Federal Employees' Group Life Insurance: Retirement Benefit and Retained Asset Account Disclosures Could Be Improved
Published: 2011-11-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Federal Employees' Group Life Insurance program (FEGLI), administered by the Office of Personnel Management (OPM), insures over 4 million federal employees and annuitants in the event of an enrollee's death. As a result, it is important that the program is clearly explained and properly overseen. However, some aspects of FEGLI, such as program disclosures and the use of retained asset accounts (RAA)--financial accounts used to settle life insurance claims--have raised questions about the program's operations. GAO was asked to describe and evaluate (1) the FEGLI program's structure and operations, (2) OPM's administration and oversight of the program, and (3) the use of RAAs in FEGLI claims payments. To address these objectives, GAO reviewed FEGLI law and regulations, interviewed OPM, Metropolitan Life Insurance Company (MetLife), and state insurance officials, and met with insurance industry experts.
section_title: What GAO Found
paragraphs: OPM, by directing the funding of the Employees' Life Insurance Fund, has effectively allowed the FEGLI program to assume the risk of loss, while MetLife provides administrative services for the program. FEGLI has some insurance coverage features that most private sector group life plans do not, but a lack of disclosure in certain areas may make it difficult for employees to make fully informed decisions about buying coverage. Generally with private group plans the employer pays the full premium for a set amount of basic coverage, but the statute that created FEGLI requires that enrolled employees contribute two-thirds of the premium for Basic coverage. In addition, FEGLI premiums include the cost of a portion of retirement coverage, a feature generally not found in private sector alternatives, and which can make FEGLI coverage more costly than those alternatives. Further, for Basic coverage, FEGLI premiums are level over employees' working lives, so that early on premiums may be higher than the actual cost of coverage, while later they may be lower. This feature can make FEGLI coverage appear to be more costly than private individual plans for certain employees. However, the materials that FEGLI provides to employees do not disclose either the retirement coverage costs or the level premiums. Employees, particularly those who might leave government service or stop participating in FEGLI before realizing the benefits of these features, may find such disclosures important when deciding whether to purchase the insurance. OPM oversees FEGLI's provision of life insurance, but certain processes for reviewing program benefits and premiums could be improved. OPM administers basic FEGLI functions such as determining and collecting premiums, publishing program regulations, and overseeing the claims payment processes of MetLife, the insurer contracted to provide claims services. Because the program was intended to provide a low-cost benefit to federal employees, OPM has periodically conducted informal comparisons of FEGLI costs and benefits to those of private group life plans. In addition, to better ensure that the program charges appropriate premium rates, OPM actuaries conduct annual reviews and may recommend rate changes. However, OPM does not have documented processes for conducting its comparisons or for documenting any recommended rate changes. The lack of documented processes in both areas creates a risk that FEGLI benefits may not be meeting the needs of federal employees and could be priced at inappropriate rates. From the mid 1990s until early 2011, RAAs were the default settlement option for many FEGLI beneficiaries. While RAAs offer some benefits to FEGLI beneficiaries, OPM does not provide beneficiaries with some important information on RAA operations and protections. According to OPM and some industry officials, RAAs can reduce administrative costs, provide guaranteed interest rates, and allow beneficiaries time to decide how to use settlement funds. But other industry participants and a federal regulator said that beneficiaries might not be fully aware of their settlement options or that RAAs are not insured by the Federal Deposit Insurance Corporation. OPM has recently improved FEGLI disclosures for RAAs, and RAAs are no longer the default settlement option. However, the disclosures still lack information on how the accounts are established and regulated, and how certain protections differ across states. Without this information, beneficiaries may not be able to make fully informed decisions when choosing a settlement option for their FEGLI claims payment.
section_title: What GAO Recommends
paragraphs: GAO recommends that OPM (1) improve disclosures on important FEGLI features, (2) develop and implement a more structured process for reviewing the FEGLI program and premium rates, and document review outcomes, and (3) improve disclosures on RAA protections and regulation. OPM concurred with these recommendations.

section_title: Letter
paragraphs: Life insurance is an important purchase for many Americans because it  provides income replacement and financial protection to beneficiaries if  they lose loved ones. While many Americans obtain life insurance by  purchasing individual policies in the private market, many also obtain  such coverage through employer-sponsored group plans, including the  approximately 4 million federal employees and annuitants who purchase  life insurance through the Federal Employees’ Group Life Insurance  program (FEGLI). This program, administered by the Office of Personnel  Management (OPM), involves substantial federal resources. In fiscal year  2010, the total amount of FEGLI life insurance coverage in force was  $824 billion, and the balance in the plan’s financial fund—the Employees’  Life Insurance Fund (FEGLI Fund)—totaled approximately $38 billion. In  addition, throughout 2010, FEGLI paid out approximately $2.6 billion in  insurance claims to beneficiaries of federal employees. The program also  involves substantial premium costs to enrolled federal employees, who  pay two-thirds of the premium for an initial amount of Basic life insurance  and the entire premium for any Optional insurance. As a result, ensuring  that FEGLI is properly administered, with appropriately priced policies,  and that federal employees receive enough information to make an  informed decision about participating in the program, is important.
The processes and methods for paying FEGLI life insurance claims  determine how beneficiaries of federal employees receive insurance  settlement funds. For the first several decades of the program,  beneficiaries received settlement funds through a lump-sum check. In  1994, FEGLI began offering retained asset accounts (RAA) to  beneficiaries as the default settlement option where the proceeds payable  were $7,500 or more. With RAAs, the Metropolitan Life Insurance  Company (MetLife)—the life insurer under contract with OPM for the  FEGLI program since its creation by Congress in 1954—makes claims  payments by establishing guaranteed accounts in beneficiaries’ names,  manages the assets backing RAA liabilities created by these accounts,  determines how to invest RAA funds, guarantees a minimum interest rate  to be credited to retained funds, and administers the accounts that allow  beneficiaries to access funds as they choose. While some industry  participants point to the potential benefits that RAAs provide, other  participants have raised questions about these accounts. For FEGLI,  these questions have included whether policyholders fully understand  their settlement options and their associated costs, benefits, and  protections.
This report responds to your interest in how FEGLI operates and how it  uses RAAs. The report describes and evaluates    how FEGLI is structured and operated,    OPM’s administration and oversight of FEGLI, and    FEGLI’s use of RAAs to pay claims.
To describe and evaluate FEGLI’s key operations, we examined the  program’s authorizing statute and associated regulations and reviewed its  key policy documents, including the contract between OPM and MetLife.  In addition, we compared FEGLI’s coverage and practices with those of  several large private sector group life insurers. To describe and evaluate  OPM’s administration and oversight of the FEGLI program, we reviewed  applicable federal and state laws, regulations, policy guidance, and  materials from consumer advocates, and examined OPM’s monitoring,  reporting, and other oversight activities. We also interviewed OPM and  MetLife officials and reviewed FEGLI annual financial and performance  reports to understand how FEGLI operates financially and to determine its  assets and liabilities. In addition, we reviewed the federal budget for  information on FEGLI’s claims, assets, and liabilities. We found FEGLI  program information and data from OPM and MetLife to be reliable for the  purposes of this report. To identify any FEGLI regulatory or consumer  protection issues, we met with industry association representatives, a  consumer advocate, and other experts. To describe and evaluate the role  of RAAs in FEGLI’s settlement process, we examined key OPM and  MetLife policy documents and program guidance and interviewed OPM  management officials. We focused on how RAAs function, what kinds of  RAA disclosures FEGLI participants receive, and what RAA protections  are available to FEGLI beneficiaries. In addition, we examined how  RAAs are regulated by focusing on the activities and processes OPM and  state regulators use to oversee these accounts. In particular, we  interviewed insurance regulators from California, Florida, New York, North  Carolina, and Maryland to determine their methods for overseeing RAAs.  We selected this sample of states because it is geographically diverse,  has a large number of federal employees, and contains some states that  have RAA-specific regulations and others that do not. For a more detailed  description of our scope and methodology, see appendix I.
