<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:23944.wais]
H.R. 1578, REAL ESTATE INVESTMENT TRUSTS [REITS]: CAN THEY IMPROVE THE
THRIFT SAVINGS PLAN?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON THE FEDERAL WORKFORCE
AND AGENCY ORGANIZATION
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
ON
H.R. 1578
TO AMEND TITLE 5, UNITED STATES CODE, TO PROVIDE FOR A REAL ESTATE
STOCK INDEX INVESTMENT OPTION UNDER THE THRIFT SAVINGS PLAN
__________
APRIL 19, 2005
__________
Serial No. 109-79
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
______
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada BRIAN HIGGINS, New York
KENNY MARCHANT, Texas ELEANOR HOLMES NORTON, District of
LYNN A. WESTMORELAND, Georgia Columbia
PATRICK T. McHENRY, North Carolina ------
CHARLES W. DENT, Pennsylvania BERNARD SANDERS, Vermont
VIRGINIA FOXX, North Carolina (Independent)
------ ------
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on the Federal Workforce and Agency Organization
JON C. PORTER, Nevada, Chairman
JOHN L. MICA, Florida DANNY K. DAVIS, Illinois
TOM DAVIS, Virginia MAJOR R. OWENS, New York
DARRELL E. ISSA, California ELEANOR HOLMES NORTON, District of
KENNY MARCHANT, Texas Columbia
PATRICK T. McHENRY, North Carolina ELIJAH E. CUMMINGS, Maryland
------ ------ CHRIS VAN HOLLEN, Maryland
Ex Officio
HENRY A. WAXMAN, California
Ron Martinson, Staff Director
Chris Barkley, Professional Staff Member
Reid Voss, Clerk
Mark Stephenson, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on April 19, 2005................................... 1
Text of H.R. 1578................................................ 6
Statement of:
Foley, Hon. Mark, a Representative in Congress from the State
of Florida, Co-Chair of the House Real Estate Caucus; and
Hon. Richard E. Neal, a Representative in Congress from the
State of Massachusetts, Co-Chair of the House Real Estate
Caucus..................................................... 21
Foley, Hon. Mark......................................... 21
Neal, Hon. Richard E..................................... 23
Saul, Andrew M., chairman, Federal Retirement Thrift
Investment Board; and Gary A. Amelio, executive director,
Federal Retirement Thrift Investment Board................. 28
Amelio, Gary A........................................... 36
Saul, Andrew M........................................... 28
Wechsler, Steven, president and CEO, National Association of
Real Estate Investment Trusts; Dr. Roger Ibbotson,
chairman, Ibbotson Associates, professor of finance, Yale
University; and Amy Schioldager, managing director, head of
U.S. indexing products, Barclays Global Investors.......... 54
Schioldager, Amy......................................... 96
Wechsler, Steven......................................... 54
Letters, statements, etc., submitted for the record by:
Amelio, Gary A., executive director, Federal Retirement
Thrift Investment Board, prepared statement of............. 38
Cummings, Hon. Elijah E., a Representative in Congress from
the State of Maryland, prepared statement of............... 113
Davis, Hon. Danny K., a Representative in Congress from the
State of Illinois, prepared statement of................... 11
Ibbotson, Dr. Roger, chairman, Ibbotson Associates, professor
of finance, Yale University, prepared statement of......... 86
Neal, Hon. Richard E., a Representative in Congress from the
State of Massachusetts, Co-Chair of the House Real Estate
Caucus, prepared statement of.............................. 24
Porter, Hon. Jon C., a Representative in Congress from the
State of Nevada, prepared statement of..................... 4
Saul, Andrew M., chairman, Federal Retirement Thrift
Investment Board, prepared statement of.................... 31
Schioldager, Amy, managing director, head of U.S. indexing
products, Barclays Global Investors, prepared statement of. 98
Wechsler, Steven, president and CEO, National Association of
Real Estate Investment Trusts, prepared statement of....... 56
H.R. 1578, REAL ESTATE INVESTMENT TRUSTS [REITS]: CAN THEY IMPROVE THE
THRIFT SAVINGS PLAN?
----------
TUESDAY, APRIL 19, 2005
House of Representatives,
Subcommittee on Federal Workforce and Agency
Organization,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:02 p.m., in
room 2154, Rayburn House Office Building, Hon. Jon C. Porter
(chairman of the subcommittee) presiding.
Present: Representatives Porter, Davis, Cummings, Norton,
and Van Hollen.
Staff present: Ron Martinson, staff director; B. Chad
Bungard, deputy staff director and chief counsel; Chris Barkley
and Shannon Meade, professional staff members; Reid Voss,
legislative assistant/clerk; Patrick Jennings, detail from OPM
serving as senior counsel; Michelle Ash, minority senior
legislative counsel; Mark Stephenson and Tania Shand, minority
professional staff members; and Teresa Coufal, minority
assistant clerk.
Mr. Porter. Usually, when it is this quiet at my house when
I get home, it is usually because the kids have done something
wrong. So let me say welcome, and I know that is not the case.
I thank you all for being here. I would like to bring the
meeting to order. This is a hearing today on the Real Estate
Investment Trusts and whether they can improve the Thrift
Savings Plan.
Since we do have a quorum present, we will bring the
meeting to order. Good afternoon. As you know, last Wednesday
I, along with Representative Chris Van Hollen and
Representative Tom Davis, our chairman of the Government Reform
Committee, introduced the Real Estate Investment Thrift Savings
[REITs] Act, H.R. 1578. As a Member of Congress who represents
a good share of major growth area in real estate in Nevada and
Las Vegas, I think it is very important we look at this issue
today, and that is why we brought the bill forward, as an
option as investment for the program.
As you know, there are many other programs, not unlike the
401(k) plans. Federal employees are given choices in handling
their own retirement planning through the Thrift Savings Plan.
The Thrift Savings Plan, however, is lagging behind the private
sector in the amount of options it offers its employees in its
defined contribution plan. The TSP offers 5 options; whereas
the private sector, in some cases, as an average can have close
to 16 options.
What we are talking about today is a simple concept and it
is called diversification. Basic economic principles dictate
that investors should not place all of their eggs in one
basket, but must spread their money and risk among different
types of assets.
A few years ago, during the tech bubble collapse, many
Federal employees experienced setbacks in their investment
portfolios and did not have the option to invest substantially
in REITs. Federal employees should not be left out in the cold.
Adding a Real Estate Investment Trust fund option to the TSP is
the next logical step. With its resilient earnings and lower
volatility, real estate provides a sound investment over the
long haul, such as investment in valuable diversification tools
providing the possibility of strong returns and risk reduction.
The demand for Real Estate Investment Trusts among 401(k)
investors has been robust, as they seek to diversify their
portfolios. In response, the Real Estate Investment Trust
stocks are increasingly being added as an investment option by
the private sector in their 401(k) plans, including employers
such as IBM and General Motors.
