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Senators Urge TSP to Include Diverse Managers in Mutual Fund Window

Group of Democratic lawmakers cites multiple studies that found that women- and minority-run asset managers were more likely to outperform financial markets.

A group of Democratic senators last week urged the federal government’s 401(k)-style retirement savings program to ensure that diversity is a consideration as officials choose which funds to include in an upcoming expansion of participants’ investment options.

Next year, the Thrift Savings Plan is expected to implement the long-planned mutual fund window, which will grant participants the ability to invest in potentially thousands of mutual funds in addition to the program’s core indexes and lifecycle funds. TSP officials have already indicated that the introduction of the mutual fund window will allow federal employees and retirees the chance to invest in environmentally sustainable and other so-called environmental, social and governance funds that have grown in popularity in recent years.

Sens. Bob Menendez, D-N.J., Cory Booker, D-N.J., Ben Ray Lujan, D-N.M., Sherrod Brown, D-Ohio, Jeff Merkley, D-Ore., and Tim Kaine, D-Va., sent a letter last week to David Jones, acting chairman of the Federal Retirement Thrift Investment Board, which administers the TSP, urging him to prioritize including woman- and minority-led asset managers in the list of funds that will be made available through the mutual fund window.

“When it comes to their retirement investments, federal workers deserve the chance to make the strategic and values-driven choice to prioritize diversity,” they wrote. “The mutual fund window is an especially critical opportunity given that the TSP’s current investment managers are failing at diversity, particularly at the executive level.”

TSP’s standard offerings are managed by two companies: BlackRock and State Street Global Advisors. Last year, BlackRock’s executive management was around 20% female, 5% Black and 3% Hispanic, while State Street’s management team was 32% female, 2% Black and 3% Hispanic.

TSP officials responded to a 2017 Government Accountability Office report calling on 401(k) providers and other financial investment firms to increase the use of minority- and women-owned asset managers by saying such reforms would be included as part of the mutual fund window. But the senators wrote that the agency must do more to make it easier for participants to select those funds.

“We understand that the [TSP] board did work with Accenture Federal Services in November 2020 to develop a screener tool for plan participants to screen for funds managed by women and minority-owned firms,” they wrote. “However, there are still significant shortcomings that should be addressed through increased outreach, communicating priorities and other practices identified by GAO to broaden the pool of qualified asset managers.”

TSP spokeswoman Kim Weaver said that the advent of the mutual fund window next year will allow participants to incorporate a “particular investment outlook,” such as diversity or environmental sustainability, into their retirement portfolio, and said the agency “looks forward to responding to the senators and providing them with information about the progress toward implementing the [mutual fund window].”

Multiple studies have concluded that asset managers with a diverse leadership team can be a boon to investors. A 2020 McKinsey study found that companies in the top quartile for racial, ethnic and gender diversity were more likely to produce returns that were higher than the median for their industries, while a recent Goldman Sachs report found that 48% of woman-managed mutual funds outperformed the market between March and August 2020, compared to only 37% of all-male-managed funds.

“A diverse team of asset managers is more likely to hold varied perspectives and may be better equipped to identify novel investment opportunities,” the senators wrote. “Diversity can also help firms avoid the dangerous pitfalls of ‘groupthink.’”

The lawmakers also argued that the promotion of diversely managed asset managers in the mutual fund window could spur better participation rates in the TSP, citing the trend of consumers prioritizing values-based investments and purchases over pure profit motive.

“Many Americans today are actively seeking opportunities to combat discrimination and reduce racial and gender inequality,” they wrote. “Minorities and women are underrepresented among asset managers hired by institutional investors, and discrimination is a serious concern. If the board offers TSP funds specifically managed by diverse asset managers, more federal workers may elect to participate in the TSP or to increase their contributions.”

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