Mr. Chairman and Members of the Subcommittee:
My name is Roger Mehle. I am the Executive Director of the Federal Retirement Thrift Investment Board (Board) and, as such, am the managing fiduciary of the Thrift Savings Plan (TSP) for Federal employees. I welcome this opportunity to appear before the Subcommittee on behalf of the Board.
The Subcommittee has invited my testimony as part of its review of possible changes to the Social Security system. Although the Board has no view regarding any of the proposals concerning Social Security that have been made, given the possible approaches, our experience with the TSP may provide some useful information for Congress in its deliberations. The relevant issues include plan structure, governance, record keeping, benefits, communications, and, importantly from this Subcommittee's perspective, investments. I am pleased to describe how the TSP functions in each of these areas and to discuss how the Congress addressed important issues in the Federal Employees' Retirement System Act of 1986 (FERSA), Pub. L. No. 99-335, 100 Stat. 514 (codified as amended largely at 5 U.S.C. H 8351 and 8401-8479).
The TSP is a voluntary savings and investment plan that provides a mechanism for Federal and Postal employees to accumulate capital for their retirement. It was enacted into law with bipartisan Congressional cooperation and support as part of FERSA. It offers employees of the Federal Government the same types of savings and tax benefits that many private corporations offer their employees under Internal Revenue Code section 401(k) retirement plans. The TSP currently has approximately 2.3 million individual accounts, and TSP investments have grown to $46 billion. Each month, participants add more than $500 million in new contributions which, when coupled with TSP earnings, portends substantial growth in the size of the Thrift Savings Fund for the foreseeable future. Participants may contribute to any or all of three investment funds; transfer their monies among the funds; apply for loans from their accounts; and, upon separation, receive a distribution of their accounts under one of the available withdrawal options.
By law, eligible employees are provided two opportunities each year to elect to participate in the Plan. The results of the open season for participation that ended on January 31, 1997, show that the TSP has experienced its 21st consecutive open season increase in the rate of participation by employees contributing their own funds. The Government-wide Federal Employees' Retirement System (FERS) participation rate now stands at 82.9 percent, with six major agencies showing participation rates of 90 percent or more- TSP participation by Civil Service Retirement System (CSRS) employees is currently approximately 56 percent.
Employees who are covered by FERS, CSRS, or equivalent Government retirement plans may contribute via payroll allotment to the TSP. Newly hired employees must wait a certain period of time before becoming eligible to participate.
TSP benefits are in addition to the FERS and CSRS defined benefit basic annuities. However, for FERS employees, the TSP is an integral part of their retirement package, along with the FERS basic annuity and Social Security. Without participation in the TSP, FERS employees usually would not have retirement benefits comparable to those available under CSRS. This is because the formula used to compute the FERS basic annuity is not as generous as the formula used to compute the CSRS benefit.
FERS employees receive an automatic contribution to their TSP accounts, paid by their employing agency, which is equal to one percent of their basic pay each pay period. They may elect to contribute, on a pre-tax basis, up to ten percent of basic pay each pay period to the TSP (subject to the Internal Revenue Code elective deferral limit), and their employing agency matches the first five percent of basic pay contributed -- dollar for dollar on the first three percent and fifty cents on the dollar for the next two percent.
For CSRS employees, the TSP is a supplement to the CSRS annuity. CSRS employees receive the same tax benefits as FERS employees, but may contribute only up to five percent of their basic pay to the TSP each pay period. CSRS employees receive no automatic or matching contributions from their agencies.
The TSP is administered by the Federal Retirement Thrift Investment Board, which was established as an independent Federal agency under FERSA. Governance of the agency is carried out by a five-person, part-time Board of Presidential appointees and by a full-time Executive Director selected by those appointees. Each of these persons is required by FERSA to have "substantial experience, training, and expertise in the management of financial investments and pension benefit plans." 5 U.S.C. 8472(d). The Board members collectively establish the policies under which the TSP operates and furnish general oversight. The Executive Director carries out the policies established by the Board members and otherwise acts as the full-time chief executive of the agency. The Board and the Executive Director convene monthly in meetings open to the public to review policies, practices, and performance. On October 1, 1986, I was appointed by President Reagan to serve as the first Chairman of the Board. In 1988, I was reappointed as Chairman by President Reagan and confirmed in that position by the Senate. I served as the agency's Chairman of the Board continuously until January 31, 1994. On that date, I resigned from the Chairmanship to accept the appointment by my fellow Board members to become the agency's Executive Director. Since that time, Mr. James H. Atkins has served as the Chairman of the Board and was confirmed in that position on October 6, 1994. On March 19, 1997, President Clinton nominated Mr. Atkins for another term.
