Testimony on new TSP REIT fund

[TSPAlaska]

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I ran across this article in FedNews Online...

*****BOARD MEMBERS ADDRESS ISSUE OF ADDING REAL ESTATE TO TSP*****
http://www.fednews-online.com/article.pl?id=7787&d=20050421

On Tuesday, two members of the Federal Retirement Thrift Savings Board
spoke to the House Subcommittee on the Federal Workforce and Agency
Organization, addressing the problems posed by the possible addition of
a Real Estate Stock Index Investment Fund to the Thrift Savings Plan.

Board Chairman Andrew Saul reported the new fund proposed in H.R. 1578
would establish an index fund exclusively comprised of Real Estate
Investment Trust securities, which the Board has determined to be "the
wrong fund at the wrong time" for TSP. Saul stated that:


* Investment policy should not be developed one fund at a time on a
case-by-case basis. Sound investment policies can only be developed
comprehensively
* Investment policy should not be developed without considering
fundamental plan design issues. The Board is well aware of the arguments
for overweighting in risk-optimized portfolios, yet including REITs
would represent a departure from the broad asset classes TSP offers that
have been endorsed by Congress in the past
* The Board believes that it is essential to focus participants'
attention on the Lifecycle Funds that will be introduced this summer


The Board unanimously recommends against the addition of an REIT fund at
this time, stressing that consideration must be given to the
appropriateness and investability of any new type of investment, how
well that type of investment complements the current mix of investment
funds, and how it compares with other possible additions or deletions.

The REIT proposal is based on the view that investors could achieve more
diversification by holding a higher percentage of REIT securities than
currently provided in the existing funds. Saul pointed out several
classes of assets that currently have no representation in TSP
investment options and deserve equal consideration to REITs if
additional funds are to be established.

Gary Amelio, the Board's executive director, testified that the Board
had sought advice from major investment consultants, banks, and mutual
fund managers. All of these organizations affirmed that the current TSP
fund menu offered adequate diversification and that additional funds
were not required. Several organizations stated that the current TSP
fund options offered ideal diversification.

Amelio also stressed that adding an REIT fund would result in
significant expenses for all program participants, including those who
choose not to participate in the new fund.

"Some TSP participants have demonstrated a tendency to chase returns,
which could likely result in higher turnover rates for such a fund and
higher transaction costs. Education efforts to counter such behavior are
costly and ineffective. Restrictions on the size and/or frequency of
interfund transfers complicate administration of the Plan and would
negatively affect all TSP participants." Amelio said.

The Board members concluded their remarks indicating that they intend to
obtain additional information and conduct careful analysis.

 

[rokid]

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It makes me wonder about the TSP board. Every one of their assertions is incorrect. In addition, I’d like to know what ‘experts’ they consulted about the adequacy of the currently available fund choices.

REITs would not drive up expenses. Vanguard's REIT fund expenses are .03% higher than their S&P index fund, i.e. hardly significant. In any event, if expensesbecame an issue, TSP could charge higher expenses for more expensive to operate funds - like all other mutual fund families!

If the board were truly concerned about participants chasing returns, they would provide a broader mix of non-correlated funds to support more effective “buy and hold” diversification and increase, from zero, investor education. Specifically, REITS, emerging markets, and precious metals would be very effective diversifiers for the C, S, and I funds. In addition, since REITS pay taxable dividends, they are particularly appropriate for tax deferred accounts, e.g. TSP.

The resistance to any new funds appears to be more about not being able to "walk and chew gum" at the same time. The key quote is "* The Board believes that it is essential to focus participants' attention on the Lifecycle Funds that will be introduced this summer". In other words, TSP is introducing the L Funds and doesn't want the complication of any introducing, or even thinking about, any other new funds. However, without effective investor education, the L Funds just become additionalfunds to trade in and out of.

End of rant! Have a great weekend!:^

 

[Guest]

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I remember back some time before June '04 reading about the creation and the hiring for 3-4 new positions for the TSP board. I remarked to a co-worker that this alarmed me (I am naturally suspicious, particularly of the Bush Administration). I see here in the above posts a possible relationship of my instinctive alarm and what may occur to the structures of our TSP program.

PS Just conjecture