The Trust was established by statute as a tax-exempt entity to manage and invest the assets used to pay a portion of Railroad Retirement Program benefits. Congress anticipated that the Trust would be managed much like a private sector pension plan trust.seven trustees that, like trustees of multiemployer plans established The Trust is governed by through collective bargaining, include representatives of both management and labor. Three of the trustees are selected by railroad management, three by railroad labor, and one independent trustee is selected by the other six. The Trust may invest Trust assets in stocks, bonds and other investment vehicles in a manner similar to other defined benefit (DB) plans. While the Trust is not subject to the Employee Retirement Income Security Act of 1974 (ERISA), which governs private sector pension plans, its trustees are subject to fiduciary standards comparable to the fiduciary duties under ERISA. For example, each member of the Board of Trustees must act solely in the interests of the Board and, thereby, plan participants and beneficiaries; for the exclusive purpose of providing plan benefits and defraying administrative costs; with the care, skill, prudence, and diligence that a prudent person familiar with such matters would use; and diversify investments to minimize the risk of large losses and avoid disproportionate influence over any industry or firm. As of September 2013, the Trust held about $25 billion in assets, placing it among the 50 largest DB plan trusts in the nation as of 2013. Trust assets consist mostly of equity and fixed income investments, but also include substantial assets allocated to alternative investments such as private equity, absolute return strategies, and commodities. From 2003 through 2013, according to a Trust representative, the Trust has had an average annual return on investment of about 6.4 percent. However, along with other plans, the Trust also suffered substantial investment losses during the financial crisis of 2008 and 2009. The Trust lost 19 percent in 2008 alone and suffered much lower losses in 2009 and 2011. The Trust operates in coordination with the Board, a federal agency established in 1937 to provide old-age pensions to retired employees of the nation’s railroads. In 2013, the Board oversaw the payment of about $11.6 billion in retirement and survivor benefits to about 568,000 beneficiaries. The Board pays two types of benefits to retired workers and their spouses, which are funded through federal payroll taxes assessed on private railroads and their employees. Tier I benefits are calculated to be comparable to Social Security benefits, for which railroad retirees generally are not eligible. The Board also pays Tier II benefits, which are intended to provide a benefit similar to that of a DB plan. Benefits under Tier II are based on a worker’s 5 years of highest earnings and the number of years spent in railroad employment. Assets not needed for immediate payment of Tier II benefits are invested by the Trust in accordance with its investment policy. The legislation creating the Trust includes language making it clear that the Trust is not part of the federal government. Specifically, the Trust is not a department, agency, or instrumentality of the federal government, and it is exempted from title 31 of the U.S. Code which governs the financial operations of the federal government and establishes the powers In addition, the and duties of the U.S. Government Accountability Office. Board is not represented on the Board of Trustees because the Board is a federal agency. However, as required by law, an independent qualified public accountant audits the Trust’s financial statements each year. It has been reported that these aspects of the Trust stemmed from concerns about government involvement in investment decisions that were repeatedly raised in Congress and elsewhere. It was reportedly feared, for example, that politically motivated investment decisions would lead to suboptimal investment returns and would provide political advantages to those influencing the decisions. Concerns about this “political risk” were of particular concern because the partial privatization of the much larger Social Security Trust Fund was a prominent public policy issue at the time. These concerns led to a desire to eliminate even the appearance of possible political influence and significantly influenced the Trust’s current structure. While the Trust manages the pool of assets in a manner similar to that of a private or public sector traditional DB plan, it also differs significantly from such plans in certain ways. As figure 1 illustrates, the Trust’s role is important but relatively narrow—its sole purpose is to manage and oversee the assets used to ensure payment of Tier II railroad retirement benefits. The Board assumes various other responsibilities of a DB pension plan, such as keeping track of benefit accruals and ensuring benefit payments. As a result, the Trust is a relatively small organization compared to the Board and pension plans of comparable size. While the Trust employs about 18 staff, the Board, which has many other duties— including unemployment and sickness benefit programs—and regional offices around the United States, employs about 865. A public pension plan like the Pennsylvania State Employees’ Retirement System, whose assets under management are comparable to that of the Trust, employs about 200 staff. Other essential aspects of a typical DB plan, such as maintaining records of accrued benefits, providing technical assistance to participants, and authorizing and making benefit payments, are carried out by the Board or the Department of the Treasury (Treasury). In addition, the Board assumes responsibility for interacting with workers or beneficiaries as needed. The Trust is thus free of these responsibilities, and is able to focus on overseeing its invested assets. Table 1 compares the Trust and the Tier II program to typical public and private DB plans. Although the Trust does not have its own OIG, since the Trust’s inception, the Board’s OIG has repeatedly expressed concerns about the adequacy of Trust oversight. In November 2002, the OIG contacted the Trust’s Chief Investment Officer to inquire about investment practices and the transfer of assets from Board accounts at Treasury to the Trust. The OIG requested written confirmation that transferred funds had been received, which investments had been purchased, and current investment yields. The Trust Chair responded by noting that the Trust transmits investment information in a statutorily-required annual report, as well as monthly reports pursuant to a memorandum of understanding with the Board, Treasury, and the Office of Management and Budget (OMB). In a subsequent correspondence, the Chairman noted that Congress had specified that the Trust was to be audited by an independent auditor, and delegated to the Board the responsibility to bring civil action if it believes the Trust is not complying with the statute. Since that time, the Trust has declined to provide any information directly to the OIG, although the Board has opted to share information pertaining to the Trust in some cases. In 2008, the OIG issued a report expressing concern that the Trust’s authorizing legislation provided the Board with a passive oversight role, and did not provide the Board with the ability to uncover circumstances requiring enforcement action. The report further noted limitations of annual financial statement audits, stating