It is no wonder. As this month's Forbes reports, in the
past 5 years, Real Estate Investment Trusts have outperformed
the Standard & Poor's 500, up 19.1 percent annually from the
Bloomberg Real Estate Investment Trust Index, negative 3.2
percent for the Standard & Poor's. Moreover, from 2000 to 2003,
when the highest total rate of return on any stock fund in the
TSP--the C, the S, or the I Funds--was 1 percent, the rate of
return on the Real Estate Investment Trusts were near plus 20
percent.
I mention the recent success of the Real Estate Investment
Trusts earnings not to raise expectations that the Fund will
produce this extraordinary result every year. Rather, it shows
that if a Federal employee had invested in a Real Estate
Investment Trust Fund in that period of economic downturn, he
or she could have avoided what for many was a financial
disaster right on the edge of their retirement plan.
I would add that the Thrift Savings Board holds the view
that the Real Estate Investment Trusts are an industry and
should be viewed like energy, technology, and the like.
Interestingly, Barclay's Global Investors, which administers
four of the five TSP Funds for the TSP Board, will state in
their testimony before us today that the Real Estate Investment
Trusts real estate are not an interest, but rather, an entirely
separate asset class.
And while I am on that subject, let me also compliment the
TSP Board for its work. I had a chance to read the backup
testimony, and appreciate the expense ratios and what you have
done. Although we may not agree on this issue, let me applaud
you for the work that you are doing. We appreciate it very
much.
I truly believe that adding a Real Estate Investment Trust
to the TSP is a step forward in bringing the benefits of
diversification to the TSP and thus enhancing the retirement
benefits for all of our hardworking Federal employees.
With that said, I know that there are differences of
opinion, as I mentioned, on what the TSP should look like. I
look forward to hearing from all of our witnesses today and
thank you for agreeing to join us.
[The prepared statement of Hon. Jon C. Porter and the text
of H.R. 1578 follow:]
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Mr. Porter. I would like to now recognize the ranking
minority member of the committee, Mr. Davis. Welcome, Mr.
Davis.
Mr. Davis. Thank you very much, Mr. Chairman. I appreciate
it.
Chairman Porter, members of the committee, we are here to
discuss a legislative proposal, H.R. 1578, the Real Estate
Investment Thrift Savings Act. H.R. 1578 would add a Real
Estate Investment Trust to the Thrift Savings Plan. The TSP is
a key component of the Federal Employees' Retirement System
[FERS]. It is a defined benefit retirement plan similar to the
401(k) plans provided by many employers in the private sector.
The income that a retired worker receives from the TSP will
depend on the balance in his or her account.
For this reason, I am concerned about the process--how,
when, and why--any investment funds, including REITs, are added
to the TSP. The act that established the TSP specifically
states that the Federal Retirement Thrift Investment Board is
to set investment policies and administer the plan ``solely in
the interest of the participants and beneficiaries.''
Indeed, when the Board last added new funds to the TSP, as
fiduciaries and managers of the TSP, the Board studied various
investment options and transmitted a legislative proposal to
Congress that authorized the addition of the S and I Funds to
the TSP. Representative Connie Morella introduced the
legislation, and it was enacted on September 30, 1995. This is
significant because, at this time, the Board and the Employee
Thrift Advisory Council do not support adding REITs to the TSP,
and the Board has not submitted a legislative proposal
recommending that REITs be included in the TSP.
The process by which funds are added to the TSP is
important because it goes to the heart of Congress' intent when
it created the TSP. In reviewing the legislative history for
the establishment of the TSP, one will find this statement: ``A
great deal of concern was raised about the possibility of
political manipulation of large pools of thrift plan money.
This legislation was designed to preclude that possibility.''
It goes on to say, ``The committee considered permitting
any qualified institution to offer employee specific investment
vehicles. However, the committee rejected that approach for a
number of reasons. First, there are literally thousands of
qualified institutions who would bombard employees with
promotions for their services. Also, even qualified
institutions go bankrupt occasionally and a substantial portion
of an employee's retirement benefit would be wiped out. This is
in contrast to the diversified fund approach which could
survive a few bankruptcies.''
It is clear that Congress intended to isolate the TSP from
political manipulation by creating the Board and emphasizing a
diversified, broad-based indexing fund approach for the TSP.
Congress envisioned exactly what is happening today, and I do
not think we should stray too far from the principles Congress
laid out in 1986 when the TSP was created.
Given the political realities, however, I strongly
recommend that the Board conduct a comprehensive study of
various investment funds, including REITs, and submit a
legislative proposal to Congress recommending what funds, if
any, should be added to the TSP.
Again, I thank you for calling this hearing and look
forward to the witnesses, and I yield back any additional time.
[The prepared statement of Hon. Danny K. Davis follows:]
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Mr. Porter. Thank you.
Congresswoman, do you have an opening statement?
Ms. Norton. Mr. Chairman, I am intrigued by this hearing,
and thank you for calling this hearing, because I think it
opens up not only an option, but it opens up the opportunity
for members to find out, for example, why--I think there are
good reasons why--this fund is lacking in the kind of
diversification that we find in the private sector. But I need
to know why.
I am a big supporter of the TSP. Mr. Chairman, with such a
bipartisan bill, I hope you will forgive this partisan note. I
would like us to have more hearings like this about how to
encourage employers and employees to promote savings for
retirement in the way the Thrift Savings Plan does, as opposed
to yanking it out of Social Security. So I am really for
enhancing the plan to the extent that is consistent with what
the Board and the Advisory Board, whose job it is to sit on top
of all this, find to be prudent.
Off the top of my head--and we all have to understand that
in Congress it is literally off of our heads--you say to me
invest in real estate. I said you have me. I am from the school
that always believed that investment in real estate and land
was more solid than the stock market. This shows how much I
know. I am also from the generation that is still a victim of
the dot com era--I used to have a shirt back then--but I do
think we all learn that what looks good in one period may not
be as good in another, which is why the TSP has a reputation
for being conservative.
I have to say, Mr. Chairman, I was intrigued by your own
opening statement, by what you indicated real estate had done
during these very down years, 2000-2003, while we were down in
the dumps. That is, what I want to know is, what happened to
us? I thought we were supposed to be conservatively invested
during that period, and look at that. The difference that you
speak of, 20 percent there, and all of us who were invested in
TSP were at 0.1 percent. I don't know where the conservatism
got us in that regard, because that is where I would have
expected us to have done better precisely because the TSP is,
as we all know, run in a conservative fashion.
So this might be the right thing to do, and, Mr. Chairman,
I think you are doing the right thing, that is to say, having a
hearing before we jump. This Board consists of fiduciaries,
including their executive director, and I asked my staff to
find out something about this Board. I wanted to know if this
Board was in any way political, and they tell me that the
members don't have to be divided by party; they are all
appointed by the current President. The Board is nonpartisan.
Of the five Board members, three were appointed by President
Bush, one was recommended by Speaker Hastert, and the other was
recommended by Senator Stevens. They have staggered terms.
So when this Board tells me go slow, I think we all ought
to listen. At the same time, I am concerned if there is less
diversification since, again, the standard gospel is that the
more diversification the better, of course. There can be a
point where diversification, I suppose, counts, but on this
matter, whereas my instinct would be to say why not, I think,
Mr. Chairman, that I may be the conservative and you may be the
liberal here, that I would like first to hear from the Board
before I tell them to risk my money in anything.
