Social Divesting Proposal Threatens to Gut Some TSP Funds

From two sources, the TSP is being asked to dump fossil fuels from TSP funds. Could the president issue an Order that would hold up in court?

The federal government’s Thrift Savings Plan (TSP) is drawing attention. No doubt, this is because the TSP has been so successful and growing fast. The TSP has made news in the national press as a model retirement plan. The reality is that the returns for the TSP are very good and the plan is easy for investors to use. The government match is also excellent.

The plan’s success is obvious. It started in 1987, has expanded over time, and now has more than $723 billion in assets.

As it grows, so does the temptation to use the power of this much money for political purposes. Elected officials, interest groups and others are noticing the money and have their own ideas about how it should be invested.

FedSmith published a recent article about proposed legislation to divest fossil fuels from the TSP funds. A short time later, a national publication came out with an article urging President Biden to accomplish fossil fuel divestment by quickly signing an Executive Order to rid the TSP funds from fossil fuels.

Should the power of the TSP be used as a way to implement “climate solutions?” In this instance, that is the purpose of the “climate solutions” movement. No doubt, some or perhaps many federal employees may agree with this goal.

Would these employees be willing to use the power of the TSP’s assets for this purpose? The recent article in the New Yorker argues federal employees are “fed up with dirty fuels lurking in their nest eggs.” The conclusion is supported by one union official in the Environmental Protection Agency.

Using the TSP “For the Greater Good”

Of course, if you are now working for the federal government or you are a federal retiree and are invested in the TSP, you realize this plan was set up as an important part of your current or future retirement income. Federal employees are often generous. On the other hand, being generous does not equate to possibly damaging or reducing assets for your future retirement.

No doubt, the publicity of a new plan to use the TSP will help politicians get re-elected (based on their generosity with TSP’s money). Other pressure is now coming to further a cause designed to save the planet (a cause true believers are certain will work). The emotional appeal may tug at the heartstrings of at least some in the federal workforce.

Would Fossil Fuel Changes Impact Your TSP Returns?

What is more likely to happen though is that future returns in the TSP may diminish if the TSP is changed to pursue whatever “for the greater good” means in the latest iteration of how to use the power of the TSP’s money. (For an example, see Expanding the TSP to Help Poor Americans.)

While it is possible that some of these ideas would provide returns equal to or better than the current TSP, pursuing an objective other than seeking a decent return with safe investments may not work out to the benefit of those depending on the TSP for their future retirement.

In the “talking points” on the RESPOND Act, this was a comment from the FRTIB.

Removing individual companies or specific segments of the market from the [TSP] Funds or their benchmark indices is highly likely to result in lower risk-adjusted returns to participants over the long term.

In effect, the RESPOND act is a legislative attempt to accomplish what the New Yorker article supports implementing through executive action.

Targeting “one of the biggest pots of money in the country”

The New Yorker magazine article states: “the federal Thrift Savings Plan, or T.S.P….is where millions of federal employees sock away their retirement accounts.”

Well, at least part of their retirement is in the TSP. Social Security and the federal annuity are a larger portion of their future retirement income.

Why is the magaziner article targeting the TSP? Here is the answer.

Clara Vondrich has been at the forefront of the fossil-fuel divestment fight for many years, focussing on foundation endowments and pension funds. Now she’s helping to coordinate an effort to go after one of the biggest pots of money in the country.

[A] mandate from President Biden to divest the T.S.P. would be a serious wake-up call to the fund’s mega-money managers, BlackRock and State Street, which together control more than ten trillion dollars in investor assets. BlackRock’s chief, Larry Fink, is saying all the right things about protecting client money from climate risk, but not enough is changing.

Urging President Biden to Alter the TSP Via Executive Order

The article implies federal employees already support this move. No doubt, some do support an Executive Order to further their cause.

“Federal workers are getting fed up with dirty fuels lurking in their nest eggs”, according to the president of AFGE Local 704. Nicole Cantello, the federal employee union official, is quoted in the article as stating, “I bring cases against polluting corporations. Right now, my employer, the federal government, forces me to invest in the very companies that imperil my children’s future by pumping greenhouse gases into the air.”

