Military Pensions: Servicemembers Need Better Information to Support Retirement Savings Decisions

DOD's new retirement system, BRS, provides automatic and matching DOD contributions to servicemembers' individual Thrift Savings Plan accounts but reduces the retirement annuity paid to those who serve at least 20 years. BRS also offers servicemembers the option of taking part of their retirement annuity as a lump-sum payment.

GAO was asked to describe DOD's financial education efforts under BRS. This report examines (1) actions DOD has taken to help servicemembers understand BRS and saving for retirement, (2) what DOD can learn from financial literacy training effective practices and its implementation of BRS training to continue supporting servicemembers in saving for retirement, and (3) how BRS lump-sum payment amounts are determined.

GAO reviewed DOD's efforts to educate servicemembers on retirement decisions, conducted group interviews with senior officers and enlisted servicemembers at five military installations on facilitating the rollout of BRS training to junior servicemembers, and created a lump-sum payment calculator to compare different calculation methods and assumptions on the value of the lump-sum payment.

In 2016, the Department of Defense (DOD), along with the military service branches, began a multi-year effort to provide training to help servicemembers make informed decisions about saving for retirement through DOD's new retirement system, the Blended Retirement System (BRS). DOD provided computer-based training to help military supervisors, financial counselors, and eligible servicemembers understand the new retirement system, implemented in 2018, and its impact on saving for retirement. DOD trained financial counselors to provide servicemembers in-person, one-on-one financial counseling and classroom courses on BRS and related topics. In addition, DOD prepared ongoing financial literacy training that servicemembers will take upon reaching specific career and life stages.

BRS trainings met many of the effective practices for financial literacy training identified in prior GAO work, but some DOD trainings do not incorporate the practice of assessing servicemembers' financial literacy. DOD could use such assessments to modify course material to bolster training in areas where servicemembers' comprehension was weaker. Without assessing whether its financial literacy training is effectively conveying course information, DOD may be missing opportunities to better support servicemembers' retirement decisions. Servicemembers also reported challenges in taking the Opt-In Course for BRS that may inform ongoing and future DOD training.

Examples of Servicemembers' Financial Literacy Challenges on Retirement

DOD determines BRS lump-sum payment amounts at retirement by applying an interest rate (or discount rate) to calculate the present value of annuity payments servicemembers forego by taking a lump sum. The BRS discount rate exceeds the rate used by private-sector pension plans, resulting in a lower lump sum than if private-sector rates applied. DOD can take certain steps to help servicemembers understand how to compare the BRS lump-sum payment option with the full annuity option. Without this information, servicemembers may not make informed decisions and potentially risk their retirement savings.

GAO recommends 1) DOD assess its course evaluations to improve its financial literacy training on retirement for servicemembers, 2) DOD provide key information on the calculation of retirement lump-sum payments, and 3) Federal Retirement Thrift Investment Board explore alternatives for servicemembers to receive their TSP passwords. Both agencies agreed with their respective recommendations.

The military retirement system traditionally offered only a defined benefit  (DB) annuity, providing regular monthly payments for life based on  military earnings and years of service. However, under this legacy  retirement system, only 19 percent of active-duty servicemembers who  entered in fiscal year 2013 are estimated to complete the minimum 20  years of service required to receive the DB annuity. The National  Defense Authorization Act (NDAA) for Fiscal Year 2016 included  provisions that created a new military retirement system. This Blended  Retirement System (BRS) offers a new defined contribution (DC) benefit  in the form of an employer contribution to a personal Thrift Savings Plan  (TSP) account that will provide some retirement compensation for a large  majority of servicemembers, including those who serve less than 20  years; however, it also reduces the DB annuity paid to those who serve  20 years or more. The Department of Defense (DOD) estimates that full  implementation of BRS will reduce its annual budget costs by $1.4 billion  compared to the legacy retirement system, in 2016 dollars. Active-duty  servicemembers with fewer than 12 years of military service as of  December 31, 2017 were given the 2018 calendar year to make an  irrevocable decision on whether to opt into BRS or remain in the legacy  retirement system. Starting January 1, 2018, all new military personnel  were automatically enrolled in BRS.

BRS’s shift toward DC benefits means that servicemembers covered by  BRS will have more of their retirement security dependent on their  financial decisions, including how much to contribute to their TSP  account, how to invest their TSP balance, and how to manage their  savings upon military retirement. Additionally, for those who complete at  least 20 years of service, BRS offers the option to take some of their DB  annuity as a lump-sum payment. DOD and the military service branches  provide some financial education to servicemembers, but concerns exist  about whether servicemembers are able to make the informed decisions  about their retirement required by BRS.

You asked us to review how DOD was helping servicemembers make  decisions about their retirement. In this report, we examine (1) what  actions DOD has taken to help servicemembers understand BRS and,  more generally, educate servicemembers on saving for retirement; (2)  what DOD can learn from financial literacy training effective practices and  the implementation of BRS training to continue supporting  servicemembers in saving for retirement; and (3) how lump-sum payment  amounts are determined under BRS and how they compare to the  methods used by the private-sector pension plans that offer them.

To answer these questions, we conducted interviews with officials from  the DOD, the Federal Retirement Thrift Investment Board (FRTIB), and  the Consumer Financial Protection Bureau (CFPB). We also conducted  group interviews with senior officers and enlisted servicemembers at five  military installations. Though these interviews did not yield information  that was generalizable to all senior officers and enlisted servicemembers,  they did provide insight into their experiences facilitating the rollout of  BRS training to junior servicemembers. Finally, we reviewed and  compared DOD’s financial literacy trainings to the financial literacy  training effective practices published in a prior GAO report. To  understand how BRS lump-sum payments are determined, we reviewed  DOD documents and relevant federal law. We also interviewed DOD  officials to understand what issues they considered when designing  BRS’s lump-sum feature, how DOD determines the discount rate, or  interest rate, that it uses for lump-sum payments, and how the rate relates  to personal discount rates, which derive from research on observed  choices people make between receiving certain sums of money in the  future versus receiving smaller sums sooner. We interviewed  stakeholders knowledgeable about other pension plans to understand  how the discount rate in BRS differs from the discount rate used by those  plans. We also created a lump-sum payment calculator to run simulations  of various lump-sum calculations—including those used in the private  sector as required by the Employee Retirement Income Security Act of  1974, as amended (ERISA)—to show the effect of different calculation  methods and assumptions on the value of the lump-sum payment.

We conducted this performance audit from March 2018 to September  2019 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

The military retirement system is a government-funded benefit system  that has historically been considered a significant incentive in recruiting  and retaining a voluntary, career military force. Until recently, almost all  active-duty servicemembers were enrolled in the High-3 (legacy)  retirement system. In this system, servicemembers who served at least  20 years earned a DB annuity. Those who were eligible earned 2.5  percentage points per year of service multiplied by the average of their  highest 36 months of basic pay, with payments beginning upon retirement  from the military and adjusted annually for inflation. Servicemembers  also had the option to contribute a portion of their basic pay to a personal  TSP account, but DOD provided no contributions.

