Lawmakers question Thrift Savings Plan investment strategy

A House hearing Thursday on creating opportunities for women and minorities to play a larger role in managing the Thrift Savings Plan turned into a debate over whether the plan should shift from its current cautious style to a more ambitious, riskier, approach.

House Oversight and Government Reform Federal Workforce Subcommittee Chairman Danny K. Davis, D-Ill., said the TSP's investment approach makes it harder for the plan to work with minority- and women-owned financial management firms.

"The executive director of the Federal Retirement Thrift Investment Board revealed that there are minority firms with talent in long-term financial management," Davis said. "However, most of those firms gravitate toward the active fund management business, which is not an investment strategy of the TSP. Research by the TSP indicates that there may be only one minority-owned firm that deals with passive management of index funds."

But Gregory Long, executive director of the board, said the law has dictated the TSP's focus on funds that track the performance of the stock market rather than the use of active managers to make trades aimed at outperforming the market. The purpose has been to minimize risks and fees for users and avoid concerns over political manipulation of large pools of funds. Long said the conference report on the creation of the TSP specifically noted that active fund management could lead to lawmakers or interest groups pressuring fund fiduciaries to create investment options that would support specific industries.

"In the past we have seen different industry groups that want to receive favorable treatment from the TSP," Long said. "There was a group that represented a real estate investment trust that thought we should have a real estate trust. There might be rational reasons behind those goals, but that's not what we do. We look out for the best interests of the beneficiaries."

Del. Eleanor Holmes Norton, D-D.C., said Long and the board should do more research into whether they could achieve better returns through other methods, especially given changes in the economy.

"I don't mind you concentrating on your work, but it seems that out of intellectual curiosity, you would want to know about state teachers' funds, a plethora of funds in the market," Norton said. "We need to get to the bottom of what it is we're afraid of so we could know if we can hedge against it in some way, or if this is the best strategy that we have."

Jarvis Hollingsworth, former board chairman of the Teacher Retirement System of Texas, said he understood that large pools of actively managed funds were an invitation to lobbying, but not necessarily manipulation.

"I've never been of the opinion that you can legislate morality," Hollingsworth said. "Each member has to execute their ethical and fiduciary responsibilities. We did do some things such as have certain ethical disclosures in place, such as when a board member met with a fund manager. That information under our policy had to be disclosed."

Edward Swan, former president of the investment company FIS Group, said concerns about political manipulation were overblown and might prevent fiduciaries from considering viable investment offerings.

"I hear this concern about political manipulation, but I'm not sure what that manipulation might be," Swan said. "The only example I hear was that some people showed up and said, 'why don't you look at commodities?' It might be a good idea; it might be a bad idea. If someone has a real example, I'd like to respond to it."