This story was updated at 12:30 on Tuesday, Oct. 29, to reflect additional information from Sen. Marco Rubio (R-Fla.).
The Federal Retirement Thrift Investment Board is reconsidering its plans to move the Thrift Savings Plan’s international fund to a new benchmark.
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The future of the I fund has become controversial in recent months, after a bipartisan group of senators, led by Marco Rubio (R-Fla.) and Jeanne Shaheen (D-N.H.), expressed concern back in August with the TSP’s plan to expand the I fund benchmark to emerging markets, including China.
The I fund currently benchmarks Morgan Stanley Capital International Europe, Australasia and Far East Index (MSCI EAFE). In the future, the fund will move to Morgan Stanley Capital International All Country World Ex-US Investable Market Index (MSCI ACWI Ex-US IMI), which covers 22 developed and 26 emerging markets and consists of large, mid- and small-cap stocks from more than 6,000 companies.
The change “will expose nearly $50 billion in retirement assets of federal government employees, including members of the U.S. Armed Forces, to severe and undisclosed material risks associated with many of the Chinese companies listed on this MSCI index,” Rubio and Shaheen wrote in an Aug. 26 letter to the board.
Additional senators, including Josh Hawley (R-Mo.), Mitt Romney (R-Utah), Rick Scott (R-Fla.) and Kirsten Gillibrand (D-N.Y.), signed on to a second letter given to the board last week. The senators again urged the TSP board to reconsider its decision on the I fund.
Rubio on Tuesday morning said he would introduce legislation that would essentially prevent the TSP from investing in Chinese companies.
In effort to alleviate the senators’ concerns, the FRTIB had commissioned an updated review of the I fund benchmark index to review its initial decision.
“The board thought that it would be a good idea to take a step back and take a look at what’s occurred since 2017 when we made our initial decision to move to the emerging markets index,” Michael Kennedy, the FRTIB chairman, said Monday at the board’s monthly meeting.
Aon Hewitt Investment Consulting, the company who originally advised the TSP agency to make this change back in 2017, on Monday reaffirmed their initial recommendation for the TSP to move to an emerging markets index.
The consulting group prepared a long and detailed report on the potential I fund change. But in short, Aon said the move would put the TSP in line with other comparable 401(k) style plans — and could improve anticipated returns for the plan’s participants.
The top 10 publicly-traded U.S. companies and the top 10 federal contractors all offer their defined contribution participants access to an emerging market equity, which includes Chinese equities, Aon said.
Twenty of the largest public sector defined benefit plans also invest in emerging market and Chinese equities.
“We recognize that one of the biggest additions here is the emerging market equities,” a representative from Aon told the board. “We think that holistically that move makes you in line with the practices of your peers, and you definitely would be an outlier by not providing access to both the emerging markets in Canada and smaller cap stocks.”
In addition, Aon projected expanding the I fund’s benchmark would improve the anticipated return for TSP participants. The projected returns today are greater than the estimates Aon originally provided back in 2017.
The board on Monday didn’t say one way or the other how exactly it might decide on the I fund now that it’s equipped with additional information. Another board meeting is scheduled for mid-November, when the board is supposed to consider the topic again.
But for Rubio, the board isn’t moving fast enough. He said it was “unacceptable” the board on Monday didn’t reverse its decision.
“It’s clear the board will not act in the best interests of the United States, reverse this misguided decision and protect our national interest, as well as those who serve it,” Rubio said in a statement. “That’s why I will be introducing bipartisan legislation to ensure that federal retirement savings can never be a source of wealth funding the Chinese Communist Party at the expense of our nation’s future prosperity.”
The FRTIB reminded members of the board and the public: Federal employees choose to participate in the TSP, and they choose how much and where to make their investments.
“Current accounts in the media recently have characterized the TSP as federal money; it is not,” Deo said. “It is the money of current and separated federal workers who have chosen to invest in their retirement.”
Senators have expressed concern that U.S. retirement assets would be exposed to ethically immoral and financial risky Chinese companies.
“It is our responsibility to these public servants to ensure that the investment of their retirement savings does not undermine the American interests for which they serve,” the senators wrote in multiple letters to the board on this topic.
The FRTIB had planned to move the I fund benchmark in mid-2020.
More than a month after the TSP unveiled a series of new withdrawal options, the agency has noted a dramatic flurry of activity and interest.
In-service withdrawals from TSP participants were up by 372% last month compared to September 2018, the FRTIB said Monday.
Specifically, participants who have reached age 59-and-a-half or older and are still in federal service made 8,701 withdrawals last month, compared to 1,842 in-service withdrawals in September 2018.
“This due to pent-up demand,” Tanner Nohe, the FRTIB’s withdrawals project manager, said at Monday’s board meeting. “But this is also due to a lot of people requesting a second in-service withdrawal, which they haven’t been able to do in the past.”
TSP participants who have left federal service are also taking more partial withdrawals than ever before. The FRTIB processed 13,361 partial distribution requests in September, a 414% increase over the 2,600 distributions the agency handled in September 2018.
“By giving participants more flexibility to take money from their accounts, it appears that they may take less money out of their accounts,” Nohe said. “We’re still seeing an increase in partial distributions from this year versus last year, but the total distributions have gone down slightly.”
As more participants look to take advantage of the new TSP withdrawal options, the FRTIB is handling a record number of questions and calls.
Nohe said the agency is receiving an average of 2,000 additional calls a day compared to this time last year.
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