July 15, 2014

What do you get paid? Are you paid fairly for the work you do? How much do you think you should get paid?

How about the leadership in your agency or command? Are they paid fairly?

I’ve heard the debate many times over the years. We don’t get paid enough. We’re over-paid. We could make more in the private sector. We already do. Etc. etc.

Now, what does the leadership of the TSP deserve to be paid, managing as they do over $400 billion of our funds?

While proposed legislation changing the default option for new employees from the G Fund to one of the L Funds has been widely reported, I haven’t seen any reporting on the parallel proposal to increase the pay for the executive director of the TSP.

The proposal is to increase the pay of the executive director to 120% of the salary of the vice president.

The vice president makes $230,700 a year. At 120% of that, the executive director would be paid just over $276,000.

The TSP has grown significantly over the past 25+ years, to now well over $400 billion in assets. That is the basic driver of the proposal: who on Wall Street gets paid less than seven figures to manage over $400 billion? I mean, that’s a big deal no matter how you slice it.

Take BlackRock for example. It manages over $4 trillion in funds worldwide. Its chairman and CEO made $10.54 million in compensation. In fact, of the top five highest-compensated executives, the lowest paid still earned $2.87 million.

And all the members of the Federal Retirement Thrift Investment Board have held or continue to hold senior positions in finance and retirement services, so they know compensation in the private sector well.

An executive having managed over $400 billion in investor assets would be able to command significant compensation in the private sector, no doubt about it.

Of course, on the flip side, who in Washington D.C. manages more than $400 billion and still gets paid less than the VP? How about the Treasury Secretary, who often come from extremely powerful and high-paying positions? Head of the OMB? Or in terms of personnel, director of OPM? How about, for that matter, the chairperson of the Senate Budget Committee, or the chairman of the Committee on the Budget in the House?

And speaking of budgets, the budget for the TSP is actually just under $200 million – quite small for a federal agency. The actual investing of the over $400 billion in assets is outsourced to BlackRock. And all of those funds, moreover, is invested in index funds, which these days is pretty much computerized and commoditized. It’s not like the TSP is its own hedge fund, after all.

So the executive director manages an operation with a budget of under $200 million, which happens to involve overseeing $400 billion in investments.

One solution to pay issues – which impacts not just the executive director but other positions across the board – is to privatize all TSP functions, since index mutual funds in the private sector are at or approaching cost parity with TSP funds. (And there is a greater selection too.) Executives would be compensated accordingly, while participants can continue to invest in low-cost index mutual funds – or other funds as they wish.

That’s not going to happen any time soon. But the next-easiest solution is to enact a “say-on-pay” provision allowing TSP participants to vote on pay for TSP executives. The SEC implemented similar provisions for shareholders of public companies in 2011 – shareholders have a right to vote at least every three years on executive compensation. It seems to be going pretty well.

The European Commission is considering a “say-on-pay” provision as well.

So how about it? Should TSP investors get a “say on pay” too?

(The proposal can be seen here, page 3, top paragraph.)

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