A previous GAO report found that active-duty servicemembers’ rate of  reaching 20 years of service varied substantially among the military  service branches (see fig. 1). For example, for active-duty  servicemembers entering military service in 1992, the estimated  probability of reaching 20 years of service was almost 15 percentage  points higher—and more than three times higher—for the Air Force than  the Marine Corps.

Federal law established the Military Compensation and Retirement  Modernization Commission (MCRMC) in the NDAA for Fiscal Year 2013  to study the military’s compensation system in detail and make  recommendations to modernize servicemembers’ pay and benefits.    The MCRMC’s final report, released in January 2015, recommended that  Congress revise the military retirement system so DOD could help more  servicemembers save for retirement earlier in their careers, leverage the  retention power of the legacy retirement system, give the services greater  flexibility to retain quality people in demanding career fields, and promote  servicemembers’ financial literacy, among other things.

The NDAA for Fiscal Year 2016 established BRS to replace the legacy  retirement system. As with the legacy retirement system, servicemembers  in BRS must serve 20 years to receive a DB annuity. Under BRS, eligible  retirees receive a DB monthly benefit equal to 2 percentage points per  year of service multiplied by the average of a servicemember’s highest 36  months of basic pay—lower than the 2.5 percentage point multiplier under  the legacy retirement system. BRS also provides servicemembers with  DC benefits through an employer contribution, which did not exist in the  legacy retirement system. For servicemembers who began their service  on or after January 1, 2018, DOD automatically contributes 1 percent of a  servicemember’s basic pay into the individual’s TSP account after 60  days of service and, after 2 years of service, matches a servicemember’s  contributions up to 4 percent of their basic pay, for a maximum military  contribution of 5 percent of a servicemember’s basic pay. These  servicemembers are automatically enrolled in BRS at a 3 percent default  contribution rate. DOD estimates that with automatic enrollment in TSP  and the automatic government contribution, 85 percent of new  servicemembers covered by BRS will receive at least some retirement  benefits when they leave military service.

BRS offers servicemembers some additional features and benefits not  offered under the legacy retirement system. Servicemembers under BRS  are eligible for a one-time continuation payment as a retention incentive  at the servicemember’s mid-career point, between 8 and 12 years of  service. Servicemembers who accept the continuation benefit incur an  additional service obligation. BRS also offers servicemembers who  serve 20 years or more the option to convert the present-value equivalent  of either 25 or 50 percent of their DB annuity payments for the period  from their date of retirement until the date they reach their Social Security  full retirement age (FRA) to a lump-sum payment upon retirement from  the military. Taking this lump-sum payment would reduce the retiree’s  annuity payments only until he or she reaches FRA, after which the  annuity payments would revert to the full benefit level (see fig. 2).

Active-duty servicemembers with fewer than 12 years of service as of  December 31, 2017 were eligible to enroll in BRS until December 31,  2018. The decision to opt in to BRS or remain in the legacy retirement  system was irrevocable.

Compared to the legacy retirement system, which provided only a DB  plan, the BRS’s enhanced DC benefit and reduced DB annuity shifts  more of the responsibility for managing servicemembers’ retirement  security from DOD to servicemembers. To help ensure that  servicemembers have the financial literacy to make sound financial  decisions, the NDAA for Fiscal Year 2016 added a requirement for DOD  to provide servicemembers ongoing financial literacy training at various  career and life stages, including at initial entry, promotions, vesting in the  TSP, eligibility for continuation pay, marriage, divorce, and the birth of a  first child. GAO’s prior work on financial literacy training compiled  testimony from experts from the private sector, federal government  agencies, nongovernmental organizations, and academic institutions to: define financial literacy as the ability to use knowledge and skills to  manage financial resources effectively for a lifetime of well-being;  identify the workplace as a particularly effective venue for providing  financial education and helping individuals improve their financial  decision making; and  summarize the effectiveness of various interventions and how to  address the needs of workplace populations traditionally underserved  by financial education.

DOD Used a Multi- Faceted Approach to Implement BRS Training and Outreach Campaigns and Is Developing Continuing Education on Saving for Retirement

DOD Administered BRS Education and Outreach Campaigns for Eligible Servicemembers

DOD developed three courses to help servicemembers make informed  decisions about whether to opt in to BRS or remain in the legacy  retirement system. The BRS Opt-In Course was available as a 2-hour  online or in-person course that servicemembers had to attest they had  completed before opting into the new retirement system. DOD reported  that 91 percent of an estimated 1.7 million eligible servicemembers  attested that they had completed the training during the BRS opt-in  period. The course included information on (1) the importance of saving  for retirement, (2) the differences between the legacy retirement system  and BRS, (3) factors for servicemembers to consider in choosing between  the two retirement systems, and (4) tools and resources for  servicemembers to consult when making their opt-in decision. DOD  developed two additional BRS trainings for key military personnel in an  effort to expand the network of in-person resources available to  servicemembers eligible to opt into BRS. One course provided  installation-level financial management professionals—Personal Financial  Managers (PFMs) and Personal Financial Counselors (PFCs)—with more  detailed information to reinforce the BRS Opt-In Course curriculum for  servicemembers and answer their specific questions about BRS. The  other course provided optional training to military supervisors regardless  of their eligibility to opt into BRS. DOD officials said it was important to  educate military supervisors on BRS since many junior servicemembers  discuss personal financial information with their direct supervisors. DOD  officials said that the agency released both of these trainings in advance  of the BRS Opt-In Course so that PFMs and supervisors would have time  to understand the new system and prepare for questions from  servicemembers.

DOD also developed the BRS New Accession Course for  servicemembers who entered the military on or after January 1, 2018 and  who are automatically enrolled in BRS. (See fig. 3.) Servicemembers take  this course when entering service as part of their mandatory basic training  (“boot camp”) or at the first school they attend after basic training. This  course explains BRS’s key components, identifies the tools and resources available to help servicemembers save for retirement, and  encourages servicemembers to actively manage their TSP accounts.  DOD officials said that the New Accession Course is very similar in  content to the BRS Opt-In Course but without comparisons to the legacy  retirement system. The course facilitator leads servicemembers through a  series of short videos on BRS, asks questions at the end of each of the  course sections, and is available to answer servicemembers’ questions  throughout the course.

