The planned transition to the Thrift Savings Plan’s I Fund to a new benchmark index is now complete, according to the TSP.
The new benchmark 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 past controversy around changing the I Fund index.
The Federal Retirement Thrift Investment Board (FRTIB), the agency which oversees the TSP, announced the planned change to the I Fund index last fall. It was scheduled to take place during 2024.
Why Did the I Fund Index Change?
The new index will expand the diversity of investment options within the I Fund. According to Aon, a 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 previous benchmark index for the I Fund, the MSCI EAFE index, invests in 741 large and mid-cap stocks in 21 developed countries. The new index invests in over 5,000 large, mid, and small-cap stocks in 21 developed and 23 emerging markets.
Controversy Surrounding Changing the I Fund Index
The FRTIB had previously announced plans to change the I Fund’s benchmark index to the MSCI ACWI ex-US IMI Index. It consists of over 6,000 companies across 22 developed markets countries and 26 emerging markets countries.
However, the planned change led to controversy because the index contains Chinese and Russian companies. Some lawmakers were concerned that this would compromise national security and leave federal employees’ retirement savings vulnerable.
The FRTIB, however, defended the plan to change to the different benchmark index. The agency maintained it was acting in the best interests of federal employees and retirees participating in the TSP as it is directed to by Congress as part of its fiduciary duties.
The tensions continued to escalate, and Senator Marco Rubio (R-FL), one of the lawmakers at the forefront of the effort to stop the change to the I Fund index, went so far as to ask the White House to remove some of the FRTIB members who were pushing to change the index.
The Trump administration did end up intervening, in part because the COVID-19 outbreak further fueled security concerns about China. Ultimately, the FRTIB backed down and postponed the change.
The controversy over including Chinese companies did influence the final change when it came about three years later. When the FRITB announced its plan to change the I Fund index in November 2023, it was a different international index than the one that generated all the controversy. The new index, and the one that is now in effect, excludes companies from China and Hong Kong. To be fair, the new investment index did not exist at the time of the previously announced change since the MSCI ACWI IMI ex USA ex China ex Hong Kong Index was launched on June 7, 2023.
According to a fact sheet about the MSCI ACWI IMI ex USA ex China ex Hong Kong Index, it “captures large, mid and small cap representation across 21 of 23 Developed Markets (DM) countries (excluding the US & Hong Kong) and 23 of 24 Emerging Markets (EM) countries (excluding China). With 5,523 constituents, the index covers approximately 99% of the global equity opportunity set outside the US, China & Hong Kong.”
