While the Roth TSP has received the lion’s share of attention since the June 2009 enactment of the “Thrift Savings Plan Enhancement Act,” the legislation also empowered the Federal Retirement Thrift Investment Board (FRTIB) to allow a “mutual fund window” if “the Board determines that such addition would be in the best interests of participants.”
A mutual fund window would allow TSP participants to invest some of their contributions in mutual funds outside the ten already offered in the TSP. This could greatly expand the number and types of investments available to TSP participants. Those who opt to use this window – if it is ever established – would have to pay for any additional costs of the mutual funds, however. As the legislation reads, “[t]he Board shall ensure that any expenses charged for use of the mutual fund window are borne solely by the participants who use such window.” Presumably, government matching contributions would be invested solely in the TSP funds, just as matching contributions will be invested in the regular TSP even when participants choose the Roth TSP option.
A mutual fund window will go a long way to answering one of the lingering criticisms of the TSP, that the fund choices are too narrow.
For example, congressional representatives from time to time submit legislation for the creation of new investment funds in the Thrift Savings Plan. During the early 2000s, there was a lot of discussion about the creation of a Real Estate Investment Trust (REIT) fund. In April 2005, Rep. Jon Porter, a Republican from Nevada, and Rep. Chris Van Hollen, a Democrat from Maryland, introduced the “Real Estate Investment Thrift Savings Act” directing the establishment of a REIT fund. A companion bill was introduced in the Senate on April 13, 2006.
In introducing the legislation, the sponsors thought that TSP participants would be able to enjoy some of the gains in the real estate market, which of course was booming at the time. These bills were introduced virtually at the peak of the real estate bubble, so had the bill been enacted, REIT fund investors would have experienced significant losses in the subsequent years. The Vanguard REIT Index ETF fell from a high of over $85 in early 2007 to a low of $21 in early 2009, for example.
Separately, in March of last year, Rep. Ron Paul of Texas introduced the “Thrift Savings Fund Improvement Act,” which called for the establishment of a “Precious Metals Investment Fund” within one year of passage of the legislation. The new fund would “be invested in physical gold, silver, or platinum bullion (rather than any mining company shares, certificates, derivatives, or futures options),” according to the legislation. Moreover, the precious metals “shall be stored in a vault in a federally chartered or State chartered bank.” Thrift investors would have their own version of Ft. Knox under this legislation. The bill was sent to the House Committee on Oversight and Government Reform and has lingered there since.
Rep. Paul introduced a similar bill in September 2003, together with Rep. Walter Jones of North Carolina and Colorado’s Rep. Marilyn Musgrave. The 2003 bill was likewise sent to the House Committee on Oversight and Government Reform. (You can read the most recent TSP Precious Metals Investment Fund legislation here.)
And TSP administrators have sponsored studies of the advisability of introducing new funds from time to time. In October 2006, Ennis Knupp and Associates published a lengthy study on a range of possible TSP funds in addition to the ones currently available. Titled “Investment Option Review for the Federal Thrift Savings Plan,” it reviewed investment options such as a REIT fund, an emerging market stock fund, a non-U.S. small-cap stock fund, a high-yield bond fund, and a non-U.S. bond fund, among others. The report essentially concluded that the options in the TSP were sufficiently diverse enough that additional fund options would be unnecessary. Several years later Ennis Knupp conducted a more focused study in 2009 on the possibility of changing the I Fund to include emerging markets and Canada in addition to developed markets in Europe and Asia.
A mutual fund window would go a long way to meeting demand from those TSP participants who want access to alternative investments without having to create any additional funds within the TSP.
Judging from monthly meeting minutes, however, opinion among board members and members of the Employee Thrift Advisory Council (ETAC) is decidedly mixed. In August 2011, Tom Trabucco, director of external affairs for the FRTIB, pointed out that FRTIB members voted 2 to 2 (with one absent - how convenient!) on the mutual fund window, and “ETAC members were similarly divergent in their opinions.” He made these comments after Executive Director Greg Long testified at the House Subcommittee on Federal Workforce on July 27th, where Congressman Stephen Lynch expressed continued interest in the mutual fund window. The topic has not been addressed in the minutes since, however, most likely because the board is preoccupied with final preparations for the Roth TSP.
Click “Thrift Savings Plan Enhancement Act of 2009” to access the full legislation. It was part of the “Family Smoking Prevention and Tobacco Control” legislation, with the mutual fund window section located on page 1854.