So I appreciate this hearing, because it allows us to hear
from them and from other witnesses on a very intriguing
subject, and I appreciate that you have called this hearing for
that reason.
Mr. Porter. Thank you very much for the kind comments. I,
like you, am anxious to hear the testimony and have an
opportunity to ask some questions ourselves.
I would like to ask unanimous consent that all Members have
5 legislative days to submit written statements and questions
for the hearing record, and any answers to the written
questions provided by the witnesses also be included in the
record. Without objection, so ordered.
I ask unanimous consent that all exhibits, documents, and
other materials referred to by Members and the witnesses may be
included in the hearing record, and that all Members be
permitted to revise and extend their remarks. Without
objection, so ordered.
I ask unanimous consent that written statements from IBM
and the Employees' Thrift Advisory Council be submitted for the
record. They were invited to speak today but were unable to do
so. So, without objection, that is also so ordered.
And it is the practice of the committee to administer the
oath to all witnesses, but we will wait a moment and introduce
our first panel. Good friends, we appreciate your being here.
First, I would like to introduce Mr. Mark Foley,
Congressman from Florida. And with him is Congressman Richard
Neal, Representative from Massachusetts. These men are co-chair
of the House Real Estate Caucus.
So I begin with Mr. Foley. You are recognized for 5
minutes.
STATEMENTS OF HON. MARK FOLEY, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF FLORIDA, CO-CHAIR OF THE HOUSE REAL ESTATE
CAUCUS; AND HON. RICHARD E. NEAL, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF MASSACHUSETTS, CO-CHAIR OF THE HOUSE REAL
ESTATE CAUCUS
STATEMENT OF HON. MARK FOLEY
Mr. Foley. Thank you very much, Mr. Chairman. My fellow
colleagues and members of the subcommittee, thank you for
inviting me here today to testify in favor of the Real Estate
Investment Thrift Savings Act ``REITs Act.'' As co-chairman of
the Congressional Real Estate Caucus, I strongly support this
effort to bring the explosive growth potential of the real
estate market to over 3 million Federal workers and military
personnel that participate in the Thrift Savings Plan.
Chairman Porter's bill will increase the investment options
available to Federal employees and enhance the retirement
security of the Federal work force. In fact, the success of
this option in the TSP could act as a model for its expansion
into private sector employer-sponsored retirement plans.
Real Estate Investment Trusts have a proven record of
success, operating portfolios of investment-grade, income-
producing commercial, residential, and industrial real estate.
REITs derive a large portion of their value and most of their
reliable income from the rents produced by these tangible
assets.
And because REITs pay out virtually all of their income to
shareholders, as required by law, their yields are much more
impressive than many of the other investment products. In fact,
non-industry research has shown conclusively that returns from
real estate investments are much higher than those from other
investments.
More recent research has shown that investment returns from
REITs and the returns from other stocks and bonds make REITs an
attractive addition to an individual investor portfolio as well
as those of institutional investors. As a result, more and more
financial experts are recomending that retirement savings be
diversified into stocks, bonds, and real estate.
Until 2001, when the S Fund and the I Fund were added, the
TSP contained only three options: the C, the G, and the F
Funds. All three were considered to be low-risk investment
options over the long term, but the plan was insufficient for
proper diversification and so other funds were added. Now is
the time to further expand the TSP by adding a REIT fund to
those options already available.
Again, subject to the discretion of the investor, myself
included, I have diversified my account to all current five
funds in thrift savings, and I would welcome the chance,
personally, to be able to have a sixth option.
Research by the Federal Retirement Thrift Investment Board,
which administers the Thrift Savings Plan, shows that the
number of investment options in private sector 401(k) plans
continues to increase. The Board reported that the percentage
of private sector companies offering 11 or more options to
their employees has risen to nearly 70 percent. On the other
hand, the percentage of companies offering five or less
options--the TSP currently has five options--has dropped to
about 1 percent. This makes the Thrift Savings Plan somewhat
out of step with the private sector retirement plans.
REITs provide the benefit of diversification and have a
proven long-term performance. The old adage of don't place all
of your eggs in one basket certainly holds true today. I have
always invested a portion of my mother's own personal
retirement savings in Real Estate Investment Trusts because I
believe them to be not only safe, but a prudent way in which to
diversify her own portfolio. I trust them for my mother. I hope
I have the trust to be able to invest them myself. I don't, as
I say, just recommend these to others; I have invested in my
own personal account as well.
Again, I reiterate my support for the chairman's
legislation and look forward to its speedy consideration by the
full House of Representatives.
Mr. Porter. Thank you, Congressman. Appreciate your
comments. And my best to your mother. Take care of your mom.
Mr. Foley. She is happy, she has a new pope today. She is
pleased.
Mr. Porter. Yes, I am sure she is. Give her our best.
Mr. Foley. Thank you.
Mr. Porter. Next, Congressman Neal.
STATEMENT OF HON. RICHARD E. NEAL
Mr. Neal. Thanks very much, Mr. Chairman. I want to also
join with my friend, Mark Foley, another son of Massachusetts.
Of course, one of the reasons that I have defended Social
Security so arduously is because of your mom. So I am looking
out for her as well as the rest of my constituents of
Massachusetts.
Mr. Foley. Thank you.
Mr. Neal. Mark is, I think, the second chairman I have
served with on the Real Estate Caucus. I do want to thank you
for taking the time to do it, because it really is worthwhile.
Adding a Real Estate Investment Trust [REIT], to the TSP
would give Federal workers the opportunity to achieve greater
diversification of their investment portfolios, potentially
making their investments more stable and more secure.
Retirement savings, as we all know, given the debate that is
taking place across the country even as we speak, really are a
sacred trust. The individuals responsible for designing and
administering these plans uphold a precious responsibility:
that when people who have worked hard all of their lives reach
retirement, the funds that they have invested will be there to
sustain them for the next chapter of their life.
When we think about adding another fund to TSP, we should
carefully consider a variety of issues, such as whether the
dividend income is dependable, long-term performance, whether
it is workable administratively, costs associated, and so
forth. But the bottom line question that we need to focus on is
whether it will help Federal workers achieve retirement
security. Is it a good investment tool for them? In the case of
REITs, the answer is clearly yes.
Recent history has shown us too many heartbreaking examples
of what can happen when people fail to diversify their
retirement savings. My clearest memory of Enron and Worldcom
scandals is of the interviews with former employees who were
left wondering how they would manage after their companies'
implosions also took down their retirement savings, and we
should never forget that here in Congress, what happened in
those instances. It is an extreme example, but it is an
important lesson in why workers should be encouraged not to put
all of their eggs in one basket.
A REIT investment option would give Federal employees one
more opportunity to achieve meaningful diversification of their
retirement portfolios. Researchers have determined that returns
on real estate investments are appreciably different than the
yields from other forms of investment. For example, when the
stock market is falling, it isn't necessarily the case that
REITs would also be declining. Institutional investors
recognize this and routinely include real estate in their
portfolios.