DOD publicized BRS by creating a central website that links to outreach  material in a variety of media formats, including videos available on  YouTube, social media content, an interactive online comparison  calculator, webinars, and external websites such as Military OneSource  and https://www.tsp.gov. For example, DOD’s central BRS website links  to its BRS Fact or Fiction video series, which addressed various BRS  misconceptions through 20 brief videos. In the video series, DOD  introduced the #BlendedRetirement hashtag, then distributed  supplementary BRS infographics with this hashtag to link back to  additional resources on social media sites. DOD officials said they also  are developing a mobile app to provide servicemembers easy access to  financial readiness information through tools like calculators and games.  Additionally, DOD’s interactive online BRS calculator allowed  servicemembers to enter personal financial information, such as their  military grade, estimated date of military separation or retirement, and  TSP contribution percentage, so those who were eligible to opt into BRS  could compare how their retirement savings outcomes might differ under  BRS and under the legacy retirement system.

DOD’s Office of Financial Readiness also trained financial counselors  across the service branches to supplement the information in its BRS  trainings as well as to provide servicemembers in-person financial literacy  education. DOD officials said that the agency employs at least one PFM  at most military installations or uses PFCs, who are government  contractors. DOD officials said that PFMs and PFCs travel as needed to  provide support at multiple installations. One PFM we interviewed  estimated that PFMs provide as many as 10 group presentations per  week on retirement issues that they tailor to fit their audiences’ needs.  Another said one-on-one counseling sessions allowed servicemembers to  share their personal financial situations, receive information germane to  their unique circumstances, and explore available tools and resources.  DOD officials said that, as outlined in federal statute, the role of PFMs  and PFCs is to educate servicemembers about financial options available  to them and not to provide financial advice.

In addition to the centralized trainings and resources DOD created, the  service branches used their internal communication systems for BRS  outreach campaigns and created additional training tailored to the needs  of their servicemembers (see fig. 4). For example, according to Navy  officials, during the final 6 months of the BRS opt-in period, the Navy  posted approximately 80 Facebook and Twitter posts to its accounts, with  many of these reminding servicemembers of their opt-in choice. The  posts linked to additional resources and advertised outreach like the  Navy’s Facebook Live event, which utilized social media to provide  servicemembers online access to financial experts who could answer  their retirement-related questions. Military supervisors also said that most  of the service branches sent targeted communications to supervisors to  remind eligible servicemembers at regular meetings to complete the BRS  Opt-In Course. The service branches also created supplemental BRS  trainings tailored to meet their servicemembers’ needs. For example, the  Marine Corps developed a classroom-based BRS training that included  specific instructions on how to use the Marines’ data systems to make  BRS decisions, as well as statistics on the average percentage of  Marines that complete 20 years of service.

DOD Is Developing Continuing Financial Literacy Education for Servicemembers on BRS and on Saving for Retirement

With all incoming servicemembers automatically enrolled in BRS as of  January 1, 2018, DOD officials said the agency has shifted its continuing  financial literacy training from the opt-in decision to saving for retirement.  As with the BRS training, the military provides continuing financial literacy  education through both DOD and the service branches. DOD’s Office of  Financial Readiness provides policy, education, advocacy, and program  oversight to promote servicemembers’ financial readiness. While DOD  developed the BRS trainings and conducted outreach, DOD officials said  that the service branches have the primary responsibility for developing  and providing servicemembers continuing financial literacy education,  including on saving for retirement, based on their own resources and their  servicemembers’ needs. The service branches use a variety of formats  (see fig. 5).

DOD is also developing a plan to provide continuing financial literacy  education to servicemembers at various career and life stages. DOD  officials said the agency plans to improve the consistency of the  continuing financial literacy education provided by the service branches  and consolidate it so it is delivered at the career and life stages specified  by the NDAA for Fiscal Year 2016. DOD’s Office of Financial Readiness  released guidance in August 2019 to provide the service branches a  common set of learning objectives for financial literacy education aligned  with these specific career and life stages. DOD officials told us that the  service branches are responsible for delivering the continuing financial  literacy education to servicemembers at these stages according to their  schedules and resources.

DOD Training Reflected Many Financial Literacy Effective Practices, but Servicemembers’ Challenges Can Inform Future Training Efforts

BRS Training Met Many Financial Literacy Effective Practices, but DOD Did Not Use Course Assessments to Improve Content

We found that DOD’s Blended Retirement System (BRS) trainings met  many established financial literacy training effective practices (see  sidebar on next page and table 1). However, lack of assessments of  some courses affected DOD’s ability to measure how well the courses  helped participants and to make any needed changes.

Financial education experts have found that financial literacy trainings  that meet effective practices can improve employees’ overall financial  wellness. These experts identified the workplace as a particularly  effective venue for providing financial education and helping individuals  improve their financial decision making because employers have the  potential to reach large numbers of adults in a cost-effective manner at a  place where they make important financial decisions.

Effective Financial Literacy Training  Practices  Information is unbiased: Employers’  financial literacy education programs should  provide financial information that avoids even  the appearance of conflicts of interest.   Links to one-on-one financial help:  Programs should provide access to one-on- one financial coaches who can help  employees understand and take action on  their priorities.   Leverages trusted messengers: Programs  should use trusted coworkers and other peers  to provide or facilitate assistance on financial  matters.  Assesses employees’ financial literacy to  provide assistance and help set priorities:  Programs should periodically assess  employees’ financial situations and goals to  pinpoint how best to provide assistance and  help employees set priorities.   Enables employees to take action directly  from the course: Programs should provide  employees the means, for example, through  direct links or forms provided in the course, to  convert knowledge to financial action.

According to DOD officials, servicemembers will make more financial  decisions that may impact their ability to successfully save for retirement  under BRS than under the legacy retirement system, which makes  providing effective financial literacy training to servicemembers  particularly important. We found that all of DOD’s BRS trainings met the  applicable financial literacy effective practices of presenting unbiased  information, directing servicemembers to options for one-on-one financial  help, and employing trusted messengers—such as military peers and  Personal Financial Managers (PFMs)—to deliver the course information.  For example, each of the applicable BRS trainings encouraged  servicemembers to work with PFMs to understand how their personal  financial circumstances impact saving for retirement.

While the BRS trainings met many of the financial literacy effective  practices we selected, two of the trainings fell short in assessing  servicemembers’ financial literacy, which could allow DOD to better  pinpoint how to provide assistance and help servicemembers set  priorities. Servicemembers were required to pass a test to complete the  BRS Opt-In Course; DOD data show that only 32 percent of  servicemembers passed on their first attempt. However, DOD did not  revise course material to provide additional information in topic areas  where post-test results indicated servicemembers may have needed  further training. DOD officials said that the agency consciously avoided  making significant changes to its BRS trainings to ensure consistency and  course stability throughout the opt-in enrollment period. DOD officials also  told us that they were not surprised by the initial low pass rate because  they designed the test to be difficult so that servicemembers could  demonstrate mastery of the material.

