Department of Energy: Progress Made Overseeing the Costs of Contractor Postretirement Benefits, but Additional Actions Could Help Address Challenges
Published: 2011-04-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Energy (DOE) relies on contractors to conduct its mission activities. DOE reimburses these contractors for allowable costs, including the costs of providing pension and other postretirement benefits, such as retiree health care plans. Since the economic downturn, DOE has had to devote significantly more funding toward reimbursing these benefit costs, in part because of a decline in interest rates and asset values that has increased contractor pension contributions. In a challenging budgetary environment, further growth in these costs could put pressure on DOE's mission work. GAO was asked to report on (1) the level of control DOE has over contractor pension and other postretirement benefit costs under its current business model and (2) the changes DOE has adopted since the national economic downturn to manage those costs and the extent to which those changes have enhanced its approach. To do so, GAO reviewed relevant laws, regulations, and DOE guidance; analyzed agency financial data; and interviewed officials.
section_title: What GAO Found
paragraphs: Under its current business model, DOE has limited influence over contractor pension and other postretirement benefit costs. For example, contractors sponsor benefit plans and, as a result, control the types of benefits offered to their employees and the strategies for investing pension plan assets. DOE nevertheless ultimately bears the investment risk incurred by the contractors. Moreover, external factors beyond both DOE's and the contractors' control, such as economic conditions and changes in statutory requirements, can significantly affect benefit costs. For example, the investment performance of plan assets can affect pension contributions, while changes in health care law can affect postretirement benefit payments. Even with these constraints, however, DOE can exercise some influence over contractor pension and other postretirement benefit costs through its oversight efforts, reimbursement policy for contractor benefit costs, and contract requirements. Still, the department will ultimately have to reimburse the cost of contractor pension benefits that have already been accrued. Since the economic downturn deepened in 2008, DOE has taken steps to enhance its management of contractor benefit costs--particularly for contractor pensions--but has not comprehensively reviewed its approach to managing its contractors' other postretirement benefit costs, such as retiree health care coverage. In addition, DOE has not added agencywide information on the costs of its contractors' other postretirement benefits to its annual budget request. As a result, DOE may be delayed in identifying options that might better address the growth of its reimbursement costs and may not provide important information to Congress that could inform annual funding decisions. Moreover, while DOE has, for the most part, continued to use the same reimbursement policy and contract requirements from before the economic downturn, it lacks complete guidance on how program offices should evaluate contractor requests to contribute more than DOE's minimum requirement to their pension plans. DOE is therefore unable to ensure that its offices decide on contractor requests on the basis of consistent criteria reflecting departmentwide goals for managing contractor pension costs. In addition, DOE's existing process for having contractors align their benefit packages with DOE's reimbursement standard is incomplete. Specifically, DOE lacks a comprehensive timetable for when contractors must modify benefit packages whose values exceed DOE's standard. As a result, only 1 of the 16 contractors with benefit packages exceeding DOE's standard for the most recent evaluation period is expected to bring its benefits in line with that standard. Further, DOE guidance allows contracting officers to waive the requirement for contractors to correct benefit packages exceeding DOE's reimbursement standard, but does not detail the criteria contracting officers should follow in making that decision or require a review by DOE headquarters. As a result, some contractors may continue for an undefined period to accrue liabilities and be reimbursed by DOE for benefit packages exceeding the department's reimbursement standard.
section_title: What GAO Recommends
paragraphs: GAO recommends, among other things, that DOE comprehensively review how it manages contractor postretirement benefit costs and define criteria for evaluating contractor requests to contribute more than the minimum to their pension plans. DOE agreed with three of GAO's recommendations but disagreed with the need to define such criteria.

section_title: Letter
paragraphs: The Department of Energy (DOE) spends about 90 percent of its annual  budget on contracts, making it the largest civilian contracting agency in  the federal government. Under its decades-old business model, the  department relies extensively on contractors to manage and operate its  sites and carry out the bulk of its national security, environmental cleanup,  and research and development missions. As of September 2010, DOE has  46 such contracts with private companies and nonprofit organizations,  including universities. Under the terms of these contracts, DOE  reimburses contractors for the allowable costs of performing work,  including the costs of providing pension and other postretirement  benefits—such as health care, dental, and life insurance benefit plans—to  nearly 200,000 current and former contractor employees and their  beneficiaries. The contractors sponsor these benefit plans, but DOE is  ultimately responsible for reimbursing contractors for allowable plan  costs.
Since the economic downturn deepened in 2008, DOE has had to devote significantly more funding to reimbursing contractors for the cost of these  employee pension and other postretirement benefits—in part because of a  decline in interest rates and asset values, which has increased the amount  contractors have needed to contribute to their pension plans. In fiscal year  2009, the department reimbursed $750 million in contractor pension costs,  more than double the amount it had reimbursed in fiscal year 2008 and  significantly more than it had budgeted for. According to DOE documents,  this increase was driven in large part by a drop in the interest rate used by  contractors to calculate their pension plan liabilities, as well as poor asset  performance due to market declines. At the same time, reimbursement  costs for its contractors’ other postretirement benefits grew by 10 percent,  to $389 million. Both costs remained at similarly high levels in 2010 and, according to recent projections, may increase in coming years. While these contractor benefit costs represent only a portion of total contractor  compensation, further growth in these costs in an increasingly challenging  budgetary environment could put pressure on the funding available for  DOE’s mission-related activities.
We have previously reported on the challenges DOE faces in managing the  costs of its contractors’ pension and other postretirement benefits.  In 2004, we noted that these costs were significant and growing and  recommended that DOE improve its oversight by instituting systematic  management review of contractor benefit data, extending requirements for  contractors to regularly assess the value of their benefit packages,  performing alternative procedures where such an extension was not  practical, and incorporating a focus on long-term costs and budgetary  implications of decisions pertaining to each component of contractor  benefit programs. We later found that DOE did not always require  contractors to modify benefit packages that substantially exceeded the value of their competitors’ benefits, potentially adding billions of dollars in  long-term costs that DOE would ultimately have to reimburse. In 2008, we  reported that DOE had taken actions to address the cost of benefits  contractors offered to new employees, but that those actions were not  expected to substantially affect the department’s contractor pension and  other postretirement benefit costs for the next 20 to 30 years, since  incumbent employees would continue to earn benefits under existing  plans.
In this context, you asked us to review DOE’s approach to managing its contractors’ pension and other postretirement benefit costs. Accordingly,  this report examines (1) the level of control DOE has over contractor  pension and other postretirement benefit costs under its current business  model and, (2) within that model, the changes DOE has adopted since the national economic downturn and the extent to which these changes have  enhanced its approach to managing contractor pension and other  postretirement benefit costs.
