Issue Briefs

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Following is the section of a final rule-making notice from the TSP regarding the investment window option in which the TSP stresses that it will not assess the available mutual funds.


One commenter suggested that mutual funds offered through the window should be “vetted” by fiduciaries to ensure that they are prudent investments. Another commenter suggested that the FRTIB should offer a large variety of funds to ensure that there is no appearance of ‘‘favoritism’’ toward any mutual funds or fund companies.

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TSP participants will have access to approximately 300 mutual fund families. A mutual fund family includes all the separate funds offered by a single fund company. Since each family consists of multiple funds, the total number of funds available to TSP participants will be in the thousands.

We have taken measures toward ensuring that our record keeper and brokerage firm are not motivated by conflicts of interest or other misaligned incentives that could influence which funds or fund families they make available to TSP participants. Many retirement plan record keepers also own subsidiaries that are fund companies or that provide investment management services to fund companies. It is common for these record keepers to design investment menus and exercise influence on retirement plan participants in a manner that benefits their subsidiaries. We have mitigated such conflicts of interests by hiring a record keeper that is not in the business of selling mutual funds.

We intend to monitor for practices that might intentionally or unintentionally nudge participants to choose more expensive funds (or share classes) over less expensive funds (or share classes) with similar risk/return attributes. Toward that end, we have contractually guaranteed ourselves a say in the choice architecture of the digital interface through which participants choose mutual funds (e.g., the order in which choices are displayed and the language used to frame the choices). We will also ensure that if a mutual fund has a share class that gives preferential treatment to institutional investors (e.g., money managers, insurance companies, investment banks, commercial trusts, endowment funds, and hedge funds), those institutional share classes will be made available to TSP participants.

We will not, however, evaluate or monitor any of the mutual funds to ensure that they are prudent investments. This mirrors the practice of private sector retirement plans. Fiduciary oversight of thousands of funds would place unreasonable cost and resource burdens on the FRTIB.

Those cost increases could disadvantage TSP participants relative to participants of private sector retirement plans— whose fiduciaries do not evaluate or monitor investments offered through brokerage windows except in extraordinary circumstances. We are also concerned that the potential for appearing to favor some fund companies over others could raise novel issues under government ethics and contracting laws; and could run counter to the spirit of a myriad of provisions in the Federal Employees’ Retirement System Act that are designed to insulate the TSP from political involvement.

We considered the less costly, less complicated alternative of implementing a screen whereby the FRTIB would adopt criteria (e.g., expense ratio of 1.00% or below) and restrict the window to those mutual funds that meet the FRTIB’s criteria. But we have decided against any screening criteria because we are concerned it would blur the distinction between funds that are fully endorsed by fiduciaries (i.e, the TSP’s core funds) and funds that only meet certain minimum thresholds established by fiduciaries. Participants who only want simple choices that are fully endorsed by the FRTIB may feel overwhelmed or misled if we make it hard to distinguish between the level of fiduciary involvement in TSP core funds and the level of fiduciary involvement in the funds offered through the mutual fund window. In view of this concern, we believe that the vast majority of TSP participants will be better served by a clear, frequent, prominent, and unequivocal warning that the FRTIB does not provide fiduciary oversight of the mutual funds offered through the window.

Participants who prefer funds that are overseen by FRTIB fiduciaries should invest in the TSP core funds.

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2022 Federal Employees Handbook