The Federal Retirement Thrift Investment Board (FRTIB), the agency that oversees the Thrift Savings Plan (TSP), approved a change to the underlying index tracked by the I Fund today.
The new index is the MSCI ACWI IMI ex USA ex China ex Hong Kong Index. This index is a collection of large, mid, and small-cap stocks in developed and emerging markets countries, but it excludes investments from China, Hong Kong, and the United States. That last point is key given the controversy of the last proposed change to the I Fund index.
No changes were made to the benchmark indices for the C, S, or F Funds.
Why is the Change to the I Fund Being Made?
The new index will expand the diversity of investment options within the I Fund. According to Aon, the consulting firm the FRTIB used to evaluate the benchmark indices within the TSP, the new I Fund index will expand coverage of non-US equity markets from 55% under the current MSCI EAFE Index to 90% under the new MSCI ACWI IMI ex USA ex China ex Hong Kong Index.
The current MSCI EAFE index invests in 798 large and mid-cap stocks in 21 developed countries. The new index invests in 5,621 large, mid, and small-cap stocks in 21 developed and 23 emerging markets.
When will the Change Take Place?
According to the FRTIB, the transition is currently scheduled to take place in 2024.
Past Planned Changes to I Fund Caused Controversy
The FRTIB moved forward with changing the underlying index of the I Fund in 2019 despite some strong political opposition. The plan at the time was to change the investment index to the MSCI All Country World ex-U.S. Investable Market (MSCI ACWI ex-US IMI) Index. The objections raised were because the new index contained Chinese companies.
Several lawmakers objected to the change, but Senator Marco Rubio (R-FL) was perhaps the most strenuous objector to the change. This excerpt from a letter sent by lawmakers to the FRTIB in 2022 captures the essence of their objections against the proposal:
We are deeply concerned by the Federal Retirement Thrift Investment Board’s (FRTIB) history of voting to invest federal employees’ retirement savings into China-based companies, including firms involved in the Chinese government’s military, espionage, human rights abuses, and aggressive industrial policy designed to undermine U.S. industry. The FRTIB’s previous actions have demonstrated a willingness to invest American retirement savings into Chinese companies working to undermine U.S. interests and national security, as well as exposing federal employees’ retirement savings to considerable risk. This cannot be allowed in the future.
The FRTIB ultimately delayed implementing the change to the I Fund, although it was not scrapped completely. This new solution may alleviate the concerns in Congress regarding investing in Chinese companies.