Mr. Chairman and members of the committee, I believe REITs
would offer Federal workers an outstanding investment
opportunity. They combine reliable income with excellent long-
term performance and they offer outstanding means of
diversifying workers' retirement portfolios. And as this
debate, that surely is to captivate us for much of the rest of
the year over retirement savings, I think that we might help to
set in position a model for what retirement plans ought to look
like for the American people.
[The prepared statement of Mr. Neal follows:]
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Mr. Porter. Thank you very much, Congressman. Appreciate
your testimony.
And to both of you, I know for years you have been
monitoring and working closely with real estate across the
country, and we appreciate your expertise today.
I am not sure if there are any questions from the panel.
Mr. Davis. Just one.
Gentlemen, thank you both for your testimony and for your
articulation of the importance of this legislation and what it
will, in all likelihood, do for those of us who participate in
it.
Obviously, we are always looking to make sure that
investments are as safe and as secure as they can possibly be.
An employee could actually put all of their investment into one
of these plans, and, of course, if something should happen to
it, they could also lose all of their investment. Would you
suggest that there might be some restriction on that as a
safeguard?
Mr. Foley. Well, I like to caution everyone that you have
to diversify. I don't like to put percentages on any particular
investment portfolio, because you may deny that individual who
has knowledge of the marketplace from gaining substantial
yields on investment.
In my particular case, though, I found my way to diversify,
because there are going to be good years in equities, there are
going to be some very bad years. I remember 1999, 2000, and
2001. But with dividend-paying stocks, with Real Estate
Investment Trusts, with a mixture of bonds and fixed income,
and also doing some things like mutual funds, the average
investor can insulate themselves.
I would always be willing, though, to look at some caps on
each individual account, because I do think we saw a lot of
people in 1999, prior to the meltdown, watching CNBC every 5
minutes, thinking they could outsmart the market and better
return investments to their portfolio. Sometimes greed needs to
be reined in with logic.
So I always like to see a balanced approach. Again, the old
adage--it may be simple--don't put all of your eggs in one
basket seems high praise to people who choose a multitude of
paths in which to invest.
Mr. Neal. It is a great question, and I think that it is
the lead-in to part of the Social Security debate. I think that
is why the certainty of Social Security becomes so important at
a date that is predictable. But most importantly, I think this
is a lesson that is lost because we forget sometimes of what
institutional memory means in this town. I came to Washington
in the middle of the S&L crisis, and I watched people sit
across the desk from me in my constituent office back in
Springfield who didn't know there was a $100,000 on FDIC.
And since an anecdote is such a powerful part of our public
lives, I think it always will stand out for me the woman who
was trying to raise twins that were retarded, and she had saved
$240,000, and came to my office asking how she could get her
money back. They were only going to guarantee $100,000.
This is what I think we have to keep perspective on in this
debate over retirement savings. If we were sitting here 10
years ago, the same people that would be saying today that it
is easy to take this cautious approach to investment, 10 years
ago they would have been saying to us how can you not get into
the dot com investment opportunities. They would have been
assuring us look what has happened; it is guaranteed forever.
Who listens to them any more?
And my point is that I think is such a sound part of
investment strategy, as Mark has done a good job of outlining.
There is nothing wrong with some risk, but there ought to be
some certainty too, and that is how we would balance it.
So I think Mr. Davis asks a very, very appropriate
question.
Mr. Foley. I guess I could ask a rhetorical one, then.
Should the Social Security recipients be all invested in one
fund, and that is T bills? And that is one of the questions we
would like to explore. I agree there are some inherent risks.
My thrift savings account, again, I have the fixed income, the
Government bond; C Fund equity; S Fund, small cap; I Fund,
international.
I have been here 10 years. Taking all of those years,
including the horrible years we suffered, in the most
conservative investment I am still at 5.6 percent annualized;
the most aggressive, in the C Fund, I am at 11.6 percent
annualized. Spread out among those portfolios, I have earned
significantly more than we have been able to earn for the
Treasury for Social Security.
My last analogy will be my constituents. I represent the
fifth largest senior population in America, so this is a very
important debate for me. Those very same constituents will
drive 3 miles if the CD offered at this bank is one-eighth of a
point higher. With their own money they shop prudently, they
look for yield and return, sometimes toasters. But at the end
of the day they are able to maximize their income by some
diversification.
We understand Social Security is a very complexing and
concerning equation. When my grandmother died, all she had was
Social Security and Medicare. My job as a member of the Ways
and Means Committee is to make sure, whatever we do, people
like my grandmother will rest in peace and those who are still
alive will have the peace of mind knowing it is a solid
program.
Mr. Davis. Well, I thank you both, and it seems to me that
we are saying that this isn't necessarily for the high-rollers,
that this is for security, in a sense. And I think that both
Social Security, as well as the TSP, requires a certain amount
of looking at, as well as analysis and education, and I think
some people take the position nothing ventured, nothing gained,
or they take the position the greater the risk, the greater the
reward. And I think education becomes the key, and I thank you
both.
Mr. Neal. Mr. Davis, could I comment on that? You are
absolutely right, but I just want to harken back to that point
that I made about dot coms. The same forces in this town that
were agitating for expanding the opportunity of the stock
market and Social Security a decade ago, they would have been
agitating to put this money in the thrift savings account into
more aggressive opportunities. They are gone, and I think that
is what we have to be mindful of.
I think the anecdote that Mark used is right on target: his
grandmother. All she had was Social Security and Medicare. And
I think that, with us, adding on opportunities for people,
again, emphasizing the term add on, makes a lot of sense, but I
hope that we don't forget the world of the dot com bust,
Worldcom, Enron, and the S&Ls.
Mr. Davis. Thank you.
Mr. Porter. Well said. Thank you, gentlemen. Appreciate
your testimony.
As is customary for the committee, we would now like to
perform the oath for all witnesses, administer the oath. So if
all the witnesses would please stand.
[Witnesses sworn.]
Mr. Porter. Let the record reflect all the witnesses have
answered in the affirmative. Please be seated.
I would like to call on our second panel, Mr. Saul and Mr.
Amelio.
For some of you that have not attended any of my
subcommittee hearings, I have jokingly always said we are going
to meet in Las Vegas next year. Let me assure you that we have
a dry heat in Las Vegas, and we appreciate that it is warming
here, but we kind of like the dry in the west. Welcome.
Mr. Saul. I accept the invitation.
Mr. Porter. Well said. Thank you.
First of all, the Honorable Andrew Saul is chairman of the
Federal Retirement Thrift Investment Board. Would you like to
present your testimony?
STATEMENTS OF ANDREW M. SAUL, CHAIRMAN, FEDERAL RETIREMENT
THRIFT INVESTMENT BOARD; AND GARY A. AMELIO, EXECUTIVE
DIRECTOR, FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
STATEMENT OF ANDREW M. SAUL
Mr. Saul. Thank you, Mr. Chairman.
