Trump directs Federal Thrift board to halt TSP China investment

The Trump administration directed the Federal Retirement Thrift Investment Board, Washington, to halt plans to shift billions of dollars in retirement assets to an index fund that includes Chinese companies.

At issue is a 2017 board decision to shift the $557.3 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, 2018, TSP's I Fund had $40.7 billion in assets.

After calls from Capitol Hill to reverse course, the board in November decided to move forward and plans to make the shift in the second half of 2020.

But pressure on the board, which oversees the TSP, the retirement system for 5.9 million federal employees and members of the uniformed services, has persisted in recent months and have come to a head in light of the COVID-19 pandemic.

Two letters were sent Monday — one from Larry Kudlow, director of the national economic council, and national security adviser Robert O'Brien to Labor Secretary Eugene Scalia and another from Mr. Scalia to Michael D. Kennedy, chairman of the FRTIB, regarding the I Fund shift.

Mr. Kudlow and Mr. O'Brien wrote that the FRTIB is set to implement the shift "during a time of mounting uncertainty concerning China's relations with the rest of the world, including the possibility that future sanctions will result from the culpable actions of the Chinese Government with respect to the global spread of the COVID-19 pandemic. In view of these considerations, we don't believe that proceeding with the investment of the retirement savings of hardworking federal workers in Chinese companies is prudent."

Mr. Scalia referenced that point and the "national security and humanitarian concerns for the Unities States" in his letter to Mr. Kennedy. "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.

The Department of Labor "has broad investigative and audit authority over the activities of the TSP board of directors and other plan fiduciaries who make investments and operate the plan," a Labor Department spokesman said in an email, which is why Mr. Scalia received a letter from the president's principal economic and national security advisers and why he wrote to Mr. Kennedy.

In his letter, Mr. Scalia added that the board should defer its decision until recently nominated board members are confirmed by the Senate. On May 4, Mr. Trump nominated three people to the five-member board that could lead to a new majority.

Deferring the I Fund shift will "enable a newly constituted board, impaneled with the advice and consent of the Senate, to decide what index — if any — should be selected to replace the current I Fund index," Mr. Scalia said.

A source familiar with the matter said it was their understanding that the administration has the authority to stop the I Fund shift from taking place.

A board spokeswoman declined comment Tuesday. In reaffirming its decision in November, board members and members of the Employee Thrift Advisory Council, which provides advice to the FRTIB, said they have to make decisions based on what's best for their participants and that's what the I Fund shift represents.

Mr. Scalia asked Mr. Kennedy — who is one of three board members that will be replaced if Mr. Trump's nominees are approved — to confirm by "close of business Wednesday" that the board will halt the I Fund shift.

On Tuesday, the board posted a notice that it will hold a meeting Wednesday morning on "investment policy review."