To examine the level of control DOE has over contractor pension and  other postretirement benefit costs under its current business model, we  reviewed relevant laws, regulations, contract provisions, and DOE  guidance to identify contractor and department responsibilities for  contractor benefit plans. For context, we interviewed DOE headquarters  officials and site officials responsible for overseeing contractor operations  at six facilities—East Tennessee Technology Park, Los Alamos National  Laboratory, Oak Ridge National Laboratory, Sandia National Laboratories,  the Savannah River Site, and the Y-12 National Security Complex—and  met with representatives of the contractors responsible for managing and  operating those facilities. We selected this nonrepresentative sample to  provide illustrative examples of such factors as contractor pension plans  with varying funding levels, contractor postretirement health care plans  with a range of statuses, and facilities overseen by different program  offices. To obtain additional insight, we also met with officials from the  Department of Defense, the National Aeronautics and Space  Administration, and the National Institutes of Health to identify how those  agencies manage contractor benefit costs at government-owned,  contractor-operated facilities and how their approaches compare with  DOE’s. We selected this nonrepresentative sample of agencies on the basis  of the amount they have spent on contracts for professional, scientific, and  technical services at government-owned, contractor-operated facilities  during the last 5 years. According to Department of Defense officials, a  small percentage of the department’s annual budget is spent on  contractors for government-owned, contractor-operated facilities. In fiscal  year 2010, the National Aeronautics and Space Administration spent $1.45  billion, or about 8 percent, and the National Institutes of Health expects to have spent about $460 million, or about 1.5 percent, of their respective  annual budgets on contracts for government-owned, contractor-operated facilities. These proportions contrast with DOE’s spending about 90  percent, or $22 billion, of its annual budget on contracts to operate its  facilities. Further, we analyzed selected budget, financial, and actuarial data on DOE contractor pension and other postretirement benefit plans to  determine cost and liability trends and summarize plan characteristics. We  interviewed knowledgeable agency officials about the source of the data  and the controls in place to maintain their integrity and found the data to  be sufficiently reliable for the purposes of our report. To examine the changes DOE has adopted to enhance its approach since the national  economic downturn, we synthesized information from DOE  documentation on these changes, as well as information gathered during  our interviews. We also analyzed selected DOE contract data and the  department’s budget requests to Congress for fiscal years 2009 through  2012, as well as the contractors’ benefit assessment studies and selected  reports to DOE on the status and management of their pension plans.
We conducted this performance audit from May 2010 through April 2011,  in accordance with generally accepted government auditing standards.   These standards require that we plan and perform the audit to obtain  sufficient and appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides such a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: DOE’s business model relies on contractors to carry out the bulk of the  department’s mission activities through management and operating  contracts and other site contracts for operations at DOE-owned facilities,  while employing federal officials to set mission objectives and provide  contract oversight. This business model dates from the Manhattan Project,  when federal officials contracted with private companies and universities  to develop and produce the atomic bomb. Under this business model,  contractors manage and operate DOE facilities—including research  laboratories, production and test facilities, and nuclear waste cleanup and storage facilities—located throughout the country. Generally, DOE  requires these contractors to be corporate entities formed for the specific purpose of managing and operating a facility and requires the contractors  to integrate their accounting systems and budget processes with those of  the department. DOE also generally requires contractors that take over a  contract to hire the existing contractor workforce at a facility. As a result,  with the exception of top managers, the workforce at a facility generally  remains in place despite changes in contractors. DOE oversees  contractors’ activities through its headquarters program offices—primarily  the National Nuclear Security Administration (NNSA), the Office of  Environmental Management, and the Office of Science—and site offices  located at each facility.
Under its business model, DOE reimburses contractors for the allowable  costs of employee compensation, including benefits such as pension and  other postretirement benefits. DOE is ultimately responsible for  reimbursing its contractors for the cost of these benefit plans, and reports  a liability or asset in its financial statements for the funded status—that is,  plan obligations minus plan assets—of these benefit plans. When site  contracts are recompeted or expire, it is DOE’s policy to ensure the  continuation of these benefits for incumbent contractor employees and eligible retirees by, for example, requiring the transfer of benefit plan  sponsorship responsibilities to a successor contractor or related company.
Although other federal agencies use contractors to operate facilities and  reimburse those contractors for their allowable benefits costs, DOE is  unique in the percentage of its budget that goes to site contractors. For  example, while the National Institutes of Health funds a contractor- operated research facility and requires the facility contractor to assume  sponsorship of existing employee benefit plans, the agency devotes only  about 1.5 percent of its budget toward this contract. In contrast, 90  percent of DOE’s budget goes toward such contracts. As a result, a large  increase in reimbursement costs for contractors’ employee benefits is  more likely to have a significant impact on DOE’s budget than a similar  increase would for agencies devoting a smaller percentage of their budget toward contracts for operating government-owned facilities.
DOE’s contractors sponsor pension plans for their employees, including  both traditional pension plans, known as “defined benefit” plans, and  401(k) or similar plans, known as “defined contribution” plans. As of  September 2010, DOE was responsible for reimbursing contractors for 50  defined benefit plans, including 40 qualified plans and 10 nonqualified  plans. Of the qualified defined benefit plans, 37 are private-sector plans  while 3 are public-sector plans. DOE’s contractors that sponsor private- sector pension plans must comply with the Internal Revenue Code and the  Employee Retirement Income Security Act of 1974 (ERISA), which  establishes minimum funding standards for the amounts that private- sector plan sponsors must set aside in advance to pay benefits when they  are due. DOE’s current policy is to reimburse contractors for contributions made by the contractors to their qualified defined benefit  plans and to reimburse contractors for their nonqualified plans on a pay- as-you-go basis. DOE reimburses contractors for their contributions to  defined contribution plans as well.
DOE’s contractors also sponsor a variety of other postretirement benefits  plans. Although these benefits can include dental and life insurance  coverage, the majority of DOE reimbursement costs are for retiree health care benefits. As of September 2010, DOE was responsible for reimbursing  41 contractors for retiree health care payments, although the specific  benefits offered to retirees varied across contractors. For these other  postretirement benefits, DOE’s contractors typically do not set aside funds  in advance because, in contrast to requirements for funding pension  benefits, there are generally no requirements and few incentives to do so.
As a result, DOE reimburses contractors on a pay-as-you-go basis for the  amount needed to meet the employer’s annual share of these costs, and  these benefit obligations represent a continuing liability for DOE.
Since September 1996, DOE Order 350.1, Contractor Human Resource  Management Programs, has set forth DOE’s policy for the oversight and  reimbursement of contractor benefit plans. In particular, this order  requires that DOE determine whether contractors’ benefit costs are  reasonable and allowable and therefore reimbursable. To help make this  determination, DOE Order 350.1 requires that contractors “benchmark”  the value or cost of their total benefit package by conducting either a  benefit value or cost study that compares the value or costs of this total  benefit package to those of comparable organizations.