Good afternoon, Mr. Chairman and members of the
subcommittee. My name is Andrew Saul, and I am the chairman of
the Federal Retirement Thrift Investment Board. The Board
administers the Thrift Savings plan for Federal employees and
members of the uniformed services.
I am accompanied today by Gary Amelio, the Board's
Executive Director. My four fellow Board members and I serve in
a part-time capacity. Gary serves as the full-time Chief
Executive Officer of the agency. The five Board members and the
Executive Director are established by statute as the plan
fiduciaries and, as such, are required to act solely in the
interest of Thrift Savings Plan participants and beneficiaries.
When Gary and I last appeared in this room to present
testimony in July 2003, we were newly appointed to our
positions and in the midst of implementing a new TSP
recordkeeping system. In response to concerns expressed by
Committee Chairman Tom Davis and other Members, I provided
assurances that the new system would dramatically improve
service to participants. This has been done. Transactions which
used to take up to 6 weeks are now executed each day. The
ThriftLine queues have been eliminated. Web-based access has
been dramatically expanded and operates in less than a third of
the pre-conversion time, and the transaction capacity has been
increased exponentially.
After implementing the new system, the Board approved
Gary's plan to continue to drive service levels up and costs
down on all fronts. The TSP data center was upgraded for speed
and capacity tenfold and a backup facility which can be
activated within hours to provide seamless service has been
brought on-line. We instituted a parallel call center to
improve response times and ensure uninterrupted service during
emergencies.
Calls are now routinely answered within the service
standards of the largest and best private sector providers. For
the first time we are in the process of soliciting bids for
recordkeeping services, thus ensuring that participants are
getting the best quality and price the competition can secure.
Agency staff has been reduced by 10 percent through attrition
and our budget has been reduced by $15 million, about 14
percent. This is especially important since participants pay
the costs of running the plan and these savings all accrue to
their bottom line account balances.
The total cost of the TSP for plan participants was down to
6 basis points or 60 cents per $1,000 of account balance in
2004. This includes both the asset management and
administrative expenses. Gary is promising to bring costs down
even further, perhaps by another 15 percent, this year. And, by
the way, the Board will hold him to that. In terms of industry
comparisons, we are off the charts when it comes to preserving
participants' funds in their accounts rather than spending them
on unnecessary administrative expenses or investment fees.
We have aggressively pursued our statutory obligation to
develop policies which are suitable for long-term investment.
We have reviewed the performance of the current TSP investments
each calendar quarter and have expanded ongoing efforts to
remain current on industry practices. The other Board members
and I have conducted due diligence site visits to our major
vendors. Where appropriate, Gary and the agency staff have met
with industry and government officials, conducted site visits
at facilities run by the major national financial service
providers, and kept the Board members fully appraised.
At Gary's recommendation, we have established the most
important new TSP investment policy in at least 10 years by
approving five new Lifecycle Funds for the TSP. These funds,
which debut this summer, will provide participants with the
benefits of professional asset allocation. Consistent with the
fundamental policy twice approved in statute by the Congress,
these investments will use the broad-based index and government
services [sic] funds now offered by the TSP. Once in place, the
Lifecycle Funds will generate no additional charges to
participants other than the minimal costs for periodically
reviewing the asset allocation model design.
As would occur with the introduction of any new fund, there
will be costs for systems modifications as well as substantial
costs associated with the comprehensive design, development,
and distribution of materials to educate participants. Indeed,
we have budgeted $10 million for this effort, in recognition of
both its critical importance and the enhanced focus on
financial literacy established by the Congress last year in
Public Law 108-469.
The education effort will be designed to meet what we
consider to be the major challenge for TSP investors:
optimizing investment performance by aligning the individual's
risk/return profile with his or her investment horizon. In the
financial world, this is known as investing on the ``efficient
frontier.'' We are very excited about the prospect of providing
the Lifecycle Funds to participants and would be pleased to
discuss this initiative in detail at the appropriate time.
The purpose of this hearing is to discuss an investment
that in many ways is quite different from the existing TSP
investments. The Real Estate Stock Index Investment Fund
proposed in H.R. 1578 would establish an index fund exclusively
comprising Real Estate Investment Trust securities. Simply
stated, for the TSP this would be the wrong fund at the wrong
time.
First, investment policy should not be developed one fund
at a time on a case-by-case basis. Sound investment policies
can only be developed in a comprehensive fashion.
Second, investment policy should not be developed absent
consideration of fundamental plan design issues. We are well
aware of the arguments for over-weighting in risk-optimized
portfolios. However, including REITs would represent a
departure from the very broad asset classes offered by the TSP
and endorsed by Congress in the past.
Third, at this time, it is essential that we focus
participants' attention on the Lifecycle Funds that we are
introducing this summer.
Over the past year, the Board has been kept apprised of the
interest expressed in REITs by both the Congress and the
industry representatives. Gary and the agency's professional
staff have met with industry representatives, received the
industry association's analysis, and performed an independent
review of that analysis for the Board. They have also met with
congressional staff and shared with the subcommittee the
results of their review. The Board strongly endorses the open
process in which the Executive Director and the agency's
professional staff engaged the proponents of a REIT fund, as
well as the findings and conclusions of the review by the
professional staff.
For the reasons detailed in that review, as well as what I
have said and Gary will say today, the Board unanimously
recommends against the addition of a REIT fund at this time.
Mr. Chairman, I will conclude my remarks at this point and
ask that the remainder of my statement appear in the record.
Thank you.
[The prepared statement of Mr. Saul follows:]
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Mr. Porter. Thank you, Mr. Saul.
Before we move on, Mr. Amelio, co-sponsor of the original
bill, Chris Van Hollen.
Sir, would you like to have an opening statement?
Mr. Van Hollen. No, thank you, Mr. Chairman. I am pleased
to join with you in introducing this legislation. I look
forward to the testimony of the witnesses. Thank you.
Mr. Porter. Very good. Thank you.
Next I will introduce Mr. Gary Amelio. I know you had a
warm introduction already, but Executive Director of Federal
Retirement Thrift Investment Board. Welcome.
STATEMENT OF GARY A. AMELIO
Mr. Amelio. Thank you, Mr. Chairman, members of the
subcommittee. My name is Gary Amelio. Since June 1, 2003, I
have served as executive director of the Federal Retirement
Thrift Investment Board. Before coming to the Board, I had 23
years of private sector experience in the employee benefits,
tax, and fiduciary industry. I appear before the subcommittee
today with extensive professional experience.
My mission is to apprise the subcommittee of the unanimous
position of the TSP fiduciaries, being the five Board members
and myself, to oppose legislation which would add a REIT fund
to the plan. Our position is neither a commentary on the
investment worthiness of REITS, nor a permanent edict.
A fiduciary must exercise the highest degree of skill and
care when considering changes to the plan's investment options.
The universe of available investment options should be
evaluated to determine whether any alternatives might be added
or taken away. This in total review is a necessary fiduciary
function.