We conducted this performance audit from September 2010 to November  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Established by Congress in the Federal Employees’ Group Life Insurance  Act of 1954 as a benefit to federal employees and their families and  administered by OPM, FEGLI offers federal employees the opportunity to  choose from a range of group term life insurance coverage options.  FEGLI insurance is provided through a contract OPM has established  with MetLife. MetLife’s Office of Federal Employees’ Group Life Insurance  (OFEGLI) adjudicates claims under the FEGLI program and makes  payments to FEGLI beneficiaries.
subsections: section_title: FEGLI Insurance Coverage and Costs
paragraphs: Most federal employees, including part-time employees, are eligible for  insurance under FEGLI, and approximately 85 percent purchase FEGLI  coverage. Upon starting their federal employment, federal employees are  automatically enrolled in FEGLI’s Basic life insurance coverage unless  they file appropriate paperwork with their employing agency to opt out of  the program. Basic life insurance coverage equals a federal employee’s  annual salary rounded up to the next even thousand plus two thousand  dollars, or $10,000, whichever is higher. Basic insurance also provides  an extra benefit to employees under age 45, at no additional cost. This  extra benefit doubles the amount of Basic insurance payable if the  employee dies at age 35 or younger. The extra benefit decreases 10  percent each year until there is no extra benefit at age 45 and above. For  Basic coverage, employees pay two-thirds of the premium determined by  OPM, and the employing agencies pay the remaining third. The rate all  covered employees, regardless of age, pay for each $1,000 of Basic  insurance is $0.150 bi-weekly or $0.325 monthly. FEGLI also provides  accidental death and dismemberment (AD&D) insurance as part of its  Basic insurance at no additional cost. AD&D insurance protects  employees in the event of a fatal accident or an accident which results in  the loss of a limb or eyesight. For benefits to be paid, the death or loss  must occur no later than 1 year from the date of the accident and must be  a result of bodily injury sustained from that accident.
Federal employees may also choose to purchase three types of Optional  insurance in addition to Basic coverage—Options A, B, and C—by  submitting a Life Insurance Election Form (SF 2817) within 60 days of  beginning their employment to their human resources office.    Option A offers $10,000 of life insurance coverage. Premiums for  Option A coverage vary by age groups, as determined by OPM.  These groups start with employees “under age 35,” progress in 5-year  increments until age 59, and finish with a “60 and over” group. Bi- weekly and monthly costs for Option A coverage range from $0.30  and $0.65, respectively, for the “under age 35” group to $6.00 and  $13.00, respectively, for the “60 and over” age group.    Option B offers additional Optional insurance coverage in an amount  of one to five multiples of the employee’s annual salary, after rounding  the salary up to the next even thousand. For Option B coverage, age  group designations also apply but begin with “under age 35,” continue  in 5-year age increments until age 79, and end with an “80 and over”  age group. Bi-weekly and monthly costs for each $1,000 in insurance  can range from a low of $0.03 and $0.065, respectively, for  employees under 35 to a high of $2.40 and $5.20, respectively, for  employees 80 and older.    Option C covers eligible family members of an employee or retiree,  including the enrollee’s spouse and eligible dependent children. The  employee selects one to five times an amount (a “multiple”)—$5,000  for a spouse and $2,500 for each eligible dependent child. If  employees purchase optional coverage within the 60 days, no medical  underwriting is necessary. For Option C coverage, the age group  designations are the same as for Option B, and costs range from bi- weekly and monthly amounts of $0.27 and $0.59, respectively, per  multiple for those under 35 to $6.00 and $13.00, respectively, per  multiple for those 80 and older.
When federal employees retire, FEGLI also offers Basic and Optional life  insurance, and employees are able to choose among several retirement  coverage levels after age 65. For Basic insurance in retirement,  employees must choose whether to reduce their postretirement insurance  level by 75 percent, 50 percent, or maintain full coverage. Those  choosing the 75 percent reduction pay no premiums after reaching age  65. Those choosing the 50 percent reduction or full coverage option  continue to pay premiums in amounts determined by OPM; the  postretirement premium rates are greater than preretirement rates. When  the 75 percent reduction in coverage is selected, OPM reduces the  coverage level by 2 percent per month beginning at age 65, until 25  percent of the original coverage remains. If the 50 percent reduction is  selected, the coverage level reduces by 1 percent per month beginning at  age 65, until 50 percent of the original coverage remains. If no reduction  is selected, the coverage does not reduce.
Federal employees may also choose to continue Optional coverage into  retirement and FEGLI offers several choices. Option A coverage reduces  2 percent per month beginning at age 65, to 25 percent of the  preretirement amount, and no premiums are charged in retirement after  the retiree reaches age 65. For Options B and C, employees desiring  coverage must elect to continue one to five multiples of coverage into  retirement, and elect whether to have all of those multiples retain full  coverage or reduce by 100 percent, at a rate of 2 percent per month for  50 months, beginning at age 65. For the 100 percent reduction option,  once the reduction starts, retirees do not pay premiums after reaching  age 65. For the full coverage option, retirees continue to pay the full  premium, as determined by OPM for the retiree’s specific age group.
The following provides an example of FEGLI premiums for a 48-year old  federal employee, married with three children, and earning $88,300 per  year.    According to OPM, Basic insurance would cost $13.65 bi-weekly and  $354.90 annually.
If the employee seeks to maximize Option B coverage by purchasing  five times annual pay, Option B coverage would cost $40.05 bi-weekly  and $1,041.30 annually.
In this example, the employee purchases Basic and Optional life  insurance coverage totaling $536,000, at an annual cost of $1,396.20.
If this employee continues full Basic and Option B coverage after  retirement, by choosing the No Reduction option for both, and retires at  the age of 65 (assuming the same $88,300 salary), Basic insurance  would cost $1,998.36 annually and Option B coverage would cost  $8,330.40 annually. The total amount of Basic and Optional insurance  for the employee at the time they retire would be $536,000 at an annual  cost to the employee of approximately $10,300.
section_title: Adding or Adjusting FEGLI Coverage
paragraphs: Federal employees may add or adjust FEGLI coverage when life events  such as marriage, divorce, death of a spouse, or the acquisition of an  eligible child occurs. Federal employees may also add or adjust coverage  when OPM offers open seasons, although OPM officials noted that these  periods are rare. FEGLI most recently offered open seasons in 1999  and 2004. Employees who opted out of FEGLI coverage upon starting  federal employment may also add coverage during these times.  Additionally, if at least a year has passed since an employee opted out of  FEGLI, an employee may request FEGLI coverage by providing medical  information via a form partially completed by the employee’s physician.  Employees are responsible for any associated expenses such as a  physician’s fee. In addition, certain employees of the Department of  Defense are eligible to elect FEGLI coverage without experiencing a  qualifying life event or by providing medical information.
section_title: Payment of FEGLI Benefits
paragraphs: When a federal enrollee with FEGLI coverage dies, MetLife’s OFEGLI  pays claims to the federal enrollee’s designated beneficiary. If no  beneficiary has been designated, payments will be made roughly in the  following order pursuant to statute: to the enrollee’s surviving spouse; if  none, to the child or children in equal shares; if none, to surviving parents  in equal shares; if none, to the executor or administrator of the  employee’s estate; or, if none, to the enrollee’s next of kin as determined  by applicable state laws. The enrollee’s beneficiary or other survivor must  follow a prescribed process for filing a claim and receiving payment that  begins with contacting the human resources office at the insured’s  agency to report the death, submitting a certified death certificate, and  submitting a Claim for Death Benefits form.
