Honey Pot

On Oct. 17, 2006, Terry Duffy made an $8 billion purchase. Duffy, executive chairman of the Chicago Mercantile Exchange, bought the Chicago Board of Trade. His move made the Merc, as it is called, the world's largest financial exchange, overtaking the New York Stock Exchange. So it is easy to understand why on Oct. 16, Duffy was busy-too busy, it turns out, to attend the monthly meeting to oversee the federal Thrift Savings Plan, of which he is a board member.

It wasn't his first absence.

In their spare time, Duffy and four fellow TSP board members oversee the $200 billion retirement plan. Nearly 4 million people -- federal employees, retirees and members of the uniformed services -- are saving money in the TSP, which functions like a 401(k) with up to 5 percent matching contributions from the government.

Congress created the plan in 1986 as part of the new Federal Employees Retirement System. Until then, employees had received a set pension based on their salary and the number of years they worked under the Civil Service Retirement System.

But CSRS, whose benefits were not portable, locked employees in golden handcuffs. To build their nest eggs, they had to remain employed with the federal government. FERS reduced the amount of pensions, added Social Security benefits to the package and created the TSP, which is portable.

Government automatically contributes 1 percent of employees' pay to the TSP and matches their contributions dollar for dollar up to 3 percent, and 50 cents on the dollar for an additional 2 percent of salary. CSRS employees can participate in the TSP, too, but they don't get matching funds.

As Sen. Richard Durbin, D-Ill., noted during Duffy's May 15, 2003, confirmation hearing: "The Federal Retirement Thrift Investment Board may be obscure to some, but it is not to the millions of federal retirees and current federal employees who are saving a portion of their earnings in anticipation of retirement."

Duffy responded in kind: "I understand the gravity of the responsibilities that I will be required to fulfill if my nomination is approved. Three million federal employees have invested more than $100 billion to assure a successful and productive retirement."

Four years later, the TSP has more than doubled its worth, but Duffy has been to Washington only four times to oversee it. Since Duffy's 2003 appointment -- he was the last of the five current board members to join -- the board met 42 times through the end of 2006. Twenty-nine of those meetings were face to face; 13 were telephone conferences. Duffy attended 25 of the 42. But for 21 of the 25, he phoned in from Chicago. Minutes from the meetings show that when he did phone in, he remained mostly silent.

Duffy declined to be interviewed for this story, but through a TSP spokesman -- who tracked Duffy down "in a car on his way to an airport somewhere in the world" -- he said, "As far as [my] attendance record, the record is the record."

TSP board members are simultaneously open and elusive. Membership is part time; last year, pay ranged from $4,000 to $22,000, because travel and preparation times varied. Most members are successful businessmen and large political donors. They are both private and public figures. Law requires them to conduct the monthly meetings in public, which they do, but all five board members and the executive director refused requests for interviews about Duffy's record, or the TSP in general.

Former board member Sheryl Marshall, appointed in 2000 by President Clinton, says the meetings are scheduled a year in advance to accommodate schedules. "It's just a responsibility, it's a fiduciary responsibility," Marshall says. "If you're not going to show up, you shouldn't be on the board."

Similarly, Marshall's fellow former board member and Clinton appointee Scott Lukins says, "That's where we did most of our decision-making -- all of it was made at these meetings. . . . You can't be giving your share if you're not attending the meetings."

Luckily for the 3.7 million TSP investors, Duffy's absenteeism is uncommon. By contrast, the other board members have near-perfect attendance records and travel to Washington for most meetings.

Chairman Andrew Saul and member Gordon Whiting live in New York; Alejandro Sanchez is from Florida and Thomas Fink is in Alaska. Saul, Whiting and Sanchez were appointed in 2002; Fink in 2000. They have presided over big changes to the plan -- and some big battles.

High Drama

The new board's very first meeting, in December 2002, was fraught with high drama. The month before, Roger Mehle, the longtime executive director, resigned to return to private law practice. He recommended James Petrick, an attorney and 16-year TSP employee, as his successor.

