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You are an expert at summarizing long articles. Proceed to summarize the following text: DOD is one of the largest federal agencies with its budget representing over half of the entire federal government’s discretionary spending. For fiscal year 2010, Congress appropriated over $694 billion for DOD. This included $530 billion in regular appropriations for base needs and about $164 billion in regular and supplemental appropriations for contingency operations in Iraq, Afghanistan, and other locations. As of June 2010, DOD had received about $1 trillion since 2001 to support contingency operations. The department is currently facing near-term and long-term internal fiscal pressures as it attempts to balance competing demands to support ongoing operations, rebuild readiness following extended military operations, and manage increasing personnel and health care costs and significant cost growth in its weapons systems programs. For more than a decade, DOD has dominated GAO’s list of federal programs and operations at high-risk of being vulnerable to fraud, waste, abuse, and mismanagement. In fact, all the DOD programs on GAO’s High- Risk List relate to business operations, including systems and processes related to management of contracts, finances, the supply chain, and support infrastructure, as well as weapon systems acquisition. Long- standing and pervasive weaknesses in DOD’s financial management and related business processes and systems have (1) resulted in a lack of reliable information needed to make sound decisions and report on the financial status and cost of DOD activities to Congress and DOD decision makers; (2) adversely affected its operational efficiency in business areas, such as major weapons system acquisition and support and logistics; and (3) left the department vulnerable to fraud, waste, and abuse. Detailed examples of these effects are presented in appendix I. DOD is required by various statutes to improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the financial information needs of agency management and oversight bodies, and to produce audited financial statements. Collectively these statues required DOD to do the following Establish a leadership and governance framework and process, including a financial management improvement plan or strategy (over time the department’s strategy evolved into the FIAR Plan, which ultimately became a subordinate plan to the department’s Strategic Management Plan) for addressing its financial management weaknesses and report to Congress and others semi-annually on its progress. Concentrate the department’s efforts and resources on improving the department’s financial management information. Systematically tie actions to improve processes and controls with business system modernization efforts described in the business enterprise architecture and enterprise transition plan required by 10 U.S.C. § 2222. Limit the resources the department spend each year to develop, compile, report, and audit unreliable financial statements. Submit an annual report to defense committees, the Office of Management and Budget (OMB), the Department of the Treasury (Treasury), GAO, and the DOD Inspector General (DOD IG) concluding on whether DOD policies, procedures, and systems support financial statement reliability, and the expected reliability of each DOD financial statement. Certify to the DOD IG whether a component or DOD financial statement for a specific fiscal year is reliable. Following DOD’s assertion that a financial statement is reliable, DOD may expend resources to develop, compile, report, and audit the statement and the statements of subsequent fiscal years. Because of the complexity and magnitude of the challenges facing the department in improving its business operations, GAO has long advocated the need for a senior management official to provide strong and sustained leadership. Recognizing that executive-level attention and a clear strategy were needed to put DOD on a sustainable path toward successfully transforming its business operations, including financial management, the National Defense Authorization Act (NDAA) for fiscal year 2008 designated the Deputy Secretary of Defense as the department’s Chief Management Officer (CMO), created a Deputy CMO position, and designated the undersecretaries of each military department as CMOs for their respective departments. The act also required the Secretary of Defense, acting through the CMO, to develop a strategic management plan that among other things would provide a detailed description of performance goals and measures for improving and evaluating the overall efficiency and effectiveness of the department’s business operations and actions underway to improve operations. To further draw the department’s attention to the need to improve its strategy for addressing financial management weaknesses and achieve audit readiness the NDAA for Fiscal Year 2010 made the FIAR Plan a statutory mandate, requiring the FIAR Plan to include, among other things specific actions to be taken and costs associated with (a) correcting the financial management deficiencies that impair DOD’s ability to prepare timely, reliable, and complete financial management information; and (b) ensuring that DOD’s financial statements are validated as ready for audit by no later than September 30, 2017, and actions taken to correct and link financial management deficiencies with process and control improvements and business system modernization efforts described in the business enterprise architecture and enterprise transition plan required by 10 U.S.C. § 2222. Consistent with the priorities announced by the DOD Comptroller in August 2009, the act also focused the department’s improvement efforts on first ensuring the reliability of the department’s budgetary information and property accountability records for mission-critical assets. In addition, the act directed DOD to report to congressional defense committees no later than May 15 and November 15 each year on the status of its FIAR Plan implementation. Furthermore, the act required that the first FIAR Plan issued following enactment of this legislation (1) include a mechanism to conduct audits of the military intelligence programs and agencies and submit the audited financial statements to Congress in a classified manner and (2) identify actions taken or to be taken by the department to address the issues identified in our May 2009 report on DOD’s efforts to achieve financial statement auditability. Over the years, the department has initiated several broad-based reform efforts, including the 1998 Biennial Strategic Plan for the Improvement of Financial Management within the Department of Defense and the 2003 Financial Improvement Initiative, intended to fundamentally transform its financial management operations and achieve clean financial statement audit opinions. In 2005, DOD’s Comptroller established the DOD FIAR Directorate to develop, manage, and implement a strategic approach for addressing the department’s financial management weaknesses and achieving auditability and to integrate those efforts with other improvement activities, such as the department’s business system modernization efforts. The first FIAR Plan was issued in December 2005. DOD’s FIAR Plan defines DOD’s strategy and methodology for improving financial management and controls, and summarizes and reports the results of the department’s improvement activities and progress toward achieving financial statement auditability. Further, the FIAR Plan has focused on achieving three goals: (1) implement sustained improvements in business processes and controls to address internal control weaknesses, (2) develop and implement financial management systems that support effective financial management, and (3) achieve and sustain financial statement audit readiness. To date, the department’s improvement efforts have not resulted in the fundamental transformation of DOD’s financial management operations necessary to resolve the department’s long-standing financial management weaknesses; however, some progress has been made and the department’s strategy has continued to evolve. While none of the military services have obtained unqualified (clean) audit opinions on their financial statements, some DOD organizations, such as the Army Corps of Engineers, Defense Finance Accounting Service, the Defense Contract Audit Agency, and the DOD IG, have achieved this goal. Moreover, some DOD components that have not yet received clean audit opinions, such as the Defense Information Service Agency (DISA), are beginning to reap the benefits of strengthened controls and processes gained through ongoing efforts to improve their financial management operations and reporting capabilities. For example, according to DISA’s Comptroller, the agency was able to resolve over $270 million in Treasury mismatches through reconciliations of over $12 billion in disbursement and collection activities. In addition, DISA’s efforts to improve processes and controls over its accounts receivable and payable accounts have resulted in improvements in its ability to (1) substantiate the validity of DISA’s customer billings and collect funds due to DISA, and (2) identify areas where funds could be deobligated and put to better use. Moreover, DISA management has gained increased assurance over its reported cash availability balance, thereby improving mission-critical decision making. Since its inception, the FIAR Plan has followed an incremental approach to structure its process for examining operations, diagnosing problems, planning corrective actions, and preparing for audit. Moreover, the FIAR Plan has continued to evolve and mature as a strategic plan. Initially, DOD components independently established their own financial management improvement priorities and methodologies and were responsible for implementing the corrective actions they determined were needed to address weaknesses and achieve financial statement auditability. However, as we reported in May 2009, it was difficult to link corrective actions or accomplishments reported by the FIAR Plan to FIAR goals and measure progress. In addition, we reported that as the department’s strategic plan and management tool for guiding and reporting on incremental progress toward achieving these goals, the FIAR Plan could be improved in several areas. Specifically, we found the following: Clear guidance was needed in developing and implementing improvement efforts. A baseline of the department’s and/or key component’s current financial management weaknesses and capabilities was needed to effectively measure and report on incremental progress. Linkage between FIAR Plan goals and corrective actions and reported accomplishments was needed. Clear results-oriented metrics for measuring and reporting incremental progress were needed. Accountability should be clearly defined and resources budgeted and consumed should be identified. We made several recommendations in our May 2009 report to increase the FIAR Plan’s effectiveness as a strategic and management tool for guiding, monitoring, and reporting on financial management improvement efforts and increasing the likelihood of meeting the department’s goal of financial statement auditability, which were incorporated into the NDAA for fiscal year 2010. In its May 2010 FIAR Status Report and Guidance, the department identified steps taken to address our recommendations to strengthen its FIAR Plan strategy and chances of sustained financial management improvements and audit readiness. For example, DOD has established shared priorities and methodology, including guidance to develop component financial improvement plans, and an improved governance framework. In August 2009, DOD’s Comptroller directed that the department focus on improving processes and controls supporting information that is most often used to manage the department, while continuing to work toward achieving financial improvements aimed at achieving unqualified audit opinions on the department’s financial statements. As a result, in 2010 DOD revised its FIAR strategy, governance framework, and methodology to support these objectives and focus financial management improvement efforts primarily on achieving two interim departmentwide priorities— first, strengthening processes, controls, and systems that produce budgetary information and support the department’s Statements of Budgetary Resources; and second, improving the accuracy and reliability of management information pertaining to the department’s mission-critical assets, including military equipment, real property, and general equipment, and validating improvement through existence and completeness testing. In addition, the DOD Comptroller directed DOD components to use a standard financial improvement plan template to support and emphasize achievement of the two FIAR priorities. The department intends to progress toward achieving financial statement auditability in five waves (or phases) of concerted improvement activities within groups of end-to-end business processes. According to DOD’s May 2010, FIAR Plan Status Report, the lack of resources dedicated to financial improvement activities at DOD components has been a serious impediment to progress, except in the Navy and the Defense Logistics Agency (DLA). As a result, the components are at different levels of completing the waves. For example, the Air Force has already received a positive validation by the DOD IG on the Air Force Appropriations Received account (wave 1) and the Navy is currently undergoing a similar review of its account. Army and DLA, are expected to complete wave 1 and be ready for validation by the end of fiscal year 2010. However, DOD is only beginning wave 1 work at other defense agencies to ensure that transactions affecting their appropriations received accounts are properly recorded and reported. The first three waves focus on achieving the DOD Comptroller’s interim budgetary and asset accountability priorities, while the remaining two waves are intended to complete actions needed to achieve full financial statement auditability. However, the department has not yet fully defined its strategy for completing waves 4 and 5. The focus and scope of each wave include the following: Wave 1—Appropriations Received Audit focuses efforts on assessing and strengthening, as necessary, internal controls and business systems involved in appropriations receipt and distribution process, including funding appropriated by Congress for the current fiscal year and related apportionment/reapportionment activity by OMB, as well as allotment and sub-allotment activity within the department. Wave 2—Statement of Budgetary Resources (SBR) Audit focuses efforts on assessing and strengthening, as necessary, the internal controls, processes, and business systems supporting the budgetary-related data (e.g., status of funds received, obligated, and expended) used for management decision making and reporting, including the SBR. In addition to fund balance with Treasury reporting and reconciliation, significant end-to-end business processes in this wave include procure-to- pay, hire-to-retire, order-to-cash, and budget-to-report. Wave 3—Mission-Critical Assets Existence and Completeness Audit focuses efforts on assessing and strengthening, as necessary, internal controls and business systems involved in ensuring that all assets (including military equipment, general equipment, real property, inventory, and operating materials and supplies) are recorded in the department’s accountable property systems of record exist, all of the reporting entities’ assets are recorded in those systems of record, reporting entities have the right (ownership) to report these assets, and the assets are consistently categorized, summarized, and reported. Wave 4—Full Audit Except for Legacy Asset Valuation focuses efforts on assessing and strengthening, as necessary, internal controls, processes, and business systems involved in the proprietary side of budgetary transactions covered by the Statement of Budgetary Resources effort of wave 2, including accounts receivable, revenue, accounts payable, expenses, environmental liabilities, and other liabilities. This wave also includes efforts to support valuation and reporting of new asset acquisitions. Wave 5—Full Financial Statement Audit focuses efforts on assessing and strengthening, as necessary, processes, internal controls, and business systems involved in supporting the valuations reported for legacy assets once efforts to ensure control over the valuation of new assets acquired and the existence and completeness of all mission assets are deemed effective on a go-forward basis. Given the lack of documentation to support the values of the department’s legacy assets, federal accounting standards allow for the use of alternative methods to provide reasonable estimates for the cost of these assets. According to DOD, critical to the success of each wave and the department’s efforts to ultimately achieve full financial statement auditability will be departmentwide implementation of the FIAR methodology as outlined in DOD’s FIAR Guidance document. Issued in May 2010, the FIAR Guidance document, which DOD intends to update annually, defines in a single document the department’s FIAR goals, strategy, and methodology (formerly referred to as business rules) for becoming audit ready. The FIAR methodology prescribes the process components should follow in executing efforts to assess processes, controls, and systems; identify and correct weaknesses; assess, validate, and sustain corrective actions; and achieve full auditability. Key changes introduced in 2010 to the FIAR methodology include an emphasis on internal controls and supporting documentation. Utilization of standard financial improvement plans and methodology should also aid both DOD and its components in assessing current financial management capabilities in order to establish baselines against which to measure, sustain, and report progress. More specifically, the standard financial improvement plan and FIAR Guidance outline key control objectives and capabilities that components must successfully achieve to complete each wave (or phase) of the FIAR strategy for achieving audit readiness. For example, to successfully complete wave 2 (SBR audit) one of the capabilities that each component must be able to demonstrate is that it is capable of performing Fund Balance with Treasury reconciliations at the transaction level. Based on what we’ve seen of the revised FIAR Plan strategy and methodology to date, we believe the current strategy reflects a reasonable approach. We are hopeful that a consistent focus provided through the shared priorities of the FIAR strategy will increase the department’s ability to show incremental progress toward achieving auditability in the near term, if the strategy is implemented properly. In the long term, while improved budgetary and asset accountability information is an important step in demonstrating incremental progress, it will not be sufficient to achieve full financial statement auditability. Additional work will be required to ensure that transactions are recorded and reported in accordance with generally accepted accounting principles. At this time, it is not possible to predict when DOD’s efforts to achieve audit readiness will be successful. The department continues to face significant challenges in providing and sustaining the leadership and oversight needed to ensure that improvement efforts, including ERP implementation efforts, result in the sustained improvements in process, control, and system capabilities necessary to transform financial management operations. We will continue to monitor DOD’s progress in addressing its financial management weaknesses and transforming its business operations. As part of this effort, we plan to assess implementation of DOD’s FIAR strategy and guidance, as part of our review of the military departments’ financial improvement plans. GAO supports DOD’s current approach of prioritizing efforts, focusing first on information management views as most important in supporting its operations, to demonstrate incremental progress to addressing weaknesses and achieving audit readiness. There are advantages to this approach, including building commitment and support throughout the department and the potential to obtain preliminary assessments on the effectiveness of current processes and controls and identify potential issues that may adversely affect subsequent waves. For example, testing expenditures in wave 2 will also touch on property accountability issues, as DOD makes significant expenditures for property. Identifying and resolving potential issues related to expenditures for property in wave 2 will assist the department as it enters subsequent waves dealing with its ability to reliably and completely identify, aggregate, and account for the cost of the assets it acquires through various acquisition and construction programs. We also support efforts to first address weaknesses in the department’s ability to timely, reliably, and completely record the cost of assets as they are acquired over efforts to value legacy assets. Prior efforts to achieve auditability of DOD’s mission assets failed, in large part, because these efforts were focused primarily on deriving values for financial statement reporting and not on assessing and addressing the underlying weaknesses that impaired the department’s ability to reliably identify, aggregate, and account for current transactions affecting these assets. GAO is willing to work with the department to revisit the question of how DOD reports assets in its financial statements to address unique aspects of military assets not currently reflected in traditional financial reporting models. Developing sound plans and a methodology and getting leaders and organizations in place is only a start. Consistent with our previous reports regarding the department’s CMO positions, including the CMO, Deputy CMO and military department CMOs, and our May 2009 recommendations to improve DOD’s FIAR Plan as a strategic and management tool for addressing financial management weaknesses and achieving and sustaining audit readiness, DOD needs to define specific roles and responsibilities—including when and how the CMO and military department CMOs and other leaders are expected to become involved in problem resolution or efforts to ensure cross-functional area commitment and support to financial management improvement efforts; effectively execute its plans; gauge actual progress against goals; strengthen accountability; and make adjustments as needed. In response to our report, DOD expanded its FIAR governance framework to include the CMOs. While expansion of the FIAR governance framework to include the CMOs is also encouraging, the specific roles and responsibilities of these important leaders have not yet been fully defined. As acknowledged by DOD officials, sustained and active involvement of the CMOs and other senior leaders is critical in enabling a process by which DOD can more timely identify and address cross-functional issues and ensure that other business functions, such as acquisition and logistics, fully acknowledge and are held accountable for their roles and responsibilities in achieving the department’s financial management improvement goals and audit readiness. Sustained and active leadership and effective oversight and monitoring at both the department and component levels are critical to ensuring accountability for progress and targeting resources in a manner that results in sustained improvements in the reliability of data for use in supporting and reporting on operations. As part of GAO’s prior work pertaining to DOD’s key ERP implementation efforts and the FIAR Plan, we have seen a lack of focus on developing and using interim performance metrics to measure progress and the impact of actions taken. For example, our review of DOD’s ERP implementation efforts, which we plan to report on in October 2010, found that DOD has not yet defined success for ERP implementation in the context of business operations and in a way that is measurable. In May 2009 we reported that the FIAR Plan does not use clear results-oriented metrics to measure and report corrective actions and accomplishments in a manner that clearly demonstrates how they contribute individually or collectively to addressing a defined weakness, providing a specific capability, or achieving a FIAR goal. To its credit, DOD has taken action to begin defining results-oriented FIAR metrics it intends to use to provide visibility of component-level progress in assessment and testing and remediation activities, including progress in identifying and addressing supporting documentation issues. We have not yet had an opportunity to assess implementation of these metrics or their usefulness in monitoring and redirecting actions. In the past, DOD has had many initiatives and plans that failed due to a lack of sustained leadership focus