According to FEGLI materials, beneficiaries may choose a payout by  receiving a lump- sum check or an RAA. According to the American  Council of Life Insurers (ACLI), RAAs have existed since 1982, and many  insurers provide them for both group and individual life insurance policies.  When an insured person dies, the life insurance company that issued the  policy may place the death benefit proceeds into an RAA, which accrues  interest for the beneficiaries from the day the account is established for as  long as the funds remain in the account. Beneficiaries have full and  immediate access to their funds and can withdraw some or all of the funds  at any time without penalty. In addition, MetLife pays RAA accountholders  a minimum guaranteed interest rate that typically is calculated using one of  several market rate indexes. MetLife compounds interest on RAAs daily  and credits that interest monthly. MetLife issues a book of drafts to the  beneficiary, allowing immediate access to the funds without penalty.  Beneficiaries may then use them to meet various financial needs, for  example to pay bills, make retail purchases (fig. 1), or transfer funds from  the RAA to another account, such as a savings or checking account.  FEGLI beneficiaries, like other life insurance beneficiaries, may leave funds  in their RAA for as long as they wish or withdraw the entire amount at any  time, and there are no maintenance fees associated with these accounts.  By investing the assets backing the liabilities of RAAs funded with FEGLI  claims payments, MetLife may earn a profit in the form of a spread, or the  difference between the interest it pays beneficiaries and what it earns on  invested assets backing RAA liabilities less expenses. MetLife assumes  the investment risk associated with investing these assets.
section_title: Although Similar to Private Sector Plans, FEGLI Has Distinct Employee Benefits and Costs That Are Not Clearly Disclosed
subsections: section_title: Some FEGLI Features Are Similar to Those of Private Sector Group Life Insurance
paragraphs: FEGLI’s Basic life insurance coverage shares several similarities with the  coverage offered by private sector group plans. First, both FEGLI and most  private sector plans automatically enroll employees in basic coverage,  often including AD&D coverage, unless they opt out of the program, and  both provide options for employees who opted out of the program to join  later. Second, neither FEGLI nor private sector basic insurance initially  requires employees to provide information on their medical condition or  history. That is, any employee can enroll in the program regardless of  age or state of health at the time that the employee is first eligible to join.  Third, while some private sector plans offer a flat amount of basic  insurance ranging from $5,000 to as much $50,000, many offer cover an amount equal to the employee’s salary or a multiple of it, as FEGLI  does. Finally, FEGLI and private sector programs both typically use a  composite rate structure to price their basic group life benefits; that is, a  rate structure where all employees pay the same average rate regardless  of age or health status. The effect of a composite rate is that all employees  pay the same rate per $1,000 of insurance coverage regardless of  characteristics such as age and health that impact the cost of life  insurance.
In addition to similarities with respect to basic coverage, FEGLI and  private sector group plans generally offer some form of optional coverage  that shares some similarities as well. First, employees in both FEGLI a nd  private group plans typically must fund any optional coverage with employer contribution. In addition, both FEGLI and private sector  employers generally offer optional coverage in increments of one to fi times the employee’s annual salary. Finally, both FEGLI and private  sector plans generally offer life insurance coverage on the employee’s  dependants.
section_title: Unlike Private Group Li Plans, FEGLI Assumes Most of the Insurance Risk
paragraphs: Unlike most private sector group life insurance plans, FEGLI, accord OPM officials, assumes most of the risk of loss associated with the  program. In the private sector, according to industry experts, employers  generally purchase group life insurance policies from insurers that then  bear the risk of loss. That is, the insurer bears the risk that the claims  associated with the policy may exceed the premiums collected from the  policyholder. In contrast, according to OPM officials, the FEGLI program effectively bears all such risk based on the expectation that the FEGLI  Fund is sufficient to cover claims made by FEGLI beneficiaries. ing to  FEGLI’s creation contemplated the federal government purchasing group  life insurance from a private sector group life insurer or insurers and  mitigating the risk of loss by purchasing reinsurance for those insurers.  However, as the FEGLI Fund balance has grown over time, OPM officials  noted, the need for an insurer and reinsurers to assume the program’s  risk of loss has diminished. For example, according to OPM and MetLife  officials, even though OPM has a policy with MetLife to provide FEGLI life  insurance and makes funds available to MetLife for this policy, when  FEGLI beneficiaries submit claims, MetLife draws upon OPM’s FEGLI  Fund to make claims payments. In addition, according to the same  officials, MetLife’s exposure to loss is currently limited to its role as a  reinsurer for the FEGLI program, as it covers approximately 85 percent of  the FEGLI program’s reinsurance. However, this exposure would only  result in payment after the depletion of the entire FEGLI Fund, which has  a balance as of September 30, 2010, of $37.6 billion, or approximately 14  times the amount of FEGLI’s annual claims payments. OPM and MetLife  both consider the possibility of exhausting the FEGLI Fund to be so  remote that the cost of the reinsurance is negligible. While the program  initially had about 160 reinsurers, only 10 were participating in 2011, with  MetLife providing about 85 percent of the program’s reinsurance. OPM  pays each of the 10 reinsurers approximately $500 annually for their  participation in the program, and FEGLI has never had to use this  reinsurance coverage.
section_title: Certain FEGLI Features and Benefits Can Result in Higher Costs for Employees Compared with Private Sector Group Term Insurance
paragraphs: Compared with private sector group term life plans, FEGLI has certain  features and benefits that can make premiums for all coverage higher for  federal employees. First, FEGLI’s statute requires enrolled federal  employees to pay two-thirds of the premium rate for their Basic life  insurance coverage, while employers in the private sector generally cover  the full cost of their employees’ basic coverage. According to insurance  industry officials, the amount of basic coverage that private group plans  generally provide can be a flat amount or equal to an employee’s annual  salary or more. Whether an employee receives more employer-paid  coverage through a private plan that pays the entire premium for some  amount of coverage than through FEGLI would depend on the amount of  no-cost coverage the private sector employer provides.
Second, according to OPM officials, FEGLI offers federal employees a  retirement life insurance benefit that is financed, in part, by a portion of the  premiums charged while employees are working. FEGLI’s retirement  benefit raises FEGLI premiums above those of most private sector group  plans, which generally do not offer such a benefit. As we have seen, FEGLI  offers a postretirement benefit for both Basic and Optional coverage.  According to OPM officials, federal employees who participate in FEGLI  begin prefunding, or paying in advance for, Basic retirement coverage as  soon as they begin their FEGLI coverage. Prefunding for Basic coverage is  necessary because newly retired employees over age 65 who choose a 75  percent reduction in this coverage are no longer required to pay premiums  for the coverage they are receiving. With Optional coverage, except for  Option A, employees begin prefunding the cost of their retirement benefits  when they reach age 55 and continue to do so until they retire. Newly  retired employees who choose a 75 percent reduction in their Option A  coverage, and a 100 percent reduction in Options B and C, coverage no  longer pay premiums for the Optional coverage they are receiving. In  addition, life insurance coverage for people of retirement age or older can  be expensive. According to private sector insurance industry participants  we spoke with, the cost of postretirement benefits is quite high because as  employees age, the likelihood of the insurer being required to pay a claim  also increases. As a result, few private sector plans offer such benefits.  While OPM has stated that having flexible benefits, including life insurance  coverage in retirement, contributes to employee retention, insurance  industry participants with whom we spoke said that they have not seen any  evidence that postretirement coverage attracted or retained employees.
In addition, for certain individuals, FEGLI Basic coverage may appear more  costly than private sector basic life insurance. First, FEGLI features level  premiums that may not be a part of some private individual policies. With  such a feature, monthly premiums remain the same over time instead of  increasing with age. Compared to a policy without such a feature, level  premiums are higher earlier in life and then become lower at a certain  point. If relatively younger federal employees compare FEGLI to private  individual coverage without level premiums, FEGLI coverage may appear  to be more costly, depending on their age. Second, because FEGLI is a  group life program, all individuals pay the same premiums regardless of  their health status, unlike individual coverage where premiums generally  depend on the health of the person being insured. As a result, if relatively  healthier federal employees compare FEGLI to private individual coverage,  FEGLI coverage could also appear more costly. Finally, FEGLI’s  postretirement coverage, which increases FEGLI premiums but is not  generally part of private plans, also contributes to FEGLI’s cost relative to  private sector alternatives that do not feature this coverage. The possibility  that FEGLI coverage may appear more costly than private sector  alternatives to relatively younger or healthier federal employees is mitigated  to some extent by the extra amount of coverage FEGLI provides federal  employees under age 45. However, in cases where FEGLI’s premiums  exceed those for similar coverage in the private sector, federal employees  may conclude that FEGLI is more expensive and choose to opt out of the  program.
section_title: Although FEGLI’s Disclosures Cover Key Aspects of the Program, They Do Not Cover Some Important Features
paragraphs: While FEGLI disclosures cover many key aspects of the program, they do  not cover certain program features that could affect an employee’s  decision to purchase FEGLI coverage. Consistent with OPM’s strategic  goal of helping ensure that federal employees fully understand their  benefits, and with the National Association of Insurance Commissioners’  (NAIC) guidance on informative marketing materials, OPM provides a  significant amount of information on FEGLI through a handbook, program  booklet (a condensed version of the handbook for employees), and  website. These disclosures provide information on a range of topics,  including enrollment, coverage options and costs, designation of  beneficiaries, claims and claims payments, and resources for employees  if they have questions or issues. OPM provides this information in hard  copy and through the FEGLI website, which also includes a calculator  that allows users to determine premiums for various combinations of life  insurance coverage. Providing timely and informative FEGLI guidance  materials to federal agency human resources staff is another means  through which OPM seeks to ensure that federal employees understand  their benefits.