DOD’s New Accession Course does not assess individual  servicemembers’ understanding of the material, which is information DOD  would need to improve its training to provide assistance and help  servicemembers set priorities. The course includes a series of knowledge  checks, but because the questions are administered to the group as a  whole, DOD cannot assess individual servicemembers’ understanding  and use this information to revise the course material or to provide  servicemembers with additional assistance. DOD officials told us that the  agency views the course as successful because it gets students to  engage in discussion regarding the basics of BRS and financial  readiness. DOD does not have a plan to assess individual  servicemembers’ understanding of course material going forward. While  servicemember engagement is important, it is not an assessment of their  understanding of course material. Servicemembers who do not  understand BRS concepts may not save enough for a secure retirement  under BRS.

Additionally, the BRS Opt-In Course did not meet the financial literacy  training effective practice of enabling servicemembers to act on course  information directly from the training. For example, the BRS Opt-In  Course suggested servicemembers contact PFMs and PFCs if they had  further questions about BRS, but the course did not provide direct links  for servicemembers to do so. Further, the course did not include forms for  servicemembers to enroll in and make contributions to TSP accounts.  This standard is considered an effective practice for financial literacy  training because research has found that employees who can directly  convert their knowledge to immediate action have improved overall  financial wellness. DOD addressed this issue in its most recently released  training, the BRS New Accession Course, which enables servicemembers  to make immediate decisions, such as assigning their initial TSP  contribution rates, by providing servicemembers the relevant form within  the training.

The NDAA for Fiscal Year 2016 included a requirement for DOD to add  questions on servicemembers’ financial literacy to its annual survey and  use the results as a benchmark to evaluate and update the continuing  financial literacy training DOD will provide to servicemembers in the  future. The NDAA for Fiscal Year 2016 also requires DOD to develop  ongoing financial literacy training for servicemembers to take at key  career and life stages. DOD has the opportunity to ensure that individual  knowledge assessments are included in the guidance it provides the  service branches on the key objectives that must be met in these  trainings.

DOD Can Learn from Servicemembers’ Challenges Taking the BRS Opt-In Course to Improve its Ongoing Training

Military personnel cited multiple challenges described by servicemembers  in taking the BRS Opt-In Course and seeking financial literacy support. In  our interviews at five military installations, military supervisors and  financial counselors said they believed servicemembers had difficulty (1)  understanding the training due to their low financial literacy; (2) taking,  and relating to, optional financial literacy training due to mission and  short-term life goals; and (3) setting up online access to their TSP  accounts.

Many military supervisors and Personal Financial Managers (PFMs) we  interviewed said that many servicemembers with whom they interacted  misunderstood key BRS concepts and lacked the basic knowledge to  make sound financial decisions related to BRS even after completing the  mandatory BRS Opt-In Course. Providing basic financial education to  junior enlisted servicemembers, who can be as young as 17 years old,  may be especially challenging due to their limited life and work  experience. These servicemembers score the lowest on measures of  financial literacy, according to the 2017 Status of Forces Survey, an  annual survey of a sample of servicemembers that covers key issues of  military life.

Some servicemembers said that the training platforms (e.g., computer- based and large group training), while efficient in providing mandatory  training to a large group of servicemembers, were not ideal for a group  with very limited baseline financial literacy. For example, several military  supervisors said some servicemembers advanced through the computer- based BRS Opt-In Course as quickly as possible, and may not have  understood the content. One military supervisor said it may be hard for  servicemembers to identify the most critical elements in the computer- based training because they could not interact with the material or ask  clarifying or personal questions. For example, one group of military  supervisors said the current training addresses what TSP is, but there is a  need for more training to answer servicemembers’ questions about how  to manage and optimize their accounts for retirement savings. In  response, DOD officials said that while these topics were not covered in  depth in the BRS trainings, servicemembers have access to additional  resources, such as PFMs and the TSP website for help with personal  questions about managing their savings under BRS.

Large group trainings, which could have hundreds of servicemembers in  attendance, also may have discouraged servicemembers from asking  clarifying questions due to the number of participants. DOD officials  acknowledged that servicemembers may need more one-on-one help  when making personal financial decisions, which is why the agency  trained PFMs and PFCs to address servicemembers’ BRS and financial  literacy questions and provide additional support. Some military  supervisors said the servicemembers who they directed to optional one- on-one financial counseling sessions asked the PFMs detailed questions  their supervisors were not able to answer, ran their own numbers and  received personalized information to help them make decisions, and often  took action during the session. DOD officials said one challenge to getting  servicemembers to seek out more personalized one-on-one financial help  is the perception that servicemembers seek PFMs primarily after facing  financial hardship. These officials said they are working to shift the  military culture so servicemembers seek out PFMs for financial planning  purposes similar to how civilians use financial counselors.

Balancing Financial Literacy Education with Competing Priorities

Military supervisors and PFMs told us that servicemembers had difficulty  seeking out financial literacy support because of demanding operational  schedules and a focus on short-term life and mission goals. This was  especially true for junior servicemembers, who may be uncomfortable  requesting time away from their mission duties. Further, some military  supervisors said junior servicemembers tended not to recognize the  importance of saving for retirement when faced with other, more  immediate, financial priorities, such as purchasing a car. One group of  military supervisors said that since most junior servicemembers do not  seek out retirement advice, they try to find opportunities to weave the  topic into other discussions, for example, about how taking out a car loan  can impact a junior servicemember’s saving for retirement.

Servicemembers can manage their TSP accounts online by viewing  current plan information and making or changing contribution allocations;  however, setting up an online account depends on servicemembers  having a stable mailing address. The Federal Retirement Thrift  Investment Board (FRTIB), which administers the TSP, mails participants  a time-sensitive TSP password required to access their TSP accounts  online. Some military supervisors said that servicemembers reported  difficulty receiving their initial TSP password because they relocate often  and may lack a permanent mailing address. FRTIB officials  acknowledged that this fraud prevention measure might make it more  difficult for participants to access their TSP accounts, but noted that they  must balance security with ease of use and have not yet found any viable  options to address this issue. Federal government internal controls  standards state that entities should use appropriate methods to  communicate so that information is readily available when needed.

Additional Information Explaining BRS Lump-Sum Payment Options Needed for Servicemembers to Make Informed Choices

BRS Offers a Time- Limited, Partial Lump-Sum Payment Using a Single Discount Rate for All Servicemembers

Under the Blended Retirement System (BRS), military retirees with 20 or  more years of service may choose, when they retire, to convert part of  their monthly annuity into a lump sum payment, in exchange for a  temporarily lower monthly benefit. The lump-sum payment is partial in two  ways: 1) servicemembers may convert either 25 or 50 percent of their  annuity payments to a lump-sum payment, and 2) the lump-sum  conversion only applies to annuity payments payable prior to the  servicemember’s Social Security full retirement age (FRA)—age 67 for  those born in 1960 or later. After the service member reaches FRA, the  annuity payments revert to the full monthly pension. (See fig. 6.)

