor employees at the 

end of fiscal year 2003, (2) determine how DOE evaluates its contractor 

pension and postretirement health benefit programs and assesses the 

comparative levels of benefits offered by its contractors, and (3) assess 

how DOE’s oversight of these benefit programs could be enhanced. 

We conducted our review from July 2003 through February 2004 at the 

Department of Energy headquarters in Washington, D.C., and the Defense 

Contract Audit Agency in Fort Belvoir, Virginia, in accordance with 

generally accepted government auditing standards. We requested written 

comments on a draft of this report from the Secretary of Energy. We also 

requested oral comments on applicable sections of a draft of this report 

from the Secretary of Defense. We incorporated those comments into our 

report as appropriate.

Results in Brief As of September 30, 2003, DOE reported an estimated $13.4 billion in 

contractor pension and postretirement health benefits that remain 

unfunded. The unfunded balance, or funded status of these benefits, is an 

estimate of the present value of all benefits attributed to employee service 

rendered prior to September 30, 2003, less the fair market value of 

accumulated assets dedicated to the payment of retiree benefits.2 The 

unfunded balance of these contractor benefits has significantly increased 

over the past 4 fiscal years due to the continuing accumulation of accrued 

benefits and adverse economic factors, such as declining interest rates and 

negative returns on pension assets. A significant portion of the unfunded 

balance relates to benefit programs at contractor sites where operations 

either have already been completed or will eventually be completed. The 

future administration and payment of pension and postretirement health 

retiree benefits following site completion creates a number of specific 

challenges for DOE. 

DOE Order 350.1 provides that DOE’s contractors should periodically 

compare their benefits to those of selected competitors or other 

professionally recognized measures. The most recently completed 

2

DOE calculates the funded status of its postretirement health and pension benefits in 

accordance with the accounting methodology and assumptions prescribed in Statement of 

Financial Accounting Standards (SFAS) No. 87, Employers’ Accounting for Pensions, and 

SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, 

as issued by the Financial Accounting Standards Board (FASB).
Page 3 GAO-04-539 Department of Energy

comparison studies report that total contractor benefits are, on average, 

comparable to selected competitors. However, the self-assessment 

provisions of DOE Order 350.1 are not applicable to a significant number of 

contractor locations and benefit obligations. Also, our review of completed 

contractor studies reveals a number of cases of nonconformance with key 

DOE procedures, which raises questions about the validity of the results of 

the comparisons.

DOE’s oversight of contractor postretirement health and pension benefits 

could be strengthened to provide for greater management review of 

contractor site information and incorporate a focus on the anticipated longterm duration of these benefit obligations. The absence of systematic 

management reviews of individual contractor site information hinders the 

agency’s ability to conduct programwide oversight of contractor benefits 

and effectively evaluate post-closure benefit costs. Moreover, the lack of 

focus on long-term costs in periodic contractor benefit reviews does not 

fully recognize the difference in costs between deferred benefits programs, 

such as pension and postretirement health benefits, and other benefit 

components. This distinction is important because changes to deferred 

benefits have a continuous and compounding effect as they are paid out in 

each year of retirement.

In written comments on a draft of this report, DOE noted that our findings 

were consistent with those of its own internal assessment and agreed with 

the report’s four recommendations. 

Background DOE relies on contractor organizations to manage, operate, maintain, and 

provide support to its environmental cleanup and science and energy 

research at government-owned facilities. Contractors at environmental 

cleanup sites direct remediation efforts for radioactive and hazardous 

waste contamination generated during former nuclear weapons research 

and production activities. The eventual completion of cleanup activities at 

individual contractor locations without the existence of other ongoing 

operations, called site completion or site closure, generally leads to 

transition into long-term stewardship activities such as monitoring and 

surveillance requiring significantly fewer resources. Contractors at 

research sites complete a variety of ongoing research and development 

activities at national laboratories and universities.
Page 4 GAO-04-539 Department of Energy

Contractors at cleanup and research sites may sponsor and pay pension3

and postretirement health4 benefits, collectively called postretirement 

benefits, for employees providing service under DOE contracts in order to 

attract, motivate, and retain qualified individuals to assist the agency in 

carrying out its mission. Contractors administer postretirement benefits for 

these employees either by establishing separate benefit plans solely for 

these individuals or by arranging for their participation in existing 

corporate plans, where contractor employees at DOE sites and those 

contractor employees assigned to non-DOE work participate in the same 

benefit plans. 

DOE reimburses contractor payments for employee compensation, 

including postretirement benefits as authorized by applicable regulations 

and each contractor’s operating agreement. For example, the Federal 

Acquisition Regulation (FAR) establishes uniform policies and procedures 

for the acquisition of goods and services by executive agencies. The FAR 

cost principles include factors to be considered by an agency when 

determining whether a contractor-claimed cost is to be allowed and 

reimbursed by an agency. Generally, consideration of whether 

compensation costs incurred under a government contract with a 

commercial organization are allowable includes whether they are, among

3

Employee pension benefits can include participation in defined benefit and defined 

contribution plans; however, we use the term pension benefits to refer to defined benefit 

pension benefits in this report. For information on the differences between defined benefit 

and defined contribution pension plans, please see U.S. General Accounting Office, Answers 

to Key Questions About Private Pension Plans, GAO-02-745SP (Washington, D.C.: Sept. 18, 

2002), 8-11.

4

In general, postretirement health benefits can include medical, disability, and life insurance 

coverage. However, the majority of DOE contractor postretirement costs are for retiree 

medical benefits; therefore, we refer to these benefits as postretirement health benefits in 

this report.
Page 5 GAO-04-539 Department of Energy

other things, reasonable,5 allocable, and compliant with other applicable 

standards and the terms of the contract. For fiscal year 2003, DOE 

reimbursed approximately $431 million in contractor postretirement 

benefit contributions at 39 different DOE contractor sites.6

Contractor employees qualify for retiree benefits in pension and 

postretirement health plans differently, resulting in different methodologies 

for the payment of the two types of benefits. Pension benefits are 

determined using a formula based on employee salary and years of service 

as specified by contractor plan provisions. Employees accrue, or earn, 

future pension benefits throughout their period of service and are generally 

required to work for a certain period, called a vesting period, before they 

have a right to receive any accrued retirement benefits. DOE contractors 

that offer defined benefit pension plans are subject to the minimum funding 

standards established by the Employee Retirement and Income Security 

Act of 1974 (ERISA).7The ERISA requirements set minimum standards 

regarding how much contractors must set aside each year in order to 

provide for future defined benefit pension payments when they are due. 

5

The FAR provides that if the compensation costs are established pursuant to an “arms 

length” labor management agreement negotiated pursuant to the Federal Labor Relations 

Act or similar state statute and are otherwise allowable, they are reasonable unless, as 

applied to the work in performing government contracts, they are determined to be 

unwarranted based on criteria specified in the regulation. See 48 C.F.R. § 31.205-6(b)(1) 

(2003). In addition, the FAR provides that if employee compensation costs are not covered 

by labor-management agreements, the compensation for each employee or job class of 

employees must be reasonable for the work performed and is reasonable if the aggregate of 

each measurable and allowable element sums to a reasonable total. Factors that may be 

relevant to this determination include, but are not limited to, conformity with compensation 

practices of other firms: (1) of the same size, (2) in the same industry, (3) in the same 

geographic region, and (4) engaged in similar nongovernment work under comparable 

circumstances. See 48 C.F.R. § 31.205-6(b)(2). 

6

See app. I for a complete list of DOE contractor locations that had recorded financial 

accounting liabilities for contractor employee benefits as of September 30, 2003.