and effective oversight and monitoring. Without sustained leadership focus and effective oversight and monitoring, DOD’s current efforts to achieve audit readiness by a defined date are at risk of following the path of the department’s prior efforts and fall short of obtaining sustained substantial improvements in DOD’s financial management operations and capabilities or achieving validation through independent audits. DOD officials have said that successful implementation of ERPs is key to resolving the long-standing weaknesses in the department’s business operations in areas such as business transformation, financial management, and supply chain management, and improving the department’s capability to provide DOD management and Congress with accurate and reliable information on the results of DOD’s operations. For example in 2010, we reported that the Army Budget Office lacked an adequate funds control process to provide it with ongoing assurance that obligations and expenditures do not exceed funds available in the Military Personnel, Army (MPA) appropriation. These weaknesses resulted in a shortfall of $200 million in 2008. Army Budget Office personnel explained that they rely on estimated obligations, rather than actual data from program managers, to record the initial obligation or adjust the estimated obligation due to inadequate financial management systems. DOD has identified 10 ERPs, 1 of which has been fully implemented, as essential to its efforts to transform its business operations. Appendix II contains a description of each of the remaining 9 ERPs currently being implemented within the department. According to DOD, as of December 2009, it had invested approximately $5.8 billion to develop and implement these ERPs and will invest additional billions before the remaining 9 ERPs are fully implemented. The department has noted that the successful implementation of these 10 ERPs will replace over 500 legacy systems that reportedly cost hundreds of millions of dollars to operate annually. However, our prior reviews of several ERPs have found that the department has not effectively employed acquisition management controls or delivered the promised capabilities on time and within budget. More specifically, significant leadership and oversight challenges, as illustrated by the Logistics Modernization Program (LMP) example discussed appendix I, have hindered the department’s efforts to implement these systems on schedule, within cost, and with the intended capabilities. Based upon the information provided by the program management offices (PMOs), six of the ERPs have experienced schedule slippages, as shown in table 1, based on comparing the estimated date that each program was originally scheduled to achieve full deployment to the full deployment date as of December 2009. For the remaining three ERPs, the full deployment date has either remained unchanged or has not been established. The GFEBS PMO noted that the acquisition program baseline approved in November 2008, established a full deployment date in fiscal year 2011 and that date remains unchanged. Additionally, according to the GCSS-Army PMO a full deployment date has not been established for this effort. The PMO noted that a full deployment date will not be established for the program until a full deployment decision has been approved by the department. A specific timeframe has not been established for when the decision will be made. Further, in the case of DAI, the original full deployment date was scheduled for fiscal year 2012, but the PMO is in the process of reevaluating the date and a new date has not yet been established. Prior work by GAO and the U.S. Army Test and Evaluation Command found that delays in implementing the ERPs have occurred, in part, due to inadequate requirements management and system testing, and data quality issues. These delays have contributed not only to increased implementation costs in at least five of the nine ERPS, as shown in table 2, they have also resulted in DOD having to fund the operation and maintenance of the legacy systems longer than anticipated, thereby reducing funds that could be used for other DOD priorities. Effective and sustained leadership and oversight of the department’s ERP implementations is needed to ensure that these important initiatives are implemented on schedule, within budget, and result in the integrated capabilities needed to transform the department’s financial management and related business operations. In closing, I am encouraged by continuing congressional oversight of DOD’s financial management improvement efforts and the commitment DOD’s leaders have expressed to improving the department’s financial management and achieving financial statement audit readiness. For instance, we have seen positive short-term progress on the part of DOD in moving forward. In its May 2010 FIAR status report, DOD reported actions it had taken in response to the 2010 NDAA and our prior recommendations to enhance effectiveness of the FIAR Plan as a strategic plan and management tool for guiding, monitoring, and reporting on the department’s efforts to resolve its financial management weaknesses and achieve audit readiness. The department has expanded the FIAR governance body to include the Chief Management Officer, issued guidance to aid DOD components in their efforts to address their financial management weaknesses and achieve audit readiness, and standardized component financial improvement plans to facilitate oversight and monitoring, as well as sharing lessons learned. In addition, DOD has revised its FIAR strategy to focus its financial management improvement efforts on departmentwide priorities, first on budgetary information and preparing the department’s Statements of Budgetary Resources for audit and second on accountability over the department’s mission-critical assets as a way of improving information used by DOD leaders to manage operations and to more effectively demonstrate incremental progress toward achieving audit readiness. Whether promising signs, such as shared priorities and approaches, develop into sustained progress will ultimately depend on DOD leadership and oversight to help achieve successful implementation. The expanded FIAR governance framework, including the CMOs, is a start; but their specific roles and responsibilities toward the department’s financial management improvement efforts still need to be defined. Importantly, sustained and effective leadership, oversight, and accountability at the department and component levels will be needed in order to help ensure that DOD’s current efforts to achieve auditability by a defined date don’t follow the path of the department’s prior efforts and fall short of obtaining sustained substantial improvement. The revised FIAR strategy is still in the early stages of implementation, and DOD has a long way and many long-standing challenges to overcome, particularly in regard to active and sustained leadership and oversight, before its military components and the department are fully auditable, and financial management is no longer considered high risk. However, the department is heading in the right direction. Some of the most difficult challenges ahead lie in effectively implementing the department’s strategy, including successful implementation of ERP systems and integration of financial management improvement efforts with other DOD initiatives. We will be issuing a report on DOD’s business system modernization efforts in October 2010 that discusses in greater detail the cost, schedule, and other issues that have hindered the success of important efforts. GAO will continue to monitor progress of the department’s financial management improvement efforts and provide feedback on the status of DOD’s financial management improvement efforts. We currently have work in progress to assess implementation of the department’s FIAR strategy through ongoing or recently initiated engagements related to (1) the U.S. Marine Corps’ (USMC) efforts to achieve an audit opinion on its Statement of Budgetary Resources, which regardless of its success should provide lessons learned that can be shared with other components, (2) the military departments’ implementation of the FIAR strategy and guidance, and (3) the department’s efforts to develop and implement ERPs. In addition, we will continue our oversight and monitoring of DOD’s financial statement audits, including the Army Corps of Engineers and DOD consolidated financial statements. Mr. Chairman and Ranking Member McCain, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. For further information regarding this testimony, please contact Asif A. Khan, (202) 512-9095 or [email protected]. Key contributors to this testimony include J. Christopher Martin, Senior-Level Technologist; Evelyn Logue, Assistant Director; Darby Smith, Assistant Director; Paul Foderaro, Assistant Director; Gayle Fischer, Assistant Director; F. Abe Dymond, Assistant General Counsel; Beatrice Alff; Maxine Hattery; Jason Kirwan; Crystal Lazcano; and Omar Torres. Despite years of improvement efforts since 2002, DOD has annually reported to Congress that the department is unable to provide reasonable assurance that the information reported in its financial statements is reliable due to long-standing weaknesses in its financial management and related business processes, controls, and systems. Importantly, these weaknesses not only affect the reliability of the department’s financial reports, as illustrated in the following examples, they also adversely affect the department’s ability to assess resource requirements; control costs; ensure basic accountability; anticipate future costs and claims on the budget; measure performance; maintain funds control; prevent fraud waste, abuse, and mismanagement; and address pressing management issues, as the following examples illustrate, The Army Budget Office lacks an adequate funds control process to provide it with ongoing assurance that obligations and expenditures do not exceed funds available in the Military Personnel, Army (MPA) appropriation. In June 2010, we reviewed Army obligation and expenditure reports pertaining to Army’s fiscal year 2008 MPA appropriation and confirmed that the Army had violated the Antideficiency Act, as evidenced by the Army’s need to transfer $200 million from the Army working capital fund to cover the shortfall. This shortfall stemmed, in part, from a lack of reliable financial information on enlistment and reenlistment contracts, which provide specified bonuses to service members. Army Budget personnel explained that they rely on estimated obligations, rather than actual data from program managers, to record the initial obligation or adjust the estimated obligation due to inadequate financial management systems. Without adequate processes, controls, and systems to establish and maintain effective funds control, the Army’s ability to prevent, identify, and report potential Antideficiency Act violations is impaired. While DOD has invested over a trillion of dollars to acquire weapon systems, also referred to as military equipment, the department continues to lack the processes and system capabilities to reliably identify, aggregate and report the full cost of its investment in these assets. We reported this as an issue to the Air Force over 20 years ago. In July 2010, we reported that although DOD and the military departments have efforts underway to begin addressing these financial management weaknesses, DOD officials acknowledged that additional actions were needed that will require the support of other business areas beyond the financial community, before they will be fully addressed. Without timely, reliable, and useful financial information on the full cost associated with acquiring assets, both DOD management and Congress lack key information needed for use in effective decision making, such as determining how to allocate resources to programs or evaluating program performance to help strengthen oversight and accountability. The department’s ability to identify, aggregate, and use financial management information to develop plans for managing and controlling operating and support costs for major weapons systems is limited. DOD spends billions of dollars each year to sustain its weapon systems. These operating and support (O&S) costs can account for a significant portion of a weapon’s system’s total life-cycle costs and include costs for, among other things, repair parts, maintenance, and contract services. However, in July 2010 we reported that the department lacked key information needed to effectively manage and reduce O&S costs for most of the weapon systems we reviewed—including life-cycle O&S cost estimates and consistent and complete historical data on actual O&S costs. Specifically, we found that the military departments lacked (1) life-cycle O&S cost estimates developed at the production milestone for five of the seven aviation systems we reviewed and (2) complete data on actual O&S costs. Without historical life-cycle O&S cost estimates and complete data on actual O&S costs, DOD officials lack important data for analyzing the rate of O&S cost growth for major weapon systems, identifying cost drivers, and developing plans for managing and controlling these costs. The department and military services continue to have difficultly effectively deploying business systems, on time, within budget, and with the functionality intended to significantly transform business operations. For example, in April 2010, we reported that the management processes the Army established prior to the second deployment of its Logistics Modernization Program (LMP) were not effective in managing and overseeing the second deployment of this system. Specifically, we found that due to data quality issues, the Army was unable to ensure that the data used by LMP were of sufficient quality to enable the Corpus Christi and Letterkenny Army depots to perform their day-to-day missions after LMP became operational at these locations. For example, LMP could not automatically identify the materials needed to support repairs and ensure that parts would be available in time to carry out the repairs. Labor rates were also missing for some stages of repair, thereby precluding LMP from computing labor costs for the repair projects. As a result of these data issues, manual work-around processes had to be developed and used in order for the depots to accomplish their repair missions. Furthermore, the performance measures the Army used to assess implementation failed to detect that manual work-arounds rather than LMP were used to support repair missions immediately following LMP’s implementation at the depots. Without adequate performance measures to evaluate how well these systems are accomplishing their desired goals, DOD decision makers including program managers do not have all the information they need to evaluate their systems investments to determine the extent to which individual programs are helping DOD achieve business transformation, including financial management, and whether additional remediation is needed. In addition to the DOD IG reports on internal controls and compliance with laws and regulations included in DOD and military department annual financial reports, the DOD IG has other reports highlighting a variety of internal controls weaknessesin the department’s financial management that affect DOD operations as the following illustrate. In January 2010, the DOD IG evaluated the internal controls over the USMC transactions processed through the Deployable Disbursing System (DDS) and determined that USMC did not maintain adequate internal controls to ensure the reliability of the data processed. Specifically, the DOD IG found that USMC disbursing personnel had not complied with the statute when authorizing vouchers for payment or segregated certifying duties from disbursing when making payments. Further, the DOD IG found that USMC personnel had circumvented internal controls restricting access to DDS information. As a result, the DOD IG concluded that USMC was at risk of incurring unauthorized, duplicate, and improper payments. In June 2009, the DOD IG reported that the Army did not have adequate internal controls over accountability for approximately $169.6 million of government-furnished property at two Army locations reviewed. Specifically, the DOD IG found that Army personnel had not ensured the proper recording of transfers of property accountability to contractors, physical inventories and reconciliation, or the identification of government property at these locations. As a result, the DOD IG concluded that the Army’s property accountability databases at these two locations were misstated and these two Army locations were at risk of unauthorized use, destruction or loss of government property. The department stated that implementation of the following nine ERPs are critical to transforming the department’s business operations and addressing some of its long-standing weaknesses. A brief description of each ERP is presented below. The General Fund Enterprise Business System (GFEBS) is intended to support the Army’s standardized financial management and accounting practices for the Army’s general fund, with the exception of that related to the Army Corps of Engineers which will continue to use its existing financial system, the Corps of Engineers Financial Management System. GFEBS will allow the Army to share financial, asset and accounting data across the active Army, the Army National Guard, and the Army Reserve. The Army estimates that when fully implemented, GFEBS will be used to control and account for about $140 billion in spending. The Global Combat Support System-Army (GCSS-Army) is expected to integrate multiple logistics functions by replacing numerous legacy systems and interfaces. The system will provide tactical units with a common authoritative source for financial and related non-financial data, such as information related to maintenance and transportation of equipment. The system is also intended to provide asset visibility for accountable items. GCSS-Army will manage over $49 billion in annual spending by the active Army, National Guard, and the Army Reserve. The Logistics Modernization Program (LMP) is intended to provide order fulfillment, demand and supply planning, procurement, asset management, material maintenance, and financial management capabilities for the Army’s working capital fund. The Army has estimated that LMP will be populated with 6 million Army-managed inventory items valued at about $40 billion when it is fully implemented. The Navy Enterprise Resource Planning System (Navy ERP) is intended to standardize the acquisition, financial, program management, maintenance, plant and wholesale supply, and workforce management capabilities at six Navy commands. Once it is fully deployed, the Navy estimates that the system will control and account for approximately $71 billion (50 percent), of the Navy’s estimated appropriated funds—after excluding the appropriated funds for the Marine Corps and military personnel and pay. The Global Combat Support System–Marine Corps (GCSS-MC) is intended to provide the deployed warfighter enhanced capabilities in the areas of warehousing, distribution, logistical planning, depot maintenance, and improved asset visibility. According to the PMO, once the system is fully implemented, it will control and account for approximately $1.2 billion of inventory. The Defense Enterprise Accounting and Management System (DEAMS) is intended to provide the Air Force the entire spectrum of financial management capabilities, including collections, commitments and obligations, cost accounting, general ledger, funds control, receipts and acceptance, accounts payable and disbursement, billing, and financial reporting for the general fund. According to Air Force officials, when DEAMS is fully operational, it is expected to maintain control and accountability for about $160 billion. The Expeditionary Combat Support System (ECSS) is intended to provide the Air Force a single, integrated logistics system—including transportation, supply, maintenance and repair, engineering and acquisition—for both the Air Force’s general and working capital funds. Additionally, ECSS is intended to provide the financial management and accounting functions for the Air Force’s working capital fund operations. When fully implemented, ECSS is expected to control and account for about $36 billion of inventory. The Service Specific Integrated Personnel and Pay Systems are intended to provide the military departments an integrated personnel and pay system. Defense Agencies Initiative (DAI) is intended to modernize the defense agencies’ financial management processes by streamlining financial management capabilities and transforming the budget, finance, and accounting operations. When DAI is fully implemented, it is expected to have the capability to control and account for all appropriated, working capital and revolving funds at the defense agencies implementing the system. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. 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As one of the largest and most complex organizations in the world, the Department of Defense (DOD) faces many challenges in resolving its pervasive and long-standing financial management and related business operations and systems problems. DOD is required by various statutes to (1) improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the financial information needs of agency management and oversight bodies, and (2) produce audited financial statements. DOD has initiated numerous efforts over the years to improve the department's financial management operations and ultimately achieve unqualified (clean) opinions on the reliability of reported financial information. The Subcommittee has asked GAO to provide its perspective on DOD's current efforts to address its financial management weaknesses and achieve auditability, including the status of its Enterprise Resource Planning (ERP) system implementations. GAO's testimony is based on its prior work related to DOD's financial improvement and audit readiness strategy and related activities, including its ERP implementation efforts. DOD has initiated numerous efforts over the years to address its financial management weaknesses and achieve audit readiness. In 2005, DOD issued its Financial Improvement and Audit Readiness (FIAR) Plan to define the department's strategy and methodology for improving financial management operations and controls, and reporting its progress. In 2009, DOD Comptroller directed that the department's FIAR efforts be focused on improving processes and controls supporting information most often used to manage operations, while continuing to work toward achieving financial statement auditability. To support these objectives, DOD established two priority focus areas: budget information and information pertaining to mission-critical assets. In 2010, DOD revised its FIAR strategy, governance framework, and methodology to support the DOD Comptroller's direction and priorities and to comply with fiscal year 2010 defense authorizing legislation, which incorporated GAO recommendations intended to improve the FIAR Plan as a strategic plan. Based on what GAO has seen to date, DOD's revised FIAR Plan strategy and methodology reflects a reasonable approach. Moreover, GAO supports prioritizing focus areas for improvement and is hopeful that a consistent focus provided through shared FIAR priorities will increase incremental progress toward improved financial management operations. However, developing sound plans and methodology, and getting leaders and organizations in place is only a start. DOD needs to define specific roles and responsibilities for the Chief Management Officers (CMO)--including when and how the CMOs are expected to become involved in problem resolution and in ensuring cross-functional area commitment to financial improvement activities. A key element of the FIAR strategy is successful implementation of the ERPs. According to DOD, as of December 2009, it had invested approximately $5.8 billion to develop and implement these ERPs and will invest additional billions before these efforts are complete. However, as GAO has previously reported inadequate requirements management, systems testing, ineffective oversight over business system investments, and other challenges have hindered the department's efforts to implement these systems on schedule and within cost. Whether DOD's FIAR strategy will ultimately lead to improved financial management capabilities and audit readiness depends on DOD leadership and oversight to help achieve successful implementation. Sustained effort and commitment at the department and component levels will be needed to address weaknesses and produce financial management information that is timely, reliable, and useful for managers throughout DOD. GAO will continue to monitor DOD's progress and provide feedback on the status of DOD's financial management improvement efforts.