In its final report, the Military Compensation and Retirement  Modernization Commission recommended that the new military retirement  system should offer a lump-sum payment option to increase flexibility for  retiring servicemembers and remain fiscally sustainable. Since many  servicemembers retire from the military at a younger age than most  civilians in the workplace, DOD officials said that some military retirees  might prefer a lump-sum payment to start a business or buy a house.

Personal Discount Rates   Personal discount rates can be derived from  individuals’ behavior when faced with  intertemporal monetary choices. In contrast,  more traditional approaches to pension  discount rates are based on financial market  data or expectations rather than on individual  preferences or behavior.  In theory, personal discount rates reflect  individuals’ valuation of money received today  versus in the future. However, behavioral  economic research has shown that people do  not always make rational choices related to  foregoing current benefits for future payoff. given stream of converted pension payments. The NDAA for Fiscal Year  2016 directed the Secretary of Defense to choose a discount rate for BRS  lump sums that (1) uses average personal discount rates that take into  consideration “applicable and reputable studies of personal discount rates  for military personnel and past actuarial experience in the calculation of  personal discount rates,” and (2) is in accordance with generally accepted  actuarial principles and practices.

Researchers have sought to quantify personal discount rates by studying  personal choices in a variety of contexts involving the tradeoff of payoffs  at different times (see sidebar). Two such studies involved military  personnel being offered lump-sum payments in lieu of annuity  payments. According to the Institute for Defense Analyses (IDA), the  studies computed an estimated average personal discount rate for  servicemembers who were presented with the offer, based on the choices  by servicemembers to either elect the lump-sum payment or the annuity.

DOD officials told us that, to comply with the requirements of the NDAA  for Fiscal Year 2016, they considered several factors to set the discount  rate for BRS lump-sum calculations. DOD officials said they first  contracted with a research organization to estimate a range of personal  discount rates based on past studies. They said they then adjusted that  range based on differences between the specific features of past lump- sum offers and those of BRS lump sums. They also considered how a  lump-sum offer could impact the retention of military personnel, since  DOD relies on a percentage of experienced servicemembers to continue  serving beyond 20 years. DOD officials told us they wanted to reduce the  likelihood a lump-sum payment would lead more people to retire earlier  than they would otherwise. Finally, even though past studies had found  higher personal discount rates (resulting in smaller lump-sum amounts)  for enlisted servicemembers than officers, DOD officials told us it would  go against core values of military compensation if the agency did not  apply the same discount rate to all lump-sum payments, regardless of the  servicemember’s rank.

Considering all of these factors, DOD devised a formula for setting what it  termed the “Government Discount Rate” (GDR) that would be used in  calculating BRS lump-sum amounts. DOD constructed the GDR by  starting with a market index of high-quality corporate bond rates and then  adding an adjustment factor so that the GDR fell within the range of  observed personal discount rates. According to DOD, this current  method for setting this rate will be reexamined at least every 4 years. The  GDR for 2019 is 6.81 percent, which is a “real” interest rate that does not  include an inflation component. To compare the GDR to more common  nominal interest rates, an inflation adjustment must be added. For  example, if inflation were assumed to be 2.4 percent per year, a GDR of  6.81 percent would be approximately equivalent to a nominal discount  rate of 9.37 percent.

BRS Lump Sums Are Calculated Using a Higher Discount Rate than Private-Sector Pension Plans, Leading to Smaller Lump-Sum Payments by Comparison

The method used to determine BRS lump-sum payment amounts is likely  to result in a discount rate that is higher—based on recent interest rates,  roughly double— than that used to calculate minimum lump-sum  distributions from private-sector pension plans, when all other factors are  equal. The discount rates for determining minimum lump-sum amounts  for private-sector pension plans that offer them are governed by ERISA.  The Internal Revenue Service (IRS) publishes the discount rates  applicable to minimum lump-sum determinations each month, based on  ERISA provisions. For 2018, these rates generally fell in the range of 2.5  to 4.9 percent, on a nominal basis, compared to the GDR, which was  about 9 percent, on a nominal basis (depending on assumed inflation).  We found, based on recent interest rates, holding age and monthly  annuity amounts constant, the higher discount rate applied to BRS lump- sum calculations would significantly reduce servicemembers’ lump-sum  payment amounts. Additionally, we found that the percentage difference  would be the largest at younger retirement ages, since the difference in  discount rates would have an impact over a longer period of time. For a  servicemember retiring at age 40, for example, we found BRS lump-sum  payments to be about 40 percent smaller, based on recent interest rates,  than if calculated following the requirements under ERISA. (See fig. 7.)  For more information on ERISA and our methodology for calculating  lump-sum payments, as well as sensitivity testing and factors that can  affect this comparison at different points in time, please see appendix I.

DOD officials told us that the discount rate used for BRS lump-sum  payments was different than the rate used in private-sector pension plans  for some key reasons. DOD officials said the NDAA for Fiscal Year 2016  required that the BRS discount rate be based on average personal  discount rates, which is a different approach to discount rates than that  used under ERISA. DOD officials also said the agency relies on  maintaining a certain percentage of servicemembers with 20 or more  years of service and did not want the offer of a lump-sum offer to entice  too large a percentage of servicemembers to leave military service.

However, knowledgeable stakeholders expressed some concerns with  the higher discount rate used to determine BRS lump-sum payment  amounts. For example, the DOD Board of Actuaries stated that a  relatively high discount rate, and the lower lump-sum payments that  would result, could be perceived as taking advantage of  servicemembers. Additionally, the American Academy of Actuaries said  those who accept lump-sum payments using higher discount rates are  likely to either not understand the financial value of their annuity benefits  or have an immediate financial need. On the other hand, stakeholders we  interviewed noted that BRS’s lump-sum feature was intended to provide  options to servicemembers, which was a central component of  implementing BRS.

Servicemembers Could Benefit From More Information on Lump-Sum Distributions

Although current active-duty servicemembers eligible to choose a lump- sum payment are not scheduled to retire until 2026, at the earliest, DOD  can take certain steps to help them better understand the tradeoffs  associated with the lump-sum option. Decisions about lump-sum options  are complicated, and stakeholders knowledgeable about financial literacy  have pointed out the importance of providing sufficient information about  the tradeoffs involved for those making such decisions. In a 2015 report,  we identified key information to help individuals in the private sector make  an informed decision when considering a lump-sum payment versus an  annuity. (See table 2.)

Without this key information, service personnel will be unable to prudently  weigh the advantages and disadvantages of the lump-sum option in their  retirement decisions. DOD officials said they posted a training video on  the BRS lump-sum option to the BRS website in July 2019.  Servicemembers also have access to other descriptive material on the  BRS website, such as a fact sheet on the BRS lump sum, and the BRS  calculator to estimate their lump-sum payment with some assumptions  about future pay.