7

Section 1013(a) of ERISA, Pub. L. No. 93-406, 88 Stat. 829, 914, added section 412 to the 

Internal Revenue Code of 1954, which appears at 26 U.S.C. § 412. Section 412 establishes 

minimum funding requirements for private sector defined benefit pension plans designed to 

ensure that these plans will have sufficient assets to pay the accrued benefits of participants 

upon retirement. The minimum funding rules generally require plan sponsors to contribute 

an annual amount to cover the following: (1) actuarial present value of benefits attributed 

by the pension benefit formula to services rendered during the plan year, (2) amortization of 

past service costs, and (3) amortization of increases in pension liabilities and experience 

losses. ERISA also establishes a maximum tax-deductible limit on the required contribution 

in 26 U.S.C. § 412(c)(7). 
Page 6 GAO-04-539 Department of Energy

In contrast to contributions for pension benefits, there are no legal 

requirements to fund postretirement health benefits in advance for 

payments to retirees. Therefore, DOE contractors generally pay for 

postretirement health plans on a pay-as-you-go8

 basis. Retired contractor 

employees are usually entitled to participate in contractor health plans 

after they complete a period of service immediately prior to their 

retirement. However, unlike pension benefits, the future amount of 

postretirement health benefits earned by a contractor employee cannot be 

expressly defined at the employee’s retirement date. This is due, in part, to 

the potential for future contractor changes in benefit provisions, such as 

retiree contributions, copayments, and coverage limitations, or 

cancellation of postretirement health coverage.

Figure 1 summarizes the previously discussed relationships between DOE, 

contractors, third-party administrators, and contractor employees in the 

payment, sponsorship, and delivery of postretirement benefits.

8

Under a pay-as-you-go method, DOE only reimburses contractors for the funds needed to 

meet the premium costs of current retirees’ benefits. This method can be contrasted with an 

accrual basis funding method, which funds estimated amounts of future payments needed 

to cover benefits earned during the current period. According to DOE officials, one DOE 

contractor does fund postretirement health benefits on an accrual-funding basis, as defined 

and allowed by applicable regulations.
Page 7 GAO-04-539 Department of Energy

Figure 1: Relationship between DOE, Contractors, Third-Party Administrators, and Contractor Employees

Consistent with the long-term nature of DOE research and cleanup 

activities, it is DOE’s policy to provide for the continuation of 

postretirement benefit plans when there are changes in individual 

contractors due to contract competitions. Typically, these scenarios would 

not result in the need for the cancellation and re-creation of these benefit 

plans. Although future contractor employee benefits earned may change as 

a result of contract negotiations, DOE attempts to continue the existing 

benefit plan with the new contractor as the sponsor, or offer comparable 

benefits in a successor contractor benefit plan during changes in 

contractors. Under this scenario, prior contractor retirees continue 

Postretirement

health benefits

Health insurance

premiums

Health

benefits

Services

Contractor

services

Contractor payments, including reimbursement of allowable postretirement benefit costs

Health insurance

premiums

Sponsor

pension

benefits and establish plan

Sponsor

health

benefits

and establish

plan

Pension

contributions

Health

insurance

pemiums

Retiree

benefits DOE

Pay to: John Doe

Compensation for services rendered

Date

$Amount

Source: Developed by GAO based on discussions with DOE officials.

DOE

Cleanup/

research

site

contractors

Insurance

provider

Pension

trustee

(banks or

other

fiduciaries)

Current

contractor

employees

Former

contractor

employees
Page 8 GAO-04-539 Department of Energy

receiving benefits from the new plan sponsor and current employees 

continue to accrue benefits according to existing plan provisions. 

It is also DOE’s policy to facilitate the continuation of postretirement 

benefits following the completion of activities at environmental cleanup 

sites. DOE officials stated that an agency review of contracts, benefit plan 

documents, and labor agreements determined that contractor 

postretirement plans set forth the terms of an exchange between the 

contractor and contractor employees.9

 In exchange for current services, 

contractors provide benefits after retirement (i.e., monthly pension 

payments and payments toward postretirement health insurance 

premiums) as defined by the terms of the postretirement benefit plans. 

DOE officials also stated that the continuation of pension and 

postretirement health benefits is necessary to reward former contractor 

employees for prior service at cleanup sites and to attract and retain future 

contractors and contractor employees to work at remaining cleanup sites. 

The completion of all contractor activities at environmental cleanup sites 

generally results in either the termination of the prime contract or a 

significant reduction in the scope of the outstanding contract. These 

contract changes at site closure differ from a change in contractor at an 

ongoing site because retirees who earned postretirement benefits under 

the terms of prior contracts are left without an active contractor to 

administer future benefit payments. It is DOE’s policy in these situations 

that future postretirement benefits earned by contractor employees may be 

satisfied by the outgoing contractor in one of two ways. Under the first 

option, the contractor can request reimbursement from DOE for the 

immediate settlement of outstanding benefit obligations, such as through 

the purchase of insurance contracts. Under the second option, the 

contractor may facilitate the continuation of the current benefit program 

and seek DOE reimbursement as postretirement benefit payments are 

made to retirees. The outgoing contractor can achieve the latter option 

through continuing to sponsor current postretirement benefit plans or 

through the transfer of plan administration to another party. This report 

refers to those benefits due and paid after site closure as post-closure 

benefits. 

9

This exchange is consistent with the provisions of SFAS No. 87, Employers’ Accounting for 

Pensions, and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other 

Than Pensions.
Page 9 GAO-04-539 Department of Energy

In 1996, DOE issued Order 350.1 to establish responsibilities, requirements, 

and further cost allowability criteria for the management and oversight of 

contractor compensation programs.10 The order provides that contracting 

officers are largely responsible for the review and approval of allowable 

contractor compensation costs. It also details procedures for the 

management and oversight of postretirement benefits, such as the approval 

of new postretirement benefit plans, the approval of changes made to 

existing plans, and required procedures during contract and postretirement 

benefit plan terminations. The department’s Contractor Human Resources 

Management Division (CHRM) is responsible for providing contracting 

officers with policies and procedures for managing contractor 

postretirement benefits costs under the provisions of DOE Order 350.1. 

DOE’s Office of Procurement Assistance Management (OPAM) establishes 

overall performance objectives for contractor compensation programs and 

approves changes to pension and postretirement health benefit plans in 

excess of contracting officer authorization limits. The National Nuclear 

Security Administration (NNSA) assumes these responsibilities at current 

naval reactor sites and assists in the review of contractor compensation 

programs at other NNSA-designated locations. 

DOE Order 350.1 requires contractors to complete a recurring evaluation of 

their employee benefit programs,11 including pension and postretirement 

health plans, against the benefit programs of labor competitors in the 

private sector or other professionally recognized measures. 

These provisions are completed to aid contracting officers in assessing 

contractor benefit costs against the reasonableness standards of the FAR. 

Specifically, DOE Order 350.1 states that contractors may use either the 

results from (1) a benefit value study or (2) the annual U.S. Chamber of 

Commerce Employee Benefit Study, collectively called comparison studies 

in this report, to perform an appropriate evaluation of their benefit 

programs. 

10Compensation programs and costs discussed in DOE Order 350.1 include employee 

salaries, other cash and noncash compensation, and employee benefits programs. 

11Contractor benefit programs, or contractor benefits, as used in this report, includes all 

major nonstatutory benefit programs offered by the contractor, such as postretirement 

health and pension benefits. Contractor benefits, as used in this report, exclude statutory 

benefits, such as Social Security benefits, and contractor employee compensation, which 

are evaluated separately by DOE.
Page 10 GAO-04-539 Department of Energy

Benefit value studies are intended to measure the relative worth of a 

contractor’s benefit programs to its employees. This is done through the 

calculation of a replacement value12 for the benefits offered in the 

contractor’s benefit program. Replacement values that may differ among 

employees, such as the use and extent of current employee health benefits, 

are calculated through the use of a hypothetical group of employees. This 

methodology allows comparisons between the provisions of benefit 

programs with different demographics, turnover and retirement rates, and 

benefit election patterns. As such, replacement values are also calculated 

for selected labor market competitors of the contractor and compared to 

the contractor replacement values. DOE contractors engage benefits 

consulting companies to assist with the benefit value studies and work with 

contracting officers to approve the methodologies used.

