With soaring interest in environmental, social and governance-oriented (ESG) investing in recent years, it may be surprising to many that the biggest defined contribution plan in the world—that of the U.S. federal government—has decided to invest in China-based companies aligned with the Chinese government and ruling Communist Party.
Despite criticism from multiple U.S. Senators, last fall the Federal Retirement Thrift Investment Board reaffirmed a move to invest in an index fund that includes Chinese state-owned companies.
According to a story posted on the website Federal Soup on November 13, 2019, the FRTIB board, which controls allocations of about $600 billion in federal retiree funds, voted to confirm a decision from two years earlier to shift the International Funds under its Thrift Savings Plan to the Morgan Stanley Capital International All Country World Ex-U.S. Investable Market Index.
Joseph M. Giglio, a professor of strategic management at Northeastern University’s D’Amore-McKim School of Business, wrote in an opinion piece in the Quincy, Mass., Patriot Ledger recently that the decision to invest in some “shady” Chinese companies is “another egregious example of an organization facing no consequences for refusing to act in the best interests of the United States and never having to say you are sorry. It’s bad for the United States and good for a strategic foreign adversary.”
The index fund in question, Giglio writes, includes companies involved in the Chinese government’s military activities and companies being sanctioned by the U.S. government. “To cite one specific example, the index includes China’s state-owned Aviation Industry Corporation. This firm is the sole supplier of military aircraft to the Chinese People’s Liberation Army. Federal employee money is being used to support an adversary, undermining the country’s national security and fueling China’s economic growth,” Giglio said.
The 5.6 million participants in the Thift Savings Plan (TSP), who decide for themselves which of the plan’s funds to invest in, include members of the U.S. military forces.
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:
- The Government Securities Investment (G) Fund
- The Fixed Income Index Investment (F) Fund
- The Common Stock Index Investment (C) Fund
- The Small Capitalization Stock Index (S) Fund
- International Stock Index Investment (I) Fund
The FRTIB administers the TSP, and assets are held in trust in the Thrift Savings Fund.
Senators fighting decision
U.S. Sens. Marco Rubio (R-FL) and Jeanne Shaheen (D-NH) sent a letter to FRTIB Chairman Michael Kennedy last Aug. 26 urging the board to reconsider its 2017 decision to shift the I Fund under TSP to the MSCI All Country World Ex-US Investable Market Index, claiming the decision to invest in the fund posed a threat to U.S. national and economy security.
“The FRTIB’s decision to track this MSCI index constitutes a decision to invest in…many firms that are involved in the Chinese Government’s military, espionage, human rights abuses,” the senators wrote. “[It] therefore poses fundamental questions about the Board’s statutory and fiduciary responsibilities to American public servants who invest in federal retirement plans.”
Per reporting in the Federal Soup article, the letter also questioned the propriety of investing in China Mobile when that firm was recently barred by the Federal Communications Commission from selling gear to U.S. carriers for use in telecom infrastructure.
Rubio and Shaheen followed up with a second letter Oct. 22 that added Sens. Mitt Romney (R-UT), Kristen Gilibrand (D-NY), Rick Scott (R-FL) and Josh Hawley (R-MO).
Members of the board have countered by saying that they did not want to let outside political pressures effect how government employee and retiree investment funds were handled on their behalf. Further, the board’s general counsel said that the 1986 legislation that created the plan shows the accounts are private, not federal property.
The Senate is looking to change that. Rubio, Shaheen and Romney introduced the Taxpayers and Savers Protection (TSP) Act last November in an effort to ban the board from investing in Chinese firms.
“Deliberately choosing to invest the retirement savings of hardworking Americans in state-owned and state-directed firms in China effectively funds the Communist Party’s efforts to undermine our economic and national security,” Romney told FCW in an e-mailed statement. “Congress must act now to prevent the Federal Retirement Thrift Investment Board from steering the retirement savings of our federal employees and military members into the hands of China’s Communist Party.”
Senators also asked leadership on the Homeland Security and Governmental Affairs Committee to quickly advance their bill, but nothing further has happened lately.
Some want opposition to back off
Not everyone thinks the FRTIB’s I Fund changes are a bad idea, and some—particularly stakeholders—are saying the government needs to back off and stay out of it because the federal employees own the fund and it cannot be tampered with by any entity including Congress. The other primary argument is that blocking the move puts participants at a competitive disadvantage compared to other retirement plans.
A coalition of federal employee unions and other associations has urged politicians to drop the TSP Act.
The bill “will needlessly harm millions of hardworking Americans now and far into the future,” wrote Clifford Dailing, chairman of the Employee Thrift Advisory Council, in a Nov. 20 letter to senators, as reported by Federal News Network.
The council said eliminating the option of investing in these emerging markets would disadvantage federal employees, citing a review from Aon, who first recommended the TSP expand to the emerging markets benchmark as an independent consultant.
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.
“It would be fiscally irresponsible to divest from a fund that has consistently outpaced developed markets over the past 15 years,” Dailing wrote. “Instituting an investment mandate at odds with the private sector would wrongfully and unnecessarily disadvantage federal employees and veterans of the armed services.”
With the COVID-19 pandemic moving just about everything else to the back burner since March, there has been no recent movement in the Senate regarding the TSP Act.
COVID-19 slashes TSP millionaire ranks
According to a recent article in FedSmith, the number of millionaires in the Thrift Savings Plan dropped from 49,620 in December 2019 to 27,212 as of March 31. This is a decrease of more than 45%.
The person with the largest TSP balance had $7,395,476.29 on December 31. On March 31, the largest account balance was $6,375,795—a decrease in value of almost 14%.
The recent loss in the value of TSP accounts is easy to understand. In March, the C Fund dropped 12.4% and was down 19.65% over the first quarter. The S Fund has had a more dramatic loss: 21.40% in March and 28.14% year-to-date.
The only TSP funds that are up so far in 2020, according to FedSmith, are the G Fund (up 0.4%) and the F Fund (up 3.10%).