While these disclosures are useful, they do not make employees aware of  some FEGLI benefits and features that could affect their decision to  participate in the program.    The disclosures do not inform employees that premiums for Basic  coverage include a postretirement benefit and that employees prefund  this benefit. Employees who are unaware of this prefunding element  could decide that FEGLI coverage is too expensive, decline  participation in the program, and not receive FEGLI’s potentially  valuable insurance benefits. Conversely, employees that plan to work  in the federal government for only a short period, or at least not through  retirement, could decide to participate in the program, not knowing that  they would be paying for a benefit they would never receive.    FEGLI disclosures, while showing a constant premium rate, do not  make employees aware of the level-premium feature of the program’s  Basic coverage that spreads premiums equally over the duration of  the policy rather than charging less during early policy years and more  in later policy years. Employees unaware of this feature could  conclude that FEGLI coverage is more expensive than alternative  private sector coverage, particularly in the earlier years of the policy,  and decide to opt out, foregoing potentially valuable life insurance  coverage.    The disclosures also do not convey to federal employees that, for  Basic coverage, FEGLI charges a composite premium that averages  the cost of insurance for all participants regardless of age or health.  That is, participants pay the same regardless of whether they pose a  lesser or greater risk of loss. This averaging can be of great benefit to  some, especially those who may not be able to obtain coverage  elsewhere. However, as with the level-premium feature, those not  aware of this feature could conclude that FEGLI coverage is simply  more expensive than alternative private sector coverage and forego  coverage they might not be able to obtain elsewhere.
section_title: In Overseeing FEGLI, Processes for Setting Premium Rates Could Be Improved
subsections: section_title: OPM Performs Many of FEGLI’s Administrative and Operational Functions and Works Closely with MetLife
paragraphs: According to OPM officials, OPM performs many FEGLI administrative  and operational functions, including collecting premiums, overseeing  FEGLI’s claims settlement process (which MetLife administers), and  publishing FEGLI’s regulations and disclosures. The same officials said  that FEGLI premiums are collected by withholding premiums from  enrollees’ paychecks, annuities, or compensation and collecting agency  contributions from employing agencies or retirement systems, as  applicable, for deposit by OPM into the FEGLI Fund. On a monthly basis,  premiums are moved from the FEGLI Fund which is held by the Treasury  Department, into a letter of credit account, which is administered by a  Federal Reserve Bank and from which MetLife can draw down funds to  pay claims. MetLife’s OFEGLI, which is responsible for paying claims to  beneficiaries, draws money from the FEGLI Fund on a monthly basis  using the line of credit and transfers claims payments to beneficiaries. In  addition to its premium collection function, OPM officials said OPM is also  responsible for investing FEGLI Fund assets in government securities  and ensuring that investment income on program assets is taken into  account when determining program costs. Funds that flow through  FEGLI, according to these officials, ultimately begin with employee and  agency premiums and end with a payout to beneficiaries in the form of a  check or an RAA. Figure 2 illustrates the flow of FEGLI funds between  those endpoints, including being held in the FEGLI Fund.
In addition to managing FEGLI resources, OPM officials said they monitor  and oversee MetLife’s claims settlement processes by receiving and  reviewing weekly reports on claims activity. In addition to managing  processes for dispersing FEGLI funds, OPM officials said they receive  annual financial reports on claims and administrative costs that are used  to determine the timeliness of payments and, as noted earlier, help  predict future claims and other expenses.
In addition to producing and updating FEGLI’s Handbook, Program  Booklet, website and forms, OPM officials said that OPM also issues  FEGLI regulations, including the Life Insurance Federal Acquisition  Regulation (LIFAR), that guide the program’s operations. The  regulations, for example, outline the types of Basic and Optional  insurance available through FEGLI, the amounts of FEGLI coverage that  the program offers, eligibility requirements, program costs, and  beneficiary designation. Additionally, the LIFAR describes the terms of  the contractual arrangement between OPM and MetLife under the FEGLI  program, including MetLife’s receipt and administration of claims and the  calculation of administrative costs and profit levels. The LIFAR also  provides guidance on contract oversight, including requiring policies and  procedures to help ensure that FEGLI services conform to the contract’s  quality requirements, and an OPM evaluation of MetLife’s system of  internal controls. Additionally, the LIFAR requires that MetLife develop a  quality assurance program that includes procedures to address (1)  timeliness of claims payments to beneficiaries, (2) quality of services and  responsiveness to beneficiaries and OPM, and (3) detection and recovery  of fraudulent claims, among other things. Although FEGLI’s statute  exempts the program from contractual competitive bidding, the LIFAR  also provides direction on contract modifications and circumstances that  would allow for contract termination. According to OPM officials, they fulfill  these requirements by monitoring consumer feedback, tracking the  timeliness of claims payments, and reviewing external audits of MetLife,  which include OFEGLI. These officials said that they have not received  any indication of problems with timeliness or responsiveness, or  indications of any other deficiencies.
Although OPM has numerous administrative and oversight responsibilities  for FEGLI, MetLife, according to its officials, has a central role in several  key FEGLI financial and claims administration functions. First, officials  said that MetLife works with OPM on an annual basis to develop a  monthly premium amount. This premium is the amount made available to  MetLife to pay claims, MetLife’s administrative expenses, and MetLife’s  service charge. MetLife annually conducts a review of claims paid and  recommends a premium amount to OPM based on the projected level of  claims and expenses for the upcoming fiscal year. Officials noted that  OPM and MetLife then agree on a total annual premium level for FEGLI,  which OPM then uses to determine rates for employees and federal  agencies. Second, OPM officials said that MetLife plays a key role in  receiving life insurance claims from FEGLI beneficiaries, processing  these claims, and ensuring that beneficiaries receive their life insurance  settlements. On a daily basis, MetLife officials said that they determine  how much they need to withdraw from the letter of credit account to meet  expenses associated with beneficiaries’ use of their RAAs.
In addition, OPM officials said MetLife prepares weekly and annual  financial reports on its FEGLI claims that provide important information on  the flow of funds from the FEGLI Fund to MetLife and from MetLife to  beneficiaries. OPM reimburses MetLife for its administrative expenses for  FEGLI, including its claims and financial functions. OPM officials said that  most of these expenses are the result of MetLife’s OFEGLI, through  which MetLife processes and pays claims. In 1997, according to MetLife  officials, OPM and MetLife entered into an agreement that capped  MetLife’s direct administrative expenses for FEGLI at $6.1 million and  indirect expenses at 20 percent of that ceiling. This ceiling is adjusted  annually by the Urban Consumer Price Index. In addition to administrative  expenses, officials said that MetLife receives a service charge for  adjudicating and administering FEGLI claims. This service charge is  calculated using the profit analysis factors found in the LIFAR. For fiscal  year 2011, according to OPM officials, MetLife’s service charge was  $965,000.
section_title: Under OPM’s Administration, FEGLI Funding Has Been Sufficient to Pay Claims and Meet Program Liabilities
paragraphs: Under OPM’s administration of the FEGLI program, according to OPM  officials, program funds have been sufficient to pay life insurance claims  and meet program liabilities. According to OPM officials, one of their key  responsibilities is to determine FEGLI’s liability for current and future life  insurance coverage and to take steps to ensure that sufficient assets are  available to meet these potential liabilities. Various factors affect how  these liabilities are calculated, including changes in the mortality of  federal employees, federal salaries, and interest rates. OPM actuaries  said that they use these factors as part of an actuarial valuation model to  make annual estimates of FEGLI’s current and future liabilities. The  actuaries then estimate the funds needed from premiums to cover these  liabilities and program expenses, taking into account interest on retained  funds and the FEGLI Fund balance. In addition, according to OPM  officials, OPM actuaries monitor and annually review the claims  experience for each FEGLI insurance coverage option, by age group and  gender, and make recommendations to OPM senior management on the  premium rates employees and their agencies should pay.