Replacement values are found for each benefit component evaluated in the 

study and used to develop an overall benefit index program for that 

contractor. The final product of the benefit value study, called the net 

benefit value index, compares the relative value of the contractor’s 

employer-paid benefits to the employer-paid value of the average labor 

competitor’s benefits, represented by an index of 100. Therefore, a 

contractor with a net benefit value index of 107.0 offers benefits to its 

employees with a replacement value that is 7 percent above the average of 

the contractor’s labor competitors. As mentioned, the benefit value studies 

also create separate indexes for major individual benefit components, such 

as pension benefits and vacation time. 

The U.S. Chamber of Commerce Employee Benefit Study, or Chamber of 

Commerce cost study, provides a comparison of the annual employee 

benefit contributions and payments made by the contractor with the 

average contributions and payments of a survey population. The U.S. 

Chamber of Commerce Employee Benefit Study is an annual polling of 

domestic employers conducted by the U.S. Chamber of Commerce’s 

Statistics and Research Center and sponsored by American International 

Group, Inc. The survey publishes information on average employer benefit 

contributions and payments per full-time employee made during the 

preceding year and the percentage of total employer payroll spent on 

employee benefits.

12Replacement value, in this context, indicates the amount of money an employee would 

need to spend or invest in order to duplicate the benefits provided by the employer.
Page 11 GAO-04-539 Department of Energy

Scope and 

Methodology

To analyze the agency’s estimated financial liability for contractor 

employee pension and postretirement health obligations, we

• obtained audited financial reports and disclosures on contractor 

employee postretirement benefit obligations for fiscal years 1999 

through 2003,

• interviewed DOE officials from the Office of Finance and Accounting 

Policy and CHRM regarding the character of obligations at DOE 

research and cleanup sites,

• reviewed actuarial computations of DOE contractor benefit obligations 

to determine how obligations at cleanup sites were adjusted for 

expected site closure dates, and

• interviewed DOE officials from the Office of Finance and Accounting 

Policy and the Office of General Counsel regarding the agency’s liability 

with respect to contractor post-closure benefits.

The calculation of financial liabilities for postretirement benefits earned by 

contractor employees involves the use of significant economic and 

demographic assumptions under the guidance of Statement of Financial 

Accounting Standards (SFAS) No. 87, Employers’ Accounting for 

Pensions, and SFAS No. 106, Employers’ Accounting for Postretirement 

Benefits Other Than Pensions. It was not our intent to assess, nor did we 

independently assess, the reasonableness of the assumptions used in the 

financial calculations or the accuracy of contractor data used in the 

calculations. For fiscal years 1999 through 2003, DOE’s financial 

statements, including estimates of contractor postretirement benefits, were 

audited by either independent public accountants or its IG. For each of 

these years, the auditing entity determined that DOE’s financial statements 

presented fairly, in all material respects, the financial position of the 

agency. 

To determine how DOE evaluates its contractor postretirement benefit 

programs and compares the benefits offered by DOE contractors with 

private industry benchmarks, we

• reviewed DOE Order 350.1 and other agency policy and procedure 

guidance related to the completion of contractor comparison studies,
Page 12 GAO-04-539 Department of Energy

• interviewed DOE officials from CHRM to determine procedures used to 

assess the quality of the contractor comparison studies,

• obtained and analyzed the most recent comparison studies completed 

by DOE contractors for all locations subject to the valuation provisions 

of DOE Order 350.1, and

• reviewed the most recent comparison studies for all locations subject to 

the DOE Order 350.1 valuation provisions for compliance with DOE 

policies and procedures.

We reviewed contractor comparison studies for compliance with key 

controls in DOE’s policies and procedures, designed to provide reasonable 

assurance over the validity of the study results, including (1) timely 

completion and inclusion of major benefit components; (2) presence of 

recommended certifications to attest to the accuracy, relevance, and 

consistency of the data used in the study; (3) development of benchmark 

information through the selection of labor competitors and the use of upto-date data for the competitors selected; and (4) calculation of desired 

(either required or recommended) performance measures. We summarized 

the results of these procedures in this report and communicated the 

detailed results of our testing to DOE officials. It was not our intent to 

verify, nor would we have been able to independently verify, the accuracy 

of actuarial calculations, assumptions, or competitor data used in the 

comparison studies due to the proprietary nature of benefits consulting 

firm databases used to conduct the studies. However, we confirmed that 

DOE requirements regarding the completion of these studies by national 

consulting groups with annual consulting revenues in excess of $5 million 

were met for all benefit value studies reviewed. We also did not 

independently assess the validity of the data supplied by DOE contractors 

for use in the comparison studies.

To assess DOE’s oversight of its contractors’ pension and postretirement 

health benefit programs, we

• reviewed the FAR and other applicable standards related to allowable 

pension and postretirement health costs under contracts with 

commercial organizations;

• determined applicable internal control procedures for DOE’s contractor 

benefits program using our Standards for Internal Control in the 
Page 13 GAO-04-539 Department of Energy

Federal Government13 and Internal Control Management and 

Evaluation Tool;14

• reviewed related DOE policy and procedure guidance and interviewed 

DOE officials regarding procedures for overseeing contractor benefit 

programs in existence through the end of fiscal year 2003; and

• reviewed contractor locations subject to the provisions of DOE Order 

350.1 for compliance with DOE policies and procedures related to the 

review of changes to contractor postretirement benefit programs.

In addition, we reviewed contractor operations and the oversight of 

contractor postretirement benefit programs at several federal agencies to 

determine whether contractor benefit programs at these agencies were 

comparable to those at DOE. We determined that the oversight of 

contractor benefit programs at the Department of Defense (DOD) was 

comparable, in some respects, to oversight at DOE and interviewed DOD 

officials to gain an understanding of that agency’s procedures and the 

differences between DOE and DOD contractor operations. 

Reported Unfunded 

Balances for 

Contractor 

Postretirement 

Benefits Are 

Significant, and 

Amounts for PostClosure Benefits Are 

Increasing

In DOE’s fiscal year 2003 Performance and Accountability Report, the 

agency reported that the present value of estimated contractor 

postretirement and pension benefits that were unfunded as of 

13U.S. General Accounting Office, Standards for Internal Control in the Federal 

Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

14U.S. General Accounting Office, Internal Control Management and Evaluation Tool, 

GAO-01-1008G (Washington, D.C.: August 2001).
Page 14 GAO-04-539 Department of Energy

September 30, 2003, totaled $13.4 billion.15 The unfunded balance of these 

deferred benefits has increased significantly over the past 4 fiscal years due 

to various operating and economic factors. An increasing portion of the 

future unfunded balance will relate to estimated pension and 

postretirement health obligations at completed or near-completed 

environmental cleanup sites. The expected magnitude of these benefits at 

site closure will require DOE to meet significant future budgetary and 

administrative challenges to facilitate the future payment of these benefits.

DOE Estimates That the 

Present Value of Unfunded 

Contractor Postretirement 

Benefits as of September 30, 

2003, Is $13.4 Billion

DOE reimburses allowable contractor costs for employee postretirement 

benefits and records estimates of these future benefit payments in its 

financial accounting statements.16 The agency reported an estimated 

present value of $13.4 billion for pension and postretirement health 

benefits that have been earned by contractor employees under current 

postretirement benefit plan provisions but were unfunded as of 

September 30, 2003. This figure, also called the funded status, is an 

actuarial17 estimate of future postretirement benefits attributed to 

contractor employee service rendered prior to the measurement date less 

the fair market value of accumulated assets dedicated to the payment of 

the obligation. 

The calculation of financial accounting estimates involves the use of 

significant actuarial, demographic, and economic assumptions, including, 

among other things, future interest rates, health care cost trends, salary 

15The unfunded balance of $13.4 billion differs from the financial liability of $9.8 billion 

presented in the Consolidated Balance Sheet of DOE’s fiscal year 2003 Performance and 

Accountability Report. The unfunded balance of $13.4 billion equals the financial liability of 

$9.8 billion plus $3.6 billion in net losses incurred but not required to be recorded until 

future periods and other adjustments as prescribed by SFAS No. 87, Employers’ Accounting 

for Pensions, and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other 

Than Pensions.

