Investment risks and restrictions in Chinese companies has led to the Thrift Savings Plan excluding the country from its I Fund portfolio.

Investment risks and restrictions in Chinese companies has led to the Thrift Savings Plan excluding the country from its I Fund portfolio. Yuichiro Chino / GETTY IMAGES

TSP board OKs new international fund index, this time without China

A previous effort to move the I Fund to a broader benchmark index, which included investments in Chinese corporations, met opposition from the Trump administration and Republican lawmakers.

The agency responsible for administering the federal government’s 401(k)-style retirement savings program announced Tuesday that next year, the Thrift Savings Plan will transition its portfolio of international investments to a new, broader index, which officials say will improve the I Fund’s performance.

The TSP’s core funds all track a benchmark index that guide investment in a market sector, be that small or large businesses in the cases of the S and C funds, respectively, or investments in international markets, as is the case with the I Fund. For years, the I Fund has been tied to the MSCI Europe, Australasia and Far East Index.

But next year, the TSP will move I Fund investments to a new, broader, index in the form of the MSCI All Country World ex USA ex China ex Hong Kong Investable Market Index, or MSCI ACWI IMI ex USA ex China ex Hong Kong Index, for slightly shorter.

Diversifying federal employees and retirees’ international investments has been a priority for the TSP for years. In 2017, the Federal Retirement Thrift Investment Board, which administers the TSP, voted to change the I Fund’s index to the MSCI All Country World Ex-US Investable Market Index with a plan to make the transition occur in 2020.

But that effort was derailed by a flurry of last-minute pressure by Republican lawmakers, who argued that federal employees and military service members’ retirement accounts should not be invested in Chinese corporations. The Trump administration ultimately ordered TSP officials to cease efforts to implement the index transition, culminating in the FRTIB indefinitely postponing the move and its chairman resigning amid cries of political interference in an agency with a solely fiduciary responsibility to TSP participants.

The newly selected benchmark index notably excludes all investments in both China and Hong Kong, but the reasoning behind the choice isn’t political, officials said. According to Aon, a consulting firm that advised TSP officials on the matter, conditions have changed increasing the risk profile of Chinese securities.

“Overall, operational complexity has increased when investing in emerging markets in recent years given a range of events such as investment restrictions on sensitive Chinese technology sectors, delisting of Chinese companies and sanctions on Russian securities due to the Russia-Ukraine conflict,” Aon wrote. “These types of events can incur transaction costs and may cause performance and volatility swings. Given the asset size of the I Fund, the forced selling of restricted investments could incur higher than average market impact costs due to liquidity challenges. If the current investment restrictions on China are the beginning of further restrictions spanning China and Hong Kong investments, this level of uncertainty can outweigh the benefits of expanding the I Fund to include China and retaining exposure to Hong Kong, based on the TSP’s specific circumstances.”

The TSP’s current I Fund index exposes participants to nearly 800 stocks across 21 developed markets, representing 55% of international market capitalization. The MSCI ACWI IMI ex USA ex China ex Hong Kong Index increases that exposure to 5,621 stocks in 21 developed markets and 23 emerging markets, and represents 90% of non-U.S. market capitalization, and is expected to outperform the existing index on a long-term basis.