TSP board rejects divestiture proposals

The board that oversees the federal employee Thrift Savings Plan on Tuesday expressed strong opposition to legislative proposals that would require divestiture of companies that do business in countries supporting genocide and terror.

At their monthly meeting, members of the Federal Retirement Thrift Investment Board expressed concern over the precedent acceptance of such proposals could establish. They argued that since its creation, the TSP has acted only in the best interest of participants and has resisted efforts to advance political objectives or social goals.

Several recently-introduced pieces of legislation seek to ensure that TSP investments do not support genocide in the Darfur region of Sudan or terrorism. Board members said these proposed measures "pressure the TSP to reconsider its neutrality on political and social issues," a stand the plan has refused to take.

"As the board members, we are responsible only for the participants' best interest, not for the best interest of the United States," said Andrew Saul, chairman of the board. "You're not wearing the hat of a United States citizen; you're wearing the hat of a fiduciary for the plan."

The board highlighted a recent analysis by consulting firm Ennis Knupp & Associates, which addressed the financial impact of implementing the divestment proposals. The firm determined that divesting the international (I) fund, which holds $24.5 billion in assets, of non-U.S. companies conducting business in Sudan and involved in the energy sector in Iran and in nation states that support terrorism, would potentially result in the annual loss of 5.1 basis points, or 51 cents per $1,000 invested. This would translate to $12.5 million in additional costs annually. Divestment also would result in a one-time transition cost of $30 million, according to the analysis.

"While we empathize with the spirit of the divestment restrictions, the added costs, complexity and portfolio impact from any such restrictions causes us concern from a purely investment standpoint," the analysis said. "Our most material concern is the negative impact that such restrictions can have on the long-term performance of participant portfolios."

The board supported a motion urging Congress to oppose legislation that would impose restrictions on the TSP.

Meanwhile, the board backed two potential changes to the TSP, which will require congressional approval. The first builds off of the 2006 Pension Protection Act, which gave organizations the ability to offer an "opt-out" approach to 401(k) plans. The law allows organizations to automatically enroll employees into such plans unless they indicate otherwise.

Board member Thomas Fink opposed the proposal, arguing that it might impose enrollment on younger employees who cannot afford to invest. He proposed automatically enrolling workers after two years on the job.

But the rest of the board supported automatic enrollment at the time of hire, provided employees are informed of the rules and given an adequate chance to opt out. The proposal would give employees 90 days to withdraw their money from the TSP. Beyond that, withdrawals would be restricted but employees would be able to halt contributions, the board said.

"I think this is very good for a young person who is making a decision about their future," Saul said. "We're not forcing people into a situation where they can't afford [support] for their family."

The second proposal would switch the default fund for investors who do not express a preference from the less-risky government securities (G) fund to the TSP's life cycle options, which invest in a more conservative mix of funds as employees near retirement.

At a biannual meeting of the Employee Thrift Advisory Council last week, union and employee group representatives agreed that the default fund proposal would be beneficial, especially to younger participants.

The board also agreed to hold off on proposing a Roth option, which would allow employees to make after-tax contributions. At last week's ETAC meeting, TSP Executive Director Gregory Long indicated that offering such an option would benefit a very small percentage of participants.

"As of now, I am not convinced that this feature will have broad appeal, and it is not clear how participants will react to the education efforts needed for complex tax planning issues," Long said at Tuesday's meeting. "I anticipate that we will revisit this issue within the next two years."