FERSA provides that all monies in the Thrift Savings Fund are held in trust for the benefit of the participants and beneficiaries. As statutory fiduciaries, the Executive Director and the Board members are required to act prudently and solely in the interest of TSP participants and beneficiaries. This fiduciary responsibility gives the Board a unique status among U.S. Government agencies.
Congress wisely established this fiduciary structure because it recognized that all funds held in trust by the Plan belong to the participants, not the Government, and thus must be managed for them independent of political or social considerations.
The Conference Report on FERSA, House Report 99-606, dated May 16, 1986, states in the Joint Explanatory Statement of the Committee of Conference:
H.R. Conf. Rep. No. 99-606, at 136-37 (1986), reprinted in 1986 U.S.C.C.A.N. 1508, 1519-20.
The original Senate version of the bill that eventually was passed as FERSA, S. 1527, required that the Board's investment policies provide for prudent investments, low administrative costs, and "investments likely to receive broad acceptance by participants and the public, taking into consideration the views of the Employee Advisory Committee." S. 1527, 99th Cong. 101(a), S. Rep. No. 99-166, at 265-66 (1985). Although this section did not explicitly mention social investing, at a Senate hearing on S. 1527, held September 11, 1985, it was pointed out to Senator Ted Stevens, Chairman of the Subcommittee on Post Office, Civil Service and General Services of the Senate Governmental Affairs Committee, that this language could be interpreted as an endorsement of social investing. Senator Stevens stated that "I don't think that [social investment] should be our function" and that the language should be changed "more toward a strict economic investment." Hearing Before the Senate Com. on Governmental Affairs on S. 1527, S. Hrg. No. 99-754, at 521 (198S). Senator Stevens' comments are entirely consistent with the intent expressed in the Conference Report, and the language in S. 1527 suggesting that social investing would be acceptable was not incorporated in the final version of FERSA.
In keeping with the intent of Congress that the Plan be administered in accordance with fiduciary standards derived from those applicable to private sector employee benefit plans -- as distinct from the usual administration of an executive branch agency -- Congress exempted the Board from the normal budget appropriations process and the legislative and budget clearance process of the Office of Management and Budget. TSP administrative expenses are borne not by the taxpayer but by the Thrift Savings Fund, which belongs to participating employees. The Plan's independence is critical to ensure the fiduciary accountability envisioned by FERSA. So long as the Plan is managed by the fiduciaries named in FERSA (the members of the Board and the Executive Director) in accordance with the statute's strict fiduciary standards, Federal employees can be confident that their retirement savings will not be subject to political or other priorities which might otherwise be imposed by the usual budget-appropriations process.
Congress has reaffirmed its commitment to exempt Board actions from the normal budget-appropriations process on a number of occasions. In addition, Congress has consistently supported proposals to improve TSP administration and benefits. Most recently, Congress last year approved legislation authorizing two additional investment choices for participants, which we plan to make available in approximately three years under a new record keeping system we are developing.
Although the Board is independent by statute, it is subject to continuing audits and review under FERSA. FERSA protects the Thrift Savings Fund through more than just the fiduciary responsibilities of the Board members and the Executive Director. Additional safeguards to protect TSP participants include the provisions in FERSA relating to (1) the role of the Secretary of Labor in establishing a program of fiduciary compliance audits; (2) the requirement that the Board contract with a private accounting firm to conduct an annual audit of the TSP on the basis of generally accepted accounting principles; and (3) the participation of the 14-member Employee Thrift Advisory Council (Council), which includes representatives of the major Federal and Postal unions and other employee organizations.