that such audits provide a “snapshot” of an organization’s financial health at a point in time, are not equivalent to a performance audit, and cannot assess program performance compared to applicable criteria. The report concluded that the annual financial statement audit should be supplemented by performance audits, which can offer information about the effectiveness of internal controls, assess compliance with law, and assess the efficiency of recruitment and retention strategies. The overall importance of adequate oversight of pension assets has been highlighted in recent years by a number of incidents involving officials responsible for managing large pools of retirement assets. For example, in 2011, high ranking officials of a large state pension plan were implicated in practices that violated fiduciary and ethical duties. Specifically, they were found to have guided investments to certain middlemen known as “placement agents” in exchange for trips and other benefits, possibly to the detriment of beneficiaries. Similarly, in 2009, the PBGC Office of Inspector General (PBGC OIG) issued a report regarding a former PBGC Director’s inappropriate involvement in contracting for investment services. Among other things, the PBGC OIG found that the former Director was communicating directly with some bidders at the same time he was actively considering their proposals, and so had clearly violated prohibitions against contact with potential service providers. Under the law, the Trust must submit an annual management report to the Congress, President, Board, and Director of OMB. This report is required to address various matters pertaining to the Trust’s administration and financial position. As table 2 outlines, the most recent annual report contains information about the investment results, financial activity, operations and management. For example, the report includes a discussion of the evolution, current status and performance of the Trust’s investment portfolio. It also includes a history of asset transfers and current book and market values. The report also includes a section on internal accounting and administrative controls including a description of the custodial arrangements under which Trust assets are primarily in the custody of a custodial bank, as well as the custodian’s responsibility to provide the Trust with a full record of all transactions involving Trust assets. The Annual Management Report also includes relevant Trust policies such as Trust by-laws, investment guidelines, and a conflicts of interest policy statement. In addition to Annual Management Reports, the Trust also submits monthly and quarterly reports to the Board. The monthly reports include financial information such as information on the purchase and sale of federal and non-federal securities, the monthly cash balance, and aggregate administrative expenses. Quarterly reports include a summary of investment objectives, quarterly investment returns, and aggregate asset values. Under the terms of a memorandum of understanding with three federal agencies, the Trust also submits a monthly report to the Board.memorandum states that because the Board is responsible for the overall management of the Railroad Retirement System, it is responsible for all budgetary and proprietary reporting of Trust transactions. Consequently, as table 2 describes, the Trust must submit information on investment and other transactions to the Board, and may do so on a 1-month delayed basis. The Board then uses this information to prepare monthly financial reports submitted to Treasury. In addition to reviewing these reports, Board and Trust officials stated that the organizations conduct regular formal meetings. In addition, the Board, in cooperation with the Trust, receives and reviews communications and information throughout the year. Board officials explained that Board members and trustees meet face-to-face twice annually, during which the Board receives a presentation on economic, legal, and other issues that could affect the Trust and its investments. The presentation may also include a detailed discussion of investment performance and outlook by asset class. A Board official said that such meetings typically include a question and answer session. These meetings are supplemented by quarterly conference calls between Trust and Board financial and legal staff in which investment performance, ongoing audits, or other issues are discussed. Board officials indicated that, after more than 10 years of experience working with and overseeing the Trust, they saw no need for enhanced oversight, noting that these reports and communications effectively provide continuous oversight, and in the event of a participant complaint, the Board would stand in for a claimant’s interest and take action in the event of malfeasance or mismanagement. Further, Board and Trust representatives told us that the Trust has never declined to share information that the Board has requested. Based on this working relationship, Board officials stated they believe they would be aware of any cause to file a lawsuit under the statute. While not required by law to do so, the Trust has commissioned four performance audits since the Trust was organized in 2002. As table 3 illustrates, these audits have occurred roughly every 2 to 3 years, and have covered a wide range of issues from technical compliance with the terms of the MOU between the Board, OMB, and Treasury, to the Trust’s approach to non-traditional investments such as hedge funds and private equity. These performance audits varied considerably in subject matter and breadth. For example, the 2004 audit, conducted by the internal audit departments of two railroad firms, sought to ensure that various core functions, including financial reporting functions, were in place and operating as intended. In contrast, the 2009 review sought to examine various aspects of investment related practices, for which a railroad internal audit department would not likely have sufficient expertise. Instead, according to a Trustee, the Trust hired a consulting firm that it believed to have considerable expertise in investment strategy and management. This report went into some detail about the nature and management of the Trust’s alternative investments such as hedge funds and private equity, and examined the Trust’s “due diligence” procedures regarding the search for investment managers and ongoing manager oversight. Each report contained recommendations and, according to Trust documents, the Trust either implemented, committed to implement, or explained why it would not implement each recommendation. In at least one instance, the Trust has not pursued the auditor’s recommendations. Specifically, while the 2006 internal risk assessment generally found few gaps in Trust processes and controls of risk, the auditor also proposed a second audit phase to explore a number of issues more deeply. According to a Trust representative, the Trust audit committee opted not to commit to the significant cost of this second phase, since the risk analysis found only a few “gaps” out of the 19 areas evaluated, and because the Trust either took corrective action or determined that the Trust’s existing policies sufficiently addressed the concern. Since that time, some of the specified issues have been addressed in subsequent reviews, but others have not. For example, the audit proposed a more in- depth review of recruiting, staff compensation, and organizational culture, but the Trust has not followed up