Examples of options to be considered in a comprehensive
review include: (a) whether to split the existing C and S Funds
to provide for growth and value equity management styles; (b)
replacing the existing S Fund with separate small-
capitalization and mid-capitalization funds; or (c) adding
other asset classes such as international emerging markets,
hedge funds, high-yield debt, inflation protected bonds, known
as TIPS, and commodities.
The analysis must also consider the existing TSP plan
design. For example, our enabling statute requires the plan to
be administered at a low cost. After reviewing current industry
products, I believe that any REIT fund, even if acquired
through competitive bidding, could cost the TSP participants
many times more than the existing plan menu. Moreover, there
could be other significant expenses, such as transaction costs.
Furthermore, adding a fund to the plan is not a
``freebie.'' It could increase the expenses for participants by
as much as 10 percent, that is $8 to $10 million, to engage
contractors to modify the TSP's Web site, its recordkeeping and
participant statement systems, as well as to create new
brochures and forms while destroying the existing forms.
The fiduciaries have determined that the cost of the
Lifecycle Funds rollout which is currently underway is money
well spent since it educates the participants about the
importance of asset allocation. Even those participants who
choose not to utilize Lifecycle Funds will benefit from the
educational materials. There is no commensurate benefit in
communicating a narrow, industry specific product.
The fiduciaries' fund selection process is, of course,
based upon need and demand. The Thrift Savings participants
already hold over $1 billion in REITs through the C and S
Funds, making our plan the 13th or so largest holder of REITs
in the country, i.e., the need is already met. As for demand,
there is no use adding a fund that no one wants. I receive many
letters, e-mails, and calls from the 3.4 million participants
who are quite willing to share their thoughts about the plan
with me. In my nearly 2-year tenure, I have received only one
letter concerning REITs.
As the subcommittee is aware, the administration has held
the Thrift Savings Plan up as a model in terms of structuring
investment options for individual retirement savings. Many
reputable national financial reporters and virtually all of the
major news and trade publications have written about the TSP
and specifically its menu of investment options in laudatory
terms. Our simple five fund structure, low costs, broad-based
index investment approach, and long-term performance have
generated high confidence levels and unequaled participation
rates.
In deciding whether to offer Lifecycle Funds for the TSP,
we first issued a Request for Information, seeking input from
major investment consultants, banks, and mutual fund managers.
We asked all of these organizations the same question: whether
the TSP fund lineup offered our participants adequate
opportunities for diversification in their accounts and, by
extension, in the Lifecycle Funds. Every organization affirmed
that the current TSP fund menu offered such diversification and
that additional funds were not required. Several of the
organizations affirmed that the current TSP fund options
offered not only adequate but ideal diversification.
Moreover, the agency has already received an expert opinion
concerning the need for additional funds. Mercer Investment
Consulting, the expert we selected to develop Lifecycle asset
allocation models, examined the current TSP fund options to
determine if they provided adequate diversification for TSP
participants. They affirmed that the current funds provided
diversification and that no other funds were needed at this
time.
The next paragraph is very important.
The Board members and I have decided to engage a reputable
investment consulting firm to assist in analyzing various
investment-related plan issues. A review of investment options,
securities lending, risk management controls, and next year's
competitive bidding of the existing funds' management are all
considerations in this discussion. I request that any
consideration of legislation be delayed at least until after
the appropriate review by the plan's fiduciaries.
That concludes my remarks, and I ask that the remainder of
my written statement appear in the record. Thank you.
[The prepared statement of Mr. Amelio follows:]
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Mr. Porter. Thank you for your testimony.
Now I would like to open it up for questions.
Regarding the cost factor, I know that is in your backup
and in your testimony, you previously made cost comparisons
between F Fund and the REIT Fund when drawing conclusions about
how much a REIT Fund would cost. But Barclays has compared the
S Fund to the REIT Fund in some ways. Wouldn't it be more
appropriate, then, to compare the S and the REIT for the cost
purposes?
Mr. Amelio. Well, if you look at the cost--first of all, we
are, I believe, the cheapest legal investment in the world.
When I got here, back to 1996, we were at about 7 basis points.
Mr. Porter. Less expensive. How about that?
Mr. Amelio. I am sorry, sir?
Mr. Porter. Less expensive.
Mr. Amelio. Less expensive, yes. It sounds better than
cheapest. Sorry, Congressman.
We have since got down. Last year we were down to 5.83
basis points. This year we are projecting we will be at about
5. Those costs are 100 percent of the plan's costs,
administrative as well as investment, and I have to tell you
the investment piece of that is very small. If we go out and
were to competitively bid and bring a REIT in--and, by the way,
those charges are across the board for the five existing
funds--of course, I don't know exactly what competitive bidding
would yield, but, just based upon generic discussions, we have
reason to believe that the management fees alone would be
somewhere in the 10 to 20 basis point range.
Now, we may find that we get someone to bid lower than
that. We may find the bid higher. We just don't know until
competitive bidding. But if you assume 10 basis points versus
what we are paying now, that particular fund would be somewhere
in the 15 to 25 basis point range versus the existing 5 funds,
and it is just way out of sync with the existing 5 funds.
Mr. Porter. You also have a comment that may be confusing
by adding additional funds. From what little I have seen to
date on the Lifecycle Funds, it seems like that is going to add
additional complexity also. Is there a reason why it will not
be confusing as the REIT would be in your argument in your
white paper?
Mr. Amelio. When you have 3.4 million participants around
the globe, anything you do to the plan is complex in terms of
communicating. But we have an extensive education effort, which
actually Congress asked us to do last year in conjunction with
OPM, and what we are going to roll out is asset allocation in
general, as well as Lifecycle. I wouldn't portend that it is
not complex, it is simply that it is much broader education,
because when you talk about Lifecycle, you are talking about
overall retirement needs.
Mr. Porter. Yes, Mr. Saul.
Mr. Saul. Mr. Chairman, I would just like to answer the
question that you just asked from my own behalf. The thing that
always has impressed me about the Thrift Savings Plan--and I am
a professional investor in my private life--when I came here, I
couldn't understand how we offered so few choices. After
spending 3\1/2\ years here, I think that is the strength of
this plan.
The fact is we have people that are very dedicated to their
professions, 3\1/2\ million of them, some in the military, some
sitting around this room, a lot of people sitting around this
room, that have a lot of things to do, and they are not
professional investors. And I think that when you have a plan
that is simple like this but very broad-based, you must
remember that if you look at all the options, the five options
that we give, it is pretty inclusive, everything from investing
in stocks in Great Britain to investing in small Russell 2000
stocks, small companies, to buying all different kinds of
bonds, whether they be corporate bonds, or government-issued
bonds, foreign government bonds.
We have a money market fund and, of course, we have the S&P
500. We have a lot of real estate stocks in the S&P 500 and the
small cap fund. This is a very, very broad-based group of
indexes and choices that we issue to people that are not that
sophisticated, for the most part, in investing.
The Lifecycle Funds do not add any complexity to this
thing. As a matter of fact, it takes away the complexity
because what it is doing is doing the asset allocation for
people that may be intimidated by the chore of investing their
money. We are not adding any more plans at all. We are not
adding any more to the menu by adding Lifecycle Funds. All we
are is actually adding an asset allocator that will make it
much easier for the average participant, I feel, to invest his
money.