A small number of contractor pension plans account for a large percentage  of DOE’s contractor pension liabilities. As shown in figure 1, 12 plans have  liabilities—specifically, projected benefit obligations—that exceed $1  billion and account for $31.4 billion, or 86 percent, of the $36.7 billion in  total liabilities represented by all DOE contractor qualified defined benefit plans. Within those 12 plans, pension liabilities are concentrated among a  handful of contractor plans. NNSA oversees contractors that sponsor 6 of  the 12 plans, including the 3 largest plans that, combined, account for over  one-third of all DOE contractor pension liabilities.
As shown in figure 2, DOE’s costs for reimbursing contractor pension and  other postretirement benefits have grown since 2000 and are projected to  increase in coming years. From fiscal year 2000 to fiscal year 2010, DOE’s   annual costs for reimbursing contractor pension contributions ranged  from a low of $43 million in 2001 to a high of $750 million in 2009.  Although projections of future contributions are inherently sensitive to  underlying assumptions and can change significantly over time, DOE  estimates, on the basis of data provided by its contractors in November  2010, that necessary contractor pension contributions may rise markedly  in fiscal year 2012—to almost $1.7 billion—in large part because of  expected increases among plans with the largest liabilities. Although  useful as an indicator of the financial pressures that could lie ahead, this  projection is subject to much uncertainty because of factors that could  result in changes in the size or timing of needed contributions to meet  future years’ funding requirements. Specifically, projections are  particularly sensitive to the future economic environment, especially with  respect to future interest rates and asset returns, and also could be  affected by legislative changes to funding rules. For example, an October  2009 DOE analysis showed that projected minimum required contributions  among the 10 largest contractor pension plans could vary by $2 billion or more in any given year during fiscal years 2012 through 2019, depending  on changes in interest rates. Although DOE’s reimbursement costs for its  contractors’ other postretirement benefits have not fluctuated as widely as  contractor pension costs, those costs have grown steadily since 2000 at an  average annual rate of 8 percent and are currently projected to rise at a  slightly higher rate of 9 percent over the next 5 years.
section_title: Within Its Current Business Model, DOE Has Limited Influence over Contractor Pension and Other Postretirement Benefit Costs
paragraphs: Under its current business model, DOE has limited influence over  contractor pension and other postretirement benefit costs. Specifically,  contractors sponsor the plans and therefore control the types of benefits  offered employees and the investment strategies for allocating pension  plan assets; they also determine the amounts paid into plans. In addition,  external factors beyond both DOE’s and the contractors’ control, such as  economic conditions and changes in statutory requirements, have  significant effects on benefit costs incurred by contractors and, in turn,  affect the amount of allowable costs that DOE reimburses contractors.  Despite these constraints, however, DOE can exercise some limited  influence over contractor pension and other postretirement benefit costs  through its oversight efforts, reimbursement policy, and contract  requirements.
subsections: section_title: Contractors, Not DOE, Sponsor and Manage Their Employee Benefit Plans
paragraphs: DOE has limited influence over contractor pension and other  postretirement benefit costs under its current business model because  contractors, not DOE, sponsor the plans. As shown in table 1, contractors  control the types of benefits offered to employees and the benefit plans’  design. Moreover, contractors are responsible for managing those plans,  including selecting strategies used to invest pension plan assets and  determining, within statutory requirements, how much is paid into the  plans. Because contractors control both the design and management of  employee benefit plans, their decisions can significantly affect the  magnitude of benefit costs and the volatility of pension contributions.  Nevertheless, although DOE has limited influence over these decisions,  the department is responsible for reimbursing its contractors for the  allowable costs of providing pension and other postretirement benefits,  including retiree health care, to current and former employees and their beneficiaries.
According to DOE documents and officials, contractors decide what type of benefits to provide to their employees and how to design benefit plans,  and these decisions are part of an overall compensation strategy devised  to recruit and retain the workers they need to fulfill their mission. With  respect to pensions, contractors may offer defined benefit plans, defined  contribution plans, or both, and the content of the plans may vary. For  example, the contractor at DOE’s Oak Ridge National Laboratory offers  both a defined benefit plan and a defined contribution plan to all  employees, while the contractor at DOE’s Savannah River Site offers a  defined benefit plan and a defined contribution plan to employees hired  before August 1, 2008, but only a defined contribution plan to employees  hired after that time. Contractors may change the pension benefits  offered to employees, in accordance with ERISA, and many have been  doing so, echoing the overall national trend from defined benefit to  defined contribution plans. For instance, the contractor at Sandia  National Laboratories changed its benefit package so that non-union  employees hired after December 31, 2008, have a defined contribution  plan, while existing employees remain participants in a defined benefit plan.
Contractors also determine other elements of plan design, such as  eligibility and vesting requirements, within the parameters set by the  Internal Revenue Code and ERISA. Moreover, in the case of defined  benefit plans, contractors determine, among other things, the formula used  to calculate benefits owed to employees, as well as additional provisions  affecting costs, such as early retirement. In the case of defined  contribution plans, they determine how much to match employee  contributions and what investment options employees will have, among other things.
In addition to their control over pension benefits, contractors also control  their offerings for other postretirement benefits, and they can change  these packages as they deem appropriate, subject to DOE approval for  reimbursement purposes. For example, at Sandia and Los Alamos National  Laboratories, new hires receive access-only postretirement health care benefits, which means that, as retirees, they will have to pay the plan’s full  benefit premiums. At DOE’s Savannah River Site, the contractor has  steadily increased its retirees’ share of health care and dental costs  since 2003, although the contractor continues to subsidize a portion of the  premiums.
Contractors also manage the pension plans they offer, and they have a  fiduciary responsibility to manage plan assets in the sole interest of the  plans’ beneficiaries. The contractors’ fiduciary role takes precedence  over their responsibility to DOE and therefore limits DOE’s influence over  the plans and the associated costs. Plan management includes selecting  investment strategies for defined benefit pension assets. In choosing  strategies for investing defined benefit plan assets, contractors make a  trade-off between risk and return. For example, bonds, because of their  higher correlation to pension liabilities, can decrease the volatility in plan  funding and potentially required contributions. On the other hand, equities  generally come with greater risk, but also greater expected returns relative  to bonds. Consequently, investment strategies relying relatively more on  equity returns are likely to provide volatile plan funding and contributions.