You are an expert at summarizing long articles. Proceed to summarize the following text: TRICARE beneficiaries used the program’s pharmacy benefit to fill almost 134 million outpatient prescriptions in fiscal year 2012. Through its acquisition process, DOD contracts with a pharmacy benefit manager— currently Express Scripts—to provide access to a retail pharmacy network and operate a mail order pharmacy for beneficiaries, and to provide administrative services. Under TRICARE, beneficiaries have three primary health plan options in which they may participate: (1) a managed care option called TRICARE Prime, (2) a preferred-provider option called TRICARE Extra, and (3) a fee-for-service option called TRICARE Standard. TRICARE beneficiaries may obtain medical care through a direct-care system of military treatment facilities or a purchased-care system consisting of network and non-network private sector primary and specialty care providers, and hospitals. In addition, TRICARE’s pharmacy benefit— offered under all TRICARE health plan options—provides beneficiaries with three options for obtaining prescription drugs: from military treatment facility pharmacies, from network and non-network retail pharmacies, and through the TRICARE mail-order pharmacy. TRICARE’s pharmacy benefit has a three-tier copayment structure based on whether a drug is included in DOD’s formulary and the type of pharmacy where the prescription is filled. (See table 1.) DOD’s formulary includes a list of drugs that all military treatment facilities must provide, and a list of drugs that military treatment facilities may elect to provide on the basis of the types of services offered at that facility (e.g., cancer drugs at facilities that provide cancer treatment).as “non-formulary” on the basis of its evaluation of their cost and clinical effectiveness. Non-formulary drugs are available to beneficiaries at a higher cost, unless the provider can establish medical necessity. See Pub. L. No. 110-181, § 703, 122 Stat. 3, 188 (codified at 10 U.S.C. § 1074g(f)). This act provides that with respect to any prescriptions filled on or after January 28, 2008, the TRICARE retail pharmacy program is to be treated as an element of DOD for purposes of procurement of drugs by federal agencies under 38 U.S.C. § 8126 to ensure that drugs paid for by DOD that are dispensed to TRICARE beneficiaries at retail pharmacies are subject to federal pricing arrangements. manufacturers are required to refund to DOD the difference between the federal pricing arrangements and the retail price paid for prescriptions filled dating back to the NDAA’s enactment on January 28, 2008. As of July 31, 2013, according to DOD, its total estimated savings from fiscal year 2009 through fiscal year 2013 were about $6.53 billion as a result of these refunds. DOD’s TRICARE Management Activity is responsible for overseeing the TRICARE program, including the pharmacy benefit. Within this office, the Pharmaceutical Operations Directorate (hereafter referred to as the program office) is responsible for managing the pharmacy benefit (including the contract to provide pharmacy services), and the Acquisition Management and Support Directorate (hereafter referred to as the contracting office) is responsible for managing all acquisitions for the TRICARE Management Activity. The two offices together manage the acquisition process for the pharmacy services contract. (See fig. 2.) The program office and the contracting office provide the clinical expertise and acquisition knowledge, respectively, for the acquisition planning, evaluation of proposals, and award of the pharmacy services contract. The acquisition process for DOD’s pharmacy services contract includes three main phases: (1) acquisition planning, (2) RFP, and (3) award. Acquisition planning. In the acquisition planning phase, the program office, led by the program manager, is primarily responsible for defining TRICARE’s contract requirements—the work to be performed by the contractor—and developing a plan to meet those requirements. The program office also receives guidance and assistance from the contracting office in the development and preparation of key acquisition documents and in the market research process. The market research process can involve the development and use of several information-gathering tools, including requests for information (RFI), which are publicly released documents that allow the government to obtain feedback from industry on various acquisition elements such as the terms and conditions of the contract. RFIs are also a means by which the government can identify potential offerors and determine whether the industry can meet its needs. In addition, we have previously reported that sound acquisition planning includes an assessment of lessons learned to identify improvements. Towards the end of this phase, officials in the program and contracting offices work together to revise and refine key acquisition planning documents. RFP. In the RFP phase, the contracting officer—the official in the contracting office who has the authority to enter into, administer, modify, and terminate contracts—issues the RFP, the proposals. Award. In the award phase, the program and contracting offices are responsible for evaluating proposals and awarding a contract to the offeror representing the best value to the government based on a combination of technical and cost factors. To monitor the contractor’s performance under the contract after award, the contracting officer officially designates a program office official as the contracting officer’s representative (COR), who acts as the liaison between the contracting officer and the contractor and is responsible for the day-to-day monitoring of contractor activities to ensure that the services are delivered in accordance with the contract’s performance standards. The draft monitoring plan for the upcoming pharmacy services contract includes 30 standards—related to timeliness of claims processing, retail network access, and beneficiary satisfaction, among other things—against which the contractor’s performance will be measured. RFPs include a description of the contract requirements, the anticipated terms and conditions that will be contained in the contract, the required information that the prospective offerors must include in their proposal, and the factors that will be used to evaluate proposals. DOD has department-wide acquisition training and experience requirements for all officials who award and administer DOD contracts, including the pharmacy services contract, as required by law. Training is primarily provided through the Defense Acquisition University, and is designed to provide a foundation of acquisition knowledge, but is not targeted to specific contracts or contract types. In addition, all CORs must meet training and experience requirements specified in DOD’s Standard for Certification of Contracting Officer’s Representatives (COR) for Service Acquisitions issued in March 2010. See appendix I for more information on the certification standards for and experience of officials who award and administer the pharmacy services contract. In September 2010, DOD issued guidance to help improve defense acquisition through its Better Buying Power Initiative. DOD’s Better Buying Power Initiative encompasses a set of acquisition principles designed to achieve greater efficiencies through affordability, cost control, elimination of unproductive processes and bureaucracy, and promotion of competition; it provides guidance to acquisition officials on how to implement these principles. The principles are also designed to provide incentives to DOD contractors for productivity and innovation in industry and government. DOD used market research to align the requirements for the upcoming pharmacy services contract with industry best practices and promote competition. DOD also identified changes to the requirements for the upcoming and current contracts in response to changes in legislation, efforts to improve service delivery, and contractor performance. DOD solicited information from industry during its acquisition planning for the upcoming pharmacy services contract through the required market research process, including issuing RFIs and a draft RFP for industry comment, to identify changes to requirements for its pharmacy services contract. Specifically, DOD used market research to align the requirements for the upcoming contract with industry best practices and promote competition. Align contract requirements with industry best practices. DOD issued five RFIs from 2010 through 2012 related to the upcoming contract. RFIs are one of several market research Although DOD is not methods available to federal agencies. required to use them, RFIs are considered a best practice for service acquisitions in the federal government.provided DOD with the opportunity to assess the capability of potential offerors to provide services that DOD may incorporate in the upcoming pharmacy services contract. In many of the RFIs, The RFIs DOD asked questions about specific market trends so that it could determine if changes were needed to the upcoming contract requirements to help align them with industry best practices. For example, DOD issued one RFI in November 2010 that asked about establishing a mechanism that would allow for centralized distribution of specialty pharmaceuticals and preserve DOD’s federal pricing arrangements. Specialty pharmaceuticals—high- cost injectable, infused, oral, or inhaled drugs that are generally more complex to distribute, administer, and monitor than traditional drugs—are becoming a growing cost driver for pharmacy services. According to DOD officials, the RFI responses received from industry generally reinforced their view that the RFP should define any specialty pharmacy owned or sub-contracted by the contractor as a DOD specialty mail-order outlet, which would subject it to the same federal pricing arrangements as the mail- order pharmacy. Promote competition. DOD has also used the RFI process to obtain information on promoting competition. DOD recognized that a limited number of potential offerors may have the capability to handle the pharmacy services contract given the recent consolidation in the pharmacy benefit management market and the large size of the TRICARE beneficiary population. DOD contracting officials told us that, in part because of the department’s Better Buying Power Initiative to improve acquisition practices, they have a strong focus on maintaining a competitive contracting environment for the pharmacy services contract, thereby increasing the use of market research early in the acquisition planning process. For example, DOD’s December 2011 RFI asked for industry perspectives on the length of the contract period. DOD was interested in learning whether a longer contract period would promote competition. DOD officials told us that the responses they received confirmed that potential offerors would prefer a longer contract period because it would allow a non-incumbent more time to recover any capital investment made as part of implementing the contract. The RFP for the upcoming contract includes a contract period of 1 base year and 7 option years. DOD also used the RFI process to confirm that there were a sufficient number of potential offerors to ensure full and open competition for the pharmacy services contract. DOD officials told us that they found there were at least six potential offerors, which gave them confidence that there would be adequate competition. Since the start of the current pharmacy services contract in 2009, DOD has identified changes to the contract requirements in response to legislative changes to the pharmacy benefit, efforts to improve service delivery to beneficiaries, and improvements identified through monitoring of the current contractor’s performance. In each instance, DOD officials needed to determine whether to make the change for the upcoming contract, or whether to make the change via a modification to the current contract. According to DOD officials, there were over 300 modifications to the current pharmacy services contract; 23 of these were changes to the work to be done by the contractor. DOD officials told us that it is not possible to build a level of flexibility into the contract to accommodate or anticipate all potential changes (and thus avoid modifications to the contract), because doing so would make it difficult for offerors to determine pricing in their proposals. Legislative changes to the pharmacy benefit. Legislative changes have been one key driver of DOD’s revisions to its pharmacy services contract requirements. For example, one legislative change required DOD to implement the TRICARE Young Adult program, which resulted in DOD adding a requirement for the contractor to extend pharmacy services to eligible military dependents through the age of 26. This change was made as a modification under the current contract. Another legislative change that necessitated changes to the contract requirements was the increase in beneficiary copayments for drugs obtained through mail-order or retail pharmacies, enacted as part of the NDAA for fiscal year 2013, which DOD changed through a modification to the current contract. A third legislative change to the pharmacy benefit was the mail-order pilot for maintenance drugs for TRICARE for Life beneficiaries. DOD officials incorporated this change in the requirements for the upcoming pharmacy services contract, as outlined in the RFP. Efforts to improve service delivery. DOD has also updated contract requirements to improve service delivery to beneficiaries under the pharmacy services contract. DOD initiated a modification to the current contract to require the contractor to provide online coordination of benefits for beneficiaries with health care coverage from multiple insurers. Specifically, the contractor is required to ensure that pharmacy data systems include information on government and other health insurance coverage to facilitate coverage and payment determinations. According to DOD officials, this change is consistent with the updated national telecommunication standard from the National Council for Prescription Drug Programs, which provides a uniform format for electronic claims processing. According to DOD officials, this change to the contract requirements eliminates the need for beneficiaries to file paper claims when TRICARE is the secondary payer, simplifying the process for beneficiaries and reducing costs for DOD. Another modification to the current contract to improve service delivery was to require the contractor to provide vaccines through its network of retail pharmacies. According to DOD officials, this modification was made to allow beneficiaries to access vaccines through every possible venue, driven by the 2010 H1N1 influenza pandemic. Contractor performance. DOD officials told us that improvements identified through the monitoring of contractor performance have also led to changes in contract requirements. Through the CORs’ monitoring of the contractor’s performance against the standards specified in the contract, the CORs may determine that a particular standard is not helping to achieve the performance desired or is unnecessarily restrictive. For example, DOD officials told us that in the current contract, they had a three- tiered standard for paper claims processing (e.g., 95 percent of paper claims processed within 10 days, 99 percent within 20 days, and 100 percent within 30 days). Through monitoring the contractor’s performance, the CORs determined that there was a negligible difference between the middle and high tiers, and holding the contractor to this performance standard was not beneficial. The requirements for the upcoming contract as described in the RFP only include two tiers—95 percent of claims processed within 14 calendar days, and 100 percent within 28 calendar days. When making changes to contract requirements, DOD officials told us they try to ensure that the requirements are not overly prescriptive, but rather outcome-oriented and performance-based. For example, DOD officials told us that they allowed the pharmacy and managed care support contractors to innovate and apply industry best practices regarding coverage and coordination of home infusion services. According to DOD officials, the contract requirements regarding home infusion are focused on the desired outcome—providing coordination of care for beneficiaries needing these services with the physician as the key decision maker—and DOD officials facilitated meetings between the pharmacy contractor and managed care support contractors to determine the details of how to provide the services. This approach is consistent with DOD’s Better Buying Power principles that emphasize the importance of well-defined contract requirements and acquisition officials’ understanding of cost-performance trade-offs. This approach also addresses a concern we have previously identified regarding overly prescriptive contract requirements in TRICARE contracts; specifically, in our previous work on the managed care support contracts, we reported that DOD’s prescriptive requirements limited innovation and competition among contractors. Since retail pharmacy services were carved out about 10 years ago, DOD has not conducted an assessment of the appropriateness of its current pharmacy services contract structure that includes an evaluation of the costs and benefits of alternative structures. Alternative structures can include a carve-in of all pharmacy services into the managed care support contracts, or a structure that carves in a component of