TSP Board Revisits Decision to Broaden International Fund

The agency responsible for administering the federal government’s 401(k)-style retirement savings program on Monday discussed whether to reconsider a 2017 decision that would base investments in its international (I) fund on a broader market index, following an outcry from some lawmakers that the new index would include Chinese equities.

In 2017, the Federal Retirement Thrift Investment Board voted to shift the index upon which the Thrift Savings Plan’s I Fund is based, from the MSCI Europe, Australasia and Far East Index to the MSCI All Country World Ex-US Investable Market Index, beginning sometime next year. The move marks a shift from a predominantly Euro-centric index, along with Japan, Hong Kong, Australia and New Zealand, to investments in 48 markets around the world, most notably including Canada and China.

In August, Sens. Marco Rubio, R-Fla., and Jeanne Shaheen, D-N.H., sent a letter to FRTIB Chairman Michael Kennedy, urging him to reverse that decision, citing the Chinese government’s history of human rights abuses and other national security concerns. Rubio, Shaheen, and Sens. Mitt Romney, R-Utah; Kirsten Gillibrand, D-N.Y.; Josh Hawley, R-Mo.; and Rick Scott, R-Fla., sent a second letter to the TSP board last week urging a reversal at Monday’s board meeting.

“As noted in previous correspondence, this decision would effectively invest the retirement savings of America’s civil servants and military personnel in constituent companies of the [new index] that assist in the Chinese government’s military activities, espionage and human rights abuses, as well as many other Chinese companies that lack basic financial transparency,” they wrote. “[Additionally], the basic financial hazards of investment in firms listed on Chinese exchanges are well documented. A recent accounting scandal involving one of China’s biggest accounting firms . . . highlights the extent of the irregularities in the financial markets to which federal employees may soon be exposed.”

During the meeting Monday, the TSP board did not make any decisions regarding whether to reverse plans for the switch in the index. But consultants from Aon Hewitt, who first recommended the new index, revisited their analysis, and stood by their recommendation. Russell Ivinjack said the law governing the Thrift Savings Plan requires the agency to offer an I Fund that is as broadly representative of non-U.S. investments as is financially responsible.

“[The law] states that the I Fund should be a reasonably complete representation of the international equity markets excluding the U.S. market, and the current benchmark represents about 58% of non-U.S. equity,” Ivinjack said. “The [new index] covers 99% of non-U.S. equity market capitalization, and that better meets the standard set out in the law. We previously had not recommended the shift, and the reason was with an abundance of caution of liquidity. But for [the 2017 review], we became more comfortable because the markets have continued to develop, and the capabilities of index managers to manage liquidity issues have improved.”

Aon Hewitt Partner Bill Ryan said that in fact, even taking into account issues regarding Chinese financial transparency, the returns for the new index outperform the existing index, both in strong global markets and weak ones.

“On every increment [of investment], there’s monetary benefit for participants, even in up and down markets,” he said.

FRTIB Member Bill Jasien asked whether it would be possible to track an emerging markets index that excludes China, but Ryan and Ivinjack both dismissed that idea as dangerous, as it could lead to participants “chasing trailing returns.”

“An emerging markets-only fund unfortunately sees a lot of inflows and outflows mirrored by the performance of markets,” Ryan said. “It didn’t serve participants well because it was essentially trailing returns.”

The board will continue to discuss the matter at its November meeting.