The performance of contractors’ investment portfolios can affect the  contributions contractors make to the plans and, in turn, their   reimbursable costs. For example, declines in the fair market value of plan  investments decrease the funded status of the plan. In such a situation,  contractors may be required to increase their annual pension  contributions over a period of years, which DOE may in turn be obligated to reimburse. Moreover, volatile investment returns can result in  fluctuations in pension contributions from year to year. As a result, DOE  ultimately bears the investment risk incurred by the contractor sponsoring the plan. DOE officials stated that the agency encourages contractors to  make investment decisions that reduce volatility but—because DOE’s role  is limited to oversight and contractors have the fiduciary responsibility for  plan administration—does not provide guidance on how to do so, nor  otherwise dictate how contractors should allocate plan assets.
Plan management also includes making decisions about funding  contractor pension plans. Contractors, not DOE, are responsible for  determining, within statutory requirements, the amounts they pay into their benefit plans. Funding requirements vary among the defined benefit  plans offered by DOE contractors, making it difficult to obtain a clear  picture of pension contribution requirements across plans and over time.  For example, three different sets of funding requirements apply to the  range of DOE contractor pension plans. Additionally, three contractor  pension plans, including the second largest plan, were eligible for special provisions from plan year 2008 to plan year 2010, which reduced their plan liabilities. Figure 3 illustrates the distribution of general funding  requirement types among DOE contractor pension plans.
Contractors, according to the funding requirements applicable to their  qualified pension plans, determine the minimum contribution they must  make to the plans. A contractor’s minimum contribution is generally  considered an allowable cost for reimbursement by DOE because the  contractor incurs this cost to meet its contractual obligation with DOE to  maintain the pension plan’s eligibility for favorable tax treatment under  the Internal Revenue Code. While contractors are obligated to pay only  the minimum required contribution, under DOE policy they can also ask  the department to reimburse them if they contribute more than the  minimum. A contractor might choose to contribute more than the  minimum in the current year to, for example, avoid benefit restrictions  that would otherwise come into effect on the basis of the pension plan’s  funding level. In addition, a contractor might wish to contribute more  than the minimum to build credit balances that it could use in future years to try to level the amount it budgets for pension contributions.
section_title: External Factors beyond DOE and Its Contractors’ Control Can Significantly Affect Benefit Costs
paragraphs: External factors over which DOE and its contractors have no control,  including economic conditions and changes in statutory requirements, can  significantly affect contractor reimbursement costs. For instance, changes  in economic conditions can significantly affect necessary pension plan  contributions, which are, in part, determined by actuarial assumptions about the future, and these assumptions are used to calculate the value of  plan assets and liabilities, such as employee turnover, and compensation  increases. Furthermore, minimum contribution requirements can vary  from year to year as the result of fluctuations in the investment  performance of plan assets. For example, the significant decline in value  of the financial markets in 2008 caused a considerable drop in plan assets.  In addition, changes in the interest rate can significantly affect contractor pension contributions. For instance, according to DOE officials, a drop in  interest rates has contributed to increases in calculated plan liabilities,  which, along with other factors, has led to a significant increase in  contractor pension contributions. Officials further noted that, in part  because of recent economic conditions, some contractors contributed to  their pension plans for the first time in years. For example, a contractor  at Oak Ridge National Laboratory told us that in fiscal year 2010, in part as  a result of the recent financial market crisis and changing interest rates, it  budgeted for the first contributions to the site’s defined benefit plan since  1984. The variability in investment returns and interest rates, which  influences the calculation of plan contributions, also adversely affects  DOE’s ability to accurately forecast the costs of pension contributions in  its budget requests.
Changes in economic conditions can also affect other postretirement  benefit costs. Changes in health care and other cost trends can influence  the cost of these benefits and, in turn, the amount that must be reimbursed by DOE. For example, officials at DOE’s Savannah River Site explained  that as health care costs increase nationally, the cost of providing retiree  health care to their employees has also increased. Los Alamos National  Laboratory officials attributed their rising health care costs to a variety of  factors, including increases in emergency room and radiology costs.
Changes in statutory requirements can also have a significant effect on  contractor benefit costs. For example, the funding requirements that  govern a large majority of DOE contractor private-sector pension plans  have been changed or significantly amended over the last 5 years. One of the most sweeping amendments to ERISA and the minimum-funding rules  occurred with the passage of the Pension Protection Act of 2006. This  act—prompted, in part, by the default of several large pension plans—  increased the minimum funding requirements for pension plans and  sought to strengthen the private pension system. Many of the funding rule  changes for single-employer plans came into effect slowly, however, and  included special rules that provided funding relief for certain plan  sponsors. Additionally, almost as soon as the act began to take effect in  2008, the economy weakened, and further statutory and regulatory  changes occurred that had the overall effect of reducing or delaying  pension contributions that would otherwise have been required. The  number and timing of statutory and regulatory changes since the  enactment of the Pension Protection Act of 2006 makes it difficult to  determine how much of an effect the law has had on contractor  contribution requirements. During our site visits, some contractors  reported an increase to their minimum required contributions since the  act’s implementation, but these increases are the combined result of  multiple factors, including economic and demographic experience and legislative changes. Contractor costs for other postretirement benefits can  also be influenced by changes in statutory requirements. For instance, according to DOE documentation, passage of the Patient Protection and  Affordable Care Act in 2010 may affect contractors’ other postretirement  benefits in a variety of ways, such as by levying an excise tax on high-cost health plans.
section_title: and Contract Requirements
paragraphs: Despite the constraints posed by DOE’s current business model, our  analysis of DOE documents—including department policy, budget  documents, and contract provisions—indicates that the agency has several  means—oversight efforts, reimbursement policy, and contract  requirements—by which it can exercise some limited influence over  contractor pension and other postretirement benefit costs (see table 2).  While DOE will ultimately have to reimburse the cost of contractor  pension benefits that have already been accrued, it can use these means to  exert some influence over future benefit costs.
First, DOE decides its degree of oversight over benefit costs, including the  amount of detailed information related to these costs that it collects and  reviews and the extent to which it communicates that information to  department officials and congressional decision makers. While DOE’s  oversight efforts do not control costs directly, according to department  officials, they help increase awareness of cost management on the part of  both the department and contractors and can encourage discussion  between the two on ways to mitigate costs where appropriate. Specifically,  DOE determines the amount of information contractors must provide  about benefit costs and the frequency with which they must do so, the  degree of departmental review, and how readily available that information  is to decision makers. For instance, DOE policy requires contractors to  periodically assess their benefit packages and submit the results of these  evaluations to the department. Generally, the contractor must take  corrective action if the value of the benefit package exceeds 105 percent of  comparable companies’ plans. Moreover, DOE requires contractors to  provide the department with cost projections and information on direct  and indirect costs as they relate to pension and other postretirement  benefits.
Second, through its reimbursement policy, DOE sets requirements that  determine the extent to which contractor benefit costs qualify for   reimbursement. In April 2006, in response to growing liabilities for  contractor employee benefits, DOE issued Notice 351.1, which provided  that the department would continue to reimburse contractors for the  allowable benefit costs for incumbent employees and eligible retirees but  limit reimbursement for new employees to the costs of “market-based”  pension and health benefit plans. A pension plan was deemed market- based when, among other things, the plan was a defined contribution plan.