16DOE calculates liabilities for contractor pension and postretirement health benefits 

according to the methodology established by FASB, which promulgates accounting rules for 

private sector enterprises. DOE’s costs under its commercial contracts include the 

reimbursement of annual contractor employee benefits, and therefore DOE records these 

obligations as if it were the plan sponsor.

17Actuarial calculations for postretirement benefits involve the determination of the value, 

as of a specified date, of a series of future amounts payable, adjusted to reflect the time 

value of money (through discounts for interest) and the probability of payment (for 

example, by means of decrements for events such as death, disability, or withdrawal from a 

plan) between the specified date and the expected date of payment.
Page 15 GAO-04-539 Department of Energy

increases, and life expectancies of eligible retirees (and their survivors). 

Also, the estimation is inherently difficult because benefits earned by 

current contractor employees are deferred until retirement and the actual 

payment of these benefits may not occur for decades. 

Funded Status of Contractor 

Postretirement Benefits Has 

Deteriorated Significantly 

since 1999

The combined funded status for contractor pension and postretirement 

health benefits has changed from a $3.6 billion overfunded position in 1999 

to a $13.4 billion unfunded position in 2003. There are several significant 

reasons for this deterioration in funded status over the last 4 fiscal years, 

including negative pension asset returns, declining discount rates18 over the 

past 3 fiscal years, and increasing trends in estimated postretirement health 

care costs. Table 1 summarizes the funded status for pension and 

postretirement health benefits for the last 5 fiscal year-ends as reported by 

DOE. 

Table 1: Reported Funded Status for DOE Contractor Pension and Postretirement 

Health Benefits at the End of Fiscal Years 1999 through 2003

Source: DOE. 

Notes: Information from DOE Performance and Accountability Reports for fiscal years 1999 through 

2003. Numbers may not add to total due to rounding. DOE’s financial statements for the covered fiscal 

years were audited and received unqualified audit opinions.

a

A positive funded status indicates an excess of the fair value of dedicated assets over estimated 

benefit obligations.

18Financial liabilities for postretirement health and pension obligations are estimated using 

the present value of future expected benefit payments. When assigning postretirement 

benefit costs to more than one financial statement period, interest costs are incurred due to 

the passage of time. The rate used to calculate the interest costs, and therefore adjust 

outstanding obligations for the time value of money, is called the discount rate. Decreases in 

the discount rate result in increases in annual financial statement benefits costs.

Dollars in billions

Fiscal year-end

Pension funded 

status

Postretirement 

health funded 

status Total funded status

2003 ($3.7) ($9.7) ($13.4)

2002 ($1.0) ($8.3) ($9.3)

2001 $5.1a ($6.8) ($1.6)

2000 $10.2 ($5.4) $4.8

1999 $8.2 ($4.6) $3.6
Page 16 GAO-04-539 Department of Energy

In general, deterioration in the funded status of postretirement health 

benefits can be attributed to the excess of future benefits earned by current 

contractor employees, known as service costs, plus interest costs on 

outstanding obligations over the payments made to retirees to satisfy 

previously earned benefits. Postretirement health benefit service costs plus 

interest costs have ranged from 2.3 times to 2.5 times the payments to 

retirees made in each of the past 5 fiscal years. The significant increases in 

recent retiree health benefit costs, decreases in discount rates, and 

continuing accrual of postretirement benefits in existing contractor plans 

all affect the service and interest costs of contractor postretirement health 

plans, although we did not determine to what extent each of these 

individual factors affected the total funded status.

Annual changes in the funded status of pension plans, unlike changes in the 

funded status of postretirement health plans, can be significantly affected 

by returns on dedicated pension assets. Contributions to pension plans are 

generally held in trust for the payment of benefits to participants and their 

beneficiaries. Plan trustees, usually banks or trust companies, make 

investment decisions for the plan with these assets. Contractor pension 

assets have, on average, experienced negative returns from 7 percent to 8 

percent in each of the past 5 fiscal years. Negative asset returns decrease 

the fair market value of accumulated pension assets and therefore 

significantly contribute to changes in the funded status of pension benefits.

However, because of current DOE policies, neither the current unfunded 

position nor the significant recent changes in funded status results in a 

requirement for contractors, or DOE, to make any additional annual 

postretirement benefit contributions. DOE Order 350.1 provides that in 

general, annual contractor contributions for pension benefits shall not 

exceed the minimum contribution required by ERISA. The order also 

provides that postretirement health benefits are paid using a pay-as-you-go 

method unless otherwise required by state or federal statute. See table 2 for 

pension contributions and postretirement health payments reimbursed by 

DOE over the last 5 fiscal years.
Page 17 GAO-04-539 Department of Energy

Table 2: DOE Reimbursements for Contractor Pension Contributions and 

Postretirement Health Payments for Fiscal Years 1999 through 2003

Source: DOE.

Note: Information from DOE Performance and Accountability Reports for fiscal years 1999 through 

2003.

However, certain contractors may face higher short-term pension 

contributions because minimum contributions calculated under ERISA 

rules factor in both current service costs and outstanding obligations.19 In 

any case, the reported $13.4 billion unfunded balance will, eventually, 

require additional contributions, investment gains, or favorable benefit 

experience20 within existing pension and postretirement health plans in 

order to satisfy future benefits when they come due.

Post-Closure Benefit 

Obligations Will Increase 

with Continuing 

Environmental Site 

Closures 

While DOE fiscal year 2003 reimbursements of postretirement benefits to 

contractors administering benefits following site closure totaled only 

approximately $6 million, future amounts will significantly increase with 

continuing environmental site closures. DOE has indicated that the agency 

is scheduled to close several environmental cleanup sites within the next 

few years. Contractor employee postretirement benefits at these sites had 

total unfunded balances in excess of $1.5 billion as of September 30, 2003. 

Dollars in millions

Fiscal year-end

Pension 

contributions

Postretirement 

health payments

Total contributions 

and payments

2003 $167 $264 $431

2002 $75 $243 $318

2001 $43 $226 $269

2000 $58 $205 $263

1999 $61 $181 $242

1926 U.S.C. § 412.

20Favorable benefit experience can be defined as differences between estimates of benefits 

earned to date by current and retired employees and the actual postretirement benefits paid 

to those employees in the future. Favorable benefit experience may also include the 

negotiated settlement of benefit obligations with contractors for amounts less than the 

estimated accounting obligations as measured by FASB standards.
Page 18 GAO-04-539 Department of Energy

DOE Order 350.1 provides that when operations at a DOE facility are 

terminated and no further work is to be completed, pension and 

postretirement health benefit continuation will be provided for those 

contractor employees who earned retirement benefits in these plans. 

Consistent with DOE Order 350.1, contract language at anticipated closure 

sites (such as Fernald and Rocky Flats) indicates that the DOE contracting 

officer will designate and communicate the method of benefit continuation 

within the final 6 months of the contract and may direct any of a number of 

potential means of doing so, including, but not limited to, (1) termination 

and settlement of the plans in accordance with relevant laws and 

regulations, (2) continuation of the plans on a pay-as-you-go basis under a 

separate contract with the contractor, or (3) transfer of plan 

responsibilities to another contractor or third party. 

In conjunction with a site closure, the contractor may submit a claim, 

called a settlement proposal, for the final calculation of estimated 

postretirement benefits earned by contractor employees. The 

reimbursement of these costs would allow the contractor, generally 

through the purchase of insurance contracts, to complete the payment of 

future pension and postretirement health benefits without further DOE 

reimbursement. The ability of DOE to honor these claims largely depends 

on DOE’s available financial resources compared to the total settlement 

costs21 involved in the satisfaction of outstanding postretirement benefits.