with an audit of these issues. Although Trust representatives indicated that they intended to continue the practice of periodic performance audits, the Trust does not have a written policy regarding performance audits, their frequency, or their subject matter. For example, the Trust’s Audit Committee Charter specifically assigns the Committee responsibility for, among other items, 1) retaining and working with the independent financial auditor, 2) overseeing the Trust’s conflict of interest and confidentiality policies, and 3) overseeing Trust staff compliance with the MOU. However, the charter is silent on performance audits. Recently, a second MOU—developed between the Trust and the Board— has been drafted that would formalize the practice of commissioning periodic performance audits. Under a draft MOU, starting in 2015, performance audits would be performed at least every 3 years, in consultation between the Trust and the Board. The document also lists 12 areas that would be appropriate subjects of the audits, and provides that the Trust and the Board would meet to review the audit results and assess what changes to Trust practices or procedures would be warranted. However, the document does not include some audit subjects, such as fiduciary responsibility and conflict of interest policies, and does not specify timeframes for addressing particular areas subject to audit. Unlike the Trust, most state plans and both federal programs we contacted are subject to performance audits that can be initiated and conducted by an independent entity. As figure 2 shows, 42 of the 50 state plans we contacted are subject to external audits conducted by the states’ Auditor General or a comparable entity with authority to audit or otherwise review them. External audits of these plans can be initiated and conducted independent of the plans’ governing board and management. The remaining 8 of these 50 state plans are not subject to external audit. Plan officials in these 8 states stated that oversight can be achieved in other ways, such as through the preparation of publically available reports as well as through board of trustee and legislative oversight. Two federal programs that oversee large asset pools for the benefit of retirees and their beneficiaries are also subject to independently initiated performance audits. For example, PBGC’s single employer insurance program is subject to OIG audits and TSP is subject to Employee Benefit Security Administration (EBSA) audits. While the large majority of state and federal officials noted the importance of performance audits conducted by an independent external entity, officials of some state plans subject to audit noted potential drawbacks as well. A plan official in one state said auditors should be independent because they need to be unbiased, and conduct their work without influence. An EBSA official stated that given the value of TSP’s asset holdings, they would be concerned if EBSA was not able to initiate an audit to examine program areas they felt warranted closer review. Nonetheless, a plan official in one state said the plan resisted such audits in part out of a concern for politically motivated reviews and a perceived lack or expertise in investment matters. The official explained that the Auditor General’s office was seen as a stepping stone to the governorship, and that plan officials were concerned that audits could be used for political purposes. According to the official, when a state court ruled that the Auditor General had the power to initiate an audit, plan officials commissioned an external firm in 2006 to conduct a separate review so state legislators could consider the findings of both audits. In contrast to the Trust, several state and both federal programs we contacted are subject to multiple audits initiated by independent agencies. As indicated in figure 2, 13 of 50 state plans can be reviewed by two or more entities. In one state for example, the plan is subject to review by three state agencies: the Auditor General, a legislative oversight agency, and the state’s Inspector General. In some cases, state oversight agencies do not conduct audits but monitor investment strategy and activities in other ways. For example, one state’s legislative oversight committee informs and advises the legislature about different investment options for pension assets. Both federal programs we contacted are also subject to audit by multiple agencies. As noted above, PBGC is subject to audit by its OIG, and TSP is subject to audit by EBSA. In addition, unlike the Trust, both are subject to GAO’s audit jurisdiction. As illustrated in figure 3, the frequency with which the Trust has commissioned performance audits is comparable to or exceeds most state efforts. Unlike the Trust, 29 of the 50 state plans we contacted are subject to external audits on a specific calendar cycle. While 14 of the 42 state plans are subject to quarterly or annual external audits, most state plans are audited about as frequently as or less so than the Trust. For instance, similar to the Trust, nine state plans are audited at least once every 2 or 3 years. The remaining 19 state plans were subject to audits at longer set intervals that varied from state to state or were not reviewed according to any established time frame. While the Trust had not established time frames for periodic reviews of any topic, in some states, external auditors are required to review certain topics within specified intervals. In one state, the Auditor General conducts a performance audit every 2 years focusing on plan operations while a second state agency audits the plan’s investment strategy, performance, and practices every other year. In another state, a state agency is required to conduct an audit every 3 years related to investment strategy, performance, and practices as well as ethics and conflicts of interest. The most recent of these audits assessed whether fiduciaries act for the sole benefit of participants, and whether the highest ethical practices were being upheld. Plan officials in this state stated that the requirement is relatively new, resulting from allegations that investment firms made improper payments to politically connected intermediaries in exchange for managing the investment of state pension assets. Thirty-seven of the 50 plans we examined report being subject to performance audits by an office of internal audit located within the plan itself. In 32 of these plans, internal audits supplement external audits, but in 5 others, the office of internal audit is the only entity that conducts performance audits. According to plan officials, internal audits are typically conducted on an ongoing basis in accordance with an annual audit plan, and are conducted with a significant degree of independence. For example, plan officials in two states stated that, although the board of trustees must formally review and approve their annual audit plan, trustees do not influence what internal auditors should or should not review. One plan official said that such independence is important because—if problems or malfeasance were occurring—the board of trustees might try to divert the focus of these reviews. Nonetheless, an official of one state plan that, like the Trust, solely manages and invests pooled pension assets, told us that given their relatively small size, an office of internal audit would not be appropriate. Instead, the official said they plan to retain a third party firm to conduct a broad-based risk assessment related to the plan’s