According to OPM officials, the FEGLI program is adequately funded if  FEGLI revenues meet or slightly exceed program costs and the  program’s assets meet or exceed its liabilities. Figure 3 shows OPM data  on FEGLI’s assets and liabilities from 2000 to 2010, and appendix II  provides additional information on FEGLI’s annual premiums, claims, and  investment income. In particular, OPM reported in its 2010 annual report  that the program’s liabilities as of September 30, 2010, were  approximately $43.9 billion and that its assets totaled $39.2 billion.  According to OPM officials, while the reported data would appear to  indicate that the program was underfunded, they believe FEGLI’s  financing is adequate because the overall liability amount reported above  does not take into account employee contributions for optional insurance  coverage, which has the effect of making the liability appear to be larger  than it actually is. According to OPM, they take these funds into account  in other internal analyses, and these analyses show that the program’s  assets sufficiently meet the program’s liability when employee  contributions are considered.
The legislation that created FEGLI intended the program to offer a low- cost insurance benefit to federal employees and their families.  Specifically, the statute that created FEGLI described the program as an  insurance benefit for federal employees that provides insurance at rates  OPM determines are generally consistent with the lowest basic premium  rates for new policies issued to large employers. Further, FEGLI’s  legislative history suggests that the program’s purpose is to provide low- cost group life insurance to federal employees. In addition, OPM’s most  recent strategic plan calls for ensuring that available benefits, including  life insurance benefits, align with employees’ needs.
As we have seen, however, FEGLI has features—some required by  statute—that can make its coverage more expensive for federal  employees compared with the type of coverage generally offered by  private group life insurance programs. For example, as noted earlier,  FEGLI requires an employee contribution for Basic insurance, something  generally not required in private sector plans. In addition, the program  features a postretirement benefit that, although not generally found in  private sector plans, does increase the premiums that FEGLI participants  must pay. OPM officials told us that they periodically compare FEGLI to  other large group life insurance plans, primarily in terms of coverage  levels, and have concluded that the features and benefits FEGLI offered  are on par with those offered by private sector plans. In addition, OPM  officials noted that key FEGLI characteristics such as coverage levels, the  portion of the cost paid by federal employees, and the structure of Basic  premiums are determined by FEGLI’s statute, and as a result, changing  the program can involve statutory changes that require congressional  action. They further noted that because of the program’s size, the limited  number of OPM staff available to administer the program, the amount of  administrative work involved in making a change to the program, and the  potential need for the FEGLI statute to be changed, altering program  processes is not a simple task. OPM officials said that because of various  concerns, such as the length of time required for legislative changes,  inherent costs incurred with structural program modifications, and their  interest in preserving program continuity, requests for significant changes  are minimal and made only after careful consideration. However, OPM is  able to make changes to FEGLI premium rates paid by federal employees  and agencies, as well as other changes including options available to  beneficiaries for receiving claims payments. Nevertheless, OPM did not  appear to have a systematic or documented process, or requirements, for  comparing FEGLI with private sector plans. In addition, OPM did not have  a methodology or criteria with appropriate benchmarks or measures for  consistently comparing FEGLI benefits with those provided by the private  sector. The results of such analyses could be used, for example, to make  changes to the program within OPM’s authority or, potentially, suggest  legislative changes to Congress.
section_title: OPM Lacked Clear, Documented Processes for Considering FEGLI Premium Rate Changes
paragraphs: Since the last premium adjustment, OPM actuaries have recommended  changes—both increases and decreases—to FEGLI premium rates. As  we have seen, each year OPM actuaries review and analyze FEGLI’s  assets and liabilities to determine the sufficiency of program assets to  cover life insurance benefit costs for all FEGLI enrollees. In addition, the  actuaries analyze the claims experience associated with each type of  coverage and age band and determine appropriate premium rates, which  may be higher or lower than the existing rates. OPM actuarial and  financial officials present the results of these analyses and any rate  change recommendations in an annual meeting with OPM management  that includes the FEGLI contracting officer, actuaries, financial staff, and  other OPM senior management. According to OPM officials, OPM senior  management then has the authority to decide whether to raise, lower, or  hold constant the rates that employees and agencies pay for FEGLI  insurance. However, according to OPM officials, OPM management  decided not to make these rate changes because they believed they  introduced more complexity for FEGLI participants and entailed  administrative changes that, at the time, were not practical given the  significant resources required.
Standards for internal control in the federal government state that policies  and procedures should exist for ensuring that findings from any audits or  reviews are promptly resolved and that all transactions and other  significant events are clearly documented. OPM’s annual actuarial  reviews are effectively an internal control designed to help ensure the  accuracy and adequacy of premium rates. However, OPM does not  appear to have a documented process providing guidance on what to  include in the annual actuarial reviews and recommendations to  management. In addition, it does not have a process for documenting  management’s decisions with respect to those recommendations,  including any accompanying rationale. Management’s decisions on the  actuarial findings are significant events because of their potential effect  on the financial condition of the program and its ability to pay claims to  beneficiaries. Without documented processes for actuarial and financial  reviews and their disposition, OPM risks compromising the efficiency and  the effectiveness of these reviews and being unable to help ensure  premiums are consistent with program experience.
section_title: RAAs Are No Longer the Default Settlement Option, but Better Disclosures Are Needed
subsections: section_title: RAAs Were the Default Option from 1994 to 2011
paragraphs: RAAs had been the default method used from 1994 until February 2011  for many FEGLI beneficiaries to receive their life insurance settlements.  RAAs became the default option in 1994 for payments over $7,500 after  MetLife requested that OPM allow RAAs to be used in addition to lump- sum check payments. OPM granted the request under certain conditions,  including RAAs be provided as additional benefits to FEGLI beneficiaries  at no additional cost. OPM officials noted that the change to RAAs  reduced administrative costs, including for staff time and materials that  were associated with issuing lump-sum checks.
In February 2011, OPM changed the FEGLI life insurance settlement  process, requiring beneficiaries to choose between receiving a lump-sum  check or an RAA when receiving a settlement. Specifically, OPM revised  the form that FEGLI beneficiaries submit for a life insurance claim,  removing the default option and requiring beneficiaries to affirmatively  choose a lump-sum payment or an RAA for settlement amounts over  $5,000. OPM officials said that they made this change after reviewing  RAA practices and procedures and published concerns about RAA  practices. Two major life insurers with whom we spoke said that making  the RAA payment method optional can have a considerable effect on  consumers. When consumers have the option to choose between RAAs  and lump-sum check payments, the overwhelming majority choose lump- sum check payments.
section_title: Industry Views Vary on the Benefits and Consumer Protection Concerns from RAAs
paragraphs: According to several insurance companies and OPM, RAAs can benefit  beneficiaries, but others expressed concerns about the extent of RAA  disclosures and consumer protections. Industry participants cited  flexibility and a guaranteed interest rate as the primary benefits of RAAs.  For example, some said RAAs offer beneficiaries flexibility during a  difficult time and loss to determine how best to use or invest the life  insurance proceeds, which are often sizeable sums. While deciding how  to use the funds, beneficiaries with RAAs receive a guaranteed minimum  interest rate on their RAA account. According to MetLife officials, for  FEGLI, each beneficiary’s minimum interest rate is based on when the  RAA was opened and is guaranteed for as long as the beneficiary  maintains the RAA. According to the same officials, the guaranteed  interest rates are 3.0 percent for RAAs opened before April 2003, 1.5  percent for RAAs opened April 2003 to April 2009, and 0.5 percent for  RAAs opened after April 2009. The officials noted that even the most  recent interest rate paid on RAAs is competitive compared to what  beneficiaries could currently earn on similar alternative investments. For  example, as of September 26, 2011, the best available rates for a money  market account ranged from .10 percent to 1.10 percent. In addition,  they said that RAAs provide beneficiaries the ability to access their funds  at any time, including the opportunity to withdraw either partial amounts or  the entire amount.