According to DOE officials, DOE has recently considered several options 

to avoid postretirement benefit settlements because the reimbursement of 

contractors for the purchase of annuity contracts and future health benefit 

payments involves significant costs above the calculated settlement 

amount. Because of the budgetary resources required to settle 

postretirement benefits at completed cleanup sites, DOE officials 

anticipate continuing the annual reimbursement of benefit payments by 

extending contracts with cleanup site contractors in some cases, solely to 

administer the benefits, thereby preserving the contractor relationship as 

the plan sponsor. The continuation of these benefits creates specific 

challenges for DOE, including the following:

21The total settlement costs for each contractor pension plan consist of the unfunded benefit 

obligation at the contract termination date, the reimbursement of excise taxes paid by the 

contractor to terminate the plan, and any additional costs or fees associated with the 

purchase of insurance contracts to satisfy future payments to employees. Contractor benefit 

plans that are overfunded at the settlement date could result in the reversion of excess 

funds to DOE after all costs are paid to satisfy the estimated benefit obligations.
Page 19 GAO-04-539 Department of Energy

• DOE currently attempts to pass the administrative responsibilities for 

the continuation of post-closure employee benefits to existing 

contractors. However, as the number of contractors with existing 

cleanup operations diminishes with additional site closures, DOE must 

either continue relationships with former contractors, many of which 

were created only to facilitate a site closure, or transfer responsibilities 

to another party.

• Even though contractor postretirement benefits are earned during 

previous employment periods, DOE will require continuing 

appropriations in order to reimburse contractors for the payment of 

postretirement benefits to former contractor retirees and other 

beneficiaries. DOE officials estimate that the post-closure obligations 

may extend through 2075.

• The continuation of postretirement benefits through another contractor 

or a third party requires DOE to pay for the allowable administrative 

expenses of these activities.

• The continuation of postretirement benefits requires DOE to monitor 

and evaluate the ongoing contractor reimbursement for post-closure 

benefit payments and any changes in those benefit programs made by 

the contractor. 

In response to these challenges, DOE announced plans in 2003 to establish 

an Office of Legacy Management to address the long-term management of 

former cleanup site contractor obligations. According to agency officials, a 

key mission of the Office of Legacy Management is to ensure the quality of 

service and continuity of former contractor employees’ pension and 

medical benefits. The office is planning a comprehensive approach to fulfill 

the agency’s pension and postretirement health obligations at current and 

future closure sites. 

Evaluation of 

Contractor Benefits 

Could Be Improved 

DOE Order 350.1 generally requires that contractors periodically complete 

self-assessments of major nonstatutory benefit programs against 

professionally recognized measures. The most recent contractor 

comparison studies report average contractor benefits are 0.2 percent 

below the value of selected labor competitors. However, a significant 

number of contractor locations are not subject to the valuation provisions 

of DOE Order 350.1, or otherwise do not complete them. In cases where 

DOE Order 350.1 does not apply, alternative procedures are performed by 
Page 20 GAO-04-539 Department of Energy

DOE personnel; however, the procedures are inconsistent among 

contractor locations and are limited at completed, or near-completed, 

cleanup sites. We also found the comparison studies that were completed 

under DOE Order 350.1 often did not conform to existing DOE policies and 

recommended procedures. 

Evaluation Studies Report 

Contractor Benefits Are 

Comparable to Those 

Offered by Selected 

Competitors

Each DOE contractor subject to the self-assessment provisions of DOE 

Order 350.1 is to periodically complete a comparison study evaluating its 

benefit programs against external benchmarks. This evaluation of 

contractor benefits may take the form of either a benefit value study, which 

measures relative replacement cost of employer-paid benefits against the 

benefits offered by a group of selected labor competitors, or a cost study, 

which measures the annual relative per capita benefit cost against 

companies surveyed by U.S Chamber of Commerce. The results of the 

comparison studies allow DOE contracting officers to measure the 

competitiveness of contractor benefit programs in the labor market and to 

assess contractor benefit program costs for reasonableness under 

applicable regulations and contract provisions. Table 3 summarizes the 

reported results from the most recent contractor comparison studies 

completed.

Table 3: Summary Statistics for DOE Order 350.1 Benefit Value and Cost 

Comparison Studies (Results Compared to an Average Comparator Index of 100.0)

Source: GAO analysis.

Notes: Summarizes most recent contractor benefit value and Chamber of Commerce cost studies 

submitted by 21 DOE contractors. Generally, DOE benefit value study indexes should not be used to 

compare benefit program values between contractor sites because each study uses different 

comparator firms, each study completes the study as of a different date, and assumptions and 

methodologies may vary among contractor locations. However, the comparison study results are 

useful as performance indicators of how contractor benefits compare to a similarly determined value, 

the average benefit value of a selected set of labor competitors.

a

DOE’s goal is for the reported contractor benefit value to be no higher than 105 (or 5 percent higher 

than the average value of the contractor competitors at each location).

Comparison study measures

Total benefits 

index

Average 99.8

Maximum 148.0

Minimum 71.0

Number of sites with an index above 105a 5

Number of sites with an index from 90 to 110 16
Page 21 GAO-04-539 Department of Energy

The reported results of the contractor comparison studies suggest that 

DOE has been fairly successful in achieving its goal of limiting the total 

value of contractor benefits to no more 5 percent higher than the average 

total value of the contractor’s labor competitors at each location. As 

shown in table 3, only 5 of 21 studies have a benefits value of more than 105 

and the average contractor benefits value is 0.2 percent below the 

employer-paid benefits level of selected study competitors. The reported 

results range from 29 percent below competitor averages to 48 percent 

above those averages; however, at 16 of 21 contractor locations, the 

reported benefits value falls from 90 to 110, or 10 percent below to 10 

percent above labor competitor averages. As discussed later in this report, 

contractor nonconformance with DOE guidance on the completion of these 

studies raises questions about the validity of the comparison study results.

A Significant Number of 

Contractors Do Not 

Complete DOE Order 350.1 

Comparison Studies 

A significant number of DOE contractors, and the postretirement benefits 

they offer, are not subject to the comparison study provisions of DOE 

Order 350.1. Contractors with postretirement benefits (1) offered in 

corporate plans,22 (2) reimbursed under support contracts,23 and 

(3) provided for employees at naval reactor sites are exempted from the 

requirements. In addition, the studies were not performed at six contractor 

sites that were closed, or nearing completion.

DOE reimbursements of postretirement benefits at sites at which 

comparison studies were not completed accounted for $105 million of the 

$431 million, or 24 percent, in total contractor contributions made for 

contractor postretirement benefit programs in fiscal year 2003. Figure 2 

illustrates DOE reimbursements for postretirement benefits made for fiscal 

year 2003 according to whether the contractor location is subject to the 

22The term “corporate plan” is used within DOE Order 350.1 to indicate the participation of 

DOE contractor employees in a contractor’s companywide benefits program. Contractors 

providing corporate plan benefits are subject to the provisions of DOE Order 350.1; 

however, they are specifically exempted from the comparison study requirements. 

23Although the majority of DOE contracts at environmental cleanup and research sites are 

for primary cleanup and research missions, called management and operating contracts, 

some contracts at these sites are support services contracts. Support services refer to those 

activities that are not fundamental to the environmental cleanup and research operations, 

including facilities management, security, and health services. These contracts are generally 

smaller in size and scope and were separated from larger management and operating 

contracts in order to provide opportunities for smaller businesses.
Page 22 GAO-04-539 Department of Energy

comparison study provisions and the reasons DOE officials provided for 

their exclusion. 

Figure 2: DOE Reimbursements for Postretirement Benefits Sorted by the 

Applicability of DOE Order 350.1 Comparison Studies

Note: Based on information provided by DOE and data in its fiscal year 2003 audited financial 

statements.