The shift from the legacy retirement system to BRS marks a significant  change in retirement benefits for an estimated 1.7 million military  servicemembers. While more servicemembers will receive retirement  benefits under BRS than under the legacy retirement system, BRS will  require servicemembers to more actively and continuously manage their  retirement decisions throughout their military career and in retirement. As  an employer, DOD is well positioned to provide financial literacy training  and support to servicemembers as they make retirement decisions. DOD  has designed a multi-faceted approach to provide resources over time  and in a variety of formats, increasing the likelihood that servicemembers  will be able to find guidance when they need it. DOD completed a large  undertaking in educating servicemembers about the choice they faced in  deciding whether to opt into BRS, but this was only the first step in  educating servicemembers about how to maximize and manage their  retirement savings under BRS. In educating servicemembers about  saving for retirement, DOD would benefit from applying the financial  literacy training effective practices identified by experts, especially  periodically assessing employees’ financial understanding and using  these assessments to revise and tailor ongoing training.

Given that young servicemembers are often stationed in multiple  locations for short amounts of time and that BRS places increased  responsibility on servicemembers to save for retirement through TSP  contributions, it is important that servicemembers receive the necessary  information to access their TSP accounts online in a timely manner. The  current TSP password process has limited some servicemembers’ ability  to manage their accounts. It is important for FRTIB to expeditiously  address this issue.

Of additional concern is how DOD will ensure that servicemembers  understand the tradeoffs associated with BRS’s lump-sum feature. BRS  lump-sum payments are calculated using a higher discount rate than  private-sector pension plans, which results in lower lump-sum payments,  by comparison. While the BRS lump sum is limited, and the full annuity  amount would resume at servicemembers’ Social Security full retirement  age, the reduced annuity paid until then could still have a significant  impact on some servicemembers’ financial security. A fundamental  element of BRS is the greater responsibility and choice placed on  individuals. To work well, such a system requires that sufficient, clear,  and accurate information be provided so that servicemembers can make  the prudent choices best suited to their personal financial situations.  Consistent with this principle, DOD should ensure that the information  and tools that it provides to eligible servicemembers about the lump sum  clearly lay out the tradeoffs of this decision and allows those eligible to  make a well-informed prudent choice that best meets their individual  financial circumstances.

The Secretary of Defense should evaluate the results of its financial  literacy training assessments to determine where gaps in  servicemembers’ financial knowledge exist and revise future trainings  to address these gaps. (Recommendation 1)

The Secretary of Defense should provide servicemembers disclosures  that explain key pieces of information about the lump-sum payment,  including some measure of its relative value, the potential positive and  negative financial ramifications of choosing the lump-sum payment  option, and a description of how it was calculated. (Recommendation  2)

The Executive Director of the Federal Retirement Thrift Investment  Board should work with the Secretary of Defense to explore  alternative options (including online resources) for servicemembers to  receive their initial Thrift Savings Plan password so that  servicemembers can access and manage their online accounts  without added delays. (Recommendation 3)

We provided a draft of this report to the Secretary of Defense and the  Executive Director of the Federal Retirement Thrift Investment Board for  review and comment.

In its letter, which is reproduced in appendix II, DOD concurred with the  report’s recommendations and offered comments on some of our  findings. For recommendation 1, regarding the evaluation of its financial  literacy training assessments, DOD stated that in 2017 it added questions  to its annual Status of Forces Survey to assess the military population’s  understanding of basic financial concepts.  While these survey results will  allow DOD to respond to identified gaps in servicemembers’ financial  literacy, Status of Forces survey results have taken years to compile in  the past. Assessing servicemembers’ financial literacy as part of  mandatory trainings will allow DOD to more promptly identify gaps in  servicemembers’ knowledge and adjust trainings to address those gaps.  For recommendation 2, regarding the provision of information on the  BRS’s lump-sum payment options, DOD stated that it has developed a  training course, published information to help educate servicemembers  on the BRS’s lump-sum option, and included a lump-sum section in its  BRS calculator. While we are encouraged by DOD’s efforts to develop  various tools for educating servicemembers on the BRS’s lump-sum  option, in this report we identified additional information that is important  to include in lump sum disclosures.

In its letter, DOD expressed concern that the title of our report focused  only on one aspect of our findings. We believe that the title accurately  reflects our report’s key findings, conclusions, and recommendations.  DOD also said that the agency did not intend for the BRS Opt-In Course  to be financial literacy training, and thus were concerned that we  evaluated this training based on the effective practice identified in prior  GAO work of assessing employees’ financial literacy to provide  assistance and help set priorities. However, we believe that our use of  this effective practice to evaluate the BRS Opt-in Course is consistent  with our prior findings that employers are well-suited to provide financial  education and help individuals improve their financial decision making.  We compared the BRS Opt-In Course to this effective practice because  the course provided DOD an opportunity to assess whether  servicemembers understood key aspects of BRS, undoubtedly a key  aspect of servicemembers’ financial well-being.

In addition, DOD stated that the agency viewed servicemembers’ initial  low pass-rate of the BRS Opt-In Course as a positive result because they  designed the course to be rigorous and it forced servicemembers to  retake the parts of the training where they were failing to comprehend the  course material. DOD also stated that revising the training during the  2017 training period was not practical because it would have resulted in  some servicemembers receiving disparate training formats and materials.  We understand DOD’s concerns; however as DOD continues to develop  additional financial literacy training we encourage the agency to consider  that low pass rates on post-training tests often indicate a gap in  knowledge and a possible need to revise the training.

In its final comment, DOD agreed with us that there is a lack of reliable  data for comparing the BRS lump-sum feature with those provisions  offered by state and local government pension plans. DOD also stated  that the BRS lump-sum feature was unique and therefore not comparable  to private-sector pension plans governed by ERISA. Although there are  differences between BRS and ERISA, the BRS and ERISA lump-sum  provisions are the only defined benefit lump sum conversion provisions  that are specified under federal law. Further, the lump-sum provisions for  both reflect a participant choice that can have important consequences  for a participant’s financial security. Our recommendation is premised on  the principle that regardless of which particular features a pension plan  offers, participants need clear, complete, and accurate information to  make prudent decisions regarding their retirement security.

The FRTIB also provided comments, reproduced in appendix III, and  generally agreed with the report’s findings and conclusions. The FRTIB  also concurred with our recommendation regarding the provision of TSP  passwords to military personnel and said that they will continue to explore  avenues to address how servicemembers receive their initial TSP  password while continuing to emphasize the need for security.

DOD and FRTIB provided technical comments, which we incorporated  into the report as appropriate.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution of this report until 30  days from the report date. We are sending copies of this report to the  Secretary of Defense, the Executive Director of the Federal Retirement  Thrift Investment Board, the Director of the Consumer Financial  Protection Bureau, and other interested parties. This report is also  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  Charles Jeszeck at (202) 512-7215 or jeszeckc@gao.gov or Frank  Todisco at (202) 512-2700 or todiscof@gao.gov. Mr. Todisco meets the  qualification standards of the American Academy of Actuaries to address  the actuarial issues contained in this report. 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 IV.