investment allocations. Trust performance audits are comparable to state and federal audits in terms of the breadth of topics reviewed. We examined relevant performance audit reports of plans in seven selected states and two federal entities and compared these to the four audits the Trust has commissioned. Our examination indicated that the range of topics the Trust has reviewed included some topics that state or federal audits have not included, and in some cases Trust audits addressed topics in more detail. For instance, as shown in table 4, unlike TSP and four states, a Trust audit included a review related to the qualifications and compensation of its Board of Trustees and Trust staff. Further, Trust audits of some topics have been more detailed than those of some state audits. For instance, the Trust’s 2009 audit included an assessment of its practices for selecting and monitoring external investment managers, as did several state audits. However, the Trust audit also assessed the Trust’s practices for terminating contracts based on the performance of external investment managers which one state audit did not include. Table 4 lists broad audit topics and indicates whether the Trust, state plans, and federal agencies have conducted related reviews. Conversely, some state and federal performance audits have included findings on topics that Trust audits have not included, or addressed topics in more detail. As table 4 indicates, two federal and six state entities have audited plan ethics and conflicts of interest policies and practices whereas the Trust audits have not. In some cases, such reviews have resulted in findings and recommendations in areas that could be relevant to the Trust. For instance, one state audit found that the plan did not have a process to independently identify potential conflicts of interest. Several states have also conducted audits that solely assessed whether the plan was in compliance with law and plan policies whereas the Trust has not. Although limited in scope, officials in one state said these types of reviews have identified issues such as conflicts of interest and the misuse of state funds. Finally, while a 2006 Trust audit considered qualifications and compensation of the Board of Trustees and Trust staff as part of a broad risk assessment, some state audits examined this issue in more detail. For example, a Trust audit considered the risk that improper compensation of staff would drive inappropriate behavior or limit ability to attract and retain staff. The review found that the Trust has processes and controls in place to address this concern, including a staff handbook and an annual review for each employee. In contrast, an audit of a state plan appeared to encompass more, finding that while the plan has a consistently high quality investment staff, it has relatively low staffing levels in several asset classes, a tendency to leave vacancies unfilled for many months, and underdeveloped and underutilized human resources. As a result, the fund has had to make more extensive use of external consultants, which, according to the audit report, resulted in higher costs to the plan. According to experts on private sector pensions, the Trust’s practice of commissioning external firms to conduct performance audits every 2 to 3 years is comparable to the practices of large private sector plans. While such plans are generally not subject to independently-initiated audits, fiduciary experts stated that large private sector DB plans commission periodic audits that are typically conducted by external consulting firms. In discussing the Trust’s current practice of commissioning audits every 2 to 3 years, one investment fiduciary expert said that this is similar to many large private sector plans. Experts indicated that such audits are fairly common among large pension plans, but that smaller plans—those managing assets of fewer than $100 million—do not typically commission these reviews. One expert stated that smaller plans may have a more difficult time justifying the use of the resources necessary to commission performance audits. Nonetheless, where resources are available, experts said that audits can be beneficial to a plan’s trustees and management. For instance, one expert said these reviews help ensure the plan is complying with all reporting and disclosure requirements. In addition to periodic audits, private plans are also subject to potential external review by ERISA enforcement agencies. To enforce the fiduciary standards established in ERISA, for example, EBSA may review private sector plans to ensure officials are in compliance with ERISA standards and, like plan participants and others, take civil action to enforce compliance. While not subject to ERISA, the Trust’s authorizing legislation includes similar fiduciary standards and the Trust is subject to potential civil action by the Board for violations of law. While such action is possible, Board officials stated that the Board has never had cause to take such action. The Board’s OIG officials emphasized their long-held belief that the current level of oversight is inadequate, and that the Trust should be In a 2011 report, the OIG subject to more rigorous performance audits.stated that without stricter accountability, transparency, and oversight on issues such as administrative expenses and overall financial health, the Trust runs the risk of fraud, waste and abuse. Further, according to the OIG, there is no comparable example where federal program assets are completely outside the jurisdiction of a federal agency’s appointed Inspector General. OIG officials told us that that the Board can take enforcement action if it believes the Trust is not in compliance with its founding legislation, but that without more transparency, fraud or mismanagement would be difficult to detect. The OIG maintained that an external organization should have oversight authority so that it can independently verify Trust reports. The OIG added that—despite explicit statutory language making it clear that the Trust is not an agency of the federal government—the Trust’s control of about $25 billion in federal government assets makes its status as a non-governmental organization somewhat illogical, and that it should be subject to greater oversight. The official added that if the railroad industry fell on hard times and the Trust was unable able to make benefit payments, industry officials would likely need to seek federal financial assistance. Both Trust and Board representatives stated that, in their view, the current oversight is adequate, citing annual mandatory financial audits, regular reporting and communications between the Board and Trust, and voluntary periodic Trust-commissioned performance audits. Also, officials cited the statutory “tax ratchet”, which raises or lowers the Tier II employer and employee tax rate to ensure that the Trust assets equal between 4 and 6 years of expected benefit payments. Officials noted that this mechanism both ensures that the Trust’s financial position will not unduly deteriorate so long as there is a viable railroad industry in the United States to pay required taxes, and ensures that railroad labor and management have a self interest in overseeing a financially healthy Trust. Selected representatives of railroad management and labor generally concurred with Board and Trust officials. For example, representatives of the Association of American Railroads—an organization representing U.S. railroads—stated that they did not have concerns about