The previous board approved him for the lifetime appointment. But when the Bush-appointed board convened in Washington that December, Saul, Whiting, Sanchez and Fink forced Petrick to resign.

Their reasoning is not entirely clear. A transcript is among court documents from a lawsuit filed against the board by Mehle and the TSP's original executive director, Frank Cavanaugh, in the U.S. District Court for the District of Columbia. According to the transcript, Saul said that shortly after he was confirmed, Petrick called him at his Westchester, N.Y., home and spoke rudely to him, telling him not to talk to TSP staff without Petrick's permission. Saul also said six senior staff members told him they would quit rather than work under Petrick.

Mehle has his own theory. Saul's board hired Gary Amelio, former senior vice president of the retirement division of PNC Bank in Pittsburgh, as executive director. A month after Amelio's arrival, he and the board accepted a $5 million settlement with a contractor to close out the botched modernization of the TSP's computer system.

Under Mehle, who resigned in November 2002, the board had paid Fairfax, Va.-based American Management Systems $36 million for the failed modernization. Mehle and his board sued AMS, beginning a turf battle with the Justice Department over whether the board had standing to sue. Petrick was committed to the lawsuit, but Saul wanted to settle and Amelio agreed.

Whatever the reason, that December, the board handed Petrick a resignation letter and told him to sign it and return to his old job at the TSP or be fired. Petrick had just minutes to decide. He resigned.

Mehle a former Treasury Department assistant secretary under President Ronald Reagan, was chairman of the TSP Board from 1986 to 1994 and stepped down to become executive director. He is passionate about the lawsuit, which essentially alleges that the board violated its fiduciary duty to TSP participants by forcing out Petrick in order to settle the AMS lawsuit.

"[I] regard the things that were done as terribly abusive of the appropriate governance of the organization," Mehle says. He expects the judge to rule this year.

Amelio is now gone -- he left in January for a job as president of retirement services for Ullico Inc. of Washington, which provides insurance and investments for union members. The board selected Gregory Long, who served as the plan's director of product development for a year, as Amelio's replacement.

At his last board meeting, Amelio promised to support his successor. "I'm not going to be filing any fruitless litigation," he says.

In any case, the TSP that faces Long is vastly different from the one Amelio inherited.

Era of Change

Amelio and the board quickly ended the contractor lawsuit and ushered the TSP into an era of change. The biggest development since the plan's inception 20 years ago has been the switch to computerized records, allowing participants to move their investments every day.

After the system went online in mid-2003, Congress ended the two annual TSP open seasons and permitted participants to move their investments among funds at any time. As Saul said in a February 2007 meeting, daily valuation is "the heart of the whole change."

But there's more. The TSP already was the cheapest plan in the country, by a long shot. Last year's annual administrative fee was only $3 for every $10,000 invested, or three basis points. In February, Amelio predicted it soon would drop to one basis point. By contrast, the fee for the least costly 401(k), Vanguard, is 22 basis points.

Federal agencies bear some of the administrative costs. But the cost reduction also is due to the board's aggressive outsourcing of administrative functions. By May 2006, TSP had entirely dropped the Agriculture Department's National Finance Center in New Orleans as its data entry, accounting and call center provider. Instead, it hired contractors SI International of Reston, Va.; Spherix Inc. of Beltsville, Md.; and Switch & Data of Tampa, Fla.

Amelio reduced the operating budget from $101.5 million in fiscal 2004 to $76.8 million in fiscal 2007 by outsourcing and downsizing staff through buyouts.

He also presided over the entry of hundreds of thousands of new participants. The 2001 Defense Authorization Act permitted uniformed members of the military to use the TSP, though by and large they don't get a matching contribution. They also have their own pension system, so a smaller portion of them -- about 500,000 out of 2.5 million, or 20 percent -- contribute to the TSP. Among civil servants in FERS, 85 percent participate, as do about 65 percent of those in CSRS.