This appendix discusses in detail our methodology for addressing (1)  what actions the Department of Defense (DOD) has taken to help  servicemembers understand the Blended Retirement System (BRS) and,  more generally, educate servicemembers on saving for retirement; (2)  what DOD can learn from financial literacy training effective practices and  the implementation of BRS training to continue supporting  servicemembers in saving for retirement; and (3) how lump-sum payment  amounts are determined under BRS and how they compare to the  methods used for private-sector pension plans that offer them.

To answer all of these questions, we interviewed officials at DOD, the  Federal Retirement Thrift Investment Board (FRTIB), the Consumer  Financial Protection Bureau (CFPB), and other organizational  stakeholders knowledgeable about the military and retirement. We also  reviewed relevant agency documents and federal laws and regulations.

To understand how DOD helped servicemembers understand BRS, we  reviewed DOD’s centralized training and outreach material. We also  conducted group interviews with senior officers and enlisted  servicemembers on military installations to learn about some of the  informal training and mentorship provided by military leaders. We used  the following criteria to select military installations to visit:  1.  Sufficient number of BRS-eligible personnel available to participate  2.  High number of active-duty servicemembers stationed at the  3.  Availability of a Personal Financial Manager (PFM) on the installation  5.  Mix of single service versus joint bases  6.  Proximity to an urban center  7.  Primary mission of the installation is operational (versus training)

We selected five military installations to visit: Camp Pendleton (Marine  Corps), Fort Sam Houston (Army), Naval Base San Diego (Navy), and  Randolph Air Force Base and Scott Air Force Base (Air Force). At each  installation, we met with separate groups of 8 to 12 senior enlisted  servicemembers and senior officers. These senior servicemembers  supervise junior servicemembers who, as a group, were most likely to  have had to make a decision on whether to opt into BRS. We also met  with the groups’ installation-level financial management professionals— Personal Financial Managers (PFM), Personal Financial Counselors  (PFC), or Command Financial Specialists (CFS)—who provide  servicemembers additional financial literacy training and one-on-one  financial counseling. We asked questions of all group interview  participants related to:  1.  Information provided to servicemembers about BRS  2.  Common needs of servicemembers in making decisions about BRS  3.  Common questions servicemembers had about BRS  4.  Challenges experienced in providing training and/or support  5.  Anticipated future needs for training and/or support  These interviews provided insights into senior officers and enlisted  servicemembers’ experiences facilitating the rollout of BRS training to  junior servicemembers, but did not yield information that was  generalizable to all senior officers and enlisted servicemembers.

We also reviewed and compared DOD’s financial literacy trainings to  financial literacy training effective practices. To identify financial literacy  effective practices, we reviewed published articles and reports on the  topic. Our review included a March 17, 2015 forum GAO convened with  20 financial literacy leaders and experts focusing on financial education in  the workplace, and the subsequent report, Financial Literacy: The Role of  the Workplace, GAO-15-639SP (Washington, D.C.: July 2015). The  report provided the best single compilation of financial literacy effective  practices from a diverse set of experts from the private, non-profit,  governmental, and academic sectors. The report summarizes forum  participants’ discussions across seven topic areas. Of these seven, we  selected two that were most germane to DOD’s BRS training: (1)  Employers should address the needs of traditionally underserved  workplace populations, and (2) Effective practices can include automatic  enrollment in retirement plans, financial health checks, and  personalization. Across these two topic areas, we selected the five  financial literacy training effective practices that were most relevant to the  type of trainings DOD developed for BRS. Specifically, we determined if  BRS trainings (1) contain unbiased information, (2) contain links to one- on-one financial help, (3) leverage trusted messengers, (4) assess  participants’ financial literacy so DOD can provide assistance and help  set priorities, and (5) enable participants to take action directly from the  course.

To understand how BRS lump-sum payments are determined, we  interviewed DOD officials to learn about the issues they considered when  designing BRS’s lump-sum feature, how DOD determines the discount  rate it uses for lump-sum payments, and how the BRS discount rate used  to calculate lump sums relates to personal discount rates. To understand  discount rate issues applicable to lump-sum payments in other pension  plans, we interviewed stakeholders knowledgeable about other pension  plans, consulted with our internal actuarial experts, and reviewed relevant  prior work. We also consulted with actuaries at DOD to clarify our  technical understanding of the calculation of lump-sum amounts under  BRS.

We created a lump-sum payment calculator to run simulations of various  lump-sum calculations—including those used in private-sector pension  plans—to show the effect that varying certain calculation methods and  assumptions can have on the value of the lump-sum payment. We  calculated and compared illustrative lump-sum amounts under BRS to  what those lump-sum amounts would have been under federal laws and  regulations applicable to private-sector pension plans. We did not do a  similar comparison to public-sector pension plans because of a lack of  reliable, generalizable data on the prevalence of lump sums offered by  the many state and local government plans and the applicable discount  rates used. Some lump-sum options under state and local government  plans do not require a discount rate at all because they return employee  contributions with interest or are a deferred retirement option provision  (DROP) rather than lump sums that involve discounting future promised  payments. Different state or local governments might set their own rules  regarding any lump sums. In contrast, the lump-sum provisions  applicable to both BRS and private-sector pension plans under the  Employee Retirement Income Security Act of 1974, as amended (ERISA)  are in federal law.

The following section provides additional technical detail regarding the  methods used to determine the lump-sum discount rate (the Government  Discount Rate, or GDR) under BRS; the methods used to determine  discount rates for determining minimum lump-sum amounts under ERISA;  a discussion of key differences between BRS and ERISA approaches;  and the methods and assumptions we used to compare BRS lump-sum  amounts to minimum lump sums under ERISA, along with a discussion of  how the comparison could vary over time.

Comparison of Lump-Sum Amounts under BRS and Private-Sector Pension Plans

DOD’s construction of the GDR begins with a 7-year average of  estimated high-quality corporate bond real interest rates for maturities of  about 23 years, and then adds an add-on factor to bring the discount rate  up to a level consistent with applicable studies of personal discount rates,  subject to possible adjustments for DOD concerns about retention of  servicemembers. DOD officials told us that the 23-year maturity was  intended to reflect the average time between a servicemember’s  retirement from the military until Social Security full retirement age (FRA).  The 7-year averaging is for the purpose of smoothing out short-term  fluctuations in interest rates. The add-on for 2018 and 2019 is 4.28  percentage points. The GDR for 2019 is 6.81 percent, which is a “real”  discount rate that does not include an inflation component.