Despite these benefits, RAA disclosures in general do not convey some  important information to consumers, including information on options  beneficiaries have for receiving their life insurance settlement funds. For  example, the disclosures do not clearly indicate that OPM considers life  insurance claims to be closed, and its relationship with beneficiaries  ended—as it is with a lump-sum payment—once a beneficiary chooses  an RAA as a settlement option. In addition, beneficiaries may not  understand that RAAs involve a separate contract with MetLife that is not  part of the FEGLI program and is regulated by states rather than the  federal government. Regulatory officials we interviewed from one state  said that consumer choice and product understanding is critically  important to consumers and that that state’s law, in force since the mid- 1990s, requires companies to offer beneficiaries a choice of life insurance  settlement options at the time life insurance claims are submitted. The  same officials noted that RAAs cannot be the default life insurance  settlement vehicle in their state. Three other states’ regulators were  concerned about how well beneficiaries understood RAAs and one of  these states had recently passed a bill that required RAA disclosures to  include information on settlement options available to beneficiaries.  Another part of the bill prevents insurance companies from offering RAAs  as their default settlement option. Regulatory officials from another of  these states said that their office had undertaken a regulatory review and  was developing guidance for insurance companies on using RAAs.
In addition to concerns about RAA disclosures, some industry participants  and a federal regulator expressed concern about the kinds of protections  that apply to RAAs and how well beneficiaries understand them. For  example, they indicated that while RAAs are not insured by the Federal  Deposit Insurance Corporation (FDIC), the use of drafts that closely  resemble checkbooks offered by banks could give the appearance that  FDIC insurance protects RAAs. Others noted that whether state guaranty  funds were adequate to fully protect those with RAAs is unclear. Industry  officials we spoke with noted that state guaranty funds typically protect  RAAs up to a limit of $300,000, although in some states that limit may be  as high as $500,000. An insurance industry expert explained that  beneficiaries who have RAA assets that exceed state guaranty fund limits  may not be fully protected. According to OPM, approximately 25 percent of  federal employees covered by FEGLI have insurance in force of $300,000  or more. Other officials noted that state guaranty fund protections are not  the same as FDIC insurance. Each FDIC-insured account is protected;  therefore, consumers with multiple accounts can be protected above the  $250,000 FDIC limit in the aggregate. Conversely, state guaranty funds  limit an individual’s payout protection to the statutory ceiling so consumers  with multiple retained asset accounts are not protected beyond it.
section_title: Insurance Industry Organizations Have Issued Guidance to Improve RAA Regulation
paragraphs: In late 2010, NAIC and the National Conference of Insurance Legislators  (NCOIL) addressed concerns about RAAs by issuing guidance intended  to improve disclosures to consumers. In December 2010, NAIC issued a  model bulletin for use by state insurance regulators to establish standards  for disclosing information about the payment of life insurance benefits  with RAAs. For example, under the bulletin, disclosures should clearly  state that choosing an RAA involves establishing a supplemental contract  with an insurance company that is distinct from the life insurance policy.  The bulletin also notes that the supplemental policy should also provide  clear disclosures of the rights of the beneficiaries and the obligations of  insurers. Other key provisions in the bulletin included making sure  disclosures explain    available settlement options for beneficiaries,    applicability of FDIC protections,    applicable RAA fees charged by insurers,    guaranteed interest rates associated with RAAs,    provision and use of draft books,  frequency of financial statements to beneficiaries, and    policies for inactive RAA accounts.
Around the same time, NCOIL released its Beneficiaries’ Bill of Rights, a  document which was intended to improve not only disclosures associated  with RAAs but also transparency and accountability. NCOIL’s new  standards echoed many of NAIC’s proposed improvements and also  included provisions that, if adopted, would require insurers to  refer beneficiaries to their state insurance departments if they had  further questions about RAAs,  immediately return to beneficiaries remaining RAA balances if  accounts became inactive during a 4-year period,    make clear that any violation of NCOIL’s Bill of Rights would  constitute a violation of states’ unfair trade practices law,  identify any financial institution or entity that administers RAAs on the  insurer’s behalf, and  report annually to state regulators on the number and dollar amount of  RAAs held, RAA structure and investment earnings, interest rates  paid to beneficiaries, and numbers and dollar amounts of RAAs that  go through state unclaimed property processes.
Some states already have regulations in place that specifically address  RAAs and others have recently taken action to address concerns about  the accounts. For example, according to NAIC, as of August 2011, 26  states had RAA-related statutes that allowed insurance companies to  establish RAAs for beneficiaries and hold life insurance assets in these  accounts. In addition, according to NAIC, 22 states had RAA-specific  regulatory protections and disclosures, including many of the provisions  found in NAIC’s model bulletin. According to NAIC, many states either  enacted or updated RAA regulations since the beginning of 2010. Figure  4 provides information on how states have approached regulating RAAs.
While OPM recently revised and improved the FEGLI RAA disclosures  beneficiaries receive, the disclosures still lack some important  information. In February 2011, OPM improved FEGLI disclosures,  particularly the form that beneficiaries must use to file a claim. FEGLI  disclosures now inform beneficiaries that they have settlement options  and include language stating that beneficiaries have an important choice  to make in choosing between a lump-sum check and an RAA and  indicating their choice on their claims form. In particular, the new form  explicitly states that MetLife offers a guaranteed minimum interest rate  that may be better or worse than the market’s prevailing interest rate and,  unlike in the previous version, clearly informs beneficiaries that MetLife  may profit from RAAs. OPM further improved disclosures by more clearly  explaining that beneficiaries can access the total amount of their funds at  any time with no cost and by improving the information on applicable  protections. For instance, the disclosures now explicitly state that RAAs  are not bank accounts and are not insured by FDIC or any other federal  agency. They also explain that MetLife guarantees all RAA accounts,  including interest earned, and that this guarantee is backed by state  insurance guaranty associations.
Despite OPM’s improved disclosures, they continue to lack some  important information. In addition to failing to mention the aforementioned  separate RAA contract between FEGLI beneficiaries and MetLife, OPM’s  revised disclosures    do not tell beneficiaries how to identify and contact the proper state  department of insurance regulation should they have any questions or  concerns about their RAAs. FEGLI beneficiaries may not clearly  understand that OPM oversees all aspects of FEGLI prior to  settlement but that state regulators become responsible thereafter. In  the event that beneficiaries have questions or face issues with an  RAA, they may not know where to turn for regulatory assistance.  Further, there may be differences of opinion among regulators about  who is the responsible regulator, making such guidance even more  important to beneficiaries    do not provide information on how to identify the relevant state  guaranty fund and its applicable limits, or where to find additional  information on a particular state’s fund. According to the National  Organization of Life and Health Guarantee Associations, beneficiaries  whose RAA accounts contain more than their state guarantees may  be at risk of leaving some funds unprotected.
It is important for beneficiaries to be able to identify the relevant state  insurance regulator and guaranty fund in case they have questions or  issues regarding their RAAs and associated guarantee fund protection.  However, identifying the appropriate regulator is challenging because  some regulators differed on what type of instruments RAAs are, as well  as who regulates them. For example, according to two state regulators  and NAIC officials, RAAs are supplemental insurance contracts between  beneficiaries and insurance companies. However, two other states’  regulators classified them as settlement options. Yet another state’s  regulator said that RAAs were both supplemental contracts and  settlement payouts of existing life insurance policies. States also differed  on the time frame for considering insurance contracts and settlements  settled. OPM officials said that FEGLI life insurance claims were satisfied  as soon as beneficiaries established RAAs, and two of the five state  regulators with whom we spoke shared that view. However, regulatory  officials we interviewed from one state said that the original insurance  contract was not satisfied until all funds were withdrawn from the RAA.  The state insurance regulators and some industry officials with whom we  spoke also differed on which state’s regulator oversees a particular RAA  account and, as a result, which state’s guaranty fund would apply. For  example, two states’ regulatory officials and NAIC representatives said  that the relevant regulator would be the one from the state where the  beneficiary resided. However, two other states’ officials said it would be  the state where the original group life insurance policy was issued, and  yet another state regulator as well as officials from the National  Organization of Life and Health Guaranty Associations said it would be  the state where the group life insurer was domiciled. A representative  from a life insurance industry association with whom we spoke said that  the appropriate regulator could be the one from the state where the  insurance contract was established, where the beneficiary resided, or  both.