pharmacy services, such as the mail-order pharmacy, while maintaining a carve-out structure for other components. DOD officials told us they believe that DOD’s current pharmacy services contract structure continues to be appropriate, as it affords more control over pharmacy data and allows for more detailed data analyses and increased transparency about costs. DOD’s continued use of a carve-out contract structure for pharmacy services is consistent with findings from research and perspectives we heard from industry group officials—that larger employers are more likely to carve out pharmacy services to better leverage the economies of scale and cost savings a stand-alone pharmacy benefit manager can achieve.These arrangements may also provide more detailed information on drug utilization that can be helpful in managing drug formularies and their associated costs. In its December 2007 report, the Task Force on the Future of Military Health Care recommended examining an alternative structure for the pharmacy services contract.health care system, the task force reviewed DOD’s pharmacy benefit program, recommending that DOD pilot a carve-in pharmacy contract structure within one of the TRICARE regions with a goal of achieving better financial and health outcomes as a result of having more integrated pharmacy and medical services. The managed care support contractors we spoke with expressed similar concerns. However, DOD did not agree with the task force’s recommendation. In its response, DOD assessed the In addition to other aspects of DOD’s benefits of the current structure and affirmed the department’s commitment to this structure. Potential cost savings. In its response to the task force report, DOD did not concur with the recommendation to pilot a carve-in pharmacy contract structure, in part because of the cost savings achieved through the carve-out. Specifically, DOD stated that the carve-out arrangement is compatible with accessing federal pricing arrangements and other discounts available for direct purchases. DOD stated in its response that, under a carve-in arrangement, even on a pilot basis, it would lose access to discounts available for direct purchases, including some portion of the $400 million in annual discounts available for drugs dispensed at retail pharmacies under the NDAA for fiscal year 2008. DOD officials told us that this loss would result from the managed care support contractor being the purchaser of the drugs, rather than DOD. DOD also stated that it would possibly lose access to the volume discounts obtained for drugs purchased for the mail-order pharmacy and military treatment facility pharmacies under a carve-in structure. DOD officials told us that these disadvantages of a carve-in structure remain the same today. Additionally, during this review, DOD noted that dividing the TRICARE beneficiary population among contractors under a carve-in would dilute the leverage a single pharmacy benefit manager would have in the market. For example, DOD would lose economies of scale for claims processing services provided by the pharmacy contractor, resulting in increased costs. However, research studies have found, and officials from TRICARE’s managed care support contractors told us, that a contract structure with integrated medical and pharmacy services could result in cost savings for DOD. For example, one recent study found that employers with carve-in health plans had 3.8 percent lower total medical care costs compared to employers with pharmacy services carved out. The researchers attributed the cost difference, in part, to increased coordination of care for the carve-in plans, leading to fewer adverse events for patients, resulting in fewer inpatient admissions; they reported that plans with a carve-out arrangement had 7 percent higher inpatient admissions. Similarly, representatives from one managed care support contractor we spoke with stated they thought they could achieve similar cost savings to what DOD currently has through its federal pricing arrangements by using integrated medical and pharmacy services as a means of reducing costs in a carve-in arrangement. Being able to analyze integrated, in-house medical and pharmacy data may help health plans to lower costs by identifying high-cost beneficiaries, including those with chronic conditions such as asthma and diabetes, and targeting timely and cost-effective interventions for this population. Potential health benefits from data integration. In recommending that DOD pilot a carve-in pharmacy contract structure, one of the task force’s goals was to improve health outcomes as a result of integrated medical and pharmacy services. DOD noted in its task force response that it could achieve this goal under the current carve-out contract structure by including requirements in the pharmacy services contract and managed care support contracts requiring data sharing between the contractors. While the current contract requires the pharmacy and managed care support contractors to exchange data for care coordination, current TRICARE managed care support contractors told us there continue to be challenges with data sharing to facilitate disease management. Contractors expressed similar concerns about sharing medical and pharmacy data as part of our previous work related to DOD’s managed care support contracts. Additionally, during this review, officials from one of the managed care support contractors told us that they continue to find it challenging to generate data that provide a holistic view of beneficiaries when medical and pharmacy data remain separate. Representatives from another managed care support contractor told us that their disease management staff faced challenges in analyzing pharmacy data for groups of patients they were managing. They also told us that if these staff had more complete and real-time access to pharmacy data, as they would under a carve-in structure, they could be more proactive in assisting DOD’s efforts to identify patients who should participate in disease management programs. Additionally, researchers have found that disease management interventions may be challenging to conduct in a carve-out arrangement due to the lack of fully integrated medical and pharmacy data. According to DOD officials, any changes to the current contract structure would result in less efficient and inconsistent pharmacy service delivery across the three TRICARE regions, as officials observed when the retail pharmacy benefit was part of the managed care support contracts. One of DOD’s reasons for the initial carve-out was a concern that pharmacy services were not being consistently implemented across the TRICARE regions. For example, DOD officials told us that two health plans in different TRICARE regions were able to have different preferred drugs within the same therapeutic class, and while both drugs may be included on DOD’s formulary, beneficiaries in different parts of the country were not being consistently provided with the same drug. In addition, according to DOD, beneficiaries were dissatisfied with a benefit that was not portable across TRICARE regions—specifically, retail pharmacy networks differed by region, so beneficiaries who moved from one TRICARE region to another would have to change retail pharmacy networks. With one national pharmacy services contract, DOD officials said they can ensure that the formulary is implemented consistently and that beneficiaries have access to the same retail pharmacy network across the TRICARE regions. Since the current pharmacy services contract structure was implemented almost 10 years ago, DOD has not incorporated an assessment of the contract structure that includes an evaluation of alternative structures into its acquisition planning activities. DOD officials told us that they consider their task force response to be an assessment of the current contract structure. While the response included a justification for the current structure, it did not include an evaluation of the potential costs and benefits of alternative structures, such as carving in all or part of the pharmacy benefit. In addition, the acquisition plan for the upcoming contract described two alternative carve-out configurations (separate contracts for the mail-order and retail pharmacies and a government- owned facility to house drugs for the mail-order pharmacy contract). However, the plan similarly did not include an evaluation of the potential costs and benefits of these options, nor did the plan include an evaluation of any carve-in alternatives. DOD officials told us there are no current plans to conduct such an evaluation as part of the department’s acquisition planning efforts. DOD officials also told us that they continue to believe the current structure is appropriate because the current carve-out structure provides high beneficiary satisfaction and is achieving DOD’s original objectives, namely consistent provision of benefits, access to federal pricing arrangements, and transparency of pharmacy utilization and cost data. Further, officials told us that the current carve-out structure is more efficient to administer with one pharmacy services contractor than the previous carve-in structure that involved multiple managed care support contractors. While DOD officials believe the current structure is appropriate, there have been significant changes in the pharmacy benefit management market in the past decade. These changes include mergers, as well as companies offering new services that may change the services and options available to DOD. For example, representatives from one managed care support contractor we spoke with told us that they can offer different services to DOD today than they were able to offer when pharmacy services were part of the managed care support contracts. While the contractor had previously sub-contracted with a separate pharmacy benefit manager to provide pharmacy services under its managed care support contract, this contractor’s parent company now provides in-house pharmacy benefit management services for its commercial clients. Additionally, according to the parent company of another managed care support contractor, its recent decision to bring pharmacy benefit management services in-house will enhance its ability to manage total health care costs and improve health outcomes for clients who carve in pharmacy services. As we have previously reported, sound acquisition planning includes an assessment of lessons learned to identify improvements. The time necessary for such activities can vary greatly, depending on the complexity of the contract. We have also reported that a comparative evaluation of the costs and benefits of alternatives can provide an evidence-based rationale for why an agency has chosen a particular alternative (such as a decision to maintain or alter the current pharmacy services contract structure). We have reported that such an evaluation would consider possible alternatives and should not be developed solely to support a predetermined solution. With each new pharmacy services contract, DOD officials have the opportunity to conduct acquisition planning activities that help determine whether the contract—and its current structure—continues to meet the department’s needs, including providing the best value and services to the government and beneficiaries. These activities can include changing requirements as necessary, learning about current market trends, and incorporating new information and lessons learned. Acquisition planning can also incorporate an assessment of the pharmacy services contract structure that includes an evaluation of the potential costs and benefits of alternative contract structures. Incorporating such an evaluation into the acquisition planning for each new pharmacy services contract can provide DOD with an evidence-based rationale for why maintaining or changing the current structure is warranted. Without such an evaluation, DOD cannot effectively demonstrate to Congress and stakeholders that it has chosen the most appropriate contract structure, in terms of costs to the government and services for beneficiaries. To provide decision makers with more complete information on the continued appropriateness of the current pharmacy services contract structure, and to ensure the best value and services to the government and beneficiaries, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense (Health Affairs) to take the following two actions: conduct an evaluation of the potential costs and benefits of alternative contract structures for the TRICARE pharmacy services contract; and incorporate such an evaluation into acquisition planning. We provided a draft of this report to DOD for comment. DOD generally concurred with our findings and conclusions and concurred with our recommendations. DOD also commented that based on past experience with alternative contract structures, it is confident that the current contract structure is the most cost efficient and beneficial. In response to our recommendation that DOD conduct an evaluation of the potential costs and benefits of alternative contract structures for the TRICARE pharmacy services contract, DOD commented that there is a lack of data to support inferences that a carve-in arrangement would result in cost savings to the government, and noted that the full development of two separate RFPs would be necessary to provide a valid cost comparison. While detailed cost estimates can be a useful tool for DOD, they are not the only means of evaluating alternative structures for the pharmacy services contract. For example, as we noted in our report, DOD has previously used RFIs to obtain information from industry to inform its decisions about the pharmacy services contract, and this process also may be helpful in identifying costs and benefits of alternative contract structures. In response to our recommendation that DOD incorporate such an evaluation into acquisition planning, DOD commented that it included an evaluation of its past contract experience into acquisition planning for the upcoming pharmacy services contract. However, as noted in our report, the acquisition plan for the upcoming contract did not include an evaluation of the potential costs and benefits of alternative contract structures, and DOD did not directly address how it would include such an evaluation in its acquisition planning activities. We continue to emphasize the importance of having an evidence-based rationale for why maintaining or changing the current structure is warranted. With each new pharmacy services contract, DOD officials have the opportunity to determine whether the contract continues to meet the department’s needs, including providing the best value to the government and services to beneficiaries. In addition, DOD stated in its comments that our report did not address its direct-care system and noted that carving pharmacy services back into the managed care support contracts would fragment the pharmacy benefit and undermine its goal of integrating all pharmacy points of service. Our review was focused on DOD’s purchased-care system for providing pharmacy services, although we did provide context about the direct-care system as appropriate. Furthermore, we did not recommend any specific structure for DOD’s pharmacy services contract, but rather that DOD evaluate the costs and benefits of alternative structures such that it can have an evidence-based rationale for its decisions. DOD’s comments are reprinted in appendix II. DOD also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to appropriate congressional committees; the Secretary of Defense; the Assistant Secretary of Defense (Health Affairs); and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Department of Defense (DOD) officials who award and administer the TRICARE pharmacy services contract are required to meet relevant certification standards applicable to all DOD acquisition officials and, according to DOD officials, some of these officials also have pharmacy- specific experience. The training and related education and experience requirements are tailored to different levels of authority and, due to the size and complexity of the pharmacy services contract, the contracting officer and program manager for the pharmacy services contract are required to be certified at the highest levels, which require the most training and experience. In addition, all contracting officer’s representatives (COR) must meet specific training and experience requirements based on the complexity and risk of the contracts they will be working with, and the two CORs for the pharmacy services contract are also required to meet the highest COR certification level. For example, the CORs for the pharmacy services contract must complete at least 16 hours of COR-specific continuing education every 3 years, which is twice the amount required for low-risk, fixed-price contracts. DOD’s department-wide acquisition training is primarily provided through the Training is designed to provide a Defense Acquisition University.foundation of acquisition knowledge but is not targeted to specific contracts or contract types. Beyond DOD’s required training, the contracting officer, program manager, and CORs also have specialized experience in pharmacy and related issues. See table 2 for the specific certification standards for and pharmacy-specific experience of the officials responsible for awarding or administering the pharmacy services contract. In addition to the contact named above, Janina Austin, Assistant Director; Lisa Motley; Laurie Pachter; Julie T. Stewart; Malissa G. Winograd; and William T. Woods made key contributions to this report.

