Why does an organization issue a press release likely to be of significant interest during a major holiday week? Often, it is because it wants to minimize the fallout from decisions that have been made and may not be popular among those with a vested interest in the topic.
Investment Rule on Considering Climate Change
On November 22nd, the Department of Labor (DOL) published a “final rule” in the Federal Register. The document is entitled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.
The new rule, according to the DOL press release, “allows plan fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights, such as proxy voting.”
As is often the case under President Biden, this action overturns a requirement from the Trump administration which required prioritizing profit in retirement plans. Marty Walsh, the Department of Labor’s Secretary was quoted in the press release:
Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits. Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.
Rule Implements Executive Order on Climate Change
Loosening investment requirements was first proposed by President Biden in an executive order ordering government agencies to assess climate-related risk to retirement and pension investments.
The Biden Executive Order assumes climate change will be harmful to investments in the Thrift Savings Plan (TSP). 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)
Impact of Administration Policies on the TSP
As often happens in a new administration, federal agencies fall in line with policies that reflect the political objective of a new administration—particularly when the incoming administration is from an opposing political party. This has clearly happened under the Biden administration.
Falling TSP Balances Under the Biden Administration—Down About 13.6% in 2022
According to the latest data, the average TSP balance for FERS participants in the TSP was $156,702 at the end of October 2022. At the end of December 2021, the average TSP balance for FERS employees was $181,279—a decline of $24,577 or about 13.6%.
At the end of January 2021, the first month of the Biden administration, the average TSP balance for FERS employees was $164,124. This is a decline in the average TSP balance of $7,422 since the introduction of the Biden administration. In effect, the average TSP balance has declined despite a banner year in TSP returns in 2021 when the C Fund went up 28.68% and the S Fund went up 12.45%.
Compared to average 401(k) balances in the private sector, the TSP has performed well. While the average TSP balance is down $24,577 in 2022, the average balance in 401(k) retirement accounts in the private sector is about $34,000, according to data from Fidelity investments, and the average balance is now down to $97,200.
GAO Falls in Line With Administration Objectives
In addition to the Executive Order, the Government Accountability Office (GAO) has weighed in on this topic and its recommendations reflect the political preferences of the Biden administration.
The 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.”
TSP and Political Objectives of Congress and Administration
There have been suggestions from interest groups that President Biden issue an Executive Order to change the TSP investment policy. As noted, he has issued an Executive Order on climate change. This document did not attempt to modify the existing statute governing how TSP investments are made. (See Social Divesting Proposal Threatens to Gut Some TSP Funds)
In responding to the rule from the Department of Labor when it was first proposed, the FRTIB noted it was operating outside the scope of restrictions imposed on other investment organizations in order to prevent the FRTIB or the executive branch to use the size of the TSP to manipulate the market to achieve political objectives. The FRTIB response read:
The FRTIB is well-aware of the discussion of climate-related financial risk in investment decision-making and portfolio construction. But the FRTIB’s role in investment decision-making and portfolio construction is extraordinarily limited. Congress reserved investment discretion to itself to mitigate the risk that the FRTIB (or, by extension, the executive branch) might use the sheer size of the Thrift Savings Fund to manipulate the market in pursuit of national policy priorities.
I applaud the DOL’s efforts to consider what steps can be taken to protect the retirement savings of U.S. workers and families from the threats of climate-related financial risk. As you do so, I urge you to bear in mind that neither the FRTIB nor any other federal agency has the constitutional authority to override the unambiguously expressed intent of Congress. A federal agency’s power is constrained by the authority that Congress delegated to it bv statute.
Previous attempts by Congress to use the TSP to advance social change or political objectives have included these proposals:
- The “Federal Employee Socially Responsible Investment Act”;
- Using actively managed funds instead of index funds to give companies run by women and minorities a chance to earn fees from the TSP;
- Creating “terror-free international investment options” in the TSP;
- Creating a TSP fund to ensure gender diversity and empowerment
- Avoiding fossil fuels in TSP investments.
None of the bills ever became law, however.
TSP Criteria for Investment
To protect the interests of TSP investors, the FRTIB noted there are only two criteria for investing money from the TSP.
- The market value of stocks included in the index;
- Factors that may make it impracticable to replicate the index exactly.
The FRTIB has largely been free to direct political involvement despite the attempts of some in Congress to use the power of TSP investments to support their political objectives.
While the FRTIB response to the proposed rule from DOL was submitted on May 13, 2022, several of the appointees to this Board were replaced in June 2022 after being confirmed by the Senate.
No doubt the political pressure on the FRTIB will grow in the near future.
In February, the Employee Benefits Security Administration published a request for public feedback on “Possible Agency Actions to Protect Life Savings and Pensions from Threats of Climate-Related Financial Risk.” In this document, the DOL singled out the TSP’s investment options and the FRTIB. The document asked, “The TSP’s fund offerings rely on passive index investing.…What analysis could FRTIB undertake to inform whether other possible indexes may better take into account the risks posed by climate change?”
Congress approved the TSP options. Could the FRTIB recommend changing the existing index funds’ strategies to begin incorporating ESG-friendly options to satisfy the administration’s political objectives? The TSP is required to track “commonly recognized” stock indexes. The S Fund tracks an index that is not widely recognized. To comply with political pressure, it is conceivable the new FRTIB could accede to the current political objectives and recognize a different index.
It remains to be seen if the new FRTIB appointments will have an impact on the position of the FRTIB in making investments in TSP Funds in view of the Biden administration’s preference to “recognize the important role that climate change and other ESG factors in the evaluation and management of plan investments….”
TSP Investment Advisor and ESG Investments
Blackrock is a major investment advisor for the TSP. Blackrock has been increasing its support for shareholder-led ESG proposals, and, according to the Wall Street Journal, it has published considerable criticism of companies that have not gone along with their requests on these issues.
Blackrock has also become more aggressive in exercising its voting power on these issues. As noted in the WSJ, “[Blackrock] votes on behalf of the investors in its many funds. For the roughly 170 ESG shareholder proposals it voted on during the first half of the proxy year, BlackRock backed 91% of environmental proposals, 23% of social proposals, and 26% of corporate-governance proposals.
Two Senators have expressed concerns about how TSP funds are invested. “We are concerned that BlackRock and (State Street) may be prioritizing their CEOs’ personal policy views over retirees’ financial security,” and that the two TSP investment advisors and the two firms are “increasingly incorporating left-leaning environmental, social and corporate governance” priorities into their voting guidelines.
So, without any wide discussion of how TSP investment decisions are made, and without knowledge of TSP investors, it is possible that TSP investors will be having more of their investment dollars put into meeting ESG (environmental, social, and governance) goals.