The Board has benefited greatly from more than one hundred audit reports conducted by the Pension and Welfare Benefits Administration of the Department of Labor over the past ten years. These audits, which have covered every aspect of the TSP, are reported to the Congress annually under Public Law 100-504, the Inspector General Act of 1978, as amended, 5 U.S.C. App. 3.
By law, the Council meets with the Executive Director and advises on investment policy and the administration of the TSP. These meetings have been invaluable in providing the Board with insights into employee needs, attitudes, and reactions to the various programs undertaken by the Board.
The TSP also benefits from the cooperation of every agency in the Federal establishment. Although the Board is an independent policy-making body, successful administration of the TSP is highly dependent upon all Federal agencies, which have direct responsibilities under FERSA for the administration of the TSP.
When I was first appointed as Board Chairman in 1986, I was at once aware of the enormous challenge to establish and maintain a system of records for what would be, and now is, the largest plan of its kind in the world. The TSP also represented the first government-wide effort ever attempted to coordinate more than 600 different Federal payroll systems into a single record keeping system, which is essential to the operation of the TSP. This global administrative process began operations on April 1, 1987, and continues to operate successfully today.
I must credit the National Finance Center (NFC) of the Department of Agriculture (USDA) for its assistance in helping the Board to deal with this challenge. Since the Plan's inception, the NFC, now operating under the direction of USDA's Chief Financial officer, has served as the record keeper and has performed its record keeping function and a number of critical auxiliary functions in an exemplary manner.
The arrangement with the NFC has been established pursuant to a Memorandum of Understanding and interagency agreements with the USDA to provide systems development, record keeping, and participant support services for the Board. We are pleased that the many independent audits of the TSP system have confirmed its continued production of accurate results. Nevertheless, the current system, and perhaps some TSP procedures as well, might be different in important ways if both a total TSP program design and a total systems design could have been completed before beginning development of the initial system features in the fall of 1986. We have thus undertaken to develop a new record keeping system to support plan operations. we have already selected a vendor through a competitive procurement under the Federal Acquisition Regulation, and we plan to make the new system operational in approximately three years.
Federal and Postal employees who participate in the TSP are served primarily by the personnel, payroll, and other administrative employees in their own agencies. The agencies are responsible for distributing TSP materials, providing employee counseling, and for the accurate and timely transmission of participant and employer contributions and necessary records to the NFC. For basic TSP participation, employees need look no further than their own agencies for assistance and service.
I think most observers, as evidenced by the TSP's high participation rate, would agree that this program enjoys the confidence of the vast majority of eligible employees. This confidence results from the professionalism and dedication of thousands of administrative personnel throughout Government who deliver basic retail TSP services to their fellow employees.
In addition, the TSP Service Office at the NFC performs a wide variety of services for TSP participants. That office works directly with current employees to provide loan and interfund transfer services, and it functions as a surrogate personnel office -- answering questions and providing withdrawal program assistance -- to those employees who have left Government service and still have TSP accounts.
By law, employees may not withdraw the funds in their TSP accounts before separation. However, the law allows actively employed participants to borrow their own contributions and earnings from their accounts according to rules established by the Board and regulations of the Internal Revenue Service.
Participants repay the loans, with interest, through payroll allotment, and the money is reinvested in their TSP accounts. The loan program is designed to facilitate prompt processing of loan applications in a manner that will minimize loan administrative costs, which are borne by all of the Plan's participants.
The other major benefit program administered by the Board is the TSP withdrawal program. Upon separation, a participant may:
Unlike the annuity payments provided under the defined benefit programs administered by the office of Personnel Management, TSP annuities are purchased from a commercial annuity vendor. By law, the Executive Director must expend the balance in the participant's account to purchase the annuity. TSP annuities are currently provided through a Master Annuity Contract between the Board and Metropolitan Life Insurance Company (MetLife), a major national insurance company competitively chosen by the Board.
