Rancor Erupts Over Adding REIT Fund to TSP
Thursday, July 20, 2006
By Dan Adcock
Assistant Legislative Director
Assistant Legislative Director
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A two-year struggle over a controversial proposal to add real estate investment trusts (REITs) to the federal Thrift Savings Plan (TSP) boiled over April 26 at a hearing held by the House Federal Workforce and Agency Organization Subcommittee.
While some on the panel focused on why federal employee and retiree organizations, including NARFE, decided to oppose prematurely adding REITs to TSP, the hearing illustrated the deep division between some subcommittee members who support a real estate fund and the Federal Retirement Thrift Investment Board (FRTIB) and its staff—the fiduciaries who administer the TSP—who oppose the proposal.
The TSP is a tax-deferred retirement savings and investment plan for federal employees and members of the uniformed services and is similar to 401(k) plans offered by many private-sector employers. Contributions made to TSP accounts are voluntary and separate from salary withheld for the Civil Service Retirement System (CSRS) annuity and the Federal Employees Retirement System (FERS) basic annuity. NARFE helped key legislators write the law that created TSP and FERS in 1986.
Study Taking Too Long?
Much of the acrimony centered on the pace of a FRTIB-commissioned review by an investment consultant to determine which new funds, if any, should be added to the five funds and lifestyle options currently available to TSP participants.
“A group [FRTIB] that is supposed to look out for federal employees has cost them millions of dollars,” said Government Reform Committee Chairman Tom Davis (R-VA) in his opening statement. He said that REITs were the fastest-growing part of his personal investment portfolio and accused the FRTIB and its executive director, Gary Amelio, of “running out the clock [on the study]”.
Davis announced at the hearing that he would soon ask his committee to approve legislation (H.R. 1578) that would add REITs to TSP. “I don’t think this committee can wait on this unelected body [FRTIB],” he said. At press time, consideration of the REITs bill had been put on the panel’s schedule without a specific date.
H.R. 1578, as introduced by Subcommittee Chairman Jon Porter (R-NV) last year, had 172 bipartisan cosponsors, including Majority Leader John Boehner (R-OH), Minority Leader Nancy Pelosi (D-CA), Committee Chairman Tom Davis and the Subcommittee’s ranking minority member, Rep. Danny Davis (D-IL).
Reps. Tom Davis, Henry Waxman (D-CA), Porter and Danny Davis, and Sens. Susan Collins (R-ME), Joseph Lieberman (D-CT), George Voinovich (R-OH) and Daniel Akaka (D-HI) asked FRTIB in July 2005 to finish the study by January 2006.
In response, Amelio testified that the procurement process and time necessary to complete the review meant that the consultant’s recommendations would not be ready until the end of 2006. “We could not possibly have done the study by the end of 2005,” he said.
In addition, Amelio said that it would be wrong to add any new fund without studying all the options. “The larger the plan, the more important it is for a complete review of all potential options,” he said.
Del. Eleanor Holmes Norton (D-DC) complained that the debate over REITs had maligned the TSP and become overly political. “Here we have a study that is coming in a few months, yet we hear the sky is falling if we don’t approve this bill [H.R. 1578]. It will hurt the TSP and hurt the relationships we have [on the subcommittee].”
But Norton also said that FRTIB could have helped to avoid the present controversy if it had tried to speed up the review.
Rep. Danny Davis, a cosponsor of H.R. 1578, said the subcommittee was obligated to research the bill in response to the concerns raised by federal employee and retiree organizations. He questioned why it was necessary to approve the REITs bill before the FRTIB had complete its comprehensive study of all possible fund options and why his colleagues were not considering other funds, like emerging market bonds or stocks or Treasury Inflated Protected Securities.
During the hearing, REIT supporters repeatedly quoted statistics from the National Association of Real Estate Investment Trusts (NAREIT) that the rate of return on REITs was nearly 20 percent a year between 2000 and 2003.
According to the FRTIB, the NAREIT REIT index is not an accurate representation of real estate fund performance, and it pointed to more reliable measures, like the Dow Jones (DJ) Wilshire and Morgan Stanley REIT index. Indeed, it found that the return on the DJ Wilshire REIT index between 1988 and 2005 was 560 percent—significantly less than the Standard and Poor (S&P) 500 index’s return of 687 percent or DJ Wilshire’s Small Capitalization stock index (the 4500 Completion), which grew by 763 percent. In other words, $1 invested in a REIT in 1988 would have returned $5.60 by 2005, while the same amount devoted to the S&P and the 4500 Completion indexes produced, respectively, $6.87 and $7.63.
