Commentary: TSP's new mutual fund window – including ESG options – is long overdue

Choosing where to invest retirement savings is one of the most powerful financial decisions an individual can make. Federal employees now have an expanded set of retirement investment options from which to choose.

In June, the Thrift Savings Plan, the nation's largest retirement plan, with $782.2 billion in assets for more than 6.5 million federal employees and retirees, opened a mutual fund window. For the first time, TSP participants have the opportunity to select mutual funds — including sustainable funds — outside the basic core options. This new offering allows greater choice for plan participants, but it comes with obstacles, including limitations and several new fees.

Nonetheless, this move is long overdue. The Federal Thrift Retirement Investment Board, which oversees the TSP, was first granted the authority to open this window in 2009 and voted to implement it in 2015. Since the early days of the Obama administration, our organization has advocated for making sustainable investment options available to TSP participants — many of whom come to government to address an array of critical environmental and social issues. Despite many delays, the mutual fund window will now provide participants with new investment options, and the expanded platform is expected to include several sustainable investment funds.

When surveyed, adding investment options was one of the top five requests from participants. When participants were asked for one thing the TSP could do better to meet their retirement planning needs, the top five responses were:

1. Provide better instructions, information or tutorials (18%).
2. Provide investment advice or retirement planning (15%).
3. Provide more transaction availability, transfers, deposits or withdrawals (12%).
4. Provide more investment options (11%).
5. Provide more tools, calculators or prediction capabilities (11%).

US SIF's 2020 "Report on US Sustainable and Impact Investing Trends" found that 1 in 3 professionally managed dollars were invested in a manner that considered environmental, social and governance factors, totaling $17.1 trillion in professionally managed assets.

This includes investments by retail investors concerned about ESG issues such as climate change, biodiversity, systemic racism and growing economic inequality.

Alongside expanding interest is growing evidence that sustainable investment solutions perform comparably to traditional investments. Numerous studies conclude that investors need not sacrifice returns or pay higher fees by selecting sustainable investment options.

Opening the sustainable investment window is a significant win for government workers. Imagine a federal government worker who works to eradicate cancer. While that employee's life work has been focused on reducing lung cancer deaths, their retirement plan might invest in a traditional S&P 500 index mutual fund (a core fund offering) that would include investments in tobacco stocks. With the mutual fund window, this employee, under certain conditions, can choose a mutual fund that may screen out tobacco funds or other investments that do not align with their environmental and social priorities.

Policies around the new mutual fund window have some limitations.

First, participants must have $40,000 saved in their plan before they can use the mutual fund window. This eliminates most if not all early career or newer participants who have not had time to accumulate these investments. These investors, many of whom may be millennials or Gen Z, are among the demographic most interested in sustainable investing. The TSP also imposes restrictions on the amount that can be moved into the mutual fund window, restricting investments to no more than 25% of a participant's account.

In addition, participants who elect to participate in the mutual fund window will pay additional fees. In addition to an annual maintenance fee, there is an annual fee so administrative costs don't get passed to non-mutual fund window participants and a fee for each trade. These added fees have the potential to make the mutual fund window less attractive for participants.

We believe that an initial fee holiday would alleviate initial roadblocks for participants interested in investing in sustainable or other funds of their choosing. Trustees can then gather more information on usage to determine whether fees are even needed. Participants should have the opportunity to select these options without the added costs.

Participants should also take the opportunity to learn more about sustainable investing. US SIF offers a short introductory online course and educational materials to help participants learn more about incorporating sustainable investments into their savings or retirement plan.

With these suggested improvements, we believe the TSP may experience greater interest from TSP participants and allow them to create the kind of retirement savings vehicle many of them have been asking for.

Lisa Woll is CEO of US SIF: The Forum for Sustainable and Responsible Investment. Bryan McGannon is director of policy and programs for US SIF, both based in Washington. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.