Without clarity on which state insurance regulator has jurisdiction over an  RAA held by a FEGLI beneficiary, or which state guaranty fund might  apply, beneficiaries may not know where to turn to find answers to RAA- related questions on the extent of protections applicable to their RAA. For  example, the underlying FEGLI policyholder (the federal government) is  located in Washington, D.C.; the RAA provider (MetLife) is domiciled in  New York; and federal employees and their beneficiaries can live  anywhere in the United States. Identifying which state has jurisdiction  over a MetLife RAA contract, and which state guaranty fund applies,  could be difficult, especially if the state regulators themselves might not  agree on the proper jurisdiction. And as we have seen, state guaranty  funds provide varying levels of protection. According to OPM officials,  determining the appropriate state regulator for RAAs is technically beyond  their purview because their involvement ends once the RAA is funded  with the FEGLI claim payment. However, OPM does work with MetLife to  create the disclosures that provide beneficiaries with information that  helps them determine whether or not they wish to select an RAA as their  settlement option. Information concerning the relevant state regulator and  guaranty fund would be important to have in deciding whether or not to  choose an RAA because it could determine the amount of protection  available to the beneficiary. In addition, it could also inform the beneficiary  of potential challenges in seeking regulatory assistance if, for example,  the beneficiary is located in one state but the relevant regulator is located  in a different state.
section_title: OPM Does Not Consider the Investment Income Earned on RAAs in Setting Premium Levels
paragraphs: In contrast to some private insurers with whom we spoke, OPM does not  consider any of the income MetLife earns on FEGLI RAAs when  determining premium rates for FEGLI coverage. Some insurance  company representatives we interviewed said that they considered all  investment income, including income earned on RAAs, when determining  the premium rates for their life insurance policies, and that this income  typically had the effect of reducing the premiums insurers charge or  defraying other related costs. While officials from two companies with  whom we spoke said that they considered RAA earnings when pricing  their overall group life insurance plans, other insurers suggested that  investment income from their RAA accounts was too small to affect their  rate-setting calculations.
Because OPM contracts with MetLife for settlement services, RAAs  funded with FEGLI claims payments are established and operated by  MetLife. As a result, MetLife retains investment gains and losses earned  on these accounts, as do most private insurers. According to OPM  officials, because OPM considers a FEGLI claim to be fully paid when a  MetLife RAA is established, OPM has no connection to the RAA accounts  or any of their funds. In addition, OPM does not track any data related to  MetLife’s FEGLI-based RAAs. However, these RAAs are established with  FEGLI claims payments, and by not considering the income earned on  the accounts by MetLife, OPM may be missing an opportunity to offset  program expenses and potentially reduce premium rates.
While MetLife officials said that they could not specifically determine the  amount of investment gains and losses on FEGLI-funded RAAs, they did  say that as of December 31, 2010, RAAs maintained for FEGLI  beneficiaries totaled approximately $3.5 billion. According to MetLife’s  2010 annual financial statements, the company had a total of  approximately $12 billion in FEGLI and non-FEGLI RAA accounts at year  end and had earned approximately $267 million in net investment income  on those accounts. The same officials also said that the company must  meet costs and expenses associated with these RAAs, including the  payment of guaranteed interest rates to FEGLI beneficiaries, and that by  guaranteeing the minimum rates previously noted, MetLife has assumed  financial risk. The same officials noted that these guaranteed rates are  higher than most rates of return beneficiaries could currently receive  through a bank or other liquid investment vehicle. In addition, MetLife  would pay and has paid interest at a higher rate than the guaranteed  minimum rates in more favorable interest rate environments, and  according to officials, approximately 40 percent of FEGLI RAAs have  been open for 5 or more years. This higher retention percentage, they  said, may be partially due to advantageous rates MetLife is paying those  beneficiaries. In contrast, several other life insurers with whom we spoke  said that RAAs are often a short-term option for beneficiaries, and that  beneficiaries typically close their RAAs within 1 to 2 years.
section_title: Conclusions
paragraphs: Because life insurance is an important purchase for those seeking to  protect their dependents, prospective buyers need to fully understand the  details of the policy they are considering. Although OPM provides  significant information on its life insurance program, some information that  could influence federal employees’ decision to buy FEGLI coverage is  lacking. First, although FEGLI offers federal employees postretirement  coverage, a benefit not commonly found in private sector group plans,  FEGLI disclosures do not explain the effect of this benefit on premium  levels, particularly the fact that federal employees begin prepaying for this  coverage as part of their Basic insurance when they begin their  employment. As a result, employees may be unaware that their premiums  may be higher than those of group plans that do not offer such coverage.  Second, the disclosures do not discuss FEGLI’s level-premium and  composite rate structure for Basic coverage. Because these features can  make FEGLI premiums look more expensive than private individual  coverage without them, especially to younger and healthier individuals,  some employees might conclude that FEGLI coverage is not a beneficial  choice and pass up a potentially valuable benefit. Conversely, someone  planning to work for the federal government for a short period of time  might purchase FEGLI coverage without realizing that the coverage  includes a retirement benefit they may not receive and will likely cost  more than a group policy without such a benefit.
Since FEGLI’s inception, OPM has sought to provide life insurance  benefits that meet federal employees’ needs at reasonable costs. While  OPM has conducted some periodic comparisons of FEGLI benefits and  premiums with those found in other group life plans, without formal,  documented processes for these comparisons, OPM risks that FEGLI  may not meet employees’ needs, that its premiums may exceed prices  charged for similar benefits in the private sector, or even that it may be  offering features that it does not need to offer to be competitive with  private sector group plans. For example, many private sector employers  no longer offer postretirement benefits in their group life plans because of  the cost. To help ensure that FEGLI premium rates are appropriate, OPM  officials said that OPM actuaries annually review and assess FEGLI’s  claims experience across different plans and age groups, recommending  rate changes when they believe such changes are necessary. However,  OPM lacks documented processes for making such recommendations  and documenting management’s disposition of any rate change  recommendations. Without a clear and consistent process for making,  reviewing, and implementing rate change recommendations, OPM risks  that needed changes may not be made and that the premiums charged to  federal employees may not reflect the coverage they are receiving.
FEGLI now offers two settlement options—a lump-sum check payment or  an RAA—and it is important for beneficiaries to be able to choose the  option that best meets their needs and to know where to turn to resolve  any issues they might have. While RAAs may offer benefits that some  beneficiaries appreciate, such as certain flexibilities and a guaranteed  interest rate, they also have certain characteristics that need to be fully  disclosed. OPM has recently revised its disclosures to beneficiaries to  provide more information on RAAs, but the disclosures still do not contain  some important information. For instance, they do not explicitly state that  RAAs involve a new contract between beneficiaries and MetLife that is  regulated by states rather than the federal government and that involves  state-based protections with certain limitations. As a result, FEGLI  beneficiaries may be unaware that new contractual terms and conditions  govern their RAAs. They also may not fully understand how their RAAs  are protected and what the limitations of that protection might be. Finally,  the disclosures do not provide the information that beneficiaries need to  find the proper regulator should they have questions about their  accounts—a problem that is complicated by the fact that the regulators  themselves may disagree over which one has jurisdiction.
section_title: Recommendations for Executive Action
paragraphs: To help better ensure that federal employees have all the information they  need when deciding whether to purchase life insurance through FEGLI,  we recommend that the Director of the Office Personnel Management  take steps to ensure that FEGLI disclosures include complete and  accurate information on key benefits and features, including the  program’s postretirement coverage, composite rates, and level-premium  structure.
To help ensure that FEGLI provides relevant benefits that meet the needs  of federal employees at a reasonable and appropriate cost, we  recommend that the Director of the Office of Personnel Management  develop and implement a more structured process for comparing FEGLI  with private sector group life insurance plans and for documenting OPM  actuaries’ rate recommendations and any management decisions  concerning those recommendations.
