Federal Thrift board pauses TSP China investment

Federal Retirement Thrift Investment Board, Washington, voted unanimously Wednesday to pause its implementation of plans to shift billions of dollars in retirement assets to an index fund that includes Chinese companies, citing the COVID-19 pandemic and newly nominated board members.

In 2017, the board decided to shift the $593.7 billion Thrift Savings Plan's I Fund benchmark to the MSCI ACWI ex-U.S. Investible Market index from the MSCI EAFE index. The new index was made up of about 8% Chinese companies, as of Sept. 30, according to an Aon Hewitt Investment Consulting study presented to the board in October. Aon recommended the board switch to the MSCI ACWI ex-U.S. IMI index in 2017 and reiterated that recommendation last fall.

As of Dec. 31, TSP’s I Fund had $54.3 billion in assets.

Facing calls from Capitol Hill to reverse its decision, the board in November decided to move forward.

But on May 4, President Donald Trump nominated three people to the five-member board that, upon Senate confirmation, could lead to a new majority.

Then on Monday, two letters were sent from administration officials regarding the I Fund shift — one from Larry Kudlow, director of the National Economic Council, and Robert O'Brien, national security adviser, to Labor Secretary Eugene Scalia. Another letter was sent from Mr. Scalia to Michael D. Kennedy, chairman of the FRTIB.

The letters sent Monday also referenced “national security and humanitarian concerns for the United States.”

"At the direction of President Trump, the board is to immediately halt all steps associated with" the I Fund shift, and "to reverse its decision to invest plan assets on the basis" of the MSCI ACWI ex-U.S. IMI index, Mr. Scalia said.

With that backdrop, the board held a special meeting Wednesday and decided to stop the planned implementation, which was going to start around June 1 and take about 90 days, Mr. Kennedy said.

In his recommendation to the board, Mr. Kennedy outlined why he felt it was prudent to pause implementation. "The coronavirus has had an impact on countries and markets all over the world," he said. "It's created a lot of uncertainty and we're not sure that now would be the time to be making a transition to the international fund with investments in emerging markets because those markets are going to be challenged and we're not sure what they're going to look like over the next two or three years."

Mr. Kennedy added: "Secondly, this will allow the new board members to be fully confirmed and be transitioned onto our board and allow them time to do their own due diligence and assessment on the (I Fund) and make the determination on which direction they would like to go."

Several board members spoke about the importance of continued board independence. “It is my fervent hope that the new board members, when confirmed, will take the time to study and make their decision regarding the I Fund, and every other issue which they will face in the future, within the context of how this agency has always been run: independently and in the best interests of the participants and beneficiaries,” board member David A. Jones said.

Mr. Jones, Mr. Kennedy and Ronald McCray are the three board members who would be replaced by Mr. Trump’s nominees.

Mr. McCray said that “changes to the TSP I Fund isn’t and shouldn’t be in the top 20 issues in relation to China.” He added, “I continue to believe that political considerations have no place in FRTIB board decisions.”

William Jasien was the lone FRTIB member to oppose the board decision in November to reaffirm the I Fund shift. At the time, he made a motion to table the decision for 12 to 18 months so the board can go to Congress and ask it to expand the I Fund offerings to include access to international markets without exposure to emerging markets and China. His motion was denied.

On Wednesday, Mr. Jasien, citing his sons’ military service, said he wants “all of the military and federal workers to be able to invest internationally without exposure to China and/or any other adversary.”

Mr. Scalia was pleased the board “voted in accordance with President Trump’s direction” to halt the planned implementation, he said in a statement.

“The millions of federal employees, retirees, and service members participating in the plan should not be placed in the untenable position of choosing between forgoing any investment in international equities, or placing billions of dollars in retirement savings in risky companies that pose a threat to U.S. national security,” Mr. Scalia said. “The board’s action was in the best interest of the plan’s participants and beneficiaries and the national security of the United States.”

A timetable for how long the pause will last was not specified Wednesday.