Thrift Savings Plan's Stock Funds Take a Hit

By Stephen Barr
Tuesday, April 22, 2008

The stock markets were roiled, and federal employees headed for cover.

That's what happened in the first three months of the year, when participants in the Thrift Savings Plan transferred about $9 billion of their retirement savings into bonds and government securities and out of more risky domestic and international stocks.

The TSP's stock funds, reflecting the uncertainty swirling around the mortgage and credit sectors, fell 9 to 10 percent in the first quarter of the year, according to data presented yesterday to members of the Federal Retirement Thrift Investment Board.

The TSP bond fund, in contrast, recorded a gain of 2.26 percent, and the government securities fund was up by 0.9 percent at the end of March.

Despite the Wall Street turmoil, government employees continue to make contributions to the TSP, a 401(k)-type program. The TSP grew to about $223.7 billion in assets at the end of March, and the number of people holding accounts increased slightly, to 3.88 million.

According to TSP data, 85.8 percent of workers covered by the Federal Employees Retirement System participate in the TSP. Nearly 36 percent of the active-duty military has joined the TSP, which Congress opened to the armed forces in 2002.

A key part of yesterday's board meeting involved a presentation by executives from Barclays Global Investors, which has managed the TSP's investment funds for the past two decades. Those funds are part of a securities lending program that Barclays operates and that produces income for the TSP.

The Barclays executives assured the thrift board that TSP assets are protected if Barclays encounters problems with borrowers who cannot live up to their contractual obligations or default on loaned securities.

Blake R. Grossman, chief executive of Barclays Global Investors, and H. Michael Williams, a managing director at the firm, told the board that borrowers put up cash as collateral when obtaining a loan or securities from the TSP. Williams said Barclays also relies on independent financial reviews, credit ratings and on-site visits when establishing credit limits for borrowers.

There have been only two defaults in the history of Barclays's lending program, but Barclays and its clients did not suffer any losses, Williams said.

In the unlikely event that Barclays ever fell into bankruptcy, Grossman said that trust and regulatory laws shield TSP assets from creditors. Asked by Alejandro M. Sanchez, a board member from Florida, if TSP assets were "locked in a room" and kept separate from other assets managed by Barclays, Grossman said yes.

Grossman rarely appears at board meetings, but Thomas A. Fink, a thrift board member from Alaska, had expressed concern about the risks involved in security lending, given the turmoil on Wall Street in recent weeks.

Andrew M. Saul, the thrift board's chairman, emphasized that Grossman's appearance was part of a "normal review" and noted that the board has "tremendous confidence" in Barclays's management of the TSP's funds.

Barclays Global Investors is part of Barclays, the 11th-largest bank in the world in terms of assets. Grossman said his division of the British Bank manages about $2 trillion worth of assets, with most of that money linked to index funds that try to mirror the broad performance of stock and bond markets.

The TSP's bond fund, for example, invests in fixed-income securities that track Lehman Brothers' U.S. Aggregate Index, which consists of securities that mature after more than one year. Over the past 12 months, the TSP's bond fund has gained 7.87 percent, outperforming the TSP's stock index funds during that time.

At yesterday's meeting, the thrift board also received an audit report from Deloitte & Touche, which gave the TSP an unqualified opinion, or "clean opinion." That means the TSP's financial statements for 2007 were in accord with generally accepted accounting principles.

Deloitte offered some recommendations for improvements in the technical controls of computer networks and system software, including how participants gain access to their accounts.

In a response, the TSP said it has hired a program manager to develop an updated password policy and standards for implementing new password requirements.

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