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.