After years of controversy, the Federal Retirement Thrift Investment Board, Washington, on Nov. 14 voted unanimously to change the benchmark for its international fund to an index that excludes China and Hong Kong.
The board decided to shift the $770.5 billion Thrift Savings Plan's I Fund benchmark to the MSCI All Country World ex USA ex China ex Hong Kong Investable Market index from the MSCI Europe, Australasia and Far East index.
The new 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, according to an FRTIB news release. This adjustment to the I Fund will more than double the number of countries included in the fund and will increase the number of equities by 700%, the board said, noting that it will work with its fund managers to implement the transition to the new index in 2024.
"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," the board said in the news release.
The old index provided exposure to 798 large- and midcap stocks in 21 developed markets, representing 55% of non-U.S. market capitalization.
As of Oct. 31, the TSP's I Fund had $68 billion in assets.
The decision caps off a lengthy process.
In 2019, the board reaffirmed a 2017 decision to shift the TSP's I Fund benchmark to the MSCI ACWI ex-U.S. Investible Market index. That index was made up of about 8% Chinese companies, according to an Aon Hewitt Investment Consulting study presented to the board in October 2019.
The decision led to stiff pushback from senators in both parties and the Trump administration. Then-President Donald Trump in May 2020 nominated three people to the five-member board that, upon Senate confirmation, could have led to a new majority. At a subsequent meeting that May, the board decided to pause the implementation and let the new board members make the final decision.
The Trump nominees were never considered by the full Senate and President Joe Biden pulled their nominations in February 2021. Biden put forth his own nominees in September and November 2021, each of whom currently serve on the board.
Based on a recommendation from Aon, the board elected to choose a benchmark that excludes China and Hong Kong companies.
Given the asset size of the I Fund, the forced selling or restricted investments could incur higher than average market impact costs due to liquidity challenges, according to an Aon presentation cited in the news release.
"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," Aon said. "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."
Sen. Marco Rubio, R-Fla., who was a driving force in the Senate to get the board to reverse its initial 2017 I fund benchmark shift decision, said in a statement to Pensions & Investments that Nov. 14’s decision is “an important first step to protect service members and federal employees from the board investing funds in Chinese companies dedicated to undermining America’s economic and national security. Unfortunately, the board still has more work to do in scrubbing mutual funds that funnel money to those same Chinese companies.”
In June 2022, the board opened a mutual fund window, which now provides access for eligible TSP participants to invest in thousands of mutual funds. Rubio has raised concerns that some funds have exposure to Chinese companies.
