Is it time to add more investment options to the Thrift Savings Plan?
The National Association of Real Estate Investment Trusts says yes. The TSP appears likely to say no.
An answer may be months in the making. But Reps. Jon C. Porter (R-Nev.), Chris Van Hollen (D-Md.) and Thomas M. Davis III (R-Va.) hope to start the debate this week. They plan to introduce legislation that would add a real estate investment trust, or REIT, option to the TSP. (Davis chairs the House Government Reform Committee; Porter chairs, and Van Hollen serves on, the federal workforce subcommittee.)
For many government employees, the TSP is a key pillar of retirement planning. The plan operates with four index funds -- three for stocks and one for bonds -- and a government securities fund designed to never lose money. With assets of about $154 billion, the TSP is one of the largest 401(k)-type programs in the world.
The REIT association believes the TSP is missing out on a vibrant part of the economy and points out that most 401(k) plans offer more investment options than the five in the TSP.
Steven A. Wechsler, the association's president, and Michael R. Grupe, a senior vice president at the association, said in a recent interview that REITs would be a way to increase diversification in the TSP. "It is a plan ripe to consider more options," Wechsler said.
REITs are publicly traded companies that own and usually operate real estate, such as office buildings, shopping centers, apartments, hotels and warehouses. They are often called "liquid real estate" because they provide a way to invest in an array of commercial properties without having to buy them directly. Because REITs are required to pay out most of their taxable income to shareholders, their dividends are higher than those of other equities, according to the association.
An analysis commissioned by the association found that a REIT investment option would probably help TSP participants increase their returns and lower their risk.
For the period 1988 to 2004, the association's index of publicly traded equity REITs performed slightly better than the TSP's C Fund, a common-stock fund that tracks the S&P 500, and the TSP's S Fund, which mirrors the Wilshire 4500 index of small and medium-size U.S. companies, according to the analysis.
For a shorter period, 2000 to 2004, the analysis calculated that a REIT investment option would have provided an average annual return of 22 percent. Those years were marked by a Wall Street slump that caused TSP stock funds to lose value or make only slight gains.
The Federal Retirement Thrift Investment Board, which oversees the TSP, appears wary of adding a REIT fund, however.
At a Jan. 19 board meeting, Gary A. Amelio, the board's executive director, suggested that the board hire a consultant to review all possible investment options before making a decision on whether to add a fund. Minutes from the meeting show that Andrew M. Saul, the board chairman, noted that real estate stocks are already represented in the TSP, making up about 7 percent of the C and S funds.
Congressional aides portray the TSP staff as opposed to adding a REIT fund in part because TSP is deep into planning for the launch of a "lifecycle" option this summer. The lifecycle option is designed to help government employees better balance their investment choices against market risks as they save for retirement.
The TSP staff also is concerned that adding a REIT fund could increase program costs, the aides said. A Jan. 26 letter sent by Barclays Global Investors, which manages TSP stock and bond funds, to the House Government Reform Committee suggested that REIT management expenses "would be higher than the fees currently charged for the existing options."
Traditionally, a Senate aide noted, Congress has deferred to the thrift board on investment policy. The 1986 law that created the TSP vested the board with the responsibility for operating the plan in the best interests of the participants, the aide said.
At the REIT association, officials said they would welcome a board review of adding a real estate investment option but believe strongly that the TSP would benefit from increased diversification.
"The employees should have more choice," Wechsler said.
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