Socially Responsible Investing Through the TSP and Your Retirement Security
by Ralph Smith |
The Thrift Savings Plan (TSP) is the key to a successful retirement for millions of federal employees. Those in the older Civil Service Retirement System (CSRS) are not as reliant to the TSP but having the money in a fund that has been building up tax free for a number of years can easily add up to hundreds of thousands of dollars. In a few cases, some in the TSP have accumulated over a million dollars.
Anyone who does not have plans for using that money in some way during retirement has probably not been doing any planning for the future.
The Thrift Savings Plan has been remarkably free from interference from Congress. Most TSP investors would agree that is a good thing. What is remarkable is that the TSP is now a large pot of money as it now stands at about $313 billion and another $900 million or so flows into the program each month.
The money is sitting there in front of those in Congress who, no doubt, think it could be used for a number of purposes while those who have invested the money are still employed and not using the money other than to finance their future retirement.
Socially Responsible Investing
It isn’t surprising that some in Congress think the system should change. Some in Congress want to use the TSP to try to achieve foreign policy goals they think would benefit the United States. For example, one Member of Congress wanted to conduct a study to determine how many companies directly or indirectly supported genocide in one African country. Other bills would urge the TSP to “initiate efforts to provide a terror-free international investment option.”
During the 1980s and 1990s, the TSP board was urged to invest in mortgages to support housing, to avoid investments in South Africa and Northern Ireland, and to back minority-owned businesses.
Moreover, some in Congress, such as Congressman Danny David (D-IL) thinks that using index funds is not the best approach and, to give women and minorities a bigger piece of the TSP action, he would prefer actively managed funds in the TSP.
Presumably, these actively managed funds would be managed in part by companies run by women and minorities that would reap a financial gain for using their expertise to invest in stocks and bonds. Of course, expenses would also rise for TSP investors as the management expense for the funds would be higher. For the reasons noted below, the extra cost would be paid by all TSP investors.
One bill, the Federal Employee Socially Responsible Investment Act, would have created a Socially Responsible Stock Index Fund within the TSP.
No doubt, some of these investments or alternative approaches would have been beneficial to investors. Others would have probably been harmful to investors who were hoping to accumulate more money for their own personal retirement. And, while everyone wants to see the world become a better place, there is usually little agreement on how to do that or what would accomplish such a goal.
The GAO and Socially Responsible Investment Options
The Government Accountability Office (GAO) was asked by Congress to check out Socially Responsible Investment funds or SRI funds. In its report, the GAO noted: “SRI—investment made on the basis of environmental, social, and corporate governance (ESG) criteria—is a global phenomenon and is growing in popularity in the United States.”
The reality is, there appears to be little demand for these types of funds among TSP investors. Most of the desire for these funds appears to come from Congressional representatives. As noted by GAO:
“TSP and most other public plan officials we contacted identified low participant demand for SRI as a challenge to adopting SRI. TSP officials told us that based on the results of their participant surveys and the experiences of ETAC there was little demand for an SRI fund among TSP participants. Specifically, they noted that the results of periodic participant surveys have consistently indicated that there was no overwhelming demand for any new investment options, including an SRI option.”
Readers can decide for themselves why some in Congress may be more interested in this type of investment. Presumably, it is derived from their own political or ideological interests. The investments would presumably be made in a way that reflects criteria outlined in a vague way by the United Nations. While that would be satisfying to some investors, others would probably find that their money was going for causes contrary to their political preferences. And, possibly, the definition of “socially responsible” and where the money would flow would probably shift depending on the opinion of those making the investment decisions.
Adding an SRI fund would not have provided substantially more portfolio diversification for TSP investors, according to GAO. The reason is that there would have been overlapping companies with the existing stock portfolio. Under existing law, the holdings within TSP funds cannot overlap. Also, of particular interest to TSP investors, investing in one of these funds could have resulted in less favorable financial returns to investors, even if the fund was more volatile than the existing TSP funds.
The GAO concludes:
“A comparison of the underlying indices of these four funds (C, S, I and SRI funds) shows that, while the SRI Fund had higher cumulative returns than the I Fund over the last 20 years, it had lower cumulative returns than all three of the TSP funds over the last 10 years.”
Also of interest to current TSP investors, establishing an SRI fund would involve expenses that would be paid by all TSP investors without regard to whether they invest in such a new fund. The TSP Board has the authority to open a mutual fund window to allow TSP participants to invest in mutual funds managed outside TSP.
If the Board did act on this authority and opened a mutual fund window, participants seeking other forms of investment, including SRI, could invest in mutual funds and would bear the costs associated with this investment.
While one may conclude that the overall tone of the GAO report on opening the TSP to a socially responsible investment fund was not positive, the agency did not make a specific recommendation on whether adding a fund for socially responsible investing was a good idea.
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by Ralph Smith |