Congress Weighs Using Nest Eggs as Agents of Change

By Stephen Barr
Monday, June 4, 2007

A $210 billion retirement savings program for government employees may soon be drawn into the growing debate over how to use the nation's economic clout to help halt the violence in Sudan and to restrict investments in companies that do business with Iran.

The Thrift Savings Plan, a 401(k)-type program with 3.7 million participants, has practiced neutrality on political and social issues since its start two decades ago. But bills pending in Congress would pressure the TSP to reconsider that stance.

The congressional proposals, to some extent, reflect the growing interest in "socially responsible" investment funds, which look for profitable companies that offer safe products and have good track records in such areas as human rights, community involvement and the environment.

Rep. Barbara Lee (D-Calif.), along with more than 100 House co-sponsors, has introduced a bill that would establish a list of companies whose business in Sudan is deemed to directly or indirectly support the genocide in Darfur. The bill would require congressional auditors to investigate the extent of TSP investments in such companies and prepare a report for Congress listing the companies.

A dozen states have passed laws mandating divestment of state pension and other funds from companies conducting business operations in Sudan, according to a paper prepared by Lee's staff. Nine other states have divestment legislation in the works.

In a bid to help prevent Iran from acquiring nuclear weapons, Rep. Barney Frank (D-Mass.) is sponsoring a bill that would authorize state and local governments to direct divestiture from companies with investments of more than $20 million in Iran's oil and gas industry.

The bill, which has Rep. Tom Lantos (D-Calif.) and six others as original co-sponsors, would shield mutual funds and employee benefit plans from lawsuits if investors suffered a financial loss. A similar bill has been introduced in the Senate by two presidential candidates, Sens. Sam Brownback (R-Kan.) and Barack Obama (D-Ill.).

Both bills would urge the TSP to "initiate efforts to provide a terror-free international investment option" but stop short of forcing the Federal Retirement Thrift Investment Board, which oversees the TSP, to set up such a fund.

Rep. Ileana Ros-Lehtinen (R-Fla.), however, has proposed using the TSP and federal pension systems to increase U.S. leverage on Iran. Under her bill, the TSP would be required to take steps to pull out of companies identified as investing more than $20 million in Iran's energy sector.

Proposals to use the Thrift Savings Plan in favor or against certain types of investments are not new. During the 1980s and 1990s, the TSP board was pushed to invest in mortgages to support housing, to avoid investments in South Africa and Northern Ireland, and to back minority-owned businesses.

But TSP officials have fended off such proposals by pointing to the plan's founding law, which discourages political manipulation of investments, and by insisting that investment decisions should be made only in the best financial interests of plan members.

The TSP's core funds are broad-based index funds that track U.S. stocks and bonds and international stocks. The funds operate with smaller overhead costs than most mutual funds and are designed to help civil service, postal and military personnel build nest eggs for their retirement.

One of the TSP's consultants, Ennis Knupp and Associates, has told the board that designing a socially responsible fund could be difficult and has recommend against setting one up in the federal program.

Criteria to exclude certain types of investments might be supported by some TSP participants and opposed by others, the consultancy said. In addition, most categories of investment that might be deemed objectionable involve legal businesses, Ennis Knupp said.

"It is hard to imagine," the consultancy said in a report last year, that the TSP "would find 'perfect' common ground and not be in contradiction with practices that are legal."

Still, 16 states have offered their employees a socially responsible investment option, according to the Social Investment Forum, a nonprofit advocacy group. In addition, major investment firms are adding or looking at offering socially responsible funds, said Jane Ambachtsheer, an expert at Mercer Investment Consulting.

She and Timothy Smith, board chairman at the Social Investment Forum, said they thought it would be reasonable for the TSP to give federal employees a social choice. "It is appropriate and some would argue it is wise to offer that opportunity," Smith said.

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