DOE officials complete alternative monitoring procedures at some 

locations where DOE Order 350.1 comparison studies are not required or 

otherwise completed. Examples of these procedures include reviews of 

benefit payment invoices, comparisons to other DOE contractor programs, 

and review of annual actuarial calculations. CHRM also periodically 

completes valuation and cost reviews at various contractor sites. CHRM 

procedures include reviews of contractors’ actual incurred costs for 

benefits and wages; actuarial valuation and accounting reports; and various 

annual pension plan reviews, such as salary replacement, plan investment, 

and cash flow requirement analysis. 

However, at completed or near-completed cleanup sites we found that DOE 

officials did not complete comparison studies and completed limited 

alternative procedures to assess the reasonableness of continuing pension 

and postretirement health payments at these locations. According to DOE 

officials, significant reasons for the absence of comparison studies for 

post-closure benefits include the lack of resources to perform the studies at 

former contractor sites that are nearing completion and the fact that three 

DOE sites were closed before the provisions of DOE Order 350.1 became 

applicable. Reimbursements at these locations in fiscal year 2003 totaled 

 39 DOE contractor sites with benefit programs

(FY03 contributions - $431.0 million)

18 sites did not complete studies under

the valuation provisions of DOE Order 350.1

(FY03 contributions - $105.3 million)

6 closed or

transitioning sites

4 support services

contracts

6 corporate benefit

plans 1 naval reactor site

1 other site

21 sites completed studies under

the valuation provisions of DOE Order 350.1

(FY03 contributions - $325.7 million)

Source: GAO analysis.
Page 23 GAO-04-539 Department of Energy

$31 million and, as previously mentioned, the postretirement benefits paid 

at closed locations are anticipated to increase as additional closure sites 

are completed.

Nonconformance with DOE 

Guidance Raises Questions 

about the Validity of 

Comparison Study Results

DOE Order 350.1 requires certain processes and procedures for completing 

the previously discussed comparison studies. In addition, DOE’s Value 

Study Desk Manual24 describes recommended methodologies for the 

completion of a benefit value study. Collectively, the procedures and 

methodology outlined in DOE Order 350.1 and the Value Study Desk 

Manual are intended to provide reasonable assurance that the comparison 

studies result in valid, reliable, and comparable information regarding the 

benefits offered by DOE contractors. To assess the studies completed by 

DOE contractors, we selected 12 significant provisions from DOE Order 

350.1 and the Value Study Desk Manual and reviewed the most recently 

completed contractor studies for conformance with these provisions. Our 

review encompassed all 21 contractor sites subject to the comparison 

study provisions of DOE Order 350.1 (18 completed benefit value studies 

and 3 completed Chamber of Commerce cost studies). 

Based on our review of the studies performed at contractor sites subject to 

the valuation provisions of DOE Order 350.1 and the Value Study Desk 

Manual, we found one or more instances of nonconformance with required 

or recommended comparison study procedures at 18 of the 21 contractor 

sites. In summary, we found instances of nonconformance with guidance in 

the following areas:

• Contractors did not follow applicable provisions for selecting and 

documenting comparators used in the development of a benefit value 

index (11 of 1825 sites completing benefit value studies).

24The Value Study Desk Manual was prepared for DOE by Buck Consultants, Inc., and 

issued in February 1999. The manual is distributed to all DOE contracting officers and 

contains recommended procedures for completing DOE benefit value studies. Policies and 

procedures for the completion of both the benefit value studies and the Chamber of 

Commerce cost studies are also found in DOE Order 350.1. 

25These tests were conducted for 18 of the 21 contractor sites because the Value Study Desk 

Manual recommended procedure to obtain contractor and actuarial certifications and 

maintain documentation for comparator companies outside of the contractor’s industry are 

not applicable to the 3 contractor sites that completed Chamber of Commerce cost studies.
Page 24 GAO-04-539 Department of Energy

• Contractors did not use the recommended methodologies to calculate 

the results of the comparison study (10 of 21 sites completing benefit 

value or cost studies).

• Contracting officers did not obtain recommended certifications from 

contractors and actuarial consultants to verify data used in the benefit 

value studies (16 of 1826 sites completing benefit value studies).

Since the results of the benefit value comparison studies are sensitive to 

the selection of a comparator group, DOE Order 350.1 and the Value Study 

Desk Manual provide that the comparator group include at least 15 

participants, only 20 percent of which can be other DOE contractor sites 

that compete for professional level staff. Our review determined that 11 out 

of 18 contractors did not properly select comparator firms or maintain 

documentation on comparators in accordance with recommended 

procedures in the Value Study Desk Manual.

27 Although DOE policies also 

require contracting officers to review and approve the contractor 

comparator group prior to the completion of the benefit value study, 

several contractors were not in compliance with this agency procedure 

because they did not provide the specific documentation recommended by 

the Value Study Desk Manual. This situation may result in inconsistent 

criteria selection for comparators among contractor studies.

DOE Order 350.1 requires contractor comparison studies to generate 

appropriate comparison statistics. The Value Study Desk Manual

recommends that benefit value studies calculate the contractor’s total 

employer-paid net benefit value using a comparison to the average total 

(e.g., the mean) net benefit value for the comparator group. DOE Order 

350.1 requires Chamber of Commerce cost studies to calculate the 

contractor’s actual per capita benefits cost per employee compared to the 

most recently published survey from the same benefit year. Our review 

found that 10 out of the 21 contractor sites did not calculate the desired 

performance measure as required or recommended by DOE guidance. In 

several cases, we found that the contractor total benefit value index was 

computed based on the median, not the mean, of competitor replacement 

26See footnote 25.

27The Value Study Desk Manual recommends that all companies selected as comparators 

for the benefit value study should compete for professional staff in the same “industry” or 

the contractor should provide documentation that they have gained or lost professional staff 

to the comparator firm within recent years.
Page 25 GAO-04-539 Department of Energy

values. We also found that separate performance measures were presented 

for employee groups with tiered benefits without any indication of the total 

cost distribution between the groups. The failure to calculate consistent 

comparison study results makes it difficult for agency officials to compare 

results among sites and correctly determine whether corrective action 

plans are required.

The Value Study Desk Manual also recommends that the assigned 

contracting officers obtain certifications from both the contractor and the 

benefits consulting group performing the comparison studies to verify the 

accuracy, consistency, and validity of comparisons completed. The 

certifications are key controls over the quality of the studies. For example, 

they would alert contracting officers if the contractor was to change 

comparator firms or valuation methodologies and assumptions or was 

unable to obtain up-to-date competitor benefit data. Our review determined 

that 16 out of 18 contractors that completed a benefit value study did not 

submit the contractor and actuarial certifications at the completion of the 

study. The absence of these certifications can result in the improper 

interpretation of the comparison study results by contracting officers.

Increased Management 

Review Would Help 

DOE Oversee Its 

Contractor Employee 

Benefits Program

DOE could enhance its oversight of contractor employee benefits and 

address the challenges posed by the future administration of significant 

post-closure benefits by providing for greater management review of 

information developed at individual contractor sites and incorporating a 

focus on the long-term nature of pension and postretirement health 

benefits. The limited review of post-closure benefit payments completed by 

contracting officers at closed sites may make the continued 

decentralization of benefit program monitoring impractical. Also, the 

70-year anticipated duration for some DOE reimbursements of contractor 

employee pension and postretirement health costs earned to date needs 

additional consideration in DOE’s evaluations of contractor benefit costs. 

DOE contracting officers are primarily responsible for determining the 

allowability of DOE contractor employee benefit costs and administering 

the benefits. Accordingly, DOE’s current monitoring and risk assessment 

process is largely performed by contracting officers who are responsible 

for reviewing benefit programs at one contractor site. Contracting officers 

have the ability to seek technical advice and policy support from various 

DOE resources, including CHRM, OPAM, and NNSA. DOE also maintains a 

Memorandum of Understanding with DOD agency offices to provide audit 

services. These management offices offer, as needed or requested, various 
Page 26 GAO-04-539 Department of Energy

issue- or location-specific monitoring activities; however, they do not 

routinely review the results of the monitoring and risk assessment 

activities of the contracting officers. Thus, agencywide information 

regarding nonconformance with guidelines for contractor employee benefit 

program assessments is not routinely analyzed by management so that 

corrective actions can be taken. Similarly, best practices are not routinely 

identified at individual contractor sites and propagated across the agency. 

