Remember that plan for the world’s largest defined contribution plan—the federal government’s Thrift Savings Plan—to transfer billions of dollars in its international fund to a new index fund that invests in emerging markets that happens to include some Chinese state-owned military and intelligence companies?
Yeah, that’s not going to happen…
In recent days, the Trump Administration picked up the heavy hammer in an effort to squash the controversial investment strategy, the subject of a bitter, if previously under-the-radar, two-year debate.
As of today, the efforts have indeed halted the investment.
The Federal Retirement Thrift Investment Board (FRTIB), which controls allocations of about $557 billion in the retirement portfolios of 5.9 million federal employees and U.S. service members, today announced it will “delay” the investment pending further study.
The brief May 13 statement from the FRTIB:
“Due to a meaningfully different economic environment related in large part to the impact of the global COVID-19 pandemic, as well as the nomination of three new Federal Retirement Thrift Investment Board Members, pending further study, the Board is delaying the implementation of the I Fund benchmark change to the MSCI ACWI ex-U.S. Investible Market index from the MSCI EAFE index.”
The full-court press from the Trump Administration to block the investment just weeks before the FRTIB was to transfer International (I) Fund assets to the Morgan Stanley Capital International All Country World Ex-U.S. Investable Market Index is in spite of the fact that the Board had last November reaffirmed its decision to invest in the index after calls from multiple U.S. Senators—prior to the COVID-19 pandemic—to reconsider.
Trump nominates 3 board members
The Trump Administration recently moved to seize control of the Board, as reported by The Washington Post. Trump nominated three members to replace the majority of the current five-member FRTIB, whose four-year terms have all expired. Senate Majority Leader Mitch McConnell (R-KY) and House Speaker Nancy Pelosi (D-CA) have not replaced those serving in the two seats they control.
“With its new nominees, the White House is taking steps to block the plan’s $40 billion international fund from investing in a fund that contains about 11% of China-based stocks, according to people familiar with the strategy,” the Post article noted.
Multiple mainstream media reports say the Trump Administration is eager to punish China for its role in the coronavirus outbreak, and reversing the TSP’s long-planned investment in the fund has become an unlikely first tangible step.
In a May 11 letter, obtained exclusively by FOX Business, National Security Adviser Robert O’Brien and National Economic Council Chair Larry Kudlow wrote to U.S. Labor Secretary Eugene Scalia stating that the White House does not want the Thrift Savings Plan to have money invested in Chinese companies.
The letter concludes, “Given the transactions to effectuate the change in the I Fund’s benchmark index are expected to begin as early as the first week of June, we believe that the Board should cease implementation immediately.”
The letter directly links China’s handling of COVID-19 as one of several reasons why investment in Chinese companies should not occur.
Later on May 11, Scalia wrote to Michael Kennedy, the chairman of the FRTIB, sharing the Kudlow/O’Brien letter noting the two have “grave concerns with the planned investment on grounds of both investment risk and national security,” per FOX Business.
That second letter says that at the direction of President Trump, “the Board is to immediately halt all steps associated with investing the I Fund” in the MSCI index, “and to reverse its decision to invest plan assets on the basis of that international equities index.”
Now, with the trio Trump-nominated new FRTIB members—Frank Dunlevy, counselor to the CEO of the U.S. International Development Finance Corporation; Christopher Bancroft Burnham, chairman and co-founder of Cambridge Global Capital, and John M. Barger, managing director at NorthernCross Partners—the MSCI index investment is more likely dead in the water than merely “delayed” as the FRTIB statement says.
FRTIB followed Aon recommendation
The FRTIB has said all along it was following a responsible investment strategy—recommended twice by outside consultant Aon—that would allow TSP participants to accrue potential gains from China’s growing economy. They argue that blocking the move puts participants at a competitive disadvantage compared to other retirement plans.
The TSP would be an outlier among other comparable 401k style plans, Aon said, as both the top 10 publicly traded U.S. companies and the top 10 federal contractors all offer their defined contribution participants access to an emerging market equity.
The TSP is a defined contribution retirement savings and investment plan established by Congress in the Federal Employees’ Retirement System Act of 1986, offering the same types of savings and tax benefits that many private corporations offer their employees under 401k plans.
The TSP offers five different individual fund options, each one invested in either short-term U.S. Treasury securities or U.S., international, or bond index funds.