In August 2005, TSP officials launched a set of new investment options called life-cycle funds. Celebrated for its simplicity, the TSP had had just five basic options.

The G Fund invests in government securities specially issued to provide a higher return than inflation without any serious risk from market fluctuations. The C Fund invests in common stocks, tracking Standard & Poor's 500 Index of stocks in the largest domestic companies. The S Fund invests in small- and mid-sized domestic companies, following the Dow Jones Wilshire 4500 Index. The F Fund is invested in fixed-income bonds. The I Fund invests in international stocks from Europe, Australia and some Asian countries.

Life-cycle funds are a new, sixth investment option, though they're not actually a new fund. They blend the five basic funds and automatically shift investors' money from a mix of riskier to more conservative investments as participants age.

For example, for a person who plans to retire in 2040, the life-cycle fund will invest 42 percent of funds in common stocks and only 5 percent in the more conservative G Fund. On the other hand, for those headed for retirement in 2010, the life-cycle fund will invest 43 percent in safe government securities and only 27 percent in more volatile common stocks.

Federal employees tend to be conservative investors. Those in FERS put an average of 9.4 percent of salary into the TSP and even those in the older CSRS tuck 9.2 percent into the plan. But they favor low-risk funds. About 44 percent of TSP dollars sit in the G Fund. At the end of 2006, 18 months after their introduction, the life-cycle funds had 433,025 participants and held $17.4 billion, roughly 8 percent of the TSP total.

Power Play

Only Congress can add funds to the plan, but since 1986, lawmakers have done so only at the suggestion of the board. Last year saw a major clash between Congress and the board when more than 200 House members tried to force a Real Estate Investment Trust Fund into the TSP without the board's approval.

They failed when the board ran out the clock on the 109th Congress by hiring an outside consultant to examine the REIT option. Congress couldn't vote to add the fund until the experts had given their verdict. The firm, Ennis Knupp & Associates of Chicago, didn't issue its report until a couple of weeks after the Nov. 7 election.

The Bush-appointed board's assertiveness, revealed in its handling of Petrick, has played out in its aggressive moves to diversify the plan and reduce costs. Amelio, the former executive director, personified this combativeness. At one of his last public appearances with the TSP, while insisting he was leaving for career and financial opportunities, he said: "One of your august members suggested I was getting frustrated with doing battle with the bullies on the Hill. I relish doing battle with bullies, particularly those that have no idea what they're doing."

The "bullies" to whom he referred include Congress members such as Tom Davis, R-Va., ranking member of the House Government Reform Committee; Jon Porter, R-Nev., ranking member of its federal workforce subcommittee; Danny Davis, D-Ill., its chairman; and Chris Van Hollen, D-Md., chairman of the Democratic Congressional Campaign Committee.

Those congressmen -- after intense lobbying by the National Association of Real Estate Investment Trusts -- supported legislation to make a REIT the sixth fund in the TSP.

They argued that REITs, which allow individuals to buy shares in companies that run apartment buildings, shopping centers, offices, hotels and other commercial facilities, are big earners and that federal employees should have the choice, as do many 401(k) participants, to invest in them. REITs also react differently to market forces than do stocks and bonds, providing diversification, which protects assets, the lawmakers argued.

But board members bristled at the attempt to overpower them. They argued that if Congress imposed a REIT fund, then other interest groups would lobby to add funds. A proliferation of funds could raise administrative costs and reduce participation levels, they said.

The battle led to contentious hearings and a heated exchange of letters. So far, no REIT bill has been introduced in the new Congress.

Meanwhile, the board has its own plans. Members are expected to ask the new Congress for more changes, among them, automatic enrollment of all new employees in the TSP and the designation of the life-cycle funds as the default investment for new participants. Saul predicts the plan will grow to $300 billion in three years.