By Stephen Barr
Wednesday, June 20, 2007
The federal board that oversees retirement savings by government employees said yesterday that it would oppose proposals in Congress to use the Thrift Savings Plan as an economic weapon against Sudan and Iran.
On a 4 to 0 vote, members of the Federal Retirement Thrift Investment Board approved a resolution objecting to any efforts that would "introduce political or social considerations into TSP investment policy."
The TSP, a program that functions like a 401(k) for the civil service, postal and military personnel, has practiced neutrality on political and social issues since its start 20 years ago. However, bills pending in Congress would pressure the TSP to stop investing in companies that do business with Iran or support, directly or indirectly, the conflict in the Darfur region of Sudan, which the United States has called a genocide.
While the legislation would "address various meritorious causes," the board objected to any effort to tamper with the TSP, which uses funds that mirror the ups and downs of stock and bond markets rather than a particular industry or individual companies.
Through the TSP, government workers may save for retirement by investing in stock index funds that cover U.S. and international markets, a bond index fund and a government securities fund. The funds operate with low overhead costs and are relatively easy to understand.
In 1986, Congress designed the TSP around the index funds as a way to stymie political manipulation and prevent board members from knowing about or controlling specific investments.
Since that time, the board has opposed proposals to divest based on tobacco sales, corporate governance and environmental practices. The board also has opposed establishing special funds to promote housing, small businesses and renewable energy.
Andrew M. Saul, the thrift board chairman, urged the board yesterday to send a signal to Congress that the Thrift Savings Plan cannot be drawn into social or political debates, even for good causes.
"Personally, I don't think this is in the participants' best interest," Saul said, noting that making exceptions to address the violence in Sudan and to weaken Iran's oil and gas industry would create "the wrong precedent."
Tracey A. Ray, chief investment officer for the savings plan, presented the board with a report from the Ennis Knupp & Associates consulting firm that showed the TSP would have encountered substantial costs if its international stock index fund, the I Fund, had been stripped of foreign companies that do business in Sudan.
Based on the I Fund's assets of $25 billion, the TSP would have paid about $30 million in one-time transition costs to create a fund without Sudan investments. It would have returned about $171.5 million less than the I Fund did during the 2001-2006 period, the consultant estimated.
The thrift board also took up a package of changes for submission to Congress.
If lawmakers approve, new government employees would be automatically enrolled in the TSP and, if they gave no investment directions, would be placed in an age-appropriate life-cycle fund. Three percent of their basic pay would be deducted for the savings plan, unless they took steps to change the amount of their contribution or opt out of the program.
Gregory T. Long, the board's executive director, said the proposal would increase participation in the TSP by a few percentage points and help the workers better prepare for retirement. Some employees do not sign up for the TSP because of inertia or uncertainty about whether they can afford to save for retirement, research shows.
To ensure they are not being forced into the program, the proposal would give new employees a chance to decline enrollment at their first orientation session on government benefits. The new employees also would be given a 90-day grace period to withdraw their money from the TSP if they wished to stop the automatic contributions.
Long recommended that the TSP not seek legislation to offer Roth accounts, which are treated differently for tax purposes than regular TSP accounts. Regular contributions are made on a pretax basis, with contributions and earnings taxed as ordinary income when withdrawn. Taxes are paid on contributions to Roth accounts, but withdrawals are not taxed.
Sixty percent of participants in a TSP survey last year said adding a Roth 401(k) option would make the TSP a better program, but Long said it would be complex and costly, involving millions of dollars to reprogram computer and accounting systems and handle telephone inquiries.
Roth accounts were approved by Congress in 2001, and Long told the board that it didn't have enough data. He recommended that the staff continue to study the issue and that the board take it up again in about two years.