In June 2006, however, DOE suspended the notice, and in response to  stakeholder and congressional concerns, subsequently decided not to  reissue it. Although the policy change was ultimately reversed, it  demonstrated that DOE can potentially use its reimbursement policy to  exercise some influence over contractor benefit packages. Currently, DOE  policy provides for reimbursement of a contractor’s minimum required  pension contribution while giving program offices the discretion to  approve higher reimbursement levels. In addition, in accordance with  department policy, contractors must obtain DOE approval for any plan  changes that can affect reimbursement costs. In asking to change a plan, a contractor must submit justification that, among other things, estimates  savings or costs and provides the basis for this determination.
Third, DOE establishes contract requirements that determine the degree of flexibility contractors have in structuring and modifying their benefit  packages and, through these requirements, can exercise some influence  over contractor decisions on benefits. Although DOE cannot unilaterally  alter an existing contract, it can negotiate with a contractor to include new  provisions in an existing contract, as well as in a contract that is extended  or newly awarded. By contractually obligating successor contractors to  assume sponsorship of existing benefit plans, DOE has generally required  that benefits be continued for existing employees and eligible retirees.  Since 2005, however, the department has used a contract provision  requiring contractors to provide market-based pension and health care  benefit plans for new employees. As a result, some contractors have  shifted from providing all employees defined benefit plans to offering new  employees defined contribution plans, and some contractors have also  stopped providing other postretirement benefits to new employees. For  example, in 2006, the new contractor that assumed responsibility at Los  Alamos chose to offer new employees only a defined contribution plan,  while giving incumbent employees who worked at the site before the  transition the option of participating in a defined benefit plan or the  defined contribution plan. The contractor at Savannah River also closed  its defined benefit plan to employees hired after 2009 and, in addition,  ceased offering some other postretirement benefits to new employees.  According to NNSA officials, NNSA is now exploring a further shift in  contract requirements for sites it oversees, to allow successor contractors to alter existing employees’ benefit packages.
section_title: DOE Has Taken Steps to Enhance Its Management of Contractor Pension Costs but Has Not Comprehensively Reviewed Other Postretirement Benefits or Issued Complete Guidance
paragraphs: Since the economic downturn deepened in 2008, DOE has taken steps to  enhance its management of contractor benefit costs—particularly for  contractor pensions—but gaps remain in its approach. Before 2008, DOE  had made some changes but had not exercised the full range of measures  at its disposal. Since then, DOE has taken additional steps to address its approach to contractor benefit costs, but more could be done. Specifically,  DOE has strengthened its oversight of contractor pension costs, but it has  yet to review its approach to overseeing other postretirement benefit costs  or to clearly inform Congress of those costs and their potential impact on  mission work. As a result, DOE may be delayed in improving its oversight  of those benefits, and potentially not provide important information to  Congress that could inform annual funding decisions. DOE has, for the  most part, continued to insert the same contract requirements since 2005 and use the same reimbursement policy since 1996, but it lacks clarifying  guidance to ensure a consistent approach to evaluating contractor benefit costs. As a result, DOE is unable to ensure that program offices apply that  policy consistently, and it continues to reimburse contractors for benefit  packages that have exceeded its standard for a prolonged period.
subsections: section_title: DOE Has Strengthened Its Oversight of Contractor Pension Costs, but It Has Yet to Review and Clearly Communicate to Congress the Cost of Other Postretirement Benefits
paragraphs: DOE has strengthened its oversight of contractor pension costs by  changing how it collects, analyzes, and communicates information on  those costs. First, in a January 2010 memo, the department announced the  creation of an annual review process to more systematically analyze the  status of each contractor’s pension plan and the contractor’s strategy for  managing the plan. Second, DOE created a central database in October  2010 to regularly collect and report information on contractor benefit  costs. Third, DOE increased the information it communicates to Congress  on contractor pension costs by adding an explanation of those costs to its  fiscal year 2011 budget request. The department has done less on other  postretirement benefit costs, however. DOE officials had stated that they  expected to begin a review in spring 2010 of the department’s approach to  other contractor benefits similar to the one done for contractor pensions,  but as of January 2011, the department has not followed through with  these plans. Moreover, DOE has not added information to its budget  request on its contractors’ nonpension postretirement benefit costs. While  contractor pension costs have risen sharply since 2009, the cost of other  postretirement benefits is also significant and growing.
In January 2010, DOE set up an annual review process for contractor  pensions that allows the department to more systematically analyze  contractor pension data and each contractor’s strategy for managing its  plan. Specifically, DOE guidance requires each contractor to submit a  standard report on its pension plans at the start of each year. This report  must include information on the plan’s current funding status and the  contractor’s estimates for how much it will need to contribute to the plan  during the current fiscal year and the 4 fiscal years after that. In addition,  the contractor must provide the key assumptions and methods used to  develop its estimates. If the estimates indicate that a plan’s funding level  could drop enough to force the contractor to impose benefit restrictions,  the contractor must describe the impact of the benefit restrictions, the  number of employees the restrictions might affect, the additional funds  needed to avoid those restrictions, and whether it recommends  contributing those funds to the pension plan. The contractor must also  include an assessment of its pension plan’s investment management and  the results of its current investment strategy. After contractors submit this  report, DOE guidance requires contractor personnel to meet with  department officials from headquarters and the field to discuss the contractor’s pension strategy and the reasons for any differences between  its current pension contribution estimates and prior estimates. In addition, DOE officials and contractor personnel are to discuss how the contractor  intends to increase the predictability of its pension contributions and  contain current and future costs. According to DOE guidance, a goal of this annual review process is to improve the accuracy and predictability of  DOE budget forecasting for funding its contracts by requiring contractors  to provide their estimated contribution amounts to their pension plans,  both for the immediate year and the subsequent years, on the basis of a range of actuarial assumptions. In addition, these discussions are meant to  provide DOE with opportunities to increase its ability to share information  concerning contractor costs with key stakeholders across the department.
DOE has also created a central database to regularly collect information  on contractor benefit costs, which is intended to facilitate analysis, as well  as ensure current reporting on those costs. DOE set up the database in  October 2010 and is requiring contractors to regularly update information  on their benefit plan costs and characteristics. Specifically, DOE guidance  requires contractors to report on, among other things, their current  pension assets and liabilities and 5-year budget projections for pension  and other benefits. Before implementing the database, DOE relied on ad  hoc data requests to contractors to collect information on pension plans  and other postretirement benefits. For example, in 2010, DOE requested  pension and other benefit data from each contractor and shared that  information in the form of site-specific “snapshots” to all of its contractors  and program offices. In contrast to these data requests, which DOE and  contractor officials at several sites found redundant or time-consuming,  DOE guidance explains that the database is intended to provide a  structure for capturing information obtained through the annual pension  review process, as well as to expand data collection to other contractor  benefits and readily report information on those benefits. By scheduling  regular data requests and storing information in a central system, DOE has   taken actions that help to streamline the data collection process and  facilitate analysis and up-to-date reporting on contractor benefit costs.