Early in its existence, the Board concluded that the TSP's success was dependent on three factors: benefits, trust, and communications. The Plan benefits authorized by Congress in FERSA provide substantial incentives for employees to save for their retirement. The trust of participants comes from sound administration at the retail level by the employing agencies and accurate financial record keeping by the NFC. Finally, the Board, since its inception, has sustained a continuous effort to communicate at a number of levels within the Federal establishment in order to achieve employee understanding of the investment choices, benefits, and the administration of the program. This is especially important given the voluntary nature of the Plan and the participants' degree of individual control over investments and benefits.
The communication effort is initiated by the Board for eligible individuals through the issuance of a new account letter to each new participant after the employing agency establishes the account. Employing agencies distribute program information, including the Summary of the Thrift Savings Plan for Federal Employees (Plan Summary), which provides a comprehensive description of the Plan; booklets describing the loan program, withdrawal program, and annuity options for employees to review at the time they are examining those benefits; and the Guide to TSP Investments, a booklet which describes in detail investment considerations and approaches, fund management, and operations. Given your particular interest in TSP investments, I have made copies of this booklet available to the Subcommittee for its review in connection with my testimony.
In addition, we issue materials related to a specific event, such as the Open Season Update, produced semiannually to announce each open season. The TSP Highlights is a newsletter distributed to each participant along with the semiannual participant statement. Advance copies of the forthcoming edition of the newsletter, which addresses topical items and conveys rates of return, have also been provided to the Subcommittee.
A TSP video is available explaining the basics of the TSP in an animated format. TSP Bulletins are issued regularly to inform agency personnel and payroll specialists of current operating procedures- In February of this year, we opened the TSP Web site (www.tsp.gov). The site contains the most recent rates of return, forms, publications, and a calculator for projecting future account balances.
As part of our effort to invite outside input and dialogue, the Board also conducts regular interagency meetings. These have proven to be an effective means of communicating program and systems requirements to Federal agency administrative personnel. These meetings also allow the Board to hear and address agency concerns and to incorporate agency suggestions in the establishment of TSP policies.
The TSP is a participant-directed plan. This means that each participant must decide how the funds in his or her account are invested. Since legislation removing investment restrictions was implemented in 1991, participants' control over investment choices has been extended to cover their entire account balances.
As initially prescribed by FERSA, participants could invest in three types of securities: U.S. Treasury obligations, common stocks, and fixed income securities. FERSA structured these three choices so that each of them differs from the others in its investment characteristics. In 1996, Congress authorized two new investment funds, which will allow further diversification and attractive long-term returns. Those funds, a small capitalization U.S. stock (S) fund and an international stock (I) fund, will be offered when the new record keeping system is operational.
The Government Securities Investment (G) Fund is invested in short-term nonmarketable U.S. Treasury securities guaranteed by the full faith and credit of the U.S. Government. 5 U.S.C. 8438(b)(1)(A), (e). There is no possibility of loss of principal from default by the U.S. Government and, thus, no credit risk. These securities are similar to those issued to the Social Security trust funds and to other Federal trust funds. See, e.g., 42 U.S.C. 401(d) (Social Security trust funds); 5 U.S.C. 8438(d) (Civil Service trust fund).
By law, the Common Stock Index Investment (C) Fund must be invested in a stock index fund broadly representing the U.S. markets, and the Board selected the Standard & Poor's 500 (S&P 500) stock index in fulfillment of that requirement. The S&P 500 index consists of 500 stocks representing approximately 63 percent of the market value of the United States stock markets. The objective of the C Fund is to match the performance of that index.
One likely concern associated with a Federal agency's investing in equities is the potential for the Government to weigh in on corporate governance questions and other issues submitted to stockholder votes. FERSA provides that the voting rights associated with the ownership of securities by the Thrift Savings Fund may not be exercised by the Board, other Government agencies, the Executive Director, a Federal employee, a Member of Congress, a former Federal employee, or a former Member of Congress. 5 U.S.C. 8438(g). Barclays Global Investors (BGI), the manager of the C Fund, has a fiduciary responsibility to vote company proxies solely in the interest of TSP participants and beneficiaries.