DOD offers health care coverage--medical and pharmacy services--to eligible beneficiaries through its TRICARE program. DOD contracts with managed care support contractors to provide medical services, and separately with a pharmacy benefit manager to provide pharmacy services that include the TRICARE mail-order pharmacy and access to a retail pharmacy network. This is referred to as a carve-out contract structure. DOD's current pharmacy contract ends in the fall of 2014. DOD has been preparing for its upcoming contract through acquisition planning, which included identifying any needed changes to contract requirements. Senate Report 112-173, which accompanied a version of the NDAA for fiscal year 2013, mandated that GAO review DOD's health care contracts. For this report, GAO examined: (1) how DOD identified changes needed, if any, to requirements for its upcoming pharmacy services contract; and (2) what, if any, assessment DOD has done of the appropriateness of its current contract structure. GAO reviewed DOD acquisition planning documents and federal regulations, and interviewed officials from DOD and its pharmacy services contractor. The Department of Defense (DOD) used various methods to identify needed changes to requirements for its upcoming pharmacy services contract. During acquisition planning for the upcoming TRICARE pharmacy services contract, DOD solicited feedback from industry through its market research process to align the contract requirements with industry best practices and promote competition. For example, DOD issued requests for information (RFI) in which DOD asked questions about specific market trends, such as ensuring that certain categories of drugs are distributed through the most cost-effective mechanism. DOD also issued an RFI to obtain information on promoting competition, asking industry for opinions on the length of the contract period. DOD officials told us that responses indicated that potential offerors would prefer a longer contract period because it would allow a new contractor more time to recover any capital investment made in implementing the contract. The request for proposals for the upcoming contract, issued in June 2013, included a contract period of 1 base year and 7 option years. DOD also identified changes to contract requirements in response to legislative changes to the TRICARE pharmacy benefit. For example, the National Defense Authorization Act (NDAA) for fiscal year 2013 required DOD to implement a mail-order pilot for maintenance drugs for beneficiaries who are also enrolled in Medicare Part B. DOD officials incorporated this change in the requirements for the upcoming pharmacy services contract. DOD has not conducted an assessment of the appropriateness of its current pharmacy services contract structure that includes an evaluation of the costs and benefits of alternative structures. Alternative structures can include incorporating all pharmacy services into the managed care support contracts--a carve-in structure--or a structure that incorporates certain components of DOD's pharmacy services, such as the mail-order pharmacy, into the managed care support contracts while maintaining a separate contract for other components. DOD officials told GAO they believe that DOD's current carve-out contract structure continues to be appropriate, as it affords more control over pharmacy data that allows for detailed data analyses and cost transparency, meets program goals, and has high beneficiary satisfaction. However, there have been significant changes in the pharmacy benefit management market in the past decade, including mergers and companies offering new services that may change the services and options available to DOD. GAO has previously reported that sound acquisition planning includes an assessment of lessons learned to identify improvements. Additionally, GAO has reported that a comparative evaluation of the costs and benefits of alternatives can provide an evidence-based rationale for why an agency has chosen a particular alternative. Without this type of evaluation, DOD cannot effectively demonstrate that it has chosen the most appropriate contract structure in terms of costs to the government and services for beneficiaries. GAO recommends that DOD conduct an evaluation of the potential costs and benefits of alternative structures for the TRICARE pharmacy services contract, and incorporate such an evaluation into acquisition planning. DOD concurred with GAO's recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: Both DB and DC plans operate in a voluntary system with tax incentives for employers to offer a plan and for employees to participate. In the past, DC plans, such as 401(k) plans, were supplemental to DB plans. However, over the past several decades, there has been a shift in pension plan coverage; the number of DC plans has increased while the number of DB plans has declined. Today, DC plans are the dominant type of private- sector employee pension. Compared to DB plans, DC plans offer workers more control over their retirement asset management and greater portability over their retirement savings, but also shift much of the responsibility and certain risks onto workers. Workers generally must elect to participate in a plan and accumulate savings in their individual accounts by making regular contributions over their careers. Participants typically choose how to invest plan assets from a range of options provided under their plan and accordingly face investment risk. There are several different categories of DC plans, but most are types of cash or deferred arrangements in which employees can direct pre-tax dollars, along with any employer contributions, into an account, with any asset growth tax-deferred until withdrawal. One option available under some 401(k) plans is automatic enrollment, under which workers are enrolled in a 401(k) plan automatically, unless they explicitly choose to opt out. However, automatic enrollment has not been a traditional feature of 401(k) plans and, prior to 1998, plan sponsors feared that adopting automatic enrollment could lead to plan disqualification. In 1998, the Internal Revenue Service (IRS) addressed this issue by stating that a plan sponsor could automatically enroll newly hired employees and, in 2000, clarified that automatic enrollment is permissible for current employees who have not enrolled. Nonetheless, a number of considerations inhibited widespread adoption of automatic enrollment, including remaining concerns such as liability in the event that the employee’s investments under the plan did not perform satisfactorily, and concerns about state laws that prohibit withholding employee pay without written employee consent. More recently, provisions of the Pension Protection Act of 2006 (PPA) and subsequent regulations further facilitated the adoption of automatic enrollment by providing incentives for doing so and by protecting plans from fiduciary and legal liability if certain conditions are met. In September 2009, the Department of the Treasury announced IRS actions designed to further promote automatic enrollment and the use of automatic escalation policies. The Employee Retirement Income Security Act of 1974 (ERISA), as amended, defines and sets certain standards for employee benefit plans, including 401(k) plans, sponsored by private-sector employers. ERISA establishes the responsibilities of employee benefit plan decision makers and the requirements for disclosing information about plans. ERISA requires that plan fiduciaries, which generally include the plan sponsor, carry out their responsibilities prudently and do so solely in the interest of the plan’s participants and beneficiaries. The Department of Labor’s (Labor) Employee Benefits Security Administration (EBSA) is the primary agency responsible for enforcing Title I of ERISA and thereby protecting private-sector pension plan participants and beneficiaries from the misuse or theft of pension assets. EBSA conducts civil and criminal investigations of plan fiduciaries and service providers to determine whether the provisions of ERISA or other relevant federal laws have been violated. In addition to Labor’s oversight, the Securities and Exchange Commission (SEC) provides oversight for 401(k) investments. For example, the SEC, among other responsibilities, regulates registered securities including company stock and mutual funds under securities law. One issue of concern with DC plans is that participation and saving rates have been low. In 2007, we reported that the majority of U.S. workers, in all age groups, did not participate in DC plans with their current employers. In fact, only about half of all workers participate in any type of employer-sponsored retirement plan at any given time. According to data from the Current Population Survey, about 48 percent of the total U.S. workforce was not covered by an employer-sponsored plan in 2007. About 40 percent worked for an employer that did not sponsor a plan, and about 8 percent did not participate in the plan that their employer sponsored. Certain segments of the working population have consistently had much lower rates of employment with employers sponsoring a plan, and lower participation rates than the working population overall, such as lower-income workers, younger workers, workers employed by smaller companies, and part-time workers who typically lack coverage compared to all full-time workers. According to our analysis of the 2004 Survey of Consumer Finances, only 62 percent of workers were offered a retirement plan by their employer, and 84 percent of those offered a retirement plan participated. Participation rates were even lower for DC plan participants since only 36 percent of working individuals participated in a DC plan with their current employers at the time of our report. Although our analysis focused on DC plans as a group, 401(k) plans make up the vast majority of DC plans. At the household level, participation rates were also low; only 42 percent of households had at least one member actively participating in a DC plan. Further, only 8 percent of workers in the lowest income quartile participated in DC plans offered by their current employer. Participation rates are low partly because not all employers offer a retirement plan, and even when employers offer such plans, workers may not participate. Some small employers are hesitant to sponsor retirement plans because of concerns about cost. In addition, DC participation rates for the U.S. workforce may be low because some employers sponsor a DB plan rather than a DC plan. When companies do sponsor employer plans, some workers may not be eligible to participate in their employers’ plan because they have not met the plan’s minimum participation requirements. In addition, workers may choose not to enroll, or delay enrolling, in a retirement plan for a number of reasons. For example, they may think—in some cases, incorrectly—they are not eligible. They may also believe they cannot afford to contribute to the plan and, for low-income workers, it may be difficult for them to contribute. Also, some may be focused on more immediate savings objectives, such as saving for a house. Many non- participants may not have made a specific decision, but rather fail to participate because of a tendency to procrastinate and follow the path that does not require an active decision. We also found that, for workers who participated in DC plans, plan savings were low. The median total DC account balance was $22,800 for individual workers with a current or former DC plan and $27,940 for households with a current or former DC plan. We reported that the account balances of lower-income and older workers were of particular concern. For example, workers in the lowest income quartile had a median total account balance of only $6,400. Older workers, particularly those who were less wealthy, also had limited retirement savings. For example, those aged 50 through 59 and at or below the median level of wealth had median total savings of only $13,800. The median total savings for all workers aged 50 through 59 was $43,200. We noted that the low level of retirement savings could be occurring for a couple of reasons. Workers who participated in a plan had modest overall balances in DC plans, suggesting a potentially small contribution toward retirement security for most plan participants and their households. For individuals nearing retirement age, total DC plan balances were also low, because DC plans were less common before the 1980s and older workers likely would not have had access to these plans their whole careers. Given trends in coverage since the 1980s, older workers close to retirement age were more likely than younger ones to have accrued retirement benefits in a DB plan. In addition, older workers who rely on DC plans for retirement income may also not have time to substantially increase their total savings without extending their working careers, perhaps for several years. Further, the value of the income tax deferral on contributions is smaller for lower-income workers than for similarly situated higher-income workers, making participation less appealing for lower-income workers. In addition to somewhat small savings contributions, 401(k) participants can take actions, such as taking loans, withdrawals, or lump-sum cashouts, that reduce the savings they have accumulated. This “leakage” continues to affect the retirement security of some participants. While participants may find features that allow access to 401(k) savings prior to retirement desirable, leakage can result in significant losses of retirement savings from the loss of compound interest as well as the financial penalties associated with early withdrawals. Current law limits participant access to 401(k) savings in order to preserve the favorable tax treatment for retirement savings and ensure that the savings are, in fact, being used to provide retirement income. The incidence and amount of the principal forms of leakage from 401(k) plans have remained relatively steady through the end of 2008. For example, we found that approximately 15 percent of 401(k) participants between the ages of 15 and 60 initiated at least one form of leakage in 1998, 2003, and 2006, with loans being the most popular type of leakage in all 3 years. We also found that cashouts made when a worker changed jobs, at any age, resulted in the largest amounts of leakage and the greatest proportional loss in retirement savings. Further, we reported that while most firms informed participants about the short-term costs of leakage, few informed them about the long-term costs. As we reported in August of 2009, experts identified three legal requirements that had likely reduced the overall incidence and amounts of leakage, and another provision that may have exacerbated the long-term effects of leakage. Specifically, experts noted that the requirements imposing a 10 percent tax penalty on most withdrawals taken before age 59½, requiring participants to exhaust their plan’s loan provisions before taking a hardship withdrawal and requiring plan sponsors to preserve the tax-deferred status of accounts with balances of more than $1,000 at job separation all helped reduce 401(k) leakage. However, experts also noted that the requirement for a 6-month suspension of all contributions to an account following a hardship withdrawal exacerbated the effects of leakage. Treasury officials told us that this provision is intended to serve as a test to ensure that the hardship is real and that the participants have no other assets available to address the hardship. However, a few outside experts believed that this provision deters hardship withdrawals and noted that it seems to contradict the goal of creating retirement income. One expert noted that the provision unnecessarily prevented participants who were able to continue making contributions from doing so. For example, an employed participant taking a withdrawal for a discrete, one-time purpose, such as paying for medical expenses, may otherwise be able to continue making contributions. In our August 2009 report, we recommended that Congress consider changing the requirement for the 6- month contribution suspension following a hardship withdrawal. We also called for measures to provide participants with more information on the disadvantages of hardship withdrawals. Although participants may choose to take money out of their 401(k) plans, fees and other factors outside of participants’ control can also diminish their ability to build their retirement savings. Participants often pay fees, such as investment fees and record-keeping fees, and these fees may significantly reduce retirement savings, even with steady contributions and without leakage. Investment fees, which are charged by companies managing mutual funds and other investment products for all services related to operating the fund, comprise the majority of fees in 401(k) plans and are typically borne by participants. Plan record-keeping fees generally account for the next largest portion of plan fees. These fees cover the cost of various administrative activities carried out to maintain participant accounts. Although plan sponsors often pay for record-keeping fees, participants bear them in a growing number of plans. We previously reported that participants can be unaware that they pay any fees at all for their 401(k) investments. For example, investment and record-keeping fees are often charged indirectly by taking them out of investment returns prior to reporting those returns to participants. Consequently, more than 80 percent of 401(k) participants reported in a nationwide survey not knowing how much they pay in fees. The reduction to retirement savings resulting from fees is very sensitive to the size of the fees paid; even a seemingly small fee can have a large negative effect on savings in the long run. As shown in figure 1, an additional 1 percent annual charge for fees would significantly reduce an account balance at retirement. Although all 401(k) plans are required to provide disclosures on plan operations, participant accounts, and the plan’s financial status, they are often not required to disclose the fees borne by individual participants. These disclosures are provided in a piecemeal fashion and do not provide a simple way for participants to compare plan investment options and their fees. Some documents that contain fee information are provided to participants automatically, whereas others, such as prospectuses or fund profiles, may require that participants seek them out. According to industry professionals, participants may not know to seek such documents. Most industry professionals agree that information about investment fees—such as the expense ratio, a fund’s operating fees as a percentage of its assets—is fundamental for plan participants to compare their options. Participants also need to be aware of other types of fees—such as record- keeping fees and redemption fees or surrender charges imposed for changing and selling investments—to gain a more complete understanding of all the fees that can affect their account balances. Whether participants receive only basic expense ratio information or more detailed information on various fees, presenting the information in a clear, easily comparable format can help participants understand the content of disclosures. In our previous reports, we recommended that Congress consider requiring plan sponsors to disclose fee information on 401(k) investment options to participants, such as the expense ratios, and Congress has introduced several bills to address fee disclosures. SEC identified certain undisclosed arrangements in the business practices of pension consultants that the agency referred to as conflicts of interest and released a report in May 2005 that raised questions about whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice. The report highlighted concerns that compensation arrangements with brokers who sell mutual funds may provide incentives for pension consultants to recommend certain mutual funds to a 401(k) plan sponsor and create conflicts of interest that are not adequately disclosed to plan sponsors. Plan sponsors may not be aware of these arrangements and thus could select mutual funds recommended by the pension consultant over lower-cost alternatives. As a result, participants may have more limited investment options and may pay higher fees for these options than they otherwise would. Conflicts of interest among plan sponsors and plan service providers can also affect participants’ retirement savings. In our prior work on conflicts of interest in DB plans, we found a statistical association between inadequate disclosure of potential conflicts of interest and lower investment returns for ongoing plans, suggesting the possible adverse financial effect of such nondisclosure. Specifically, we detected lower annual rates of return for those ongoing plans associated with consultants that had failed to disclose significant conflicts of interest. These lower rates generally ranged from a statistically significant 1.2 to 1.3 percentage points over the 2000 to 2004 period. Although this work was done for DB plans, some of the same conflicts apply to DC plans as well. Problems may occur when companies providing services to a plan also receive compensation from other service providers. Without disclosing these arrangements, service providers may be steering plan sponsors toward investment products or services that may not be in the best interest of participants. Conflicts of interest may be