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After pressure from Trump, board delays including China in investment fund

President Trump with Chief of Staff Mark Meadows, center, and national security adviser Robert C. O’Brien last week.
President Trump with Chief of Staff Mark Meadows, center, and national security adviser Robert C. O’Brien last week. (Mandel Ngan/AFP/Getty Images)

The governing board of the retirement savings program for federal employees and military personnel on Wednesday delayed indefinitely a controversial broadening of one of its investment funds to include China and other emerging-market countries.

The unanimous vote followed pressure from the Trump administration and some members of Congress as the planned fund change became caught up in the administration’s China policies, including those related to the coronavirus pandemic.

However, members of the board overseeing the Thrift Savings Plan said a delay was necessary to give the three recent nominees to the five-member board time to review the issue. Several added that they believed a delay was prudent given the pandemic’s potential for disrupting the stock markets of the countries that would be added.

They meanwhile did not directly address an assertion, conveyed through a Monday letter from the Labor Department, that the board of the semi-corporate federal agency is subject to the direct control of the administration — a notion that has not been tested in the 401(k)-style program’s 30-year existence.

The TSP had been preparing since 2017 to use a broader index for its international stock fund, or I Fund, which tracks an index of 21 developed countries’ stocks. On the recommendation of a consultant, the board voted then and again last year to change to an index that also includes 26 emerging-market countries, China among them.

The transition had been scheduled to start as early as next month and was projected to take about three months. Wednesday’s vote shelves the change pending confirmation by the Senate of the three nominees who would constitute a new board majority and could then vote to reverse it.

The motion to delay the change came from the sole member of the board who had opposed the change, William Jaisen, chief executive and managing director of StoneHedge Global Partners. “I want all of the military and all federal workers to invest internationally without exposure to China or any other adversary,” he said.

A letter Monday from Larry Kudlow, the director of the White House’s National Economic Council, and national security adviser Robert C. O’Brien expressed national security concerns and also said the Chinese government concealed critical information from the United States and the rest of the world regarding the coronavirus.

President Trump last week nominated replacements for the three board seats under his control, on the expectation that they would reverse the board’s previous decision to broaden the international fund.

Board members serve part time and all are in holdover status since their four-year terms have expired. Nominations for the other two seats are at the discretion of the speaker of the House and the Senate majority leader.

“We’re being asked to make a decision on the I Fund based on political challenges, national security, financial risk, things of that nature,” said the board’s chairman, Michael Kennedy, one of the members who would be replaced. “But we’re professionals with backgrounds in investment, finance, capital markets and pensions.”

“We are a bipartisan group, Democrats and Republicans, but we operate in a nonpartisan manner so that the decisions that we make have been nonpartisan,” said Kennedy, a managing director in the Atlanta office of Korn/Ferry International.

Several board members said they hoped that the nominees will review the reasoning behind the decision to use the broader index before rejecting it.

Those reasons include that the current index covers only about three-fifths of the value of international stock markets, while the broader one would cover virtually all of it; that it offers the potential for higher returns than the current index; and that major 401(k) plans as well as major pension funds and mutual-fund companies offer investments in emerging markets.

The board and an advisory council of federal employee organizations also have stressed that investment in the fund is voluntary for the program’s 5.9 million account holders. That fund makes up about $41 billion of the $557 billion invested, far below the amounts in U.S. stock, bond and government securities funds.

“My belief remains intact that we made the correct decision given all the facts and studies that we had,” said board member David A. Jones, who has worked for a number of financial services companies and currently operates an independent financial consulting firm.

Dana K. Bilyeu, executive director of the National Association of State Retirement Administrators, said a delay would give the new members an opportunity “to conduct their own due diligence and make their decision based on the best interests of the participants and beneficiaries of this fund.”

Like Jones, she said that it is up to the Treasury Department, not the TSP, to decide whether to prohibit investments in a particular country or company.

“This has been a very long process, a very thorough process,” she said. “We have relied on experts and professionals relative to the investment markets and are trying our best to ensure that the federal workforce has the same opportunities that all Americans have to invest their retirement dollars.”

Labor Secretary Eugene Scalia said in a statement that the board’s action “was in the best interest of the Plan’s participants and beneficiaries and the national security of the United States” because it headed off investment in “problematic” Chinese companies.

“The millions of federal employees, retirees, and service-members participating in the Plan should not be placed in the untenable position of choosing between forgoing any investment in international equities, or placing billions of dollars in retirement savings in risky companies that pose a threat to U.S. national security,” he said.

Two senators who had been active in opposing the fund change also issued statements praising the delay.

“It’s reckless to prop up companies that threaten U.S. interests and values, and it would be particularly egregious to do so with the hard-earned savings of federal workers, including our military and civilian workforce,” said Sen. Jeanne Shaheen (D-N.H.).

Sen. Marco Rubio (R-Fla.) made similar comments and added that he would continue to work to “pass legislation that would ban the Board from moving forward with this type of action in the future.”