Group Opposition
The 1986 law that authorized the TSP also created the Employee Thrift Advisory Council (ETAC) to advise the FRTIB on the operations and investment policies of the plan. The law allows 15 representatives from most of the major federal/postal worker and annuitant organizations and Defense Department to serve on the council. Current member organizations include the American Federation of Government Employees (AFGE), the National Federation of Federal Employees (NFFE), the National Treasury Employees Union (NTEU), the American Postal Workers Union (APWU), the National Association of Letter Carriers (NALC), the National Rural Letter Carriers’ Association (NRLCA), National Association of Postmasters of the United States (NAPUS), the National League of Postmasters of the United States (NLPUS), Federally Employed Woman (FEW), the Federal Managers Association (FMA), the Senior Executive Association (SEA) and NARFE.
National Treasurer Richard C. Ostergren is NARFE’s present member on the ETAC. ETAC meets with the FRTIB’s executive director and staff at least twice a year.
The council’s members have discussed the feasibility of adding REITs to TSP since NAREIT lobbyists first began floating their proposal with the Thrift Board and members of Congress over two years ago. NAREIT met with several ETAC members as a group in January 2005, and NARFE’s Ostergren met with NAREIT separately in April 2005.
During ETAC’s March 14, 2006, meeting, the council voted 11 to 0, with one abstention, in favor of a resolution to oppose the addition of a REIT fund to the TSP. Carl F. Witschonke, ETAC’s Uniformed Services representative, abstained because he was appointed to serve by his federal agency—the Department of Defense—rather than by an advocacy group.
ETAC Testifies
James W. Sauber, who represents the NALC and serves as ETAC chairman, testified at the April 26 hearing that he and his colleagues were “reluctant to support the addition of a REIT fund over the unanimous objections of the TSP’s legislated fiduciaries—the members of the Federal Retirement Thrift Investment Board.”
As fiduciaries of the TSP, the Thrift Board’s sole responsibility is to protect the financial interests of the participants and beneficiaries of the plan.
“Such a precedent is important because, in our view, the addition of one sector fund will lead groups representing other sectors to seek ‘equitable’ access to the TSP pool of investment capital,” Sauber added. “The investment policy of the TSP would become more politicized, the cost and complexity of the TSP would increase and the participation of federal employees in the TSP would likely suffer.”
NARFE Maryland Federation President Richard Strombotne, who represents SEA on ETAC, also testified: “I thought it was premature to pick out a REIT index fund as the next instrument option for the TSP in the absence of an analytical comparison with other potential investment options. Superficially, there are other options that may be even more attractive for addition to the TSP than an REIT index fund.”
Beyond these objections, ETAC members have considered that a REIT fund might not be a wise addition to TSP because of the plan’s reliance on market index funds. When TSP was created, some critics were concerned that billions of dollars of stocks and bonds would be controlled, and could be manipulated, by the federal government. Stock and bond index funds were selected by the Congress, and later the FRTIB and lawmakers worked together to add the small capitalization and international stock index funds. TSP participants also benefit from the low overhead costs of the present index funds.
Did You Ask Each Member?
While most of the REIT proponents’ venom was leveled at the FRTIB, ETAC and its members were also criticized. “ETAC representatives do not systematically solicit the feedback from their constituents. I thought we were in a democracy; apparently we are not,” Porter said. “I mention the problems with ETAC not to criticize the employee groups, who are doing what they can with a broken process and who are forced to take action and make recommendations without the benefit of good tools for gathering important information from the federal employees they serve.”
Sauber responded that while the employee and retiree organization do not survey each of their members on every relevant issue that comes before the Congress, most of the groups have a participatory policy-making process and several methods of receiving member feedback. “I am absolutely convinced that I know where our members are [on policy issues], and I know other organizations in ETAC are similarly situated,” he said.
Likewise, Strombotne pointed out that although members of Congress may have a good grasp of their constituents’ opinions, they do not necessarily poll them on each and every issue.
Porter concluded that he might introduce legislation that would help ETAC groups survey their respective memberships about the TSP.
“We all want what’s best for federal employees, and it is regrettable that we are not in agreement on this one issue,” said NARFE’s Ostergren. “No new fund should be added to TSP until an impartial analysis is completed. Only then can the Congress and Thrift Board make an educated decision about REITs or other new TSP options.”
© 2008 by the National Active and Retired Federal Employees Association
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