INVESTOR PROFILE

US federal employees’ plan embarks on giant investment tender

The $289 billion Thrift Savings Plan (TSP), the largest defined contribution plan in the world, is embarking on a tender of its entire outsourced investments, worth about $173 billion. The incumbent is Blackrock. Executive director, Greg Long, explains the process to Top1000funds.com.

The Washington-based Thrift Savings Plan, the defined contribution plan for US federal employees, past and present, has five different fund options. Four of those five are managed externally, by Blackrock, and will be competitively put to market later this year.

The internal procurement team of the TSP – two people – is currently working on the request for proposal (RFP) for the investment management contracts and expects to tender in the first quarter of 2012, executive director of the fund, Greg Long, says.

“It’s a lengthy exercise,” Long says. “There’s a lot of internal work to prepare. We expect it to be on the street in the first quarter of next year.”

The fund uses a consultant, Hewitt Ennis Knupp, which assists with the process, and Long says the fund has “no reservations” about Blackrock.

“This is just a competitive process as part of the normal course of business,” he says.

At the moment the fund is required by law to manage its investments in a passive manner, and Long says that is unlikely to change.

He is reluctant to reveal the fee structure arrangement that TSP has with the fund manager.

“We hold that close,” he says, but the annual fee charged to participants is about five basis points.

About 40 per cent of the assets are in one of the individual funds – the G Fund – which is a government securities investment fund, and is managed in-house.

The rest of the investments are in four other funds, which are up for tender. They are: the F Fund, fixed income index investment fund; the C Fund, common stock index investment fund; the S Fund, small cap stocks index investment fund; and the I Fund, international stock index investment fund. At the moment, Blackrock manages all of these funds.

The fund also offers a suite of lifecycle funds (or L Funds), which are constructs of the individual funds and are essentially target date funds. The glide path, overseen internally with the help of Mercer, consists of five options ranging from a ratio of roughly 80:20 aggressive to defensive assets, to a ratio of 20:80.

The TSP is part of a three-tiered pension structure for federal government employees, which includes the defined contribution aspect managed by TSP and a defined benefit component, which is run by the office of personnel and management.

“We focus on cost, simplicity and large scale, and that makes a lot of sense to me, it has translated well,” he says.

The TSP has about 4.4 million members, who are federal government employees, past and present, including the US Vice President, but not the President, who appoints the fiduciary.

The fund also faces huge administrative challenges, with about 2.9 million members contributing their own money; and with uniformed services employees among the membership, there are communication challenges.

In addition to the investment tender, the fund is undergoing a large-scale plan design initiative that looks at how to incorporate post-tax contributions.

“This requires a significant interaction with payroll, and we are in the midst of doing that now; we will launch in the second quarter of next year,” Long says.

“It depends on the individual participants’ income and tax rates as to how useful this option will be. It is valuable if they want to diversify their tax exposure and if they are in a higher marginal tax rate when they are taking the money out.”

The fund is also looking to develop an educational campaign around the initiative, which will not be about tax advice, but about making good decisions.

In other news, President Obama has appointed a new chair to the Federal Retirement Thrift Investment Board, Michael Kennedy, who replaces Andrew Saul.

There are five presidentially appointed board members, who develop and establish the policies governing the TSP.

 

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