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A consulting firm delivered a long-awaited report Monday advising Thrift Savings Plan officials not to add a controversial real estate fund to the 401(k)-style retirement savings program for federal employees.

The TSP board last fall commissioned Ennis Knupp & Associates of Chicago to examine the possibility of adding a Real Estate Investment Trust fund to the plan, which hit the $200 billion mark for investments this month. The board has been under pressure from lawmakers to add such a fund.

More than 200 members of the House co-sponsored a bill this session to add a REIT fund to the plan's five basic options. In a series of contentious hearings and an exchange of letters, the board objected to making the addition without studying it further. Board members said they wanted to add funds for financial reasons, not because of political pressure.

Existing TSP funds do not invest in a single area, such as real estate. Instead, they track stocks and bonds invested in a range of fields.

In a compromise, the board -- which is made up of five presidentially appointed financial advisers -- and its executive director, who runs day-to-day operations, agreed to hire Ennis Knupp to conduct an independent study that would examine all possible fund additions, including those of socially responsible funds and inflation-protected funds, as well as REITs.

Ennis Knupp gave three reasons not to add a REIT fund. First, the REIT sector is too small -- about $380 billion versus trillions of dollars for the indexes of the current funds. Because the TSP is so large, it would be too big of an investor in the sector and have too much of an effect on the sector's standing, the consultants concluded.

Second, they reported, while REITs have had high returns over the past several years, returns in the very long term have not been as high. There is a diversification benefit, but it is offset by lower returns and higher risk than the current options.

Finally, only one in six of the TSP's peers offer stand-alone REIT funds, Ennis Knupp reported, and participation rates are low in those.

In July, Rep. Tom Davis, R-Va., chairman of the House Government Reform Committee, sent a letter to TSP Executive Director Gary Amelio on the REIT issue. Davis questioned the objectivity of the Ennis Knupp study. A memorandum from the company explaining the study's parameters said investors were well served by current TSP offerings.

"Should not such a conclusion be expressed following the completion of the study rather than before the analysis even is undertaken?" Davis asked.

A spokesman for the TSP said the board sent Ennis Knupp's report to lawmakers on the oversight committees and their staffs, and only Sen. George Voinovich, R-Ohio, chairman of the Senate Homeland Security and Governmental Affairs subcommittee on Oversight of Government Management, the Federal Workforce and the District of Columbia, asked for a meeting to discuss the results.

With a new Congress taking over in January, the bill would have to be reintroduced.

The National Association of Real Estate Investment Trusts has lobbied hard for the addition of a REIT fund to the TSP. Representatives of NAREIT argue that the diversification and high returns make REITs a solid investment for TSP participants.

COMMENTS

• Nullrout, If you need the TSP to take care of your every need you are in real trouble. It takes almost no work and little time to setup an IRA to handle your investment needs outside TSP. The government only matches 3 percent of your salary so contribute 3 percent to TSP and put the rest into an IRA that is REIT oriented. If you put it in a Roth it is not taxed on withdrawal but your TSP is taxed upon withdrawal! If you’re young, you may want to make a one time withdrawal from TSP and roll it into a Roth that invests in REITs. You would pay on the rollover now but you would avoid taxes on the distributions in the future. I would assume the tax rate is going to increase because of the excessive spending by Congress on Iraq and what lies ahead for Social Security and Medicare! It is purely a mathematical calculation about whether you should rollover to a Roth now or stay put. However, the result is dependent upon your assumption of future tax rates and when they will happen. The baseline calculation should use existing rates because I do not assume they are going to get any less. If your only bet is on TSP and Social Security, you are putting most of your eggs in a single basket - the U.S. government. That’s not a bad basket to be in but you never know. Look what happened to Enron and they looked safe too. Taxpayer Posted December 8, 2006 8:17 AM
• Excellent article, Ted. Thanks. URL: http://money.cnn.com/magazines/moneymag/moneymag_archive/2006/12/01/8395180/index.htm Tip off. GovExec.com reader Posted December 4, 2006 4:12 PM
• There’s an interesting article on CNN Money re: TSP. The retirement plan Uncle Sam has right Hard to believe but true: The government offers employees a great plan, and you'd do well to emulate it. By Walter Updegrave, Money Magazine senior writer Nov. 23, 2006: 7:56 AM EST Ted Posted December 4, 2006 8:37 AM