Also, dissimilarities in benefit programs between contractor locations can 

lead to adverse situations for the contractor benefits program as a whole. 

DOE recently approved proposals submitted by contractor employee 

groups at two DOE sites to enhance each group’s pension benefits so they 

would be comparable with the pension benefits at another DOE site. The 

agency approved these benefit enhancements largely based on the 

argument that doing so would retain skilled staff, even though the most 

recent contractor benefit value studies indicated that these sites already 

had pension and postretirement health benefit replacement values 

exceeding average labor competitor programs.

The fact that some sites have closed, and others are nearing completion, 

also suggests the need for more management attention to program reviews. 

We found that contracting officers at several closed, or near-completed, 

environmental sites did not perform comparison studies under the 

provisions of DOE Order 350.1 or complete other substantive monitoring 

procedures. The failure to do so was attributed to a lack of resources. We 

believe that transitioning these monitoring and risk assessment procedures 

to a management level that will still exist after site closure would better 

position DOE to address future challenges. Systematic monitoring reviews 

and risk assessments will be necessary for post-closure benefits since DOE 

officials contend that (1) current contractor pension and postretirement 

health plan provisions allow for changes in postretirement benefits 

subsequent to the site closure and (2) post-closure benefit payments 

remain subject to compliance with DOE’s guidance for comparison studies 

and applicable regulations, such as the cost reasonableness provisions of 

the FAR.
Page 27 GAO-04-539 Department of Energy

Although the agency resources required to monitor DOD’s contractor 

benefits program are significantly greater than those needed at DOE,28 the 

organizational structure at DOD provides an example of an oversight group 

used to assist in compliance reviews and risk assessment at all contractor 

locations. DOD provides contracting officers significant operational 

support from the Defense Contract Audit Agency (DCAA) and the Defense 

Contract Management Agency (DCMA). The two agencies provide a 

consistent source of routine review and analysis of detailed benefit and 

cost information outside of individual contractor locations. This group is 

thus able to gain broad knowledge of contractor issues and decisions to 

apply a more consistent definition of reasonableness to the evaluation of 

contractor benefit costs. DOD also has formal guidance within the agency’s 

supplement to the FAR,29 which lists occurrences in postretirement health 

or pension programs that indicate heightened risk and should lead a 

contracting officer to request a separate in-depth evaluation of the policies, 

practices, and costs of a contractor benefit component that is performed 

jointly by DCAA and DCMA staff.

DOE’s evaluation of total benefits in the benefit value study rather than a 

review of the individual benefit components does not fully address the 

differences in costs between deferred benefit programs, such as pension 

and postretirement health benefits, and other benefit components. A 

management focus on the long-term impacts of contractor benefit program 

decisions may provide improved information for decision makers in DOE 

and Congress. This information is important because decisions on changes 

to pension and postretirement health benefits can have a significant impact 

on DOE’s long-term budgetary needs. For example, a 1 percent increase in 

a contractor employee’s current year vacation benefits has less impact on 

DOE’s long-term costs and budgetary needs than a 1 percent increase in 

postretirement pension or health benefits, which have a continuous and 

compounding effect as they are paid out in each year of retirement. 

Nevertheless, DOE contracting officers decide whether corrective action 

28DOD generally maintains a shorter duration of individual contractor operations and 

contractor employees usually participate in existing corporate plans and are not separated 

from non-DOD contract operations. This results in an increased need to review the 

allocation of employee costs, including benefit costs, between DOD and non-DOD 

contracts. See app. II for further comparisons between DOE and DOD contractor benefit 

reimbursement programs.

29Federal agencies subject to the FAR provisions may supplement the regulations through 

separately issued requirements for agency contractors. Both DOE and DOD have issued 

agency supplements to the FAR. 
Page 28 GAO-04-539 Department of Energy

plans are needed largely based on the review of the total benefit value 

index, which does not take into account the differences between the total 

cost of pension and postretirement health benefits and other benefit 

components. These cost differences may be significant because pension 

and postretirement health benefits can require DOE reimbursement long 

after an employee retires.

As shown in table 4, the benefit value indexes for contractors’ pension and 

postretirement health benefits are significantly different from the total 

benefits indexes shown in table 3. Both the pension and postretirement 

health benefit indexes have larger programwide averages, larger index 

ranges, and more contractors with benefit indexes outside of DOE’s target 

range of 5 percent above the average of selected competitors. For 

example, postretirement health benefits average more than 44 percent 

greater than the average of the DOE contractors’ competitors, while 

defined benefit pensions average 29 percent greater. 

Table 4: Summary Statistics for Total Benefits, Defined Benefit Pension Benefits, 

and Postretirement Health Benefits in DOE Contractor Value Studies (Results 

Compared to an Average Comparator Index of 100.0)

Source: GAO analysis.

Note: Summarizes the most recent contractor benefit value studies submitted by DOE contractors.

In addition, DOE’s review of current pension contributions and 

postretirement health payments through the Chamber of Commerce cost 

studies completed by three contractor sites is not consistent with the longterm nature of pension and postretirement health benefits. This 

inconsistency is largely due to the fact that annual employer contributions 

for pension and health benefits generally do not equal the estimated 

amount of postretirement benefits earned by current employees that year, 

also called the annual service cost of benefits. For example, DOE 

Comparison study measures

Total benefits 

index

Defined benefit 

pension index

Postretirement 

health index

Average 99.8 129.0 144.8

Maximum 148.0 261.2 737.0

Minimum 71.0 75.0 18.6

Number of sites with an index 

above 105 5 11 9

Number of sites with an index 

from 90 to 110 16 2 2
Page 29 GAO-04-539 Department of Energy

reimbursed $430 million in costs to its contractors for pension and health 

plan contributions in fiscal year 2003; however, the reported fiscal year 

2003 service cost of those plans was $872 million.30

It is DOE’s policy to evaluate contractor requests for changes to existing 

pension and postretirement health plans by reviewing total benefit values 

and annual contributions, rather than total costs. DOE Order 350.1 requires 

contractors to submit proposed changes to contractor postretirement 

benefit programs with information on the impact of the changes on existing 

comparison studies and anticipated changes in cost. However, the order 

does not differentiate the annual contractor contribution cost from the 

total future cost of the changes. For example, the determination to accept 

proposed changes by one contractor noted that the increase in pension 

liabilities caused by the changes would not result in additional short-term 

reimbursements by DOE due to the positive funded status of the plan. 

Furthermore, our review of changes made to contractor postretirement 

benefit plans during fiscal year 2002 revealed that 3 out of 11 contractors 

that submitted changes to DOE for approval did not include either the 

effect of the plan changes on comparison study results or an estimate of 

savings or costs. 

Conclusions The satisfaction of postretirement contractor benefits earned under 

current and prior contracts with the government will require significant 

amounts of budgetary and administrative resources to pay and monitor the 

payment of these benefits long after current research contracts and 

cleanup sites are terminated. Because DOE has excluded certain 

contractor locations from a requirement to complete periodic benefit 

valuation studies, it cannot apply a consistent evaluation of costs for all 

benefit programs. Within programs required to complete comparison 

studies, instances of contractor nonconformance with policies and 

guidance make the results difficult to interpret and use in making 

management decisions regarding the level of program benefits. The 

challenges associated with administering post-closure benefits and a lack 

of focus on the long-term nature of postretirement pension and health 

30These differences in annual postretirement benefit payments and service costs can occur 

because the number of current employees earning benefits and the cost of those benefits in 

any given year may not equal the number of retirees receiving postretirement benefits and 

the cost of those benefits. Differences can also occur because pension contribution 

amounts required under ERISA may not equal the estimated benefits earned by employees. 
Page 30 GAO-04-539 Department of Energy

benefit obligations exacerbate these problems. Formal management 

reviews that attempt to identify and correct areas of nonconformance, 

propagate best practices agencywide, and focus on long-term budgetary 

needs could improve DOE’s oversight of the contractor employee 

postretirement benefits program. 