The Fixed Income Investment (F) Fund, which by law must be invested in fixed income securities, is invested in a bond index fund, chosen by the Board to be the Lehman Brothers Aggregate (LBA) index. The LBA index represents a large and diversified group of investment grade securities in the major sectors of the U.S. bond markets: U.S. Government, corporate, and mortgage related securities.
The G, C, and F Funds are passively managed. Passive management is generally defined as the investment in a portfolio in which a "buy and hold" strategy is pursued.
Indexing is a common form of passive management in which securities are held in proportion to their representation in the stock or bond markets. The philosophy of indexing is that, over the long term, it is difficult to beat the average return of the market. The investment management fees and trading costs incurred from passive management through indexing generally are substantially lower than those associated with active management. Passive index funds preclude the possibility that political or other considerations might influence the selection of securities. Like the C and F Funds, the two new stock funds (i.e., the S and I Funds) will be index funds.
The asset managers of the C and F Funds have been selected through competitive bidding processes. In 1987, 1990, and again in 1995, proposals from prospective asset managers were evaluated on objective criteria that included ability to track the index, low trading costs, fiduciary record, experience, and fees.
The Board has contracts with BGI, the largest investment manager of index funds in the United States, with over $400 billion in assets under management, to manage the C and F Fund assets.
The C Fund assets are invested in the Barclays Equity Index Fund, and the F Fund assets are invested in the Barclays U.S. Debt Index Fund. The Equity Index Fund and the U.S. Debt Index Fund are commingled trust funds in which the assets of public and corporate tax-exempt employee benefit plans are combined and invested together. BGI keeps separate accounting records for each plan in the Equity Index Fund and the U.S. Debt Index Fund. As of December 31, 1996, 260 employee benefit plans were invested in these two funds. (The two Barclays funds are not open to individual investors, but only to tax-exempt employee benefit plans such as the TSP.)
Because the assets of the C and F Funds are held in trust by Barclays, the money in the C and F Funds cannot be used to meet the financial obligations of BGI or any related companies. Therefore, the C and F Fund assets are protected from any adverse financial situation involving BGI or any of its subsidiaries or affiliates.
The centralized management of TSP investments was carefully considered in FERSA by Congress. According to the Joint Explanatory Statement of the Committee of Conference quoted earlier:
The conferees concur with the resolution of this issue as discussed in the Senate report (99-166) on this legislation:
H.R. Rep. No. 99-606, at 137-38, reprinted in 1986 U.S.C.C.A.N. 1508, 1520-21.
By law, TSP investment policies must provide for both prudent investments and low administrative costs. From the beginning of the G Fund's existence (April 1987) and the beginning of the C and F Funds, existence (January 1988) through March 31, 1997, the G, C, and F Funds have provided compound annual returns of 7.7 percent, 15.7 percent, and 8.1 percent, respectively, after expenses. For calendar year 1996, the annual returns were 6.8 percent for the G Fund, 22.8 percent for the C Fund, and 3.7 percent for the F Fund. Barclays funds closely tracked their respective markets indexes throughout this period.
For calendar year 1996, the net Plan administrative expenses were .08 percent for the G Fund, .09 percent for the C Fund, and .10 percent for the F Fund. This means that the 1996 net investment return to participants was reduced by approximately $.80, $.90, and $1.00 for each $1,000 of account balance invested in the G, C, and F Funds, respectively. The expense ratio for the G Fund represents the basic costs of plan administration, which are predominantly record keeping expenses. The expense ratios for the C and F Funds include the basic costs of administration as well as private investment management costs. Expense ratios would be approximately .02 percent higher in the absence of account forfeitures, which offset expenses. These costs compare very favorably with typical private sector 401(k) service provider charges.
In summary, Mr. Chairman, I believe that the Thrift Savings Plan for Federal and Postal
employees has effectively and efficiently realized the numerous objectives thoughtfully established for
it by Congress eleven years ago. To the extent that our experience is useful to Congress as it
considers possible changes to the Social Security system, I welcome the opportunity to provide any
additional information you may require. That concludes my prepared statement. I would be pleased
to respond to any questions you or other Members of the Subcommittee may have.
Home | Menu | Links | Info | Chairman's Page