Consultants advise TSP not to change investment mix

An outside consulting firm on Tuesday advised Thrift Savings Plan administrators to stay the course with all investments.

The TSP, which is a 401(k)-style retirement savings plan for federal employees with assets of almost $175 billion, hired Chicago-based consulting firm Ennis Knupp & Associates to perform the first-ever external review of the plan's investment practices.

The consultants presented the first of what will be four recommendations to the TSP Board at a monthly meeting Tuesday. The initial review focused on the indexes that the TSP tracks for its common stocks (C), small- and mid-size companies (S), fixed income securities (F) and international stocks (I) funds.

The TSP is managed passively, meaning its holdings simply mirror indexes as opposed to using mutual fund managers to attempt to beat the market. For each of the four funds reviewed, the consultants told the board its current indexes remain the best choice.

The TSP board subsequently passed a resolution to retain the indexes.

The C Fund, which follows the S&P 500 Index of the top 500 stocks, and the S Fund, which tracks the Dow Jones Wilshire 4500 Index of the next 4,500 stocks, cover the universe of domestic stocks for TSP participants, consultants said.

Ennis Knupp advisers Russell Ivinjack and Neeraj Baxi told the board this combination is optimal for investors because the indexes are widely-followed and provide access to all U.S. markets.

The consultants also said switching to the next-best option, the Russell 1000 and Russell 2000 for the C and S funds respectively, would cost about $225 million.

For the F Fund, Ennis Knupp recommended sticking with the Lehman Brothers Aggregate Bond Index. The consultants noted that it is the most widely accepted index and provided the most diversification. Switching to another index would cost about $15 million, they said.

The I Fund was perhaps the toughest decision for the board and its consultants. The current index used -- the Morgan Stanley Capital International Europe, Australasia, Far East Index -- does not include Canada or emerging markets like Latin America.

"In the theoretical world, the all-inclusive fund is better because it is more diversified," TSP Executive Director Gary Amelio said.

But a number of factors stand in the way of switching to an index that includes stocks from these countries. The current index is valued daily, as are all of the other TSP funds, allowing participants to change the makeup of their holdings on a daily basis. But indexes which include emerging markets and Canada are valued monthly. Switching to monthly valuation of the I fund would require a change in policy and could create confusion and inconvenience for investors.

Also, the current index is the largest, and the board favors larger indexes so that nonfederal investors can carry the weight if TSP participants move their billions of dollars around dramatically.

Once indexes with emerging markets and Canada become daily-valued and grow larger, the board will reconsider the I Fund's index, TSP Board Chairman Andrew Saul said. The growing economies of China, India and other countries eventually will be too valuable of an investment opportunity for TSP participants to miss out, he said.

"We're going to have to look at this thing," Saul said. "I think we'd be remiss not to."

Future presentations from Ennis Knupp will cover potential changes in asset management, which is currently performed by Barclays Global Investors.

The consultants also will review the possibility of adding funds such as a real estate investment trust, which is an option some lawmakers are advocating. Amelio said key staffers on the House Government Reform Committee called a meeting Friday to discuss progress on the REIT option.

The TSP also announced at Tuesday's meeting that it is retaining the Metropolitan Life Insurance Co. to provide annuities for TSP participants. TSP participants have the option, upon retirement, of converting their savings into a stable annuity. About 11,000 retirees now have such annuities, officials said.