While DOE has reviewed its approach to overseeing contractor pension  plans, it has yet to devote a similar level of attention to other  postretirement benefits. While our analysis of DOE financial data indicates  that other postretirement benefit costs have generally been less volatile  than those of pension plans, these costs have steadily risen over the last 10 years, amounting to $385 million in fiscal year 2010. According to federal  standards for internal control, federal agencies are to employ internal control activities, such as top-level review, to help ensure that  management’s directives are carried out and to determine if the agencies  are effectively and efficiently using resources to assess risks from both  internal as well as external sources. Consistent with these standards, DOE has collected and analyzed some information on the risk it faces from  other postretirement benefits. For example, in May 2010 DOE issued a  summary of its analysis on contractor pension plan and other benefits,  including postretirement health care benefits. But it has not  comprehensively reviewed its approach to overseeing those benefits or  correspondingly changed its policy on how it manages other contractor  benefit costs. DOE officials had stated that they expected to begin a review of benefits other than pensions in spring 2010. As of January 2011,  however, DOE had yet to begin its planned review, according to an agency  official, because of the department’s continuing work on contractor  pensions. This official stated that the department still planned to review its  approach to other postretirement benefits, but it was not clear when the  review would begin.
Without comprehensively reviewing its approach to overseeing other  contractor benefits, including postretirement benefits other than pensions,  DOE may be delayed in improving its oversight of those benefits and  identifying policy options that might reduce or better address the growth  of reimbursement costs. For example, in a 2004 report on this topic, we  recommended that DOE incorporate into its 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, which have budgetary requirements  beyond the current year. DOE has taken steps to incorporate such a  focus into its oversight of contractor pension costs through its annual  review process, but it has yet to incorporate a similar focus on long-term  costs and budgetary implications into its oversight process for other  postretirement benefit costs. Further, while DOE reimburses other  postretirement benefits on a pay-as-you-go basis, an option for addressing  its liabilities is to reimburse contractors for prefunding some or all retiree benefits, particularly those associated with health care, before employees  retire. By reimbursing contractors for prefunding these benefits, DOE may  be able to reduce the unfunded liability reported in its financial statements  and take advantage of the compounding effects of investment returns on  plan assets. Nevertheless, while prefunding more effectively recognizes  costs when the associated work is being performed, in the short term  prefunding might require higher contractor contributions, which would in  turn increase DOE’s short-term reimbursement costs. In addition,  opportunities for prefunding other postretirement benefits and  nonqualified pension benefits are more restricted than for tax-qualified  benefits. By not comprehensively reviewing its approach to its contractors’  other postretirement benefits, DOE has yet to systematically weigh the  advantages and disadvantages of these and other potential policy changes  that might enhance its approach.
Moreover, although DOE has taken steps to improve its communication to  Congress of key information concerning contractor pension costs, it has  yet to provide similar information on the costs of other postretirement  benefits and their potential impact on mission work. DOE expanded the  information it provides to Congress in its fiscal year 2011 budget request  by adding a discrete section explaining contractor pension costs. This  section outlined contractor pension costs for the upcoming fiscal year and  2 prior years by program office and site. In addition, the section included a discussion of the challenges and risks DOE faces in managing contractor  pension costs. The addition of this information is an improvement over  prior budget requests, which included only isolated references to  contractor pension costs and did not provide an agencywide picture of the magnitude of those costs. But DOE did not provide the pension  information in a format consistent with the appropriation accounts that  Congress uses to provide funding to the department. As a result, the  information may be less useful to Congress than it otherwise could be.
Moreover, DOE did not include agencywide information on other  postretirement benefit costs in its fiscal year 2011 request, nor did it add  such information to its fiscal year 2012 request. Yet DOE reimbursements  to contractors for other postretirement benefits have risen steadily from roughly $306 million in fiscal year 2005 to $385 million in fiscal year 2010.  By not including an explanation of these costs in its budget request, DOE  is not providing Congress with complete information on the full cost of its  contractor retirement benefits and their potential impact on the resources  DOE has available to accomplish its mission work. As a result, Congress  lacks important information that could inform its annual funding  decisions.
section_title: DOE Has Largely Continued Its Existing Contract Requirements and Reimbursement Policy but Lacks Clarifying Guidance to Ensure a Consistent Approach to Contractor Benefit Costs
paragraphs: DOE has, for the most part, continued to insert the same contract  requirements since 2005 and use the same reimbursement policy from 1996, but it lacks complete guidance on how program offices should  evaluate contractor requests to contribute more than the minimum required to their pension plans, and it also lacks a comprehensive timeline  for modifying contractor benefit packages with values that exceed DOE  standards. DOE has inserted language into new and renewed contracts  that ties the reimbursement of contractor benefit costs for new employees  to market-based benefit packages and increases how frequently  contractors must assess their benefit packages. DOE Order 350.1 does not reflect these updated requirements, although DOE officials said the  department plans to revise the order by removing certain sections and  adding applicable provisions to its acquisition regulations. But because of  procedural delays and the sensitive nature of the order’s content, officials  stated they do not expect this revision of the order for some time.
Aside from a brief change in 2009, DOE has largely maintained its  reimbursement policy for contractor benefits. The Office of Management  and Budget’s implementing guidance emphasizes the need for agencies to  develop policies that ensure the effectiveness and efficiency of their  operations. In keeping with this guidance, DOE’s policy, as reflected in  DOE Order 350.1, is to reimburse contractors for the minimum amount  required by ERISA or more on a case-by-case basis. Also in keeping with  Office of Management and Budget guidance, DOE reimbursement policy  defines the reasonableness of reimbursement costs by requiring  contractors to benchmark the value of pension and other benefits with  those of comparable companies and to reduce the value of benefits if they  exceed the overall benchmarked average by more than 5 percent.
Nevertheless, DOE lacks complete guidance on how its program offices  should evaluate contractor requests to contribute more than the minimum  required to their pension plans in order to carry out this revised policy. In particular, DOE has not outlined a standard process or criteria for  evaluating requests to contribute more. Despite Office of Management and  Budget criteria, DOE program officials we interviewed were not aware of  any departmentwide guidance on factors to consider when deciding to  approve or deny contractor requests to contribute more than the  minimum. For instance, DOE does not specify whether program offices  should place a higher priority on minimizing contribution volatility or  reducing cost when evaluating contractor requests. As a result, DOE’s  program offices use different evaluation procedures and may not consider  the same factors when deciding whether to approve or deny contractor  reimbursement requests.