Interest rates are often regarded, economically, as consisting of two  components: a portion to cover expected inflation (the inflation  component), plus a portion to provide a return in excess of inflation (the  “real” return component). For example, if inflation expectations are 2.50  percent per year, and the interest rate on a bond is 4.50 percent, then the  bond is expected to provide a real return (in excess of inflation) of  approximately 1.95 percent ( x 100). In this case, 4.50  percent would be referred to as the nominal interest rate and 1.95 percent  would be referred to as the real interest rate.

In order to convert the GDR into an equivalent nominal discount rate (for  comparison to ERISA discount rates), an inflation assumption is needed.  We used an inflation assumption of 2.40 percent per year, which is the  inflation assumption used by the Congressional Budget Office (CBO) in  its 2019 long-term budget outlook. As a result, with this inflation  assumption, the nominal discount rate equivalent to the GDR of 6.81  percent is 9.37 percent ( x 100). Military pensions  (both under legacy and BRS) are increased each year to fully keep up  with inflation. The lump-sum equivalent of such a benefit could be  calculated in one of two ways, which mathematically would produce the  same result: (1) applying the nominal discount rate (in this example, 9.37  percent) to the projected increasing series of monthly annuity benefits, or  (2) applying the real discount rate (in this example, 6.81 percent) to a  fixed (not inflation indexed) monthly annuity.

For determining minimum lump sums under ERISA, the discount rate is  actually a combination of three “segment” rates that reflect bond yields at  different maturities: a short-term rate to discount future payments due in  the next 5 years, a medium-term rate to discount future payments due  between 5 and 20 years out, and a long-term rate to discount future  payments due beyond 20 years. These are nominal rates. These rates  are published monthly by the Internal Revenue Service (IRS) and are  based on an average of high-quality corporate bond rates for the month.  Private-sector pension plan sponsors have some flexibility in selecting a  method for determining which monthly averages would be used to  calculate lump sums offered in a particular plan year. As a result, for a  lump sum payable in a particular month, the applicable ERISA segment  rates could be those for a month up to 16 months prior to the month of the  lump-sum payment, depending on the provisions of the plan.

Minimum lump sums under ERISA also include a “mortality discount,”  which means that the lump sum is reduced to reflect the fact that for any  future scheduled pension payment, there is a probability that the retiree  will no longer be alive to receive it. We included this mortality discount in  our ERISA calculations. DOD decided not to include a mortality discount  in the BRS lump-sum methodology. DOD officials told us that mortality  rates from age 44 to age 67 are relatively small, such that the impact of  including mortality would be overwhelmed by minor changes in the  discount rate. As a result, for simplicity, they decided not to include a  mortality discount. Not including a mortality discount has the effect of  making the BRS lump sum somewhat more generous than it would be if it  included a mortality discount.

Thus, key differences in the determination of lump-sum amounts under  BRS and for ERISA minimums include the following:

The development of the GDR starts with corporate bond rates for a  23-year maturity, whereas the ERISA segment rates are based on  corporate bond rates for many maturities that are summarized into  three segment rates for three different ranges of maturities. Thus, the  comparison at any point in time will be affected by the shape of the  yield curve.

The development of the GDR starts with a 7-year average of  corporate bond rates, whereas the ERISA segment rates are based  on more current corporate bond rates. Thus, the comparison at any  point in time will be affected by movements in interest rates in the  prior 7 years.

The GDR includes an add-on, currently 4.28 percentage points, to  bring the GDR in line with applicable studies of personal discount  rates. According to DOD, the add-on also takes into account  considerations of retention of military personnel. Thus, the  comparison at any point in time will be affected by any changes DOD  makes to the magnitude of the GDR add-on.

The determination of the minimum lump sum under ERISA includes a  mortality discount; the determination of lump sums under BRS does  not.

The GDR applies over an entire calendar year, whereas the segment  rates change month to month, and the segment rates applicable to a  particular month’s lump sum could be the published rates for up to 16  months prior, depending on the plan provisions.

For our comparison, we assumed a lump sum payable in June 2019. As  noted earlier, the applicable GDR for 2019 is 6.81 percent, and the  nominal equivalent rate, based on our inflation assumption of 2.40  percent, is 9.37 percent. For the ERISA minimum lump sum, we used the  May 2019 segment rates published by IRS, which are 2.72 percent for the  first 5 years’ scheduled payments, 3.76 percent for the next 15 years’  payments, and 4.33 percent for the scheduled payments beyond 20  years. We also included the mortality discount in the ERISA calculation.

As noted in the body of this report, the result was that the BRS lump sum  was 42 percent smaller than it would have been under ERISA rules for an  age-40 retirement, and 32 percent smaller for an age-50 retirement. We  also looked at the range of ERISA segment rates over the 16-month  period from February 2018 through May 2019 to determine the range of  potential results depending on which month’s ERISA rates might apply for  a particular plan. The BRS lump sum ranged from 38 percent smaller to  42 percent smaller than on an ERISA basis for an age-40 retirement and  from 28 percent smaller to 32 percent smaller for an age-50 retirement.

We also calculated sensitivities from varying the inflation assumption. As  noted earlier, we used an inflation assumption of 2.4 percent, the inflation  assumption used by the CBO in its 2019 long-term budget outlook. If  instead we used an inflation assumption of 2.0 percent (and the May  2019 ERISA segment rates), the BRS lump sum would have been 39  percent smaller than on an ERISA basis for an age-40 retirement, and 30  percent smaller for an age-50 retirement.

The other key differences, noted earlier, in the determination of lump-sum  amounts under BRS and for ERISA minimums could also affect the  comparison at any point in time. However, we believe the comparisons  presented in this report are a reasonable representation of the general  magnitude of the differences in lump-sum amounts under BRS compared  to the minimum amount required under ERISA.

We conducted this performance audit from March 2018 to September  2019 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Appendix II: Comments from the Department of Defense

Appendix III: Comments from the Federal Retirement Thrift Investment Board

Appendix IV: GAO Contacts and Staff Acknowledgments

In addition to the contacts named above, Mark M. Glickman (Assistant  Director), Anjali Tekchandani (Analyst-in-Charge), Cynthia Nelson, and  Stephen C. Yoder made key contributions to this report. Also contributing  to this report were Vincent Balloon, Alicia Cackley, Virginia Chanley,  Sheila R. McCoy, Mimi Nguyen, Stacy Ouellette, Joseph Silvestri, Adam  Wendel, and Seyda Wentworth.

In 2016, DOD and the military service branches began providing training to help servicemembers make informed decisions about the military’s new retirement system.

The training courses incorporated many effective financial literacy practices. However, some of them do not assess servicemembers’ financial literacy. DOD could use such assessments to ensure its courses are effective and revise the courses in areas where servicemembers need more assistance.

DOD could also do more to help servicemembers understand how lump sums—an optional form of payment for some retirement benefits under the new system—are calculated.