This EPA lawyer wants President Biden “to use the executive powers he has to divest the T.S.P. All federal employees, members of the uniformed services, veterans, and retirees are encouraged to sign.”

As of this writing, the petition the EPA lawyer is circulating has 264 signatures. The New Yorker article states that “roughly six million active and retired federal employees and service members” are served by the TSP.

Creating “Street Cred” for President Biden

The article is less about objective analysis than about appealing to the emotional reaction of readers—and appealing to the emotions and political inclinations of President Biden. The article also states:

Biden has the chance to atone for the sins of his forebears and build up some serious street cred on climate. Using his executive authority to divest the T.S.P. will help him go down as the first real climate President.

If not President Biden, who? If not now, when? U.S. climate policy has been painfully slow and painfully incremental. 

It is easy to urge the president to issue an executive order for him to create his “street cred.” To our 78-year old president, perhaps this argument will ring true. Perhaps he will even issue such an order despite the legal arguments to the contrary.

The article also begs the question of “does President Biden even have the legal authority to take this action?” No answer is provided by the New Yorker’s article, although two lawyers, including one federal lawyer, are quoted in the article.

Unlike the article that assumes President Biden does have such authority, FedSmith asked the federal experts working for Federal Retirement Thrift Investment Board (FRTIB). The FRTIB is the organization that administers the TSP.

The reality is that the TSP is governed by Statute. This law outlines the funds that will be established by the TSP. That has been done by the FRTIB and TSP investors have, in accordance with this law, access to the five core funds of this program (G Fund, F Fund, C Fund, S Fund and the I Fund).

The Law and Divesting TSP of Fossil Fuels

All of this means that in the event the president were to issue an Executive Order requiring the TSP to change how TSP funds are invested, it appears such an Order would be contrary to the Statute creating the TSP.

As it happens, there is a proposal in Congress to accomplish legally what the New Yorker is urging based on an emotional appeal. The RESPOND Act would legally require the TSP to start taking action to do what the New Yorker is advocating through an Executive Order.

Change Would “Gut” Four TSP Funds

Kim Weaver, Director of External Affairs for the FRTIB, stated that the FRTIB opposes the RESPOND Act and cites several reasons basing investment decisions of the TSP based on eliminating fossil fuel entities.

First, this action would gut four of the TSP’s five funds. It would require the FRTIB to pick winning and losing stocks and violate the concept of passive managed investing now used by the TSP (and as required by law).

Second, the action would likely result in lower risk-adjusted returns to TSP participants. In other words, federal employees who retire would have less income after they retire in the opinion of those making the investment decisions for the TSP.

Third, the law requires the FRTIB to develop investment policies providing for “prudent investments suitable for accumulating funds for payment of retirement income.”

Fourth, Congress specifically addressed concerns the TSP would be used for political purposes and the Statute prevents Congress, the Administration and the FRTIB for manipulating the assets of the TSP.

Instead, writes the FRTIB:

To the extent real change is desired, directing the DOL (Department of Labor) to create a national standard for all retirement investments will accomplish…the purported goal and result in a more consistent approach.

Making TSP Investors Second-Class With Restrictions

According to the FRTIB, the TSP funds are a small share of the overall universe of investors. Restricting TSP investments would make the U.S. civilian and military workforce and retirees second-class investors.

TSP Funds investing in the US stock market, the US bond market, and large-cap international stocks result in a total portfolio of $455.5 billion. As of the end of February, the total combined market capitalization of American stocks, large-cap international stocks, and the US investment-grade bond market are about $81.081 trillion.

Conclusion

The TSP is a big target. As the total assets start to approach a trillion dollars or more, the pressure will increase from interest groups seeking help to further their cause. There will also be more in Congress wanting to use the money for their own political ends.

To date, the TSP has been free from overt political influence. No doubt, those with a political agenda, such as those cited in the New Yorker article, will pop up with their arguments and seeking action to further their goals. With a new administration taking office in January, and one that is overtly favorable to arguments such as those embracing actions that will, at least in theory, further their agenda regarding the climate of our planet, there will be other attempts to alter the TSP in various ways.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47