the Trust’s current oversight structure. Similarly, an official of the Brotherhood of Maintenance of Way Employes indicated that the Trust is doing well financially, and did not have concerns with regard to Trust oversight because the Trust is quite transparent, and labor organizations are able to obtain periodic reports. Based on discussions with experts and key stakeholders, as well as our review of oversight models that apply to large state plans, private sector plans subject to ERISA, and comparable federal entities, we identified four possible policy options for expanding Trust oversight. We spoke with key stakeholders about these policy options and solicited their views on the potential benefits and drawbacks of each. Table 5 summarizes stakeholder views on these policy options. An OIG official told us that, in their opinion, this would be the most logical option because the Trust controls Board assets and the OIG is responsible for overseeing the Board. However, the official noted that the OIG has limited staff, and that such authority would require additional staff resources. To make this option more agreeable to the Trust, an OIG official said that any necessary statutory language could clearly delineate what the OIG’s role would and would not be. The official said the OIG would seek to verify that there are proper checks and balances in place and to assess internal controls. The official stated the OIG would not seek to advise the Trust on investment policy, which is beyond the OIG’s area of expertise. However, representatives of the Trust and the Board that we contacted were unanimously opposed to such a proposal. Board officials stated that such a development would be counter to the Trust’s originating legislation, and one official stated that externally-initiated audits could open the door to political influence, stating that audit objectives could be framed in a way that would pressure the Trust’s investment policies in a particular direction. For example, an audit could be designed to review “politically incorrect” investments, or investments that might be portrayed as not environmentally conscious. Similarly, a Trustee expressed concern about “headline risk”, where an outside auditor might make an issue about the Trust’s investments in alternative investments such as private equity. Trust representatives also expressed concerns about what they perceived as an unconstructive, confrontational relationship with the OIG. One official said this has been manifest in a number of ways since the Trust was established, including on matters relating to investment management and returns. A Trust official noted that the OIG has commented on Trust investments and related issues, and said that should the OIG be granted authority to audit the Trust, such concerns could result in an audit that would influence Trust investments. The official added that the Trust has a professionally developed investment strategy, and does not wish to take advice about investments or about its selection of investment advisors from the OIG or any other government agency. Also, as summarized below, Trust officials noted that the OIG’s stance with regard to the Statement of Social Insurance (SOSI) has led them to undertake a costly and, in their view, unnecessary second audit of their financial statements each year. An OIG official told us that because the SOSI is included in Board financial statements, in their view the audit of the December 31 asset values is necessary based on OMB guidance. The official further noted that while the difference in the value of Trust assets between September 30 and December 31 is generally not large, in 2008 there was an 18 percent difference. Background U.S. generally accepted accounting principles require federal agencies charged with responsibility for selected federal social insurance programs such as the Railroad Retirement, Social Security and Medicare programs—to present the Statement of Social Insurance (SOSI) as a basic financial statement in their respective annually audited financial statements. The SOSI presents the projected actuarial present value of the estimated future revenue and estimated future expenditures of these social insurance programs over 75 years. In preparing its annual SOSI for the Railroad Retirement program, the Board considers projections of employment levels, economic factors, and demographic factors such as mortality rates, widow remarriage rates, retirement rates, as well as current asset values provided by the Trust. The Department of the Treasury has cautioned that the assumptions used to prepare SOSI’s are inherently subject to substantial uncertainty, and that depending on future events, there will be differences between the SOSI estimates and actual results. OIG Action In 2006, the OIG informed the Board that it would not provide an unqualified opinion on its financial statements if the Board continued to accept unaudited December 31 asset values from the Trust. The Board then requested that the Trust pay for an audit of the December 31 asset values. Trust Position A Trust official stated that this is unnecessary because Trust assets are audited at the end of the Trust’s fiscal year—September 30. Further, the Trust noted that the variance between audited December 31 and unaudited December 31 values are invariably quite small—averaging about .12 percent and never exceeding ½ of 1 percent. According to a Trust official, the various assumptions made by the Board actuary in preparing the SOSI have much more impact on the projections than the difference between the audited and unaudited asset values. Impact According to the Trust, the additional audit is also wasteful—costing $152,000 in 2013 and a total of about $1.6 million since 2005. Finally, Board and Trust officials indicated that the OIG would not have sufficient expertise to conduct performance audits of the Trust. One official noted that the internal audit departments of two railroad firms were hired for the first audit that covered various administrative issues. However, Trust officials decided that these auditors would not have the expertise to conduct subsequent reviews, the scope of which required greater knowledge of investment management. Instead, the Trust opted to hire private consulting firms with recognized expertise in the relevant subject matter. For the same reason, a Trust official contended that OIG lacks the expertise to conduct these audits. Key stakeholders—including Board and Trust officials—generally supported this option. The Trust does not have a formal policy regarding the frequency or subject matter of its performance audits, or a policy regarding obtaining external advice on the subject and scope of such audits. However, one trustee stated that, while the Trust has every intention of continuing the practice of conducting periodic audits, they would be amenable to formalizing this process. An OIG official also generally supported this idea, but had previously stated that reviews every 3 years would not be sufficient, and that more ongoing oversight is needed. Board and Trust officials were also supportive of the Board serving in an advisory role with regard to such audits. Recently, the Trust and the Board have been developing a memorandum of understanding (MOU). According to a draft version of this MOU, starting in 2015, performance audits would be performed at least every 3 years based on mutual agreement between the Trust and the Board. The draft MOU also lists 12 areas that would be appropriate subjects of such