especially hidden when there is a business arrangement between one 401(k) plan service provider and a third-party provider for services that they do not disclose to the plan sponsor. The problem with these business arrangements is that the plan sponsor will not know who is receiving the compensation and whether or not the compensation fairly represents the value of the service being rendered. Without that information, plan sponsors may not be able to identify potential conflicts of interest and fulfill their fiduciary duty. If the plan sponsors do not know that a third party is receiving these fees, they cannot monitor them, evaluate the worthiness of the compensation in view of services rendered, and take action as needed. Because the risk of 401(k) investments is largely borne by the individual participant, such hidden conflicts can affect participants directly by lowering investment returns. We previously recommended that Congress consider amending the law to explicitly require that 401(k) service providers disclose to plan sponsors the compensation that providers receive from other service providers. Although Congress has not changed the law, Labor has proposed regulations to expand fee and compensation disclosures to help address conflicts of interests. A recent change in law to facilitate automatic enrollment shows promise for increasing participation rates and savings. Under automatic enrollment, a worker is enrolled into the plan automatically, or by default, unless they explicitly choose to opt out. In addition, for participants who do not make their own choices, plan sponsors also establish default contribution rates—the portion of an employee’s salary that will be deposited in the plan—and a default investment fund—the fund or other vehicle into which deferred savings will be invested. The Pension Protection Act of 2006 and recent regulatory changes have facilitated plan sponsors’ adoption of automatic enrollment. In fact, plan sponsors have increasingly been adopting automatic enrollment policies in recent years. According to Fidelity Investments, the number of plans with automatic enrollment has increased from 1 percent in December 2004 to about 16 percent in March 2009, with higher rates of adoption among larger plan sponsors. Fidelity Investments estimates that 47 percent of all 401(k) participants are in plans with automatic enrollment. Employers may also adopt an automatic escalation policy, another policy intended to increase retirement savings. Under automatic escalation, in the absence of an employee indicating otherwise, an employee’s contribution rates would be automatically increased at periodic intervals, such as annually. For example, if the default contribution rate is 3 percent of pay, a plan sponsor may choose to increase an employee’s rate of saving by 1 percent per year, up to some maximum, such as 6 percent. One of our recent reports found that automatic enrollment policies can result in considerably increased participation rates for plans adopting them, with some plans’ participation rates increasing to as high as 95 percent and that these high participation rates appeared to persist over time. Moreover, automatic enrollment had a significant effect on subgroups of workers with relatively low participation rates, such as lower-income and younger workers. For example, according to a 2007 Fidelity Investments study, only 30 percent of workers aged 20 to 29 were participating in plans without automatic enrollment. In plans with automatic enrollment, the participation rate for workers in that age range was 77 percent, a difference of 47 percentage points. Automatic enrollment, through its default contribution rates and default investment vehicles, offers an easy way to start saving because participants do not need to decide how much to contribute and how to invest these contributions unless they are interested in doing so. However, current evidence is mixed with regard to the extent to which plan sponsors with automatic enrollment have also adopted automatic escalation policies. In addition, many plan sponsors have adopted relatively low default contribution rates. While the adoption rate for automatic enrollment shows promise, a lag in adoption of automatic escalation policies, in combination with low default contribution rates, could result in low saving rates for participants who do not increase contribution rates over time. Another recent GAO report offers additional evidence about the positive impact automatic enrollment could have on workers’ savings levels at retirement. Specifically, we projected DC pension benefits for a stylized scenario where all employers that did not offer a pension plan were required to sponsor a DC plan with no employer contribution; that is, workers had universal access to a DC plan. When we coupled universal access with automatic enrollment, we found that approximately 91 percent of workers would have DC savings at retirement. Further, we found that about 84 percent of workers in the lowest income quartile would have accumulated DC savings. In our work on automatic enrollment, we found that plan sponsors have overwhelmingly adopted TDFs as the default investment. TDFs allocate their investments among various asset classes and shift that allocation from equity investments to fixed-income and money market investments as a “target” retirement date approaches; this shift in asset allocation is commonly referred to as the fund’s “glide path.” Recent evidence suggests that participants who are automatically enrolled in plans with TDF defaults tend to have a high concentration of their savings in these funds. However, pension industry experts have raised questions about the risks of TDFs. For example, some TDFs designed for those expecting to retire in or around 2010 lost 25 percent or more in value following the 2008 stock market decline, leading some to question how plan sponsors evaluate, monitor, and use TDFs. GAO will be addressing a request from this committee to examine some of these concerns. DC plans, particularly 401(k) plans, have clearly overtaken DB plans as the principal retirement plan for U.S. workers and are likely to become the sole retirement savings plan for most current and future workers. Yet, 401(k) plans face major challenges, not least of which is the fact that many employers do not offer employer-sponsored 401(k) plans or any other type of plan to their workers. This lack of coverage, coupled with the fact that participants in 401(k) plans sometimes spend their savings prior to retirement or have their retirement savings eroded by fees, make it evident that, without some changes, a large number of people will retire with little or no retirement savings. Employers, workers, and the government all have to work together to ensure that 401(k) plans provide a meaningful contribution to retirement security. Employers have a role in first sponsoring 401(k) plans and then looking at ways to encourage participation, such as utilizing automatic enrollment and automatic escalation. Workers have a role to participate and save in 401(k) plans when they are given the opportunity to do so. In addition, both employers and workers have a role in preserving retirement savings. Government policy makers have an important role in setting the condition and the appropriate incentives that both encourage desired savings behavior but also protects participants. Recent government action that has helped enhance participation in 401(k) plans is a good first step. But action is still needed to improve disclosure on fees, especially those that are hidden, and measures need to be taken to discourage leakage. As this Committee and others move forward to address these issues, improvements may be made to 401(k) plans that can help assure that savings in such plans are an important part of individuals’ secure retirement. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further questions about this statement, please contact Barbara D. Bovbjerg at (202) 512-7215 or [email protected]. Individuals making key contributions to this statement included Tamara Cross, David Lehrer, Joseph Applebaum, James Bennett, Jennifer Gregory, Angela Jacobs, Jessica Orr, and Craig Winslow. Retirement Savings: Automatic Enrollment Shows Promise for Some Workers, but Proposals to Broaden Retirement Savings for Other Workers Could Face Challenges. GAO-10-31. Washington, D.C.: October 23, 2009. Retirement Savings: Better Information and Sponsor Guidance Could Improve Oversight and Reduce Fees for Participants. GAO-09-641. Washington, D.C.: September 4, 2009. 401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers’ Retirement Savings. GAO-09-715. Washington, D.C.: August 28, 2009. Private Pensions: Alternative Approaches Could Address Retirement Risks Faced by Workers but Pose Trade-offs. GAO-09-642. Washington, D.C.: July 24, 2009. Private Pensions: Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans. GAO-09-503T. Washington, D.C.: March 24, 2009. Private Pensions: Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors. GAO-08-774. Washington D.C.: July 16, 2008. Private Pensions: GAO Survey of 401(k) Plan Sponsor Practices (GAO-08-870SP, July 2008), an E-supplement to GAO-08-774. GAO-08-870SP. Washington, D.C.: July 16, 2008. Private Pensions: Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers. GAO-08-8. Washington, D.C.: November 29, 2007. Private Pensions: Information That Sponsors and Participants Need to Understand 401(k) Plan Fees. GAO-08-222T. Washington, D.C.: October 30, 2007. Private Pensions: 401(k) Plan Participants and Sponsors Need Better Information on Fees. GAO-08-95T. Washington, D.C.: October 24, 2007. Employer-Sponsored Health and Retirement Benefits: Efforts to Control Employer Costs and the Implications for Workers. GAO-07-355. Washington, D.C.: March 30, 2007. Private Pensions: Increased Reliance on 401(k) Plans Calls for Better Information on Fees. GAO-07-530T. Washington, D.C.: March 6, 2007. Employee Benefits Security Administration: Enforcement Improvements Made but Additional Actions Could Further Enhance Pension Plan Oversight. GAO-07-22. Washington, D.C.: January 18, 2007. Private Pensions: Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees. GAO-07-21. Washington, D.C.: November 16, 2006. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Over the past 25 years, the number of defined benefit (DB) plans has declined while the number of defined contribution (DC) plans has increased. Today, DC plans are the dominant type of employer-sponsored retirement plans, with more than 49 million U.S. workers participating in them. 401(k) plans currently cover over 85 percent of active DC plan participants and are the fastest growing type of employer-sponsored pension plan. Given these shifts in pension coverage, workers are increasingly relying on 401(k) plans for their pension income. Recently, policy makers have focused attention on the ability of 401(k) plans to provide participants with adequate retirement income and the challenges that arise as 401(k) plans become the predominant retirement savings plan for employees. As a result, GAO was asked to report on (1) challenges to building and maintaining of savings in 401(k) plans, and (2) recent measures to improve 401(k) participation and savings levels. There are challenges to building and saving through 401(k) plans. While low participation rates may be due, in part, to the fact that some workers participate in DB plans, there is also a large portion of workers who do not have access to an employer-sponsored retirement plan, as well as some who do not enroll in such a plan when an employer offers it. We found that for those who did participate, their overall balances were low, particularly for low-income and older workers who either did not have the means to save or have not had the opportunity to save in 401(k)s for much of their working lifetimes. There are also challenges workers face in maintaining savings in 401(k) plans. For example, 401(k) leakage--actions participants take that reduce the savings they have accumulated, such as borrowing from the account, taking hardship withdrawals, or cashing out the account when they change jobs--continues to affect retirement savings and increases the risk that 401(k) plans may yield insufficient retirement income for individual participants. Further, various fees, such as investment and other hidden fees, can erode retirement savings and individuals may not be aware of their impact. Automatic enrollment of employees in 401(k) plans is one measure to increase participation rates and saving. Under automatic enrollment, which was encouraged by the Pension Protection Act of 2006 and recent regulatory changes, employers enroll workers into plans automatically unless they explicitly choose to opt out. Plan sponsors are increasingly adopting automatic enrollment policies, which can considerably increase participation rates, with some plans' rates reaching as high as 95 percent. Employers can also set default contribution rates and investment funds. Though target-date funds are a common type of default investment fund, there are concerns about their risks, particularly for participants nearing retirement.

You are an expert at summarizing long articles. Proceed to summarize the following text: GAO’s body of work related to prior workforce reductions at DOD and other organizations demonstrates the importance of strategic workforce planning, including a consideration of costs, to help ensure that DOD has a fully capable workforce to carry out its mission. According to GAO’s Standards for Internal Control, management should ensure that skill needs are continually assessed and that the organization is able to obtain a workforce that has the required skills that match those necessary to achieve organizational goals. Section 322 of the National Defense Authorization Act for Fiscal Year 1991 directed DOD to establish guidelines for reductions in the number of civilian workers employed by industrial or commercial type activities. The act also directed certain DOD agencies or components to submit 5 year master plans for those workers, providing information on workload, demographics, and employee furloughs and involuntary separations, with the materials submitted to Congress in support of the budget request for fiscal year 1991. Subsequently, in 1992, we reported that DOD intended to undertake a multiyear downsizing effort aimed at reducing the civilian workforce by nearly 229,000 positions, or to 20 percent below its fiscal year 1987 levels. However, in 2000, we reported that DOD’s approach to prior force reductions was not oriented toward shaping the makeup of the workforce, resulting in significant imbalances in terms of shape, skills, and retirement eligibility. GAO, Defense Force Management: Expanded Focus in Monitoring Civilian Force Reductions Is Needed, GAO/T-NSIAD-92-19 (Washington, D.C.: March 18, 1992); and Defense Force Management: Challenges Facing DOD as It Continues to Downsize Its Workforce, GAO/NSIAD-93-123 (Washington, D.C.: February 12, 1993). Realignment round and the impacts of Operations Desert Shield and Desert Storm. We concluded that broader assessments were needed to determine the magnitude of civilian workforce reductions and their potential impact on given areas and regions, as well as the impact of hiring constraints on the ability of all DOD civilian organizations to efficiently and effectively accomplish their missions. We also have reported that the approaches DOD has relied on to accomplish past civilian workforce downsizing have sometimes had unintended consequences, such as workforce skills imbalances. For instance, DOD’s approach to past civilian downsizing relied primarily on voluntary attrition and retirements and varying freezes on hiring authority to achieve force reductions, as well as the use of existing authorities for early retirements to encourage voluntary separations at activities facing major reductions-in-force. The National Defense Authorization Act for Fiscal Year 1993 authorized a number of transition assistance programs for civilian employees, including financial separation incentives— ”buyouts”—to induce the voluntary separation of civilian employees. DOD credited the use of these separation incentives, early retirement authority, and various job placement opportunities in its avoidance of nearly 200,000 involuntary demotions and separations. The tools available to DOD to manage its civilian downsizing helped mitigate some adverse effects of force reductions. However, DOD’s approach to civilian workforce reductions was less oriented toward shaping the makeup of the workforce than was the approach it used to manage its military downsizing and resulted in significant imbalances in terms of shape, skills, and retirement eligibility. We also reported that, while managing force reductions for its uniformed military, DOD followed a policy of trying to achieve and maintain a degree of balance between its accessions and losses in order to “shape” its uniformed forces in terms of rank, years of service, and specialties. In contrast, we did not see as much attention devoted to planning and managing civilian workforce reductions. Moreover, the Acquisition 2005 Task Force’s final reportinstance, that this was especially true of the civilian acquisition workforce, which from September 1989 to September 1999 was reduced by almost 47 percent. This rate of reduction substantially exceeded that of the rest of the DOD workforce. Eleven consecutive years of downsizing produced serious imbalances in the skills and experience of the highly talented and specialized civilian acquisition workforce, putting DOD on the verge of a retirement-driven talent drain. Our work on the downsizing conducted by other organizations adds further perspective on some challenges associated with certain strategies and the need to conduct effective planning when downsizing a workforce. of downsizing undertaken by 17 private In 1995, we conducted a review companies, 5 states, and 3 foreign governments, generally selected because they were reputed to have downsized successfully. We reported that a number of factors may constrain organizations’ downsizing strategies, such as public sentiment, budget limitations, legislative mandates to maintain certain programs, and personnel laws. Moreover, we found that using attrition as a sole downsizing tool can result in skills imbalances in an organization’s workforce because the employees who leave are not necessarily those the organization determined to be excess. Further, we also found that attrition is often not sufficient to reduce employment levels in the short term. In addition, some workforce reduction strategies have been found to slow the hiring, promotion, and transfer process and create skills imbalances. However, we found that one key theme emerged from such downsizing efforts. Specifically, most organizations found that workforce planning had been essential in identifying positions to be eliminated and pinpointing specific employees for potential separation. In organizations where planning did not occur or was not effectively implemented, difficulties arose in the downsizing. For example, we reported that a lack of effective planning for skills retention can lead to a loss of critical staff, and that an organization that simply reduces the number of employees without changing work processes will likely have staffing growth recur eventually. We have also identified the potential cost implications of downsizing in our prior work. In 1995, we reported that the savings realized from government downsizing efforts are difficult to estimate. Payroll savings attributed to workforce reductions would not be the amount of actual savings to the federal government from the personnel reductions because of other costs associated with such efforts—for example, separation incentives— or, in the case of reductions-in-force, severance pay. In addition, the ultimate savings would depend on what happened to the work previously performed by the eliminated personnel. For example, if some of the work was contracted out to private companies, contract costs should be considered in determining whether net savings resulted from workforce reductions. In 2001, we concluded that, considering the enormous changes that DOD’s civilian workforce had undergone and the external pressures and demands faced by the department, taking a strategic approach to human capital would be crucial to organizational results. As I will discuss further, this is no less true today than it was in 2001. I turn now to opportunities we have identified for DOD to enhance its strategic human capital planning. Since the end of the Cold War, the civilian workforce has undergone substantial change, due primarily to downsizing, base realignments and closures, competitive sourcing initiatives, and DOD’s changing mission. For example, between fiscal years 1989 and 2002, DOD’s civilian workforce shrank from 1,075,437 to 670,166—about a 38 percent reduction. According to the department, as of January 2012, DOD’s total civilian workforce had grown to include about 783,000 civilians. As I have noted, the achievement of DOD’s mission is dependent in large part on the skills and expertise of its civilian workforce, and today’s current and long-term fiscal outlook underscore the importance of a strategic and efficient approach to human capital management. The ability of federal agencies to achieve their missions and carry out their responsibilities depends in large part on whether they can sustain a workforce that possesses