By using different evaluation procedures, DOE program offices may  implement DOE’s reimbursement policy inconsistently. For example,  according to DOE officials, NNSA and the Office of Science have generally approved contractor requests to contribute additional funds to their  pension plans for reasons such as leveling site or program office budget  costs, while the Office of Environmental Management has generally denied  such requests and instead directed those additional funds toward mission  work. In particular, one site official stated that Environmental  Management’s denial of a contractor request to contribute more than the  minimum in 2010, with the intent of reducing future reimbursement costs,  prompted the site to alter its planned budget allocations and mission  work. Additionally, this denial resulted in a drop in the plan’s funding to a  level at which plan restrictions went into effect for employees. In contrast,  NNSA approved a similar request aimed at managing the anticipated rise in future pension costs. NNSA officials stated that in making these decisions,  the office considers whether the contractor has made a compelling case  that the higher contribution will reduce or level future budget costs.  According to another DOE official, the Office of Science uses a set of  criteria based on prior pension management performance, as well as an  analysis of the contractor’s assumptions and investment strategies. An  official from the Office of Environmental Management stated that, unlike  NNSA and the Office of Science, the office will not reimburse pension  contributions exceeding the minimum unless funding at the minimum level  would restrict benefits. Without standard guidance for its program offices,  DOE is unable to ensure that its offices are deciding on contractor  requests on the basis of consistent criteria reflecting departmentwide  goals for managing contractor pension costs. As a result, program offices  may not systematically consider both near-term mission needs and  potential spikes in future reimbursement costs when reaching their  decisions.
In addition, DOE’s existing process is incomplete for correcting contractor  benefit packages that exceed its reimbursement standard. Specifically,  DOE lacks a comprehensive timetable for when a contractor must modify  the value of its benefit package to fall within DOE’s reimbursement  standard. DOE requires contractors to regularly assess whether the value  of their benefit packages is reasonable relative to comparable companies  and to take corrective actions if they do not meet that standard.
Specifically, DOE guidance requires contractors to implement corrective  action plans if the assessments, known as value studies, show that the  value of a contractor’s benefit package is more than 5 percent of the  average value of 15 selected entities in similar lines of industry. DOE  guidance stresses that the goal of the value study is to measure the relative worth of a contractor’s total benefits package, regardless of the actual  payroll costs associated with the benefits.
DOE guidance requires contractors to implement corrective action plans  within 2 years, but the guidance does not include a defined timeline by  when contractors must submit, and DOE contracting officers must decide  whether to approve, contractors’ corrective action plans. As a result, some  contractors with benefit package values exceeding 105 percent may spend  several years developing corrective action plans. From our analysis of  DOE data, of the 20 contractor benefit packages most recently assessed as exceeding the 105 percent standard, 3 were being corrected as of February  2010. Of those 3 benefit packages, one is expected to be reduced to below  DOE’s standard, but another is expected to exceed DOE’s standard even after the contractor finishes taking its corrective actions, and it is unclear  whether the third benefit package’s corrective actions will bring the score  to below DOE’s standard. Contractors for 5 benefit packages that exceed  DOE’s standard, some from as early as 2008, have yet to implement corrective action plans, either because the contractors are developing  them or because DOE has yet to approve them. For example, one  contractor whose August 2008 value study showed its benefits exceeding  the threshold value does not yet have an approved corrective action plan,  more than two and a half years after discovering its benefits were too high.  According to a DOE document, the contractor submitted a corrective  action plan that was disapproved by NNSA and, after analyzing different  alternatives at NNSA’s request, decided to resubmit its original plan for  reconsideration. As of February 2011, NNSA had notified the contractor  that approval of its corrective action plan was being deferred pending the  results of the contractor’s 2011 value study. In another instance, DOE directed a contractor to develop a corrective action plan in May 2010 after  the contractor’s July 2009 value study exceeded DOE’s standard.  According to a DOE document, the contractor submitted a corrective  action plan in September 2010, but that plan has yet to be approved by  NNSA because the plan, as submitted, was lacking in detail. As a result,  only one contractor with benefit packages exceeding DOE’s standard for  the most recent evaluation period is expected to bring its benefits in line  with DOE’s requirements.
Furthermore, DOE guidance states that, on the basis of a contractor’s  written justification, contracting officers may waive the requirement for  contractors to develop a corrective action plan. But neither DOE policy  nor guidance provide details on the process the contracting officers  should use or the factors they should consider when deciding whether to  waive the corrective action plan requirement. Moreover, the DOE  headquarters offices with responsibility for overseeing contractor human  resource management issues are not required to review the contracting  officers’ decisions to issue waivers. In addition, a DOE official stated that  the agency does not have departmentwide criteria for evaluating  contracting officers’ rationale for waiving corrective action. As a result,  DOE lacks assurance that contractor requests to waive corrective action  plans are being consistently evaluated across the department or that  decisions to allow benefit plans to remain above DOE’s standard—  sometimes significantly—are based on departmentwide criteria. For the  most recent value study, our analysis of DOE data showed that contracting   officers issued waivers to eight contractors for a range of reasons,  including marginal differences between DOE’s standard and the  contractor’s score and recognition of a contractor’s previous efforts to   reduce its score. Also according to DOE data, officials waived the  requirement for one contractor whose score exceeded the DOE standard  in part because of opposition from the site’s employee group. As a result,  contractors whose scores exceed DOE’s standard may remain above that  level for an undefined period and continue to accrue liabilities and be  reimbursed for the cost of benefits that may not meet DOE’s standard.
section_title: Conclusions
paragraphs: Given DOE’s long history of using contractors to accomplish its mission  and its growing unfunded liabilities for contractor pension and other  postretirement benefits, it is important that DOE manage its contractual  obligations associated with those benefits so as to ensure both the  successful accomplishment of its mission objectives and the cost-effective   use of government resources. While contractor retirement benefits are  only one piece of total contractor compensation, in an era of federal  budget constraints, DOE will likely continue to face significant challenges  managing the costs of those benefits and mitigating their impact on  funding available for the department’s mission activities. In particular, in  some cases it will have to reimburse the costs of the substantial pension  liabilities its contractors have accumulated over decades. While the  volatility of pension contributions and the growth in other postretirement   benefit costs are not unique to DOE’s contractors, the department’s  extensive reliance on contractors and its limited influence over their  benefit packages makes the department’s budget particularly sensitive to  these factors. DOE’s recent review of contractor pension plans and the  resulting oversight and transparency improvements are positive steps.  Nevertheless, DOE has yet to comprehensively review its approach to  managing other postretirement benefit costs as it has for contractor  pensions, although the cost of these benefits is growing and could put  pressure on the department’s budget in coming years. Without  comprehensively reviewing its approach to managing other contractor  benefit costs, DOE may miss opportunities to make policy changes that  could improve oversight, enhance efficiency, and potentially reduce its  reimbursement costs in the future.