audits, and provides that the Trust and the Board would meet to review the results and assess what changes to Trust practices or procedures are warranted. However, the draft MOU does not mention some audit subjects, such as fiduciary responsibility and conflicts of interest policies, and does not specify that key subjects should be addressed within specified timeframes for addressing particular areas subject to audit. Larger private sector DB plans have, according to experts we contacted, performance audit practices resembling those of the Trust. However, in response to participant complaints or other information, such plans are also potentially subject to EBSA investigations. As we have previously reported, EBSA does not conduct routine compliance audits, but rather investigators rely on various sources for case leads, such as staff reviews of plan annual reports or media reports, participant complaints, or referrals from other agencies. As noted previously, the Board can bring a civil action against the Trust for violations of law. Trust officials are subject to fiduciary standards similar to those under ERISA, and are prohibited from transactions in the trustees’ own interest, or receiving any benefit from any party dealing with Trust assets. However, the Trust’s authorizing statute does not provide for any mechanism other than a lawsuit with regard to a violation. Trust officials stated that establishing an external investigative authority might have limited benefits because railroad retirees and survivors do not interact with the Trust in the same way that retirees interact with a DB plan. A Trust representative noted that because the Trust’s sole duty is to manage the assets pertaining to Tier II benefits, it does not have responsibility for determining benefit levels, making benefit payments, or the other matters about which a pension plan may communicate with beneficiaries. According to Board representatives, workers taking issue with some aspect of Trust management or actions would likely contact the labor representative on the Board, and management officials would likely contact the Board’s management representative. An office of internal audit is common in state plans, but according to stakeholders, the Trust may be too small an organization to justify such a unit. The majority of the state plans were subject to audits conducted by an internal audit department. Internal auditors generally conducted audits on an ongoing basis, following a routine audit plan. Both Board and Trust officials stated that, given the small size of the Trust’s staff, an office of internal audit would not be suitable. One Trust representative noted that, if the Trust was comparable in size to a large public pension plan, establishing an internal office would make some sense. However, he noted that the Trust employs few staff, and investment management is entirely carried out by external firms. The official stated that such an entity would need considerable skill—including in-depth expertise in investment, accounting, and financial controls—and such a professional would likely command a much higher salary than the Trust would be willing to pay for someone who would have limited responsibility for most of the year. A trustee also expressed concern about the substantial cost of such a position given that there would not be much for them to do most of the time. A representative of the OIG stated that establishing an internal compliance officer or auditor is a reasonable idea, but expressed concern about the operational independence of such a position. This official was not familiar with the status of internal audit offices within public pension plans, but indicated that such an office would need to be independent of management and Trustees, just as the OIG is independent of the Board. With respect to the policy options we discussed with stakeholders, Trust and Board officials stated that they would prefer any changes be established through an interagency agreement such as an MOU as opposed to a statutory amendment. Representatives of the Trust and the Board strongly preferred to avoid a statutory change. Trust representatives explained that any statutory amendments would offer less flexibility and opportunity for modification than would an administrative agreement such as an MOU. Further, Trust and Board officials expressed concern that the process of a statutory change might bring unexpected and disruptive consequences. For example, once begun, industry or labor might use the legislative process to impose additional amendments, which could cause unnecessary strife. An OIG official noted advantages and drawbacks to both options, noting for example that while the statutory option could be more difficult to achieve, it would have the benefit of greater permanence, since the Trust could not legally opt to discontinue new oversight practices. The National Railroad Retirement Investment Trust manages a $25 billion pool of federal assets that are critical to providing retirement benefits for railroad workers and their families. To protect these assets—and the entity that manages them—from political influence, the Trust was established independent of the federal government and explicitly exempted from the title 31 of the U.S. Code, which governs the financial operations of the federal government and establishes the powers and duties of GAO. However, the Trust is not without oversight beyond mandatory financial audits. Through regular reports and other communications, the Trust’s financial condition is monitored by the Board and other agencies of the federal government. Further, the Trust has appropriately recognized the importance of oversight and transparency by taking the initiative to commission four performance audits since it was organized in 2002. These voluntarily initiated audits are comparable to and in some cases more comprehensive than those of the state pension plans we reviewed. Nonetheless, our review suggests that there are aspects of the approach to accountability for the Trust that could be strengthened. First, while 42 of the 50 state plans we surveyed and both federal agencies we reviewed are subject to performance audits that are initiated and conducted by external entities, the Trust is not. Instead, it has commissioned private firms to conduct audits whose subject and scope the Trust defines. However, a lack of independently initiated audits raises the risk that auditors could be directed away from potentially problematic issues. Second, 29 of the 50 state plans we contacted are subject to external audits on a specific calendar cycle, and those plans with an internal auditor are audited on an ongoing basis. Although the Trust has opted to commission performance audits every 2 to 3 years since its creation, it does not have a written policy requiring such audits, defining their scope, or establishing their frequency. Finally, while some states require that specific subjects be periodically reviewed, the Trust does not. For example, one state now requires plans to undergo ethics and conflict of interest reviews every 3 years—the most recent of which assessed whether fiduciaries act for the sole benefit of participants, and whether the highest ethical practices were being upheld. Any improvement in Trust’s performance audit oversight should help ensure that its investment decisions are insulated from political influence. Our review of state pension plans and selected federal programs suggests that while external audits are not necessarily a source of