The TSP (Thrift Savings Plan) is a very popular federal employee benefit. It was created as part of the Federal Employees Retirement System (FERS) that became effective in 1987 replacing the older Civil Service Retirement System (CSRS). The TSP program now has more than $762 billion in assets.
The TSP has been remarkably free from political interference and controversy. Federal employees have benefited. The TSP is referred to as a “model retirement plan“. It has been so successful that interest groups and legislators are now advocating making the TSP a national program and not one that only exists for the benefit of federal employees.
That lack of politics impacting TSP investments is changing. Interest groups, politicians, and private companies sometimes find themselves in agreement and work together to make changes. The changes may be beneficial or harmful to others when political alliances are formed. This type of alliance may be occurring now to try and make changes in the TSP’s investment strategy.
Lack of Political Interference Has Benefitted TSP
The huge amount of money in the TSP would seem to be a logical target for those in Congress who may think they could put the money to better use than providing for the financial security of federal employees. And, in fact, there have been a number of efforts in Congress to use the TSP assets to further their political interests or the financial interests of their constituents. These efforts have not been successful.
Federal employees work in a political organization. Most are more aware of the impact politicians can have on their careers and policies than most people are. By large majorities, the informal surveys conducted by FedSmith have demonstrated a large percentage of federal employees like the TSP as it is and want it to remain clear of political influence.
All decisions regarding TSP administration are made exclusively by statutory fiduciaries at the Federal Retirement Thrift Investment Board (FRTIB or Board).
The fiduciaries are legally obligated to act “solely in the interest of the [TSP] participants and beneficiaries” and for the “exclusive purpose of providing benefits to participants and their beneficiaries.”
The law also requires the FRTIB to develop investment policies that provide for “prudent investments suitable for accumulating funds for payment of retirement income,” and specifically allocates the responsibility for benchmark selection to the Board and investment selection to the participants.
Average Balance for FERS Employees
The success of the program for TSP investors is obvious from the latest data. This report shows that there are now more than six million participants in the program. The average balance for federal employees under the FERS system as of May 2021 was $173,896. This is an average for all FERS participants regardless of income and regardless of participants’ age. And, according to the latest data, there are now almost 100,000 millionaires in this retirement investment program.
Participation in the TSP is very high. The participation rate for all FERS employees is now 94.6%.
The average 401(k) balance for all Americans in 2020 was $106,478. This is based on a study by Vanguard and was calculated by analyzing account data from 5 million retirement accounts.
The average salary of a federal employee is now over $90,000. While we do not have a breakdown of the average TSP balance by salary, according to Vanguard the average 401(k) balance for Americans with a salary of $75,000 – $99,999 was $113,143 in 2020.
In effect, federal employees who have taken advantage of this benefit will have a more secure retirement.
Climate Change, Politics, and the TSP
Climate change is a priority for the Biden administration and it is fully on board with those that see major problems resulting from the threat of climate alterations changing the world.
President Biden has issued an Executive Order that assumes climate change will harm TSP investments. The Executive Order concerns “the global shift away from carbon-intensive energy sources and industrial processes present(ing) transition risk” while also providing “generational opportunities to enhance U.S. competitiveness and economic growth, while also creating well-paying job opportunities for workers.” (Also see Saving the Planet with the TSP)
Within 180 days, a report is to be finalized on the actions being taken by the Thrift Savings Plan to take climate-related financial risk into account in making investments into the TSP.
In addition to the Executive Order, the Government Accountability Office (GAO) has weighed in on this topic. GAO has recommended: “The Executive Director of the Federal Retirement Thrift Investment Board, to better inform the Board’s ongoing oversight activities, should evaluate TSP’s investment offerings in light of risks related to climate change.”
GAO noted the FRTIB “subscribes to a strict indexing discipline and that the efficient market theory concludes that the market is pricing all risks into its valuation on an on-going basis. FRTIB stated that its next investment consultant review is planned for fiscal year 2022 and that it would review any recommended changes to its fund offerings at that time.”
The GAO essentially concluded the TSP Board is not taking the climate change issue seriously and is out of step with what needs to be done. According to GAO, “Given the systemic and unprecedented risk that climate change is expected to have on global financial markets, GAO continues to believe that it is important for FRTIB to evaluate TSP’s investment offerings for these risks.”
There have also been suggestions from interest groups that President Biden issue an Executive Order to change the TSP investment policy. While he has issued an Executive Order on climate change, it did not attempt to modify the existing statute governing how TSP investments are made through an Executive Order. (See Social Divesting Proposal Threatens to Gut Some TSP Funds)
Proxy TSP Votes and Left Wing Politics
Blackrock and State Street Global Assets (SSGA) are companies that invest TSP assets into stocks and bonds. In effect, if you are investing in TSP funds, these companies are the ones that actually manage the investment dollars.
Two Senators are questioning how politics may be guiding the impact of how TSP assets can be used to pursue political and social goals.
The Senators are questioning the corporate control of proxy votes for federal employees’ Thrift Savings Plan investments as a way to pressure other companies to adhere to the environmental and social policy views of Blackrock and State Street Global Assets.
In a June 30 letter to David Jones, the Acting Chairman of the Federal Retirement Thrift Investment Board, Senators Pat Toomey (R-PA) and Ron Johnson (R-WI), expressed their concerns about “recent statements by the CEOs of BlackRock and State Street Global Advisors (SSGA).”
The letter notes that “while these proxy voting guidelines are ostensibly focused on the investor’s fiduciary advantage, both entities are increasingly incorporating left-leaning environmental, social, and corporate governance (“ESG”) priorities into these guidelines.”
For example, according to the letter, BlackRock has announced “key changes” in its voting guidelines “address board quality; the transition to a low-carbon economy; key stakeholder interests; diversity, equity, and inclusion; alignment of political activities with stated policy positions; and shareholder proposals.” SSGA’s CEO has stated, “our main stewardship priorities for 2021 will be the systemic risks associated with climate change and a lack of racial and ethnic diversity.”
The Senators are asking for “a briefing detailing BlackRock’s and SSGA’s policies for using proxy voting rights derived from Plan assets, Board oversight of proxy voting use by Plan investment managers, and Board recourse if an investment manager is found to have violated their fiduciary duty no later than the week of July 26, 2021.”
The Board managing the TSP has a fiduciary responsibility to its investors. The success of this indexing system used by the professionals at the FRTIB is obvious from the results.
Pressure is growing to change this system from interest groups, politicians, and, perhaps, from the companies that invest the TSP’s funds. An indexing investment system is usually a safer investment approach that eliminates many of the emotional, political, or other forms of bias that may influence how to invest in stocks and bonds. The FRTIB has achieved very good results for its investors in the inevitable ups and downs of investment markets.
The Trump administration was focused on national security and TSP investments in Chinese companies. The Biden administration is focused on climate change and TSP investments in fossil fuels.
Political fashions and economic situations change over time. Predicting the future for investments involves risk. The FRTIB has been successful through these various political and economic changes with its investment approach.
Whether this approach will change at the FRTIB as a result of increasing pressure remains to be seen. If the approach does change, we will find out if a different approach to investing TSP assets is as successful for investors as it has been in the past. As is usually the case, those with strong political beliefs are certain the changes will be helpful. Perhaps TSP investors will benefit from this feeling of certainty about the future if the changes are implemented or perhaps their investments will be harmed by it.
Investors will be well advised to pay attention to how the current attempts play out in the political arena.