Recommendations for 

Executive Action

GAO recommends that the Secretary of Energy take the following four 

executive actions:

1. Institute systematic management review of pertinent data from each 

contractor location to enhance the consistency of benefit program 

evaluations and reduce the instances of nonconformance with the 

requirements of DOE Order 350.1 and other recommended procedures. 

The intent of the management review would be to correct areas of 

nonconformance, identify best practices, and disseminate this 

information across the agency.

2. Extend the comparison study requirements of DOE Order 350.1, to the 

extent practical, to all contractor locations with benefit obligations to 

provide better information about programwide contractor employee 

benefit costs. 

3. In cases where the extension of the order is not practical, develop and 

perform appropriate alternative procedures to provide similar 

information.

4. Incorporate into DOE’s oversight process a focus on the long-term 

costs and budgetary implications of decisions pertaining to each 

component of contractor benefit programs, especially pension and 

postretirement health benefits, that have budgetary requirements 

beyond the current year. This would augment the current consideration 

of total annual benefit costs.

Agency Comments and 

Our Evaluation

We requested and received from DOE written comments on a draft of this 

report, which are reprinted in appendix III. In its comment letter, DOE 

noted that our findings were consistent with those of its own internal 

assessment and agreed with the report’s four recommendations. DOE also 

provided us with technical comments, which we have incorporated as 

appropriate. 
Page 31 GAO-04-539 Department of Energy

Additionally, we requested oral comments from DOD on applicable report 

excerpts. DOD did not have any comments on the report.

We are sending copies of this report to appropriate House and Senate 

committees; the Secretary of Energy; and the Director of the Office of 

Management and Budget. We will also make copies available to others 

upon request. The report is also available at no charge on GAO’s Web site at 

http://www.gao.gov. If you have any questions about this report, please 

contact me at (202) 512-6131. You may reach me by e-mail at 

martinr@gao.gov. Contributors to this report are listed in appendix IV.

Sincerely yours,

Robert E. Martin 

Acting Director

Financial Management and Assurance
Page 32 GAO-04-539 Department of Energy

Appendix I

DOE Contractor Locations with Pension and Apendxies

Postretirement Health Liabilities as of 

September 30, 2003 ApendxiI

Contractor site

Ames Laboratory

Argonne National Laboratory

Bettis Atomic Power Laboratory

Brookhaven National Laboratory

Civilian Radioactive Waste Management Program (Yucca Mountain

Project)

Fermi National Accelerator Laboratory

Fernald Environmental Management Project

General Electric Vallecitos Nuclear Center

Grand Junction Sites

Hanford Site

Hanford Site – Hanford Environmental Health Foundation

Idaho National Engineering and Environmental Laboratory

Kansas City Plant

Knolls Atomic Power Laboratory

Lawrence Berkeley National Laboratory

Lawrence Livermore National Laboratory

Los Alamos National Laboratory

Miamisburg Environmental Management Project (Mound Plant)

National Renewable Energy Laboratory

Nevada Test Site/Naval Petroleum Reserves1

Nevada Test Site – Security Services

Oak Ridge / Paducah and Portsmouth Gaseous Diffusion Plants

Oak Ridge Y-12 Site

Oak Ridge Associated Universities / Oak Ridge Institute for Science and

Education

Oak Ridge National Laboratory

Oak Ridge – Security Services

Pacific Northwest National Laboratory

Pantex Plant

Pinellas Plant

Portsmouth Gaseous Diffusion Plant2

Princeton Plasma Physics Laboratory

1

DOE operations sites that include more than one contractor have been counted as one 

location for purposes of this report when the contractor benefits for multiple contractors 

are included in the same DOE Order 350.1 comparison study. 

2

The obligation for postretirement benefits at this contractor site was liquidated through a 

negotiated settlement in February 2004.
Appendix I

DOE Contractor Locations with Pension and 

Postretirement Health Liabilities as of 

September 30, 2003

Page 33 GAO-04-539 Department of Energy

Rocky Flats Environmental Technology Site / Rocky Flats Security

Services3

Sandia National Laboratory

Savannah River Site 

Savannah River Site – Security Services

Stanford Linear Accelerator Center

Thomas Jefferson National Accelerator Facility

Waste Isolation Pilot Plant

West Valley Demonstration Project

3

See footnote 1.
Page 34 GAO-04-539 Department of Energy

Appendix II

Comparison of DOE and DOD Contractor 

Benefit Programs ApendxiI

Both DOE and DOD manage a large number of individual contracts and 

contractor operations. Both agencies also allow for the reimbursement of 

annual pension and postretirement health costs and have agency 

contracting officers who are responsible for reviewing these costs for 

compliance with applicable regulations. However, as shown in table 5, 

there are some underlying program differences that have an impact on the 

way the two agencies manage their contractor benefits. 
Appendix II

Comparison of DOE and DOD Contractor 

Benefit Programs

Page 35 GAO-04-539 Department of Energy

Table 5: Comparison of DOE and DOD Contractor Benefit Programs

 Source: GAO analysis of DOE and DOD data.

a

Section 26 of the Office of Federal Procurement Policy Act, as amended, 41 U.S.C. § 422 (2000), 

requires certain contractors and subcontractors to comply with CAS, as issued by the Cost Accounting 

Standards Board. These standards are mandatory for use by all executive agencies and by contractors 

in estimating, accumulating, and reporting costs in connection with negotiated prime contract and 

subcontract procurements with the government in excess of $500,000, other than contracts or 

subcontracts that have been exempted by regulations. 

b

According to a DOE official, compliance with CAS standards related to accounting for pension costs is 

not mandatory under DOE management and operating or support services contracts. 

Program area DOE DOD

Ownership of operations 

facilities

Employees receiving 

benefits are at governmentowned facilities.

Majority of employees 

receiving benefits are at 

contractor-owned facilities.

Duration of contractor / site 

mission

Long-term relationships, for 

example, completion of 

environmental cleanup 

tasks and ongoing research 

missions.

Mostly short-term 

relationships, for example, 

construction of military 

equipment.

Separation of operation 

employee benefits from other 

contractor employee 

programs

Majority of plans are for 

DOE contract benefits only; 

corporate plans require 

separate benefits 

calculations for reporting 

purposes.

Employees continue to 

participate in existing 

contractor corporate plans.

Involvement in contractor 

establishment and changes 

to existing contractor 

employee benefit programs

Contracting officers are 

involved in the initial 

approvals of contractor 

benefit programs and 

subsequent changes to 

those programs.

Contractor is usually free to 

structure and make changes 

to plans, but resulting costs 

are subject to review for 

allowability.

Segregation of operation 

contractor employees from 

other contractor operations

DOE contractor employees 

generally do not split time 

between DOE and nonDOE work.

DOD contractor employees 

often work on DOD and 

other contracts concurrently.

Extent of post-closure benefit 

obligations and applicability 

of Cost Accounting 

Standards 

(CAS)a

DOE policies allow for 

contractor continuance of 

benefit programs for 

employees who earned 

benefits under former 

contracts.b

DOD generally settles 

obligations according to 

CAS provisions after the 

contractor ceases to 

perform under the contract. 
Page 36 GAO-04-539 Department of Energy

Appendix III

Comments from the Department of Energy ApendxiI
Page 37 GAO-04-539 Department of Energy

Appendix IV

GAO Contact and Staff Acknowledgments ApendxiIV

GAO Contact Robert E. Martin, (202) 512-6131

Acknowledgments In addition to the individual named above, Sharon Byrd, Richard 

Cambosos, Lisa Crye, Frederick Evans, Darren Goode, Roger Thomas, and 

Scott Wrightson made key contributions to this report.

(190096)
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