As reported by Pensions & Investments and other news outlets, the Trump administration has ordered the board of trustees of the federal Thrift Savings Plan to cease transitioning from offering TSP participants the current international equity fund based on the index for foreign developed markets — the MSCI EAFE index — to a broader index that includes emerging markets — the MSCI ACWI-ex-U.S. Investible Market index.
U.S. Labor Secretary Eugene Scalia wrote that "at the direction of President Trump, the board is to immediately halt all steps associated with investing the I Fund according to the (new index), and to reverse its decision to invest plan assets on the basis of that international equities index. This now is the only acceptable course."
This creates the bizarre situation in which the leadership of the U.S. — a country whose investment community supposedly revolves around free-market capitalism and principles of financial risk and return — espouses an investment standard that China's Communist Party likewise espouses, as a matter of law.
The fiduciary standards governing the TSP board are patterned on ERISA. The basic standard for the board's trustees is to act "solely in the interest of the participants and beneficiaries" and "for the exclusive purpose of providing benefits to participants and their beneficiaries," according to United States Code Section 8477(b)(1)(A)-(B). That statute also requires trustees to act in accordance with the ERISA prudence standard, which (in shorthand) requires the "care, skill, prudence and diligence" of a "prudent individual acting in a like capacity."
As Vice Chairman James Sauber of the TSP's advisory council put it in late 2019: "We just do not want to let political issues interfere with the decision-making of the board and what investments are available."
Consistent with that mandate, the board decided in 2017 and reaffirmed late last year that shifting from an EAFE index fund to an ACWI-ex-U.S. fund was the preferable investment approach. This comported with the advice of Aon Hewitt Investment Consulting, which cited numerous investment reasons for the shift, including broader market exposure (including Canada, as well as emerging markets such as China), sufficient liquidity, a higher historic Sharpe ratio and an improved expected risk/return profile. Aon also noted that fiduciaries of comparable funds across the U.S. invested in emerging markets, including the 401(k) plans of the 10 largest U.S. companies and the 10 largest federal contractors, as well as the 20 largest defined benefit public plans and the six largest target-date fund providers.
Now turn to China in the year 2000. Beginning in that year, I was one of a few U.S. and British professionals who advised the Chinese State Council on Western models of fiduciary responsibility in investing as it considered developing its own laws on that subject. The Chinese government issued draft provisions governing investing by a range of trusts, including pension funds, and later finalized that into a national trust law. The draft reflected a fiduciary standard comparable to ERISA in important ways, but departed in one pivotal respect: It required fiduciaries to act solely in the interest of trust beneficiaries and in light of prudent practices, but without impairing the public interest or the interests of the state. Commenting on that latter clause in 2000, I wrote:
"The draft law also is unclear regarding trustee action which does not support programs that the government favors. … On the one hand, the draft law provides that the trustee must act in the maximum interest of the beneficiary but on the other hand, Article 4 states that parties to a trust 'may not impair national, social or public interests.' In many countries, public pension funds struggle to balance the interests of the beneficiaries in sound, productive investments (designed to secure and maximize their retirement security) vs. the interest of the government at large."
As finally adopted in 2001, Chapter I, Article 5 of the Trust Law of the People's Republic of China reflected a standard partly comparable to ERISA's exclusive purpose and prudence principles, but additionally provides that trustees may not "impair the interests of the State and the public."
Now back to current-day America. Wanting to block the TSP from investing in an ACWI-ex-U.S. index fund, Sen. Marco Rubio characterizes as "unconscionable" the board's decision "to transfer the retirement savings of our service members and federal employees to the Chinese Communist Party. The board's refusal to act in the best interests of the United States will not go without consequences." (emphasis added)
Sounds to me like the "impairment" provision of the Chinese Communist national trust law.
Samuel “Skip” Halpern is sole member, Prudent Expert LLC, Luray, Va. 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.
