February 15, 2019

TSP administrators are about to rebalance the I Fund…in late 2020.

The I Fund will expand from one based on developed markets – called the “MSCI EAFE” or “Europe, Australasia, Far East” (that is to say, mainly Europe and Japan) – to a total international fund, including pretty much every stock market outside of the United States.

The recommendations were first made in a study by Aon Hewitt and presented to the Federal Retirement Thrift Investment Board (FRTIB) in November 2017. The study was titled the “Benchmark Study for the Thrift Savings Plan,” and it actually reviewed the holdings for four of the five main funds, the C, S, F, and I Funds.

The study recommended keeping the first three funds as they are. But it recommended major changes to the I Fund. The study (which is available here) highlighted that the EAFE index makes up about 59% of world (ex-US) stock markets, but it does not include Canada. (Readers will note that I’ve long advocated for Canada to be included in the I Fund…)

Moreover, EAFE - and the I Fund - do not include emerging markets, which make up another 21% of world/ex-US stock markets. And finally, ex-US international small cap markets are another 14% of possible international holdings.

To remedy this, the study recommended moving to the “MSCI All-Country World ex-US IMI” benchmark index. This, according to the study, would include “99% of investable market large + mid + small cap” securities.

And this, essentially, is what the FRTIB and TSP administrators are setting out to do now. But it’s going to take time.

On December 20, 2018, a “Justification and Approval” notice was posted to FBO.gov noting a “short-term TSP I Fund contract extension” and outlining the new approach to managing the I Fund in the coming years. What is new about the upcoming process is that it will fall under a “multiple managers” setup, under which all of the externally managed funds will be overseen by two investment managers instead of one (with Blackrock and State Street having already expressed interest). Here is the relevant text:

The current TSP I Fund contract, managed by a single external investment manager, will be replaced with the Board directed multi-manager fund structure. FRTIB intends to solicit a new multimanager fund structure requirement through a full and open competition. The short-term TSP I Fund contract extension is being utilized to ensure continuity in the management of the TSP I Fund while the Agency undertakes the competitive process for awarding a new multi-manager fund structure.

Further:

It’s conceivable that the multi-manager RFP process encompassing the four (4) Funds would begin only after an individual procurement and require 12 to 15 months for RFP development, solicitation, evaluation, award, and transition initiation. In total, this could take up to two (2) years [emphasis added].

This is confirmed in the December 2018 FRTIB meeting minutes, that the FRTIB was suspending previously announced plans for the re-competition of the I Fund on a single maanger basis in favor of the multi-manager approach. The meeting minutes also noted that the transition to the new benchmark will wait until assignment of a new primary manager for the I Fund. The administrators therefore did not foresee completion of the transition to the new index until the second half of 2020.

So those interested in investing in the new, expanded I Fund will have to wait until the second half of 2020 at the earliest. (One wonders, given all the major index funds already available, why it should take almost two years to transition to a new benchmark index, but that is a topic for separate discussion…)