So I just want to sum this up, and I know it is a long-
winded answer, but I think it is very important. I think if you
look at our plan, the strength of our plan is the fact that it
has limited choices but a full range of options within those
choices because of the broad base of financial markets that our
plan covers.
Mr. Porter. One of the reasons that I encourage the passage
of the bill is this allows everyone to have an oportunity to
invest in real estate. There are a lot of folks in the country
that are in a financial position to do it on their own. This
gives everyone an opportunity within the plan. But when we look
at the returns, take the G Fund from 2000 to 2004, it was 5
percent; the I Fund was 1.2 percent; F Fund, 7.8 percent; the C
Fund a 0.8; the S Fund 3.6; and you look at the REIT Funds, we
are at 22.4 percent. So is there a reason that you haven't
moved forward with REITs in the past?
Mr. Saul. First of all, I think the important thing in
looking at this plan is to look at the results over a longer
period of time rather than 5 years. I think that you really
have to go back, take a period from 1988 to now, where we have
accurate statistics on the plan, and take a look at the returns
there. Any one of the plans can do well at any shorter period
in the cycle, there is no question about that.
But what you really want to do is if you have somebody that
is a young person that is investing in this plan, he is 25
years old, hopes to work until normal retirement age, you
really want to see how he does over the long period of time.
And I think if you look at these broad-based choices, which, by
the way, I am not against real estate, I own personally a lot
of real estate. I want you to know that. It is a bedrock of the
U.S. economy.
And I do think that we have that included in the broad-
based funds that we have now. But I don't think it is accurate,
and I would caution against picking out any one investment over
a short cycle and see how it does. I think the real thing is to
take a look at it over a longer period of time and then see how
it does.
Mr. Porter. And I know I am actually using more than I am
entitled to, but just to followup. In the past 30 years the
REITs have out-performed the Standard & Poors. If you look from
1988 to 2004, the Real Estate Investment Trusts have returned
about 14 percent since 1988. So we are looking at the long-
term, and these numbers actually came from the Ibbotson
Associates. So I think we have some disagreement, and we will
have some more time to get back to that, OK?
And as far as the information, it came from the Board
itself. Thank you.
Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman.
Chairman Saul, you indicate that investment policy should
not be developed one fund at a time on a case-by-case basis,
that it has to be, or certainly should be, comprehensive. Does
that mean that once you have established a plan, that in all
likelihood you would not add, detract, or subtract at some
point?
Mr. Saul. I think that as fiduciaries we look at this thing
on a quarterly basis. I think that you have to--business is
evolutionary, the U.S. economy is evolutionary. Things are
changing all the time. I think that the duty of the
fiduciaries, and why I have been chairman, we look at this
quarterly, monthly, is to look at all possibilities.
And I think you are absolutely right, we are talking about
the possibilities, and I think there are possibilities there,
things in the future. Any prudent businessman would feel that
way.
I think you would also want to look at the offerings that
you have, and I think that Gary said that in his testimony,
that we would constantly look at the existing plans and see if
they should be changed in any way. I think you are absolutely
correct in that assumption. I think the whole plan has to be
constantly evaluated on an ongoing basis.
Mr. Davis. Notwithstanding the fact that real estate has
been fairly strong. I think of my own city, especially in much
of my district, which is Downtown Chicago and within the Loop
area, I mean, things are simply booming. I mean, they are going
great guns.
So it would seem like, in a sense, that since there is a
level of stability--and I just returned, say, from China a
couple weeks ago, and real estate was pretty hot there as well;
finding a place to live. And, of course, in Japan it is pretty
good too. Certainly notwithstanding these market conditions,
you still wouldn't recommend?
Mr. Amelio. I believe it is absolutely the wrong reason to
make an investment decision. It is using the rifle approach
target, almost stock picking. Virtually all professional asset
managers, investment managers will tell you that asset
allocation, rather than stock picking, is the way to go,
particularly for unsophisticated investors. What we have are
broad-based funds that cover every food group of investment in
this country, if not the world, and that offers the best
protection over the long term.
I am not saying there isn't a better investment option out
there, Congressman. There might be, and this one might have had
a great run. And if you lived in Houston a few years ago, Enron
had a better run. But eventually all great individual things
could come to an end. And I am not saying this would. We are
not being critical of REITs, we are just saying broad-based and
asset allocation is the way prudent 401(k) providers have to
look at this.
Mr. Davis. Do you normally hear from participants a great
deal? You indicate that you haven't heard much from
participants suggesting that we move in this direction. Do you
hear from participants about anything? I am saying at all. Do
you hear from them? So is this an unusual circumstance or you
just don't hear from them?
Mr. Amelio. Actually, I get a great deal of feedback. The
participants aren't shy, as many of you are aware, especially
those with districts with a lot of Federal employees. Two years
ago we got over 25,000 letters when we had the recordkeeping
problem. I get contact in one of many ways: we get letters, e-
mails, phone calls, and sometimes it is heavy. I do a lot of
speaking myself to participants. I go out all over the country
and I speak to large groups of participants, as many as several
hundred at a time. Next week I will be seeing about 500.
And I get a lot of feedback. And most of it really is along
the lines--they are very fee conscious. I am hearing an awful
lot about these Lifecycle Funds. They feel they want more
assistance in terms of getting educated for when they retire.
But I have only got one letter on this subject in 2 years.
Mr. Davis. Thank you very much.
Mr. Amelio. Yes, sir.
Mr. Porter. Congresswoman.
Ms. Norton. Thank you, Mr. Chairman.
Given your testimony from an independent board, all
appointed by Republicans, I am disinclined to say it would be
adverse to expanding investment opportunities. So I approach
this whole hearing, as I do most hearings in Congress, simply
with a sense of skepticism about both sides so I can make up my
mind.
I was on this committee in 1996, when the S and I Funds
were at it. Now we are into more than 10 years, and no new
funds. Did we reach nirvana then? Have we reached perfection in
the last 10 years? One might ask why it took us so long to get
to the S and I Funds. Perhaps you can--particularly since you
say--I guess it is in your testimony, Chairman Saul, you
indicate that there has already been an independent review.
You talk here about yet another study, but you indicate on
page 3 of your own testimony that you are offering this
testimony after doing an independent review and analysis for
the Board. So I am not sure, first, what the new--I take it
that you probably looked only at REITs, and maybe you were
looking at the whole thing when you did your own independent
review. But I can't tell the difference between what you have
already done and what you propose to do.
I can't tell what made you go to S and I Funds, but
reluctant to go further at this time, particularly when you
talk about transaction costs, since every time you do it there
are going to be transaction costs, I suppose. So I suppose I am
asking how do you operate. How do you decide when, if ever, to
diversify further, particularly bearing in mind that you can't
make money without investing some money. So we know it is going
to cost you something if you add to the funds, as it must have
cost you something in 1996.
Go ahead.
Mr. Amelio. You have a lot of questions in there. I will
talk fast.