such influence, such influence may not be beyond the bounds of possibility. However, concerns about such “political risk” should be balanced against the management and financial risk that exists in situations where oversight is not clearly independent. The Trust’s recent initiative to document a performance audit policy and to involve the Board in determining the subject and scope of future audits adds a welcome external perspective that is likely to enhance the independence of future audits. However, Trust action—including any interagency agreements—would not necessarily be permanent, and under current law the parties could revoke such an agreement at any time. After more than a decade of Trust operation, it may be time to consider whether such an arrangement should be made permanent, while still ensuring that Trust assets are managed solely with the long term best interest of railroad retirees and their families in mind. We provided a draft of this report to the National Railroad Retirement Investment Trust, the Railroad Retirement Board, and the Railroad Retirement Board Office of Inspector General for review and comment. We received formal written comments from all three organizations, and each generally agreed with our findings and analysis. Among other comments, the Trust indicated that it would seek to address two issues GAO noted with regard to the draft memorandum of understanding between the Trust and the Board regarding performance audits between the Trust and the Board. The Board’s OIG summarized some of its long- standing concerns about oversight of the Trust, and raised other concerns. For example, the OIG stressed the importance of audits conducted by independent external entities, and expressed opposition to any arrangement that would allow the Trust and the Board to control performance audits. The OIG also disagreed with the concern expressed by the Board that its audits could lack independence or be a source of political influence. The Trust, Board, and OIG formal comments are reproduced in appendixes II, III, and IV, respectively. The Trust and Board also provided a number of technical comments, which we incorporated as appropriate. Because performance audit policies or the work of the Pension Benefit Guaranty Corporation, the PBGC Office of Inspector General, the Federal Retirement Thrift Investment Board, and the Department of Labor’s Employee Benefit Security Administration are reflected in our report, we also provided those agencies with a copy of the report for technical review and comment. None provided formal written comments, but the Federal Thrift Investment Board and the PBGC provided technical comments, which we have incorporated at appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to appropriate congressional committees, the agencies named above, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you have any questions about this report, please contact Charles Jeszeck at (202) 512-7215 or jeszeckc@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 found in appendix V. Our objectives were to answer the following questions: 1. What performance audit policies and practices exist for the oversight of the National Railroad Retirement Investment Trust (Trust)? 2. What performance audit policies apply to comparable organizations, such as large state public pension plans? 3. What options, if any, could be pursued to improve Trust performance audit policies and what tradeoffs do stakeholders believe such options entail? To answer our first question, we reviewed applicable federal laws, regulations, and Railroad Retirement Board (Board) policies and procedures regarding oversight of the Trust and the memorandum of understanding established between the Board, the Trust, the Office of Management and Budget (OMB), and the Department of the Treasury. Additionally, we interviewed representatives of the Board, the Trust, and the Railroad Retirement Board’s Office of Inspector General (OIG) to determine the nature and frequency of oversight and audit policies and practices regarding the Trust. We also obtained and reviewed relevant documents including each of the four Trust-commissioned performance audit reports, the Trust’s annual reports to Congress, and the Trust’s financial statement audit reports. Additionally, we reviewed relevant OIG reports and communications between the Board and OIG related to Trust audit and oversight. To answer our second question, we conducted in-depth illustrative case studies of audit policies and practices in seven states: California, Florida, Illinois, New York, Tennessee, Texas, and Pennsylvania. We purposefully selected case studies based on region, plan participation, and governance and oversight structure.interviewed representatives of the state’s Auditor General or equivalent and either representatives of the state’s largest public employee pension plan or state agency that, similar to the Trust, solely managed the investment of pooled pension assets. Further, we obtained and reviewed As part of each case study, we relevant state performance audit reports. Specifically, we reviewed relevant state audit reports issued since 2008. We generally obtained these reports from the website of the states’ Auditors General or equivalent. During interviews with state Auditors General or equivalent and state pension officials, we discussed these reports and asked for copies of other relevant audit reports issued since 2008. Where available, we also reviewed audit reports produced by state plans’ offices of internal audit. As internal audit reports are generally not publically available, we asked officials to provide us with copies of these reports particularly those that reviewed aspects of the plan related to investment strategy and management that would be most applicable to the functions of the Trust. To obtain higher-level data regarding the performance audit policies and practices of the remaining 43 states, we also conducted structured interviews with officials of each state’s largest defined benefit (DB) public employee pension plan or pension investment entity as available. To identify the state DB plans or pension investment entities, we used information obtained from Pension and Investment’s Research Center and the National Association of State Retirement Administrators (NASRA).questions and held pre-tests with officials in two states to obtain feedback on the clarity and relevance of our questions. While the majority of our questions could be answered with a yes or no response, we also included more open ended questions regarding the frequency of external and internal performance audits and to what extent plan officials found such audits useful. Based on our audit objectives, we developed standard To obtain information on comparable federal entities, we also interviewed officials from the Pension Benefit Guaranty Corporation’s (PBGC) single employer insurance program and the Federal Retirement Thrift Investment Board that administers the Thrift Savings Plan. While the functions of these organizations are not completely analogous to the functions of the Trust, like the Trust, both programs manage large asset pools for the benefit of retirees and their beneficiaries. Further, we also interviewed officials from two federal agencies that have audit authority of these programs—respectively, PBGC’s Office of Inspector General and the Department of Labor’s Employee Benefit and Security Administration—to determine the nature and frequency of their audit practices. Additionally, we obtained