the necessary education, knowledge, skills, and competencies. Our work has shown that successful public and private organizations use strategic management approaches to prepare their workforces to meet present and future mission requirements. Preparing a strategic human capital plan encourages agency managers and stakeholders to systematically consider what is to be done, how it will be done, and how to gauge progress and results. While the department has made progress adopting some of these approaches, we remain concerned that some missing key elements of strategic workforce planning will hinder DOD’s ability to most effectively and efficiently achieve its mission. As we have reported in the past, federal agencies have used varying approaches to develop and present their strategic workforce plans. To facilitate effective workforce planning, we and the Office of Personnel Management have identified six leading principles such workforce plans should incorporate, including: aligning workforce planning with strategic planning and budget involving managers, employees, and other stakeholders in planning; identifying critical skills and competencies and analyzing workforce gaps; employing workforce strategies to fill the gaps; building the capabilities needed to support workforce strategies through steps to ensure the effective use of human capital flexibilities; and monitoring and evaluating progress toward achieving workforce planning and strategic goals. The application of these principles will vary depending on the particular circumstances the agency faces. For example, an agency that is faced with the need for a long lead time to train employees hired to replace those retiring and an increasing workload may focus its efforts on estimating and managing retirements. Another agency with a future workload that could rise or fall sharply may focus on identifying skills to manage a combined workforce of federal employees and contractors. Over the past few years, Congress has enacted a number of provisions requiring DOD to conduct human capital planning efforts for its overall civilian, senior leader, and acquisition workforces and provided various tools to help manage the department’s use of contractors, who augment DOD’s total civilian workforce. For example, the National Defense Authorization Act for Fiscal Year 2006 directed DOD to create and periodically update a strategic human capital plan that addressed, among other things, the existing critical skills and competencies of the civilian workforce as well as projected needs, gaps in the existing or projected civilian workforce, and projected workforce trends. Subsequent acts established additional requirements for the human capital plan, including requirements to assess issues related to funding of its civilian workforce. We have closely monitored DOD’s efforts to address the aforementioned requirements. In our September 2010 review of DOD’s 2009 update to its human capital strategic plan we found that, although DOD had demonstrated some progress in addressing the legislative requirements related to its Civilian Human Capital Strategic Workforce Plan, several key elements continued to be missing from the process—including such elements as competency gap analyses and monitoring of progress. Our work found that DOD’s plan addressed the requirement to assess critical skills. Specifically, the overall civilian workforce plan identified 22 mission- critical occupations that, according to the department, represent the results of its assessment of critical skills. According to DOD, mission- critical occupations are those occupations that are key to current and future mission requirements, as well as those that present a challenge regarding recruitment and retention rates and for which succession planning is needed. Examples of mission-critical occupations include (1) contracting, (2) accounting, and (3) information technology management. However, as noted, DOD’s plan lacked such key elements as competency gap analysis and monitoring of progress. Our prior work identified competency gap analyses and monitoring progress as two key elements in the strategic workforce planning process. Competency gap analyses enable an agency to develop specific strategies to address workforce needs and monitoring progress demonstrates the contribution of workforce planning to achieving program goals. For example, at the time of our review, because the plan discussed competency gap analyses for only 3 of the 22 mission-critical occupations and did not discuss competency gaps for the other 19 mission-critical occupations, we determined that the requirement was only partially addressed. Moreover, DOD was in the initial stages of assessing competency gaps for its senior leader workforce, but it had not completed the analysis needed to identify gaps. Without including analyses of gaps in critical skills and competencies as part of its strategic workforce planning efforts, DOD and the components may not be able to design and fund the best strategies to fill their talent needs through recruiting and hiring or to make appropriate investments to develop and retain the best possible workforce. Further, DOD leadership may not have information necessary to make informed decisions about future workforce reductions, should further reductions to its workforces become necessary. We currently have ongoing work assessing DOD’s 2010 Strategic Workforce Plan, which the department released in March 2012. The results of this review are expected to be released in September 2012. In light of the challenges DOD has faced in its strategic workforce planning, we support the department’s participation in efforts being made across the federal government to address governmentwide critical skills gaps. Currently, the Office of Personnel Management and DOD are leading a working group comprised of members of the Chief Human Capital Officers Council tasked with (1) identifying mission-critical occupations and functional groups, (2) developing strategies to address gaps in these occupations and groups, and (3) implementing and monitoring these strategies. Our reviews of DOD’s acquisition, information technology, and financial management workforces—which include a number of DOD’s identified mission-critical occupations—amplifies some of our overarching observations related to strategic workforce planning. In fiscal year 2011 alone, DOD obligated about $375 billion to acquire goods and services to meet its mission and support its operations in the United States and abroad. As noted, our prior work found that the significant reductions to the acquisition workforce in the 1990s produced serious imbalances in the skills and experience of this highly talented and specialized workforce. The lack of an adequate number of trained acquisition and contract oversight personnel has, at times, contributed to unmet expectations and placed DOD at risk of potentially paying more than necessary. Our February 2011 high-risk report noted that DOD needs to ensure that its acquisition workforce is adequately sized, trained, and equipped to meet department needs. We further reported in November 2011 that the department has focused much-needed attention on rebuilding its acquisition workforce and made some progress in terms of growing the workforce, identifying the skills and competencies it needed, and used such information to help update its training curriculum. While DOD has acknowledged that rebuilding its acquisition workforce is a strategic priority, our most recent review of the Defense Acquisition Workforce Development Fund found that DOD continues to face challenges in strategic workforce planning for its acquisition workforce. Specifically, we found that DOD lacks an overarching strategy to clearly align this fund with its acquisition workforce plan. The department has also not developed outcome-related metrics, such as the extent to which the fund is helping DOD address its workforce skills and competencies gaps. Moreover, we remain concerned that the acquisition workforce continues to face challenges in terms of the age and retirement eligibility of its members. According to the most recent reported data from the Federal Acquisition Institute, as of December 2011, the average age of the acquisition workforce ranged from 47 years to 51.7 years, with at least 36 percent of the workforce becoming eligible to retire over the next 10 years. We have also identified a number of challenges associated with DOD’s workforce planning for its financial management and information technology workforces. With regard to the financial management workforce, we reported in July 2011 that DOD’s financial management has been on GAO’s high-risk list since 1995 and, despite several reform initiatives, remains on the list today. Specifically, we noted that effective financial management in DOD will require a knowledgeable and skilled workforce that includes individuals who are trained and certified in accounting. DOD accounting personnel are responsible for accounting for funds received through congressional appropriations, the sale of goods and services by working capital fund businesses, revenue generated through nonappropriated fund activities, and the sales of military systems and equipment to foreign governments or international organizations. According to DOD’s fiscal year 2012 budget request, the Defense Finance and Accounting Service processed approximately 198 million payment-related transactions and disbursed over $578 billion in fiscal year 2010. However, we also reported in July 2011 that DOD’s strategic workforce plan lacked a competency gap analysis for its financial management workforce, thus limiting the information DOD has on its needs and gaps in that area and the department’s ability to develop an effective financial management recruitment, retention, and investment strategy to address other financial management challenges. With regard to DOD’s information technology workforce, we reported2011 that, as threats to federal information technology infrastructure and systems continue to grow in number and sophistication, the ability to secure these infrastructure and systems will depend on the knowledge, skills, and abilities of the federal and contractor workforce that implements and maintains these systems. We noted that DOD’s information assurance workforce plan—which addresses information technology—incorporates critical skills, competencies, categories, and specialties of the information assurance workforce, but only partially describes strategies to address gaps in human capital approaches and critical skills competencies. DOD’s workforce is comprised of military personnel, civilians, and contractors. DOD has acknowledged, however, that with approximately 30 percent of its workforce eligible to retire by March 31, 2015, and the need to reduce its reliance on contractors to augment the current workforce, it faces a number of significant challenges. Our September 2010 review of DOD’s strategic workforce plan found that the department had issued a directive stating that missions should be accomplished using the least costly mix of personnel (military, civilian, and contractors) consistent with military requirements and other needs. However, the department’s workforce plan did not provide an assessment of the appropriate mix of military, civilian, and contractor personnel capabilities. accompanying a proposed bill for the More recently, the House Report National Defense Authorization Act for Fiscal Year 2013 directs GAO to assess what measures DOD is taking to appropriately balance its current and future workforce structure against its requirements. Specifically, we plan for our review to include: (1) the process by which DOD identified its civilian workforce requirements, taking into consideration the withdrawal from Iraq and impending withdrawal from Afghanistan; and (2) the analysis done by DOD to identify core or critical functions, including which of those functions would be most appropriately performed by military, civilian, or contractor personnel. Our report is due to the Armed Services Committees of the House and Senate by March 15, 2013. H.R. Rep. No. 112-479, at 196-197 (2012), which accompanies H.R. 4310, 112th Cong. (2012). In conclusion, DOD has a large, diverse federal civilian workforce that is key to maintaining our national security. However, as we have noted, DOD’s workforce also includes military and contractor personnel and changes made to one of these groups may impact the others. As such, we are currently assessing the measures the department is taking to appropriately balance its current and future workforce structure and its requirements. Chairman Forbes, Ranking Member Bordallo, this concludes my prepared remarks. I would be happy to respond to any questions that you or other Members of the Subcommittee may have at this time. For future questions about this statement, please contact Brenda S. Farrell, Director, Defense Capabilities and Management, at (202) 512-3604 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Margaret Best, Assistant Director; Spencer Tacktill; Jennifer Weber; Erik Wilkins-McKee; Nicole Willems; and John Van Schaik. In addition, Penny Berrier, Mark Bird, Timothy DiNapoli, Gayle Fischer, Steven Lozano, Belva Martin, Carol Petersen, and Rebecca Shea made contributions to this report. Defense Acquisition Workforce: Improved Processes, Guidance, and Planning Needed to Enhance Use of Workforce Funds. GAO-12-747R. Washington, D.C.: June 20, 2012. Defense Acquisitions: Further Actions Needed to Improve Accountability for DOD’s Inventory of Contracted Services. GAO-12-357. Washington, D.C.: April 6, 2012. Defense Workforce: DOD Needs to Better Oversee In-sourcing Data and Align In-sourcing Efforts with Strategic Workforce Plans. GAO-12-319. Washington, D.C.: February 9, 2012. Streamlining Government: Key Practices from Select Efficiency Initiatives Should Be Shared Governmentwide. GAO-11-908. Washington, D.C.: September 30, 2011. DOD Financial Management: Numerous Challenges Must Be Addressed to Improve Reliability of Financial Information. GAO-11-835T. Washington, D.C.: July 27, 2011. DOD Civilian Personnel: Competency Gap Analyses and Other Actions Needed to Enhance DOD’s Strategic Workforce Plans. GAO-11-827T. Washington, D.C.: July 14, 2011. High Risk Series: An Update. GAO-11-278. Washington, D.C.: February 16, 2011. Human Capital: Further Actions Needed to Enhance DOD’s Civilian Strategic Workforce Plan. GAO-10-814R. Washington, D.C.: September 27, 2010. Workforce Planning: Interior, EPA, and the Forest Service Should Strengthen Linkages to Their Strategic Plans and Improve Evaluation. GAO-10-413. Washington, D.C.: March 31, 2010. Human Capital: Opportunities Exist to Build on Recent Progress to Strengthen DOD’s Civilian Human Capital Strategic Plan. GAO-09-235. Washington, D.C.: February 10, 2009. High Risk Series: An Update. GAO-07-310. Washington, D.C.: January 31, 2007. Human Capital: Agencies Are Using Buyouts and Early Outs with Increasing Frequency to Help Reshape Their Workforces. GAO-06-324. Washington, D.C.: March 31, 2006. DOD Civilian Personnel: Comprehensive Strategic Workforce Plans Needed. GAO-04-753. Washington, D.C.: June 30, 2004. Human Capital: Major Human Capital Challenges at the Departments of Defense and State. GAO-01-565T. Washington, D.C.: March 29, 2001. High Risk Series: An Update. GAO-01-263. Washington, D.C.: January 1, 2001. Human Capital: Strategic Approach Should Guide DOD Civilian Workforce Management. GAO/T-GGD/NSIAD-00-120. Washington, D.C.: March 9, 2000. Human Capital: A Self Assessment Checklist for Agency Leaders. GAO/GGD-99-179. Washington, D.C.: September 1999. Acquisition Management: Workforce Reductions and Contractor Oversight. GAO/NSIAD-98-127. Washington, D.C.: July 31, 1998. Workforce Reductions: Downsizing Strategies Used in Select Organizations. GAO/GGD-95-54. Washington, D.C.: March 13, 1995. Defense Civilian Downsizing: Challenges Remain Even With Availability of Financial Separation Incentives. GAO/NSIAD-93-194. Washington, D.C.: May 14, 1993. Defense Force Management: Challenges Facing DOD As It Continues to Downsize Its Civilian Workforce. GAO/NSIAD-93-123. Washington, D.C.: February 12, 1993. Defense Force Management: Expanded Focus in Monitoring Civilian Force Reductions Is Needed. GAO/T-NSIAD-92-19. Washington, D.C.: March 18, 1992. Defense Force Management: DOD Management of Civilian Force Reductions. GAO/T-NSIAD-92-10. Washington, D.C.: February 20, 1992. Defense Force Management: Limited Baseline for Monitoring Civilian Force Reductions. GAO/NSIAD-92-42. Washington, D.C.: February 5, 1992. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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DOD’s workforce of 783,000 civilians performs a wide variety of duties, including some traditionally performed by military personnel, such as mission-essential logistics support and maintenance, as well as providing federal civilian experts to Afghanistan and other theaters of operations. With the long-term fiscal challenges facing the nation, reductions to the civilian workforce may be considered to achieve cost savings. Human capital has remained a critical missing link in reforming and modernizing the federal government’s management practices, even as legislation and other actions since 1990 have been put in place to address major management areas. In the past, GAO has observed that the federal government has often acted as if people were costs to be cut rather than assets to be valued. DOD previously experienced significant downsizing in the 1990s where it did not focus on reshaping the civilian workforce in a strategic manner. Particularly as decision makers consider proposals to reduce the civilian workforce, it will be critical to DOD’s mission for the department to have the right number of federal civilian personnel with the right skills. This testimony discusses DOD’s 1) prior experience with civilian workforce downsizing, and 2) current strategic human capital planning efforts. This testimony is based on GAO reviews issued from March 1992 through June 2012. Prior Department of Defense (DOD) civilian workforce downsizing efforts in the 1990s were not oriented toward shaping the makeup of the workforce, resulting in significant imbalances in terms of shape, skills, and retirement eligibility. Specifically, in a series of reviews GAO found that DOD’s efforts in the 1990s to reduce its federal civilian workforce to levels below that of 1987 were hampered by incomplete data and lack of a clear strategy for avoiding skill imbalances and other adverse effects of downsizing. For instance, in 1992, GAO found that DOD used incomplete and inconsistent data related to workers, workload, and projected force reductions. Further, the approaches DOD has relied on to accomplish downsizing have sometimes had unintended consequences. The use of voluntary attrition, hiring freezes, and financial separation incentives allowed DOD to mitigate some adverse effects of civilian workforce reductions, but were less oriented toward shaping the makeup of the workforce than was the approach the department used to manage its military downsizing. For DOD, this was especially true of the civilian acquisition workforce. The department, which in 2011 obligated about $375 billion to acquire goods and services, was put on the verge of a retirement-driven talent drain in this workforce after 11 consecutive years of downsizing, according to a DOD report. Finally, GAO has found that the use of strategies such as financial separation incentives makes it difficult to document or estimate the actual cost savings of government downsizing efforts, especially in cases where the work previously performed by the eliminated personnel continues to be required. For example, if the work continues to be required, it may need to be contracted out to private companies and contract costs should be considered in determining whether net savings resulted from workforce reductions. DOD has taken positive steps towards identifying its critical skills, but there are opportunities to enhance the department’s current strategic workforce plans. GAO and the Office of Personnel Management have identified leading principles to incorporate into effective workforce plans, such as the need to identify and address critical skills and competencies. DOD has been required to have a civilian strategic workforce plan since 2006. Currently, DOD is required to develop a strategic workforce plan that includes, among other things, an assessment of the skills, competencies and gaps, projected workforce trends, and needed funding of its civilian workforce. GAO has found improvements in DOD’s efforts to strategically manage its civilian workforce. For instance, GAO reported in 2010 that DOD’s 2009 strategic workforce plan assessed critical skills and identified 22 mission-critical occupations, such as acquisition and financial management. However, DOD’s plan only discussed competency gap analyses for 3 of its 22 mission-critical occupations, which GAO has reported is key to enabling an agency to develop specific strategies to address workforce needs. For example, GAO found that DOD had not conducted a competency gap analysis for its financial management workforce, and GAO remains concerned that DOD lacks critical information it needs to effectively plan for its workforce requirements. GAO is currently reviewing DOD’s latest strategic workforce plan, which was released in March 2012. The results of this review are expected to be released in September 2012.

