The I Fund (International Fund) within the federal government’s Thrift Savings Plan will track a new benchmark index as a result of a unanimous vote this week by the Federal Retirement Thrift Investment Board (FRTIB).
And that new index will not include investments in China, Hong Kong or Russia.
After several years of delay, debate and controversy surrounding a desire to avoid the fund including some politically sensitive Chinese and Russian investments, the vote means that starting in 2024, TSP’s I Fund will switch from the MSCI Europe, Australasia and Far East (EAFE) Index to the MSCI All Country World ex USA ex China ex Hong Kong Investable Market Index (MSCI ACWI IMI ex USA ex China ex Hong Kong Index) as the new benchmark.
“By broadening the index, the Board is expanding investment opportunities and improving the I Fund’s risk-return profile, in line with its statutory mandate and fiduciary duty to the 6.9 million TSP participants”
“By broadening the index, the Board is expanding investment opportunities and improving the I Fund’s risk-return profile, in line with its statutory mandate and fiduciary duty to the 6.9 million TSP participants,” said a FRTIB press release issued this week.
FRTIB conducted a routine review of the four benchmark indexes followed by the Thrift TSP’s Common Stock Index Investment Fund (C Fund), the Small Capitalization Stock Index Investment Fund (S Fund), the Fixed Income Index Investment Fund (F Fund), and the International Stock Index Investment Fund (I Fund). The Board reviewed the report and recommendations of Aon, its investment consultant, and FRTIB staff. The Board made no changes to the current benchmarks for the C Fund, S Fund and F Fund, and unanimously voted to change the benchmark used for the I Fund.
The MSCI EAFE Index—launched on June 7, 2023— provides exposure to 798 large- and mid-cap stocks in 21 developed markets, representing 55% of non-U.S. market capitalization. The MSCI ACWI IMI ex USA ex China ex Hong Kong Index provides exposure to 5,621 large-, mid-, and small-cap stocks in 21 developed markets and 23 emerging markets, representing 90% of non-U.S. market capitalization. This adjustment to the I Fund will more than double the number of countries included in the Fund and will change the number of equities by 700%.
The Board noted that the MSCI ACWI IMI ex USA ex China ex Hong Kong Index is expected to outperform the MSCI EAFE Index on a risk-adjusted basis over the long term. Historical analysis confirmed that the risk-adjusted returns for the MSCI ACWI IMI ex USA ex China ex Hong Kong Index have exceeded those of the MSCI EAFE Index over the past 20 years.
Among its recommendations to the Board, Aon noted the following concerning the I Fund:
“Overall, operational complexity has increased when investing in emerging markets in recent years given a range of events such as investment restrictions on sensitive Chinese technology sectors, delisting of Chinese companies and sanctions on Russian securities due to the Russia-Ukraine conflict…
“Tensions between the U.S. and China have been building, with the latest developments being the technology investment restrictions and export ban of U.S. technology to China. If the current investment restrictions on China are the beginning of further restrictions spanning China and Hong Kong investments, this level of uncertainty can outweigh the benefits of expanding the I Fund to include China and retaining exposure to Hong Kong, based on the TSP’s specific circumstances.”
Recent I Fund performance
As of October 31, 2023, TSP participants had invested $68 billion in the I Fund. The FRTIB will work with its fund managers to implement the transition from the current index to the new index in 2024.
The I Fund continues to post the highest returns of any TSP fund over the last 12 months at 15.51%. Despite being down -3.22% in October, it was up 3.49% YTD. Tracking the stock market, most TSP funds have posted negative returns in the last three months, with the exception being the government securities investment G Fund.
As of October 2023, total TSP assets were approximately $770.5 billion, and retirement savings accounts were being maintained for more than 6.9 million TSP participants.
Timeline of I Fund benchmark debate
The Board’s vote to change the benchmark on Tuesday marks the end of what has been a long and tumultuous debate.
FRTIB first made a decision to expand the I Fund to an emerging markets benchmark back in 2017 and planned to implement the change in 2020. But, as summarized in an article this week by Federal News Network, the plan gained strong pushback from members of Congress and the Trump Administration because at the time, the board was planning to include investments in China as part of the new I Fund benchmark index.
In 2019, Florida Republican Sens. Marco Rubio and Rick Scott raised concerns to former President Donald Trump about the planned investments in China, saying the board’s decision to move the I Fund to a new benchmark would expose federal retirement assets to potentially unethical and harmful Chinese companies.
In response to lawmakers’ concerns in 2019, as well as a Trump directive, the board delayed implementation of the change to a new index.
In the end, the Board opted to exclude investments in China and Hong Kong in the upcoming transition to the new MSCI ACWI IMI ex USA ex China ex Hong Kong Index.
The FRTIB said all along it was following a responsible investment strategy—recommended twice prior to 2020 by outside consultant Aon—that would allow TSP participants to accrue potential gains from China’s growing economy. They argued that blocking the move put participants at a competitive disadvantage compared to other retirement plans.
The exclusions made the I Fund an outlier among other comparable 401k style plans, Aon said at the time, 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.
SEE ALSO:
• Trump Squashes TSP Plan to Invest in China
• TSP Still Investing in ‘Shady’ Chinese Companies
• Trump’s 2020 Block Means No TSP Funds Invested in Russia
• Trio of TSP Funds Up Over 15% in 2023