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By: FEDweek StaffA recent notice by the Labor Department could once again put that department at odds with the TSP over the investment options the TSP makes available, reviving a dispute that first arose in 2020 and never was fully resolved – this time centered on environmental, social and governance (ESG) focused investment options.
The department recently posted a Federal Register notice seeking information on steps it might take under a Biden administration executive order on the government’s potential financial liabilities arising from climate change. That order among other things called for an assessment of how the TSP “has taken [ESG] including climate-related financial risk, into account” in its fund offerings.
That ultimately could lead, for example, to a recommendation that the TSP investment funds reduce or eliminate companies involved with fossil fuels. All of the TSP’s fund offerings track large-scale indexes and all but the government securities G fund reflect the stock or bond prices of such companies among many others.
The TSP always has opposed proposals that it offer tailored investment funds, saying that such funds would reduce returns to investors and stressing that money in accounts belongs to investors, not the government. It made those arguments last year in opposing bills offered in Congress — which have made no progress — to require it to create a “Climate Choice” stock index fund excluding investments in any company involved with fossil fuels. Those bills also would require the TSP to set up an internal panel to advise it on investment strategies related to countering climate change.
That issue may in effect resolve itself in the months ahead as the TSP opens its investment “window” which will allow investors to put part of their accounts into outside mutual funds. The range of the expected available funds, numbering in the thousands, will allow investors to steer money into mutual funds that use various standards for what they do or don’t invest in.
However, a potentially larger issue would be the Labor Department’s reassertion of direct authority over the TSP, which is run by an independent board of finance industry experts nominated by the White House and subject to Senate confirmation.
The notice for example asks for input on “what specific actions . . . could and should” the department take “consistent with [its] authority and role” over the TSP. It also asks for input on how mutual fund managers take climate change risk into their investment decisions and on “which of these policies and practices could the department or the [TSP board] incorporate.”
Traditionally, the Labor Department’s only direct involvement with the TSP has been to conduct certain audits, much like an outside audit firm is used to review a publicly traded private sector company’s financial statements. However, such language amounts to an assertion that the department has broader authority over the TSP.
That issue first arose in 2020 as the TSP prepared to expand the international stock I fund to include stock markets of some two dozen additional countries. At the time the White House had the Labor Department issue a letter ordering the TSP to stop the change because China would have been among those added.
However, the question of the Labor Department’s broader authority over the TSP—if any—went unanswered because President Trump meanwhile nominated for the TSP board three individuals opposing such a change, to create a majority to block it. The TSP then indefinitely suspended its plan. That suspension remains in effect even though those nominees were not confirmed. President Biden last year made nominations for all five board seats but they have not been confirmed either.
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