You are an expert at summarizing long articles. Proceed to summarize the following text: There is no single definition for financial literacy, but it has previously been described as the ability to make informed judgments and to take effective actions regarding current and future use and management of money. Financial literacy encompasses both financial education and consumers’ behavior as it relates to their ability to make informed judgments. Financial education refers to the processes whereby individuals improve their knowledge and understanding of financial products, services, and concepts. However, being financially literate refers to more than simply being knowledgeable about financial matters—it also entails utilizing that knowledge to make informed decisions, avoid pitfalls, and take other actions to improve one’s present and long-term financial well-being. Evidence indicates that many U.S. consumers could benefit from improved financial literacy efforts. In a 2010 survey of U.S. consumers prepared for the National Foundation for Credit Counseling, a majority of consumers reported they did not have a budget and about one-third were not saving for retirement. In a 2009 survey of U.S. consumers by the FINRA Investor Education Foundation, a majority believed themselves to be good at dealing with day-to-day financial matters, but the survey also revealed that many had difficulty with basic financial concepts. Further, about 25 percent of U.S. households either have no checking or savings account or rely on alternative financial products or services that are likely to have less favorable terms or conditions, such as nonbank money orders, nonbank check-cashing services, or payday loans. As a result of this situation, many Americans may not be planning their finances in the most effective manner for maintaining or improving their financial well-being. In addition, individuals today have more responsibility for their own retirement savings because traditional defined-benefit pension plans have declined substantially over the past two decades. As a result, financial skills are increasingly important for those individuals in or planning for retirement to help ensure that retirees can enjoy a comfortable standard of living. Federal financial literacy programs and resources are spread widely among many different federal agencies, raising concerns about fragmentation and potential duplication of effort. As we noted in our recent report on overlap, duplication, and fragmentation, in 2009, more than 20 different agencies had more than 50 financial literacy initiatives under way that covered a number of topics, used a variety of delivery mechanisms, and targeted a range of audiences. This distribution of federal financial literacy efforts across multiple agencies can have certain advantages. For example, different agencies can focus their efforts on particular subject matter or target specific audiences for which they have expertise. However, this fragmentation also increases the risk of inefficiency and redundancy and highlights the need for strong coordination of these efforts. Further, fragmentation of programs across many federal agencies can make it difficult to develop a coherent overall approach for meeting needs, identifying gaps, and rationally allocating overall resources. Because of the fragmentation of federal financial literacy efforts, coordination among agencies is essential to avoid inefficient, uncoordinated, or redundant use of resources. Identifying potential inefficiencies can be challenging because federal financial literacy efforts have numerous different funding streams and there are little good data on the amount of federal funds devoted to financial literacy. Financial literacy efforts are not necessarily organized as separate budget line items or cost centers within federal agencies and there is no estimate of overall federal spending for financial literacy and education, according to the Department of the Treasury. In part to encourage a more coordinated response to financial literacy, in 2003 Congress created the multiagency Financial Literacy and Education Commission and mandated that the Commission develop a national strategy. We conducted a review of the Commission in 2006 and made recommendations related to enhancing public-private partnerships, conducting independent reviews of duplication and effectiveness, and conducting usability testing of the Commission’s MyMoney.gov Web site. We subsequently reported that the Commission had made progress in cultivating sustainable partnerships with states, localities, nonprofits, and private entities, and had acted on our recommendation to measure customer satisfaction with its Web site. The Commission and the Department of the Treasury also initiated two independent reviews, as we had recommended, addressing overlap in federal activities and the availability and impact of federal financial literacy materials. As we have noted in the past, the Commission faces significant challenges in its role as a centralized focal point: it is composed of many agencies, but it has no independent budget and no legal authority to compel member agencies to take any action. Our 2006 review also found that while the Commission’s initial national strategy was a useful first step in focusing attention on financial literacy, it was largely descriptive rather than strategic. In particular, the national strategy was comprehensive to the extent of discussing major issues and challenges in improving financial literacy and describing initiatives in government, nonprofit, and private sectors. However, it did not include a plan for implementation and only partially addressed some of the characteristics we had previously identified as desirable for any effective national strategy. For example, although it provided a clear purpose, scope, and methodology, it did not go far enough to provide a detailed discussion of problems and risks; establish specific goals, performance measures, and milestones; discuss the resources that would be needed to implement the strategy; or discuss, assign, or recommend roles and responsibilities for achieving its mission. However, in December 2010, the Commission released a new national strategy that identifies five action areas—policy, education, practice, research, and coordination––and clearly lays out a series of goals and related objectives intended to help guide financial literacy efforts over the next several years. To supplement this national strategy, the Commission has said it will be releasing an implementation plan for the strategy by the end of this fiscal year. While the new national strategy clearly identifies action areas and related goals and objectives, it still needs to incorporate specific provisions for performance measures, resource needs, and roles and responsibilities, which we believe to be essential for an effective strategy. The new strategy will benefit if the forthcoming implementation plan incorporates these elements, as well as addresses the fragmentation of federal financial literacy efforts. More recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires the establishment of an Office of Financial Education within the new Bureau of Consumer Financial Protection, further underscoring the need for coordination among federal agencies on this topic. The Dodd-Frank Act charges the new office within the bureau with developing and implementing a strategy to improve financial literacy through activities including opportunities for consumers to access, among other things, financial counseling; information to assist consumers with understanding credit products, histories, and scores; information about saving and borrowing tools; and assistance in developing long-term savings strategies. This new office presents an opportunity to further promote awareness, coordinate efforts, and fill gaps related to financial literacy. At the same time, the duties this office is charged with fulfilling are in some ways similar to those of the separate Office of Financial Education and Financial Access within the Department of the Treasury. As noted above, the Dodd-Frank Act charges the Bureau of Consumer Financial Protection with developing and implementing a strategy on improving the financial literacy of consumers—one that is consistent with, but separate from, the strategy required of the Commission. Thus, these entities will need to coordinate their roles and activities closely to avoid unnecessary overlap and make the most productive use of resources. Coordination and partnership among federal, state, nonprofit, and private sectors are also essential in addressing financial literacy, and there have been positive developments in these areas in recent years. For example, a recent partnership between the National Credit Union Administration, the Department of Education, and the Federal Deposit Insurance Corporation aims to improve the financial education of millions of students. These three agencies are coordinating to facilitate partnerships among schools, financial institutions, federal grantees, and other stakeholders to provide effective financial education. Additionally, the National Financial Education Network, the President’s Advisory Council on Financial Capability, and the Community Financial Access Pilot all represent examples of progress in fostering partnerships among participants in financial education. For example, our review in 2009 found that the establishment of the National Financial Education Network was a useful initial action to facilitate and advance financial education at the state and local levels. Similarly, the President’s Advisory Council on Financial Capability facilitates strategic alliances among federal, private, and nonprofit enterprises. Although numerous financial literacy initiatives are conducted by federal, state, local, nonprofit, and private entities throughout the country, there is little definitive evidence available on what specific programs and approaches are most effective. As part of ongoing work we are performing in response to a mandated study in the Dodd-Frank Act, we are conducting a review of studies that have evaluated the effectiveness of financial literacy efforts. More than 100 articles, papers, and studies have been published on the general topic of financial literacy since 2000, but our preliminary findings have identified only about 20 papers that constitute empirically based evaluations on the effectiveness of specific financial education programs. In addition, only about 10 of these studies actually measured the impact of a program on participants’ behavior rather than simply identifying a change in the consumer’s knowledge, understanding, or intent. This distinction is important because a change in behavior is typically the ultimate goal of any financial literacy program, and changes in behavior do not necessarily follow from changes in knowledge or understanding. We are currently in the process of analyzing the results of these studies and look forward to reporting more fully on our findings this summer. But in general, the consensus among a wide variety of stakeholders in the field of financial literacy is that relatively little is known about what financial literacy approaches are most effective in meaningfully changing consumers’ financial behavior. The limited number of rigorous, outcome-based evaluations of financial literacy programs is likely the result of several factors. Because the field of financial literacy is relatively new, many programs have not been in place long enough to allow for a long-term study of their effectiveness; many of the key federal financial literacy initiatives were created only within the past 10 years. In addition, experts in financial literacy and program evaluation have cited many significant challenges to conducting rigorous and definitive evaluations of financial literacy programs. For example, measuring a change in participant behavior is much more difficult than measuring a gain in knowledge, which can often be captured through a simple post-course survey. Similarly, financial literacy programs often seek to effect change over the long term, which means that effective evaluation can require ongoing follow up with participants—a complex and expensive process. In addition, discerning the impact of the financial literacy program as distinct from other influences, such as changes in the overall economy, can often be difficult. Nonetheless, given that federal agencies have limited resources, focusing federal financial literacy resources on initiatives that work is important. Some federal financial literacy programs, such as the Federal Deposit Insurance Corporation’s Money Smart, have included a strong evaluation component, while others have not. The Financial Literacy and Education Commission and many federal agencies have recognized the need for a greater understanding of which programs are most effective in improving financial literacy. The Commission’s original national strategy in 2006 noted, for example, that more research and program evaluation are needed so that organizations are able to validate or improve their efforts and measure the impact of their work. In response, in October 2008, the Department of the Treasury and the Department of Agriculture convened, on behalf of the Commission, the National Research Symposium on Financial Literacy and Education, which discussed academic research priorities related to financial literacy. Moreover, we are pleased to see that the Commission’s new 2011 national strategy sets as one of its four goals to “identify, enhance, and share effective practices.” The new strategy sets objectives for reaching this goal that include, among other things, (1) encouraging research on financial literacy strategies that affect consumer behavior, (2) establishing a clearinghouse for evidence-based research and evaluation studies, (3) developing and disseminating tools and strategies to encourage and support program evaluation, and (4) forming a network for sharing research and best practices. These measures are positive steps in helping ensure that, in the long term, scarce resources are focused efficiently and effectively. At the same time, as we have noted in the past, an effective national strategy goes beyond simply setting objectives; it also must describe the specific actions needed to accomplish goals, identify the resources required, and discuss appropriate roles and responsibilities for the players involved. We encourage the Commission and its participating agencies to incorporate these elements into the national strategy’s implementation plan, which is slated to be released later this year. In addition, it is important to note that financial education is not the only approach—or necessarily always the best approach—for improving consumers’ financial behavior. Alternative strategies or mechanisms, sometimes in conjunction with financial education, have also been successful in improving financial behavior. In particular, insights from behavioral economics that recognize the realities of human psychology have been used effectively to design strategies to assist consumers in reaching financial goals without compromising their ability to choose among different products or approaches. For example, one strategy has been to use what are referred to as commitment mechanisms, such as having individuals commit well in advance to allocating a portion of their future salary increases toward a savings plan. Another strategy for encouraging consumers to increase their savings has been to use incentives with tangible benefits, such as matching funds. In addition, changing the default option for enrollment in retirement plans—that is, automatically enrolling new employees while giving them the opportunity to opt out—has led to significant increases in plan participation rates among some organizations. The most effective approach to improving consumers’ financial decision making and behavior may be to use a variety of these types of strategies in conjunction with financial education. As I noted during my confirmation hearing, financial literacy is an area of priority for me as Comptroller General, and during my tenure, I hope to draw additional attention to this important issue. Improving financial literacy involves many stakeholders and must be a partnership between the federal government, state and local governments, the private and nonprofit sectors, and academia. My hope is that GAO can play a role in facilitating knowledge transfer among these different entities, as well as working with other organizations in the accountability community, such as the American Institute of Certified Public Accountants. Almost 7 years ago we hosted a forum on the role of the federal government in improving financial literacy. At that forum, public and private sector experts highlighted, among other things, the need for the federal government to serve as a leader in this area, but they also stressed the importance of public-private partnerships. We will host another forum on financial literacy later this year to bring together experts in financial literacy and education from federal and state agencies, nonprofit organizations representing consumers, educational and academic institutions, and private sector employers. This forum will address the gaps that exist in financial literacy efforts, challenges that federal agencies may face in addressing these gaps, and opportunities for improving the federal government’s approach to financial literacy. In addition, as part of our audit and oversight function, we will continue to conduct evaluations of the efficiency and effectiveness of federal financial literacy efforts. Financial literacy plays a role in a wide variety of areas that GAO regularly reviews—including student loans, retirement savings, banking and investment products, and homebuyer assistance programs, to name a few. For example, in work we have done on retirement savings, we have made recommendations intended to facilitate consumers’ understanding of retirement plans, disclosures, and any associated fees. Additionally, our reviews of financial products will continue to focus on consumer understanding of these products, as well as strategies for encouraging consumers to make sound decisions about them. Moreover, we will continue our body of work evaluating various consumer protections, which in conjunction with financial education are a key component in helping consumers avoid abusive or misleading financial products, services, or practices. Financial education has its limitations, of course, but it does represent an important tool that can benefit both individuals and our economy as a whole. On an individual level, better money management and financial decisions can play an important role in improving families’ standard of living and helping them achieve long-term financial goals. While personal financial decisions are made by individuals and their families, the federal government can play a role in helping ensure that its citizens have easy access to financial information and the tools they need to make sound decisions. Moreover, improving consumer financial literacy can be beneficial to our national economy as a whole. Financial markets function best when consumers understand how financial service providers and products work and know how to choose among them. Our income tax system requires citizens to have an adequate understanding of both the tax system itself and financial matters in general. Educated citizens are also important to well-functioning retirement systems—for example, workers should understand the benefit of saving for their retirement to supplement any benefits received from Social Security. Finally, our nation faces a challenging long-term fiscal outlook, and it is important that our citizens understand and are attentive to the fact that the federal government faces hard choices that will affect their own, and our nation’s, economic future. Chairman Akaka, Ranking Member Johnson, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact Alicia Puente Cackley at (202) 512-8678 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Alicia Puente Cackley (Director), Jason Bromberg (Assistant Director), Tania Calhoun, Beth Ann Faraguna, Jennifer Schwartz, and Andrew Stavisky. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. Consumer Finance: Factors Affecting the Financial Literacy of Individuals with Limited English Proficiency. GAO-10-518. Washington, D.C.: May 21, 2010. Financial Literacy and Education Commission: Progress Made in Fostering Partnerships, but National Strategy Remains Largely Descriptive Rather Than Strategic. GAO-09-638T. Washington, D.C.: April 29, 2009. Financial Literacy and Education Commission: Further Progress Needed to Ensure an Effective National Strategy. GAO-07-100. Washington, D.C.: December 4, 2006. Highlights of a GAO Forum: The Federal Government’s Role in Improving Financial Literacy. GAO-05-93SP. Washington, D.C.: November 15, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Financial literacy plays an important role in helping ensure the financial health and stability of individuals, families, and our broader national economy. Economic changes in recent years have highlighted the need to empower Americans to make informed financial decisions, yet evidence indicates that many U.S. consumers could benefit from a better understanding of financial matters. For example, recent surveys indicate that many consumers have difficulty with basic financial concepts and do not budget. This testimony discusses (1) the state of the federal government's approach to financial literacy, (2) observations on overall strategies for addressing financial literacy, and (3) the role GAO can play in addressing and raising awareness on this issue. This testimony is based largely on prior and ongoing work, for which GAO conducted a literature review; interviewed representatives of organizations that address financial literacy within the federal, state, private, nonprofit, and academic sectors; and reviewed materials of the Financial Literacy and Education Commission. While this statement includes no new recommendations, in the past GAO has made a number of recommendations aimed at improving financial literacy efforts.. Federal financial literacy efforts are spread among more than 20 different agencies and more than 50 different programs and initiatives, raising concerns about fragmentation and potential duplication of effort. The multiagency Financial Literacy and Education Commission, which coordinates federal efforts, has acted on recommendations GAO made in 2006 related to public-private partnerships, studies of duplication and effectiveness, and the Commission's MyMoney.gov Web site. While GAO's 2006 review of the Commission's initial national strategy for financial literacy found that it was a useful first step in focusing attention on financial literacy, it was largely descriptive rather than strategic. The Commission recently released a new strategy for 2011, which laid out clear goals and objectives, but it still needs to incorporate specific provisions for performance measures, resource needs, and roles and responsibilities, all of which GAO believes to be essential for an effective strategy. However, the Commission will be issuing an implementation plan to accompany the strategy later this year and the strategy will benefit if the plan incorporates these elements. The new Bureau of Consumer Financial Protection will also have a role in financial literacy, further underscoring the need for coordination among federal entities. Coordination and partnership among federal, state, nonprofit, and private sectors is also essential in addressing financial literacy, and there have been some positive developments in fostering such partnerships in recent years. There is little definitive evidence available on what specific programs and approaches are most effective in improving financial literacy, and relatively few rigorous studies have measured the impact of specific financial literacy programs on consumer behavior. Given that federal agencies have limited resources for financial literacy, it is important that these resources be focused on initiatives that are effective. To this end, the Commission's new national strategy on financial education sets as one of its four goals identifying, enhancing, and sharing effective practices. However, financial education is not the only approach for improving consumers' financial behavior. Several other mechanisms and strategies have also been shown to be effective, including financial incentives or changes in the default option, such as automatic enrollment in employer retirement plans. The most effective approach may involve a mix of financial education and these other strategies. GAO will continue to play a role in supporting and facilitating knowledge transfer on financial literacy. GAO will host a forum on financial literacy later this year to bring together experts from federal and state agencies and nonprofit, educational, and private sector organizations. The forum will address gaps, challenges, and opportunities related to federal financial literacy efforts. In addition, as part of GAO's audit and oversight function, GAO will continue to evaluate the effectiveness of federal financial literacy programs, as well as identify opportunities to improve the efficient and cost-effective use of these resources.

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