and reviewed relevant federal audit reports issued since 2008. Further, we interviewed representatives of NASRA, and the Association of Public Pension Fund Auditors to discuss audit practices of public plans. To obtain information on the audit practices of private sector DB plans, we reviewed relevant provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and interviewed private sector plan fiduciary experts, ERISA experts, and representatives of an external consulting firm that has been commissioned by private sector plans to conduct performance audits. To answer our third question, we developed four policy options regarding improved Trust oversight. These options were based substantially on the oversight models that apply to state pension plans or comparable federal agencies, as developed under objective 2. We then interviewed experts and stakeholders familiar with the Trust—including representatives of the Board, the Trust, the OIG, and other federal officials, as well as railroad labor and management—to discuss the potential benefits of establishing independent performance audits of the Trust. We discussed with them the benefits and drawbacks of four possible policy options: 1) permitting OIG audits, 2) requiring periodic audits with external input on scope, 3) establishing external investigative authority, and 4) establishing an office of internal audit. We also solicited input on the mechanisms—statutory or otherwise—by which the options could be implemented. We also obtained and reviewed existing principles and guidelines regarding the audit and oversight of DB pensions plans, especially those applicable to investment management activities. Examples of such principles include the guidelines published by the Organisation for Economic Cooperation and Development (OECD) and the National Conference on Public Employee Additionally, we reviewed Retirement Systems (NCPERS) among others.academic articles on pension plan governance and oversight and relevant auditing and internal control standards such as the American Institute of Certified Public Accountants Statements on Auditing Standards, Government Auditing Standards, International Standards for the Professional Practice of Internal Auditing (Standards), and Standards for Internal Control in the Federal Government. We conducted this audit from April 2013 to May 2014 in accordance with generally accepted government auditing standards. Those 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 a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, David Lehrer (Assistant Director), Michael Hartnett, and Justin Dunleavy made key contributions to this report. In addition, key support was provided by Susanna Clark, Mimi Nguyen, Kate van Gelder, Walter Vance, and Craig Winslow.

Summary: The Trust was established by federal statute effective in 2002 to manage a portion of the assets the Board uses to pay benefits to retired railroad workers, and managed about $25 billion in assets as of 2013. The Trust invests assets in stocks, bonds, and other investment vehicles in a manner similar to that of defined benefit plans. To insulate the Trust from political influence over its investment decisions, the Trust was established independent of the federal government. It is exempted from the federal law that governs the financial operations of the U.S. government and which establishes the duties and powers of the GAO. GAO assessed (1) the performance audit policies and practices that exist for oversight of the Trust; (2) the performance audit policies that apply to comparable organizations, such as large state public pension plans; and (3) what options, if any, could be pursued to improve Trust performance audit policies and what tradeoffs stakeholders believe such options entail. GAO reviewed applicable federal laws, Trust policies and procedures, and relevant reports such as state, federal, and Trust-commissioned performance audit reports. GAO also interviewed officials of the Board, state and federal pension plans, the state Auditors General, and private plan fiduciary experts. Oversight of the National Railroad Retirement Investment Trust (Trust) includes both regular reporting and communications with the Railroad Retirement Board (Board), and periodic performance audits that the Trust has opted to commission; however, no written requirement for such audits exists. The Trust's mandatory annual management report includes financial and descriptive information, including a discussion of the evolution, current status and performance of the Trust's investment portfolio and administrative costs, including investment manager fees. The Trust has also commissioned four external performance audits since its creation—the first in 2004 and the most recent in 2012. These reviews have encompassed a wide range of issues, including the accuracy of monthly reports, compliance with Trust investment manager hiring policies, processes to ensure accuracy of financial recordkeeping and internal controls, adequacy of due diligence procedures, and the role of non-traditional investments. Performance audit practices of comparable entities can differ from the Trust in scope and frequency. The large majority of state pension plans and two federal programs GAO reviewed that manage investment assets are subject to performance audits that can be initiated and conducted by an external entity, and some of these audits have addressed issues Trust-commissioned audits have not included. Forty-two of the 50 state plans GAO contacted are subject to performance audits that can be initiated and conducted by an external auditor, such as state Auditors General or equivalent, or by offices of internal audit. In some cases, the external auditor reviews the plan annually, while in others, plans are audited less frequently. Both federal programs—the Pension Benefit Guaranty Corporation's single-employer insurance program and the Thrift Savings Plan—are also subject to externally initiated and conducted performance audits. State and federal audits varied in subject and scope, and in some cases, examined issues that Trust-commissioned reviews have not yet included, such as ethics and conflict of interest policies. Experts told GAO that Trust performance audit practices are comparable to those of large private sector plans governed by the Employee Retirement Income Security Act of 1974. Based on our review of oversight models that apply to state plans and other information, GAO developed several options to enhance the Trust's performance audit practices, and stakeholders identified potential advantages and limitations pertaining to them. For example, the Board's Office of Inspector General (OIG) could be granted authority to conduct performance audits, which would help ensure these reviews are initiated and performed independent of the Trust. However, both Board and Trust officials had reservations about this option, stating that the OIG lacks sufficient expertise in aspects of the Trust investment program, and expressing concerns about what they perceive as an unconstructive working relationship. The Trust's practice of commissioning periodic performance audits could be established as a formal requirement, either through a memorandum of agreement between the key parties, or through a statutory amendment, with external input on subject and scope of the audits. Trust and Board officials stated that this would be a reasonable option, and in early 2014 developed an initial proposal to implement such an agreement. This report makes no recommendations.