Moreover, given the potential magnitude of contractor benefit costs, it is  important that DOE keep Congress informed about amounts budgeted for  all such costs, the factors that affect those costs, and the department’s  plans for mitigating possible mission impacts if contractor benefit costs  rise. DOE is collecting this information from its contractors but, with the  exception of defined benefit plans, has yet to provide Congress with  agencywide information on contractor benefit costs for use in annual  budget deliberations. Without this information, policymakers will not have  a full understanding of the context in which they are making funding  decisions or of how benefit reimbursement costs might affect the  department’s mission work in coming years.
It is also important that DOE consistently apply its policies for overseeing  and reimbursing contractor benefit costs to ensure timely compliance by  all contractors. Without consistent criteria for program offices to consider  when evaluating contractor requests to contribute more to their pensions  than the minimum required by law, department management lacks assurance that its offices are systematically considering both near-term  mission needs and potential spikes in future reimbursement costs when  reaching their decisions. Furthermore, without a defined timetable for  when corrective action plans need to be in place or clear criteria for DOE  contracting officers to use in deciding to waive corrective action, DOE will  continue to have contractor benefit packages with values exceeding its  standards and will accrue additional liabilities—which the department  must ultimately reimburse—for an extended period of time. In addition,  without headquarters review of contracting officer decisions to waive  corrective action plans, DOE lacks assurance that contractor waiver  requests are being evaluated consistently across the department.
section_title: Executive Action
paragraphs: Energy take the following four actions:
Conduct a comprehensive review, similar to the review of contractor  pensions, of the department’s approach to managing other contractor  benefit costs, including other postretirement benefits, and evaluate  options for improving oversight and better managing the cost of these  benefits.
Expand the information provided to Congress during its annual budget   deliberations to include, for example, nonpension postretirement benefit  costs by site, program office, and appropriation account, as well as a  discussion of factors that affect these contractor benefit costs and DOE’s  plans for managing those costs in coming years.
Issue guidance to program offices overseeing contractors with defined  benefit plans that defines criteria to be considered when evaluating  contractor requests to contribute more than the minimum to their pension  plans.
Clarify existing guidance on correcting contractor benefit packages that  exceed DOE’s standard by: establishing a defined timeline by when contractors must submit  corrective action plans to their DOE contracting officer if the value of  their benefit package is determined to exceed DOE’s standard, as well  as a timeline for when DOE contracting officers must reach a decision  on such plans; developing criteria for contracting officers to use when deciding  whether to waive a required corrective action plan; and requiring review of these contracting officer decisions by the  responsible headquarters office to help ensure consistent application  of the criteria across the department.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from the Secretaries of  Defense, Energy, and Health and Human Services, and from the  Administrator of the National Aeronautics and Space Administration. The  Secretaries of Defense and Health and Human Services and the  Administrator of the National Aeronautics and Space Administration had  no comments. On April 18, 2011, we received written comments from the  Department of Energy, which are summarized below and reprinted in  appendix I. In addition, DOE provided technical comments, which we  incorporated in the report as appropriate.
In its written comments, DOE did not state whether it concurred with our  findings. DOE agreed with three of our recommendations but disagreed  with the recommendation that the Secretary of Energy issue guidance to  program offices that defines criteria to be considered when evaluating  contractor requests to contribute more than the minimum to their pension  plans. DOE stated that more stringent guidance regarding the use of  additional funds is not needed and that each program office is best suited  for determining whether additional contributions are the best use of funds  in a given year. We did not recommend that DOE issue more stringent  guidance or that program offices should have less flexibility in deciding whether to approve or disapprove contractor requests. Rather, we noted  that DOE lacks complete guidance to its program offices on the common  factors that they should consider when making their decisions. We agree  that program offices may reasonably come to different decisions given  their particular circumstances. Nevertheless, we continue to believe that  DOE should provide a consistent set of factors for program offices to  consider when making those decisions. Without such criteria, DOE lacks  assurance that program offices are systematically considering both near- term mission needs and potential spikes in future reimbursement costs  when reaching their decisions.
As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees; Secretaries of Energy, Defense, and Health and  Human Services; Administrator of National Aeronautics and Space  Administration; and other interested parties. The report will also be  available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-3841 or gaffiganm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix IV.
section_title: Appendix I: Comments from the Department of Energy
section_title: Appendix II: Status of DOE Contractor Defined Benefit Plans
paragraphs: The number of current Department of Energy (DOE) contractor defined  benefit plans open to new entrants has been dropping over the last decade,  particularly since 2005, while the number of frozen plans has increased.
Of the 40 tax-qualified defined benefit plans currently sponsored by DOE  contractors, only 1 was frozen as of 2000 (see fig. 4). By 2006, about one- fourth (9) of currently sponsored tax-qualified DOE contractor defined  benefit plans were frozen in some way. By 2010, of the 40 tax-qualified  defined benefit plans sponsored by DOE contractors, 21 were frozen in  some way, and 19 plans were open to new entrants. This trend in plan  freezes over time is similar to the trend discussed in another report, which found that, among currently frozen plans nationwide, half of plan freezes were implemented after 2005.
section_title: Appendix III: Investment Allocation of DOE Contractors’ Defined Benefit Plans
paragraphs: Table 3 shows the investment allocations of each DOE contractor tax- qualified defined benefit plan by percentage and dollar values as of  September 30, 2010. As noted in the report, contractors—not DOE—are  responsible for selecting strategies used to invest pension plan assets.  Each tax-qualified, DOE contractor defined benefit plan is unique in its investment allocations. For example, certain plans have as much as 73  percent of plan assets invested in equities, whereas a few plans have no  equity investment. The overall mix of assets across DOE contractor plans  is 58 percent equities, 33 percent bonds, and 9 percent other assets (see  last row of table 3). An asset allocation of 60 percent equities and 40 percent bonds is often considered a “typical” asset allocation for many  defined benefit plans.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: Other key contributors to this report were Kimberley M. Granger and  Diane G. LoFaro, Assistant Directors; Charles Ford; David Marroni; Ken  Stockbridge; Fatema Wachob; and Marie Webb. Important contributions  were also made by Joseph A. Applebaum, Ellen W. Chu, Charles Jeszeck,  Mehrzad Nadji, Robert Owens, Cheryl Peterson, Anne Rhodes-Kline,  Christopher Ross, Cynthia Saunders, Kiki Theodoropoulos, Roger Thomas,  Frank Todisco, Craig Winslow, Melissa Wolf, and William Woods.