To help ensure that FEGLI beneficiaries are provided with information on  all relevant aspects of selecting an RAA as a FEGLI settlement option, we  recommend that the Director of the Office of Personnel Management  include more complete information on financial protections and regulatory  oversight in program disclosures, working as necessary with MetLife and  NAIC to determine the appropriate state regulator for beneficiaries and  their RAAs.
section_title: Agency Comments and Our Evaluation
paragraphs: On October 7, 2011, we provided a draft of the report to OPM for  comment. On October 28, 2011, OPM provided written comments, which  are reproduced in full in appendix III. OPM concurred with the  recommendations in the report and also provided technical comments,  which we incorporated as appropriate.
OPM concurred with our first recommendation that it take steps to ensure  FEGLI disclosures include complete and accurate information on FEGLI’s  key benefits and features, including postretirement coverage, composite  rates, and level-premium structure. Specifically, OPM stated that it strives  for FEGLI transparency and will take steps to provide more information on  key FEGLI features to ensure federal employees have the information  they need to make an informed benefit decision.
OPM also concurred with our second recommendation that OPM develop  and implement a more structured process for comparing FEGLI with  private sector group life insurance plans and for documenting OPM  actuaries’ rate recommendations and any management decisions  concerning those recommendations. Specifically, OPM stated that it  believes that benchmarking federal benefits programs, including FEGLI,  with other employer-provided benefits is essential to ensuring that the  federal government can recruit, retain, and honor a world-class workforce.
Finally, OPM concurred with our third recommendation that OPM include  more complete information on financial protections and regulatory  oversight, working as necessary with MetLife and NAIC to determine the  appropriate state regulator for beneficiaries and their RAAs. Specifically,  OPM stated that it has updated the FEGLI claims form and website to  provide more information about the choice for FEGLI beneficiaries to  receive a lump-sum check or RAA and will ensure that the best  information is available to assist beneficiaries in their decision-making  process.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to appropriate  congressional committees, the Director of the U.S. Office of Personnel  Management, and the Chief Executive Officer of the National Association  of Insurance Commissioners. In addition, the report will be available at no  charge on GAO’s website at http://www.gao.gov.
If you or your staffs have any questions regarding this report, please  contact me at (202) 512-7022 or cackleya@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff that made major contributions to  this report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To describe and evaluate the Federal Employees’ Group Life Insurance  (FEGLI) program’s key operational and financial components, we  examined FEGLI’s authorizing statute and associated regulations,  including the Life Insurance Federal Acquisition Regulation (LIFAR). In  addition, we reviewed the program’s key policy documents, including the  FEGLI Handbook, FEGLI Program Booklet for Federal Employees, FEGLI  website, and the contract between the Office of Personnel Management  (OPM) and the Metropolitan Life Insurance Company (MetLife). We  focused on how FEGLI provides life insurance coverage to federal  employees and their families and the cost of that insurance to federal  employees and their respective agencies. Interviews with OPM and  MetLife officials provided additional information on FEGLI operations,  including the program’s coverage options; how the government, MetLife,  and reinsurers bear insurance risk; and how the Employees’ Life  Insurance Fund—FEGLI’s main financial fund—is used for paying life  insurance claims and other program costs. We reviewed data from OPM  annual financial reports and performance and accountability reports from  2000 to 2010 to analyze FEGLI’s assets and liabilities. In addition, we  reviewed information in the U.S. Budget on FEGLI from fiscal years 2002  to 2012 to analyze FEGLI premiums, claims payments, and investment  income. We also reviewed MetLife financial statements to determine the  total dollar amount of MetLife’s retained asset accounts (RAA) and the  total investment income MetLife derives from its RAA investments.  Because these are audited documents and financial statements, with  unqualified audit opinions, we found data from these documents and  summary statistics from OPM and MetLife to be reliable for the purposes  of this report. In addition, to determine how FEGLI’s structure and  operations compare to large private sector group life insurance plans, we  compared FEGLI to plans offered by six large private sector group life  insurers. Our comparison focused on insurance coverage options,  processes for determining premiums, available settlement options, and  methods for establishing capital or surplus levels. We selected these  insurers based on various insurer characteristics including their group life  insurance market share, number of group life policies and certificates  issued, and whether or not they provided group life insurance to federal  employees. We also interviewed officials from the National Association of  Insurance Commissioners (NAIC) and the American Council of Life  Insurers (ACLI) to gain their perspective on group life insurance plans,  finances, and operations. For additional information on how private sector  group life plans are structured and the insurance they offer, we met with  insurance regulators and benefits administrators from the states of  California, Florida, New York, North Carolina, and Maryland. We selected  this sample of states because it is geographically diverse, includes states  of domicile for several large insurance companies that sell a significant  number of the industry’s group life insurance policies, has a large number  of federal employees, and contains some states that have RAA  regulations and others that do not. In addition, we met with  representatives from two private companies with experience in insurance  brokerage, and human capital and benefits consulting.
To describe and evaluate OPM’s oversight of the FEGLI program, we (1)  reviewed FEGLI’s authorizing statute and regulations, including the  LIFAR, (2) reviewed OPM’s program monitoring, reporting, and other  oversight activities, (3) interviewed OPM and MetLife officials, and (4) met  with industry association representatives. We focused on the steps OPM  takes to periodically monitor and review FEGLI’s financial condition, and  on OPM processes for overseeing MetLife functions for receiving,  adjudicating, and paying claims to FEGLI beneficiaries. In addition, to  identify possible regulatory and consumer protection issues with group life  insurance plans and settlement vehicles, we met with representatives  from NAIC, ACLI, and a consumer advocate from the Center for  Economic Justice. To determine how states generally regulate group life  insurance plans, we met with insurance regulators from the five states  described earlier and compared FEGLI oversight with state regulation of  private group life insurers and identified similarities and differences.
To describe and evaluate the role of RAAs in FEGLI’s settlement process,  we examined key OPM disclosures, including the FEGLI Handbook,  FEGLI Program Booklet for Federal Employees, FEGLI website, and  Strategic Plan, 2010-2015, and we interviewed OPM officials. To  understand the kinds of information beneficiaries receive on life insurance  settlement processes, we also reviewed MetLife’s Welcome Kit for RAAs  and interviewed MetLife officials. We focused on (1) what RAAs are, how  they function, and how they are funded, (2) the kinds of RAA disclosures  OPM and MetLife provide and how clearly they help beneficiaries  understand their use, and (3) what RAA protections apply to FEGLI  beneficiaries. In addition, we examined how RAAs are regulated by  focusing on the activities and processes OPM and state regulators use to  oversee these accounts. With respect to state RAA oversight and to  determine what kinds of regulatory and consumer protection requirements  states have for insurance companies that offer RAAs, we chose a small  number of states as described earlier, some of which have RAA-specific  regulation, and others that do not. In addition, we compared FEGLI’s use  of RAAs to their use in the private sector and looked for any similarities,  differences, and emerging issues. We also looked to the insurance  industry for any applicable best practices with respect to RAAs that might  be used to improve the FEGLI program. To better understand protections  associated with RAAs, we contacted officials from the Federal Deposit  Insurance Corporation, state regulators from our sample, and officials  from the National Organization of Health and Life Insurance Guaranty  Associations and the Center for Economic Justice. We also reviewed  information on RAA guidance from the National Conference of Insurance  Legislators.
We conducted this performance audit from September 2010 to November  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Federal Employees’ Group Life Insurance Program Financial Information
paragraphs: This appendix provides information on the dollar amount of premiums the  FEGLI program has collected from enrolled federal employees and their  respective agencies. It also shows the dollar amount of claims the  program has paid to beneficiaries of federal employees. In addition, the  figure shows the dollar amount of interest income derived from investing  FEGLI Fund assets in U.S. Treasury securities. From 2000 to 2010, the  dollar amount of premiums collected and claims paid has grown, while the  dollar amount of interest income has declined slightly.
section_title: Appendix III: Comments from the Office of Personnel Management
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Patrick Ward (Assistant Director),  Joe Applebaum, Jan Bauer, Emily Chalmers, Marc Molino, Alan Rozzi,  Steve Ruszczyk, Mel Thomas, and Frank Todisco made key contributions  to this report.