Think tank blasts TSP real estate fund proposal

A conservative Washington think tank published a paper last week denouncing congressional efforts to add a real estate fund to the Thrift Savings Plan.

The Heritage Foundation's report said the addition of a Real Estate Investment Trust fund to the TSP -- a $180 billion 401(k)-style retirement savings plan for federal employees -- over the objections of its fiduciary board would open a slippery slope for the addition of politically motivated funds.

"If Congress successfully forces a REIT fund on TSP, the balance of power will shift from [the board's] focus on the needs of TSP members to political interests of a particular industry or interest group," said Heritage senior research fellow David John.

At a meeting Monday, TSP Board member Alejandro Sanchez said of the report: "Wow, it said it all."

But congressional backers of a bill to add a real estate fund argue that REIT funds provide invaluable diversification for retirement investments. The bill (H.R. 1578) has 180 co-sponsors in the House.

"H.R. 1578 is simply about providing choice to federal employees and giving them the opportunity to diversify their portfolio," said Rep. Jon Porter, R-Nev., responding to the Heritage report.

The report, which called the TSP "one of the most successful retirement investment vehicles ever created," said its success has been due to Congress' historical detachment.

"Its governing board only considers the need of its members to build adequate retirement savings," John said. "As a result, federal employees can have full confidence that their interests will come before whatever political winds are currently blowing in Washington."

But Porter called Congress the "ultimate fiduciaries of the TSP," and said the board "has failed to exercise leadership in studying and responding to the issue of adding funds to the TSP."

Earlier last week, 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 an investment study the board commissioned from private firm Ennis Knupp & Associates of Chicago to examine possible additional funds for the TSP. 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.

TSP spokesman Tom Trabucco said at the board meeting Monday that Amelio had received the letter and would respond.

Representatives of the National Association of Real Estate Investment Trusts, which has been lobbying Congress and the board extensively for the addition of such a fund, said John's paper looked only at the political game and ignored the financial performance of REIT funds.

"He does completely ignore the story of performance," said Michael Grupe, NAREIT's senior vice president of research and investment affairs. "That is the reason this issue is on the table. That is the reason it is being considered. As to what the process is, it's very clear that Congress created the Thrift Savings Plan. Congress is by no means an inappropriate organization to be focusing on TSP investment policy."

Grupe also objected to the Heritage report's assertions about the volatility and expense ratio of REIT funds, which he said are both lower than John claims. Grupe also said John's argument that a greater number of funds will confuse investors is weak because most private 401(k) plans offer more than 15 fund options, while the TSP has only five.