Lawmakers Want More Diverse Asset Managers in Upcoming TSP Mutual Fund Window

A group of Senators want more “racially, ethnically, and gender diverse asset managers” managing funds in the Thrift Savings Plan.

The upcoming mutual fund window being added to the Thrift Savings Plan (TSP) is leaving some lawmakers in Congress anxious to instill their desired new diversity requirements into the retirement savings program for federal employees.

In a letter sent to the acting chairman of the Federal Retirement Thrift Investment Board (FRTIB), several Senators said they want to see diversity quotas applied to fund managers. Specifically, they are calling for more opportunities for federal employees to invest in funds run by “racially, ethnically, and gender diverse asset managers.”

The letter was sent by Senators Bob Menendez (D-NJ), Alex Padilla (D-CA), Ben Ray Lujan (D-NM), Sherrod Brown (D-OH), Jeff Merkley (D-OR), Tim Kaine (D-VA), and Cory Booker (D-NJ).

The letter stated that funds run by more diverse asset managers yield better investment returns and also is an opportunity for the investment firms to “avoid the dangerous pitfalls of ‘groupthink.'”

The Senators were also critical of current long-time TSP investment firm BlackRock for its lack of diversity. “In 2020, BlackRock’s executive management was approximately 20% female, 5% African American, and just 3% Hispanic. State Street’s executive management was 32% female, 2% African American, and 3% Hispanic,” states the letter.

Although it may lack the diversity the Senators would like to see, the FRTIB has maintained a long standing relationship with Blackrock for managing assets in the TSP. It seems unlikely the FRTIB would have continued its relationship with the investment management firm if its performance as lackluster.

Outside Political Influence on the TSP

The letter notes that the TSP is the largest defined contribution retirement plan in the country with over $700 billion in assets. As that pot of money grows, it becomes increasingly tempting for politicians to use it to advance their preferred political agendas.

For example, one of the Senators who wrote this letter has made legislative efforts in the past to use the TSP as a way to fight climate change. Senator Jeff Merkley (D-OR) wants to see a “climate choice investment option” in the TSP to give federal employees the opportunity to avoid investing in the fossil fuel industry.

To date, the TSP has generally avoided political interference in the investment options offered to federal employees within the program. While adding mutual funds to the TSP will open up many new investment opportunities to plan participants, the much larger number and variety of funds also introduces new risks and is likely to open the door to greater political pressure from Congress.

FedSmith readers have repeatedly indicated in surveys we have conducted that they are against too much outside influence on the TSP. A majority said that they do not want to see a mutual fund window added to the TSP and they also stated their opposition to the idea of using the TSP to combat climate change.

A copy of the letter is included below.

Dear Mr. Jones,

I understand that the Federal Retirement Thrift Investment Board (“the Board”) aims to offer federal workers more flexible investment options within the Thrift Savings Plan (TSP) starting next year. As part of this initiative, I urge you to create opportunities for federal workers to invest in funds run by racially, ethnically, and gender diverse asset managers. When it comes to their retirement investments, federal workers deserve the chance to make the strategic and values-driven choice to prioritize diversity.

The TSP is the world’s largest defined contribution retirement plan, with approximately $735 billion in assets. The Federal Retirement Reform Act of 2009 (P.L. 111-31) granted the Board the authority to establish a mutual fund window for the TSP, which would provide participants with more self-directed investment options. I understand that the Board aims to offer a mutual fund window that includes actively managed funds with Environmental, Social, and Governance (ESG) goals starting in summer 2022.

The mutual fund window is an especially critical opportunity given that the TSP’s current investment managers are failing at diversity, particularly at the executive level. While the Board internally manages a portion of the TSP’s funds, the Board contracts with BlackRock as its primary investment manager and State Street Global Advisors as a secondary investment manager. In 2020, BlackRock’s executive management was approximately 20% female, 5% African American, and just 3% Hispanic. State Street’s executive management was 32% female, 2% African American, and 3% Hispanic.

For nearly five years, Congress has urged the Board to take concrete steps towards improving diversity among asset managers. In 2017, the United States Government Accountability Office (GAO) identified four key practices for increasing opportunities for minority- and women-Owned (MWO) Asset Managers greater. At the time, the Board was the only surveyed entity that failed to adopt any of those practices, arguing that the Board would take further action when developing the 2020 mutual fund window platform. We understand that the Board did work with Accenture Federal Services (Accenture) in November 2020 to develop a screener tool for plan participants to screen for funds managed by women and minority-owned firms. However, there are still significant shortcomings that should be addressed through increased outreach, communicating priorities, and other practices identified by the GAO to broaden the pool of qualified asset managers.

The mutual fund window should offer funds managed by diverse asset managers because executive diversity is a good business practice that has been shown to improve returns. A 2020 study by McKinsey found that companies in the top quartile for racial, ethnic and gender diversity were more likely to have returns above their industries’ national medians. A Goldman Sachs study found that 48% of female-managed mutual funds outperformed the market from March 2020 through August 2020, compared with of 37% for all-male-managed funds. A diverse team of asset managers is more likely to hold varied perspectives and may be better equipped to identify novel investment opportunities. Diversity can also help firms avoid the dangerous pitfalls of “groupthink.”

Additionally, many Americans today are actively seeking opportunities to combat discrimination and reduce racial and gender inequality. Minorities and women are underrepresented among asset managers hired by institutional investors, and discrimination is a serious concern. If the Board offers TSP funds specifically managed by diverse asset managers, more federal workers may elect to participate in the TSP or to increase their contributions. By being responsive to consumer interest in diversity, the Board could improve TSP participation and retirement security among values-driven federal workers.

In light of the issues detailed above, I respectfully request that the Board provide a detailed summary of the Board’s progress towards the implementation of GAO’s recommendation and its further plans for the mutual fund window related to asset manager diversity no later than October 15, 2021. Following receipt of your response, I also request that the Board provide a briefing for my staff on this topic no later than November 5th, 2021.

Thank you for your timely consideration of this matter.

About the Author

Ian Smith is one of the co-founders of He has over 20 years of combined experience in media and government services, having worked at two government contracting firms and an online news and web development company prior to his current role at FedSmith.