First of all, I want to say this under oath. I am appointed
by the Board, not by the President. I am----
Ms. Norton. No, I know. The Board is appointed by the
President and by the Speaker.
Mr. Amelio. The Board, in 2 years, has never brought
politics into the TSP setting, and I want that on the official
record under oath. Never once. And I want to make sure I make
that clear.
Second thing is with respect to the consultants, the
consultant that we talk about and the others that we
interviewed did that in terms of the Lifecycle Funds in looking
at our existing mix, and they did not look specifically at
REITs, they gave us their investment opinion, Mercer did, in
terms of looking at the Lifecycle Funds.
The last study we talk about on the last page of my
testimony, that paper is the Board and I have already decided--
--
Ms. Norton. Well, just a moment, Mr. Amelio.
Mr. Amelio. Yes, ma'am.
Ms. Norton. The testimony of the chairman specifically says
the Board has been kept apprised of the interest expressed in
REITs by both Congress and the industry. Gary and the agency
professionals have met with industry, received the industry,
and performed an independent review. This testimony clearly, it
seems to me, refers to REITs, not to Lifecycle or the rest of
it.
Mr. Amelio. We also did an--we at the plan did an
independent analysis of REITs. We have got four different
studies here that we are talking about. We did do an
independent analysis of REITs. Mercer had nothing to do with
this study. Mercer put the asset allocation for us together on
the Lifecycle Funds. That is independent from the letter I sent
to the subcommittee staff about REITs, they are completely
unrelated.
Ms. Norton. Yes, but I am asking about REITs. And it says
the agency's professional staff engaged the proponents of a
REIT fund, as well as the findings and conclusions of the
review by the professional staff.
So the study I am interested in is the study that
apparently has already been done, and that is the independent
review on page 3 of Mr. Saul's testimony. Does that mean that
you have already looked at REITs? If you have, what is this new
look you are going to give and how is it different from what
you have already done, which apparently has made you conclude
that we shouldn't do REITs at this time?
Mr. Amelio. We did an analysis of REITs on a one-on basis,
in other words, looking specifically at REITs directly in
response to the subcommittee's request. However, the
fiduciaries have decided to now go beyond that, engage a
professional investment consultant to look at the universe of
investments, which would include REITs. We haven't eliminated
it, we just want to look at everything in total, as I
mentioned, rather than simply look at a standalone, up or down
vote on one fund. We want to look at everything.
Ms. Norton. I see. Now, you say we are already into REITs,
and the difference between what we are into is standalone REITs
versus what we are into. How much REITs are we into?
Mr. Amelio. $1 billion.
Ms. Norton. Of REITs alone?
Mr. Amelio. $1 billion of REITs alone sit in--well, they
are part of the C and the S Fund; 8 percent of the plan.
Ms. Norton. Well, let me ask you this. The chairman pointed
to some initial figures over the short-term that were very
impressive. Then you challenged him about long-term
investments. Then he quoted some long-term figures that were
equally impressive, which makes me want to know why we did so
poorly between 2000 and 2003 if we are so invested in REITs.
Where REITs, at least during that period, when everything else
was in the valley, were going up. REITs didn't look like it
helped us then, so I don't know what $1 billion means, $1
billion out of whatever. Perhaps you should tell me $1 billion
out of what is the total amount.
Mr. Amelio. $155 billion.
Ms. Norton. Out of $155. Well, no wonder it didn't help us
much. Maybe that is why some people want REITs by themselves.
I was not satisfied with your response, because the
chairman challenged you again about the long-term returns on
real estate. It kind of reinforces the stereotype all of us
have about real estate, where real estate did better than the
traditional stock. And yet you seem reluctant on REITs, and you
are so little invested in REITs, that when you were going down
the drain and, by the way, taking all of the rest of us with
you in 2000 to 2003, we were dependent upon you all to do much
better since all of us didn't have the sense that we thought
you had, and we were all into dot coms. You must have been into
them too.
I am wondering why, given the track record with REITs and
the track record in which you are already in, the long-term
track record and the track record for REITs, when everything
else was going down, I am trying to understand your reluctance
on REITs in particular.
Mr. Saul. I think you ask some good questions, but I think
that I would like to try and focus us back, if I might, to part
of my testimony. If you look at the investing we do at the TSP,
one could always point out there are many sectors, very narrow
sectors of investment vehicles that could always return, at
different periods of time, higher results than broad-based
indexes. There is no question about that. You could pick it
out. I think a perfect example which we all hear about all the
time is hedge funds. If you look at the good hedge fund
operators, they have certainly done better than the broad-based
indexes. You could point to----
Ms. Norton. It is not fair to choose the worst examples.
Mr. Saul. Well, I think they are very good examples. There
is over $1 trillion invested in hedge funds----
Ms. Norton. Are you invested at all in hedge funds? Are we
invested?
Mr. Saul. Personally, I have a lot of investment in hedge
funds.
Ms. Norton. No, you and me, sir.
Mr. Saul. But I wouldn't recommend it for this plan. That
is my point. I think that what you have to look at here is this
is a broad-based plan of indexes that I think gives a highly
diversified portfolio of availability to the participants,
everything from money markets to international stocks. Yes,
there are segments--and, by the way, all these different things
are covered, for the most part, in these different index funds,
all different kinds of investments. Energy stocks, you could
pick out energy stocks in the last have been the greatest
investment since Swiss cheese.
But I guarantee you, and I don't have the numbers right
here, but if you look at the TSP, it is very heavily weighted
as the U.S. economy is weighted in energy stocks. The indexes
are weighted to REITs as the U.S. economy as the indexes are
weighted. And I think the important thing is to focus on what
the TSP--and this is as a fiduciary I am talking about now--is
to be able to offer a diversified portfolio that is easy to
understand, relatively simple to operate to the investing
participants.
Ms. Norton. Mr. Chairman, I have finished my questions. I
just want to leave you with what I hope your study shows me.
Your off-the-chart examples--hedge funds, energy--do not
respond to the chairman's example of the long-term returns on
REITs. That is No. 1. No. 2, you told me something that
impressed me. You said you were already diversified within the
funds we had. That impressed me.
Then I thought about REITs, the short-term and the long-
term return on REITs, and all I could think of, well, if they
were diversified in REITs, really diversified within their
present funds, sufficiently in REITs-type investments, then
their fund, TSP, would have done better between 2000 and 2003.
Look, I am with you. I am with you only because you do this
every day, you have a unanimous Board. I am not about to
second-guess; you know, I did my second-guessing during dot
com. I am not about to second-guess your judgment. I do want to
say you have not--I have a presumption in favor of what you
have said, but that presumption fell. That presumption has
fallen. If you could have shown me that you had done pretty
well during a good period that I think testified what happens
to funds that were adequately diversified, then it seems to me
I would have another view.
I have not yet come to the conclusion that we should invest
in REITs, but I do need to know why, particularly since you
were willing to take the transaction costs in 1996 and have two
more funds, I do want to know, in the long-run, after your
review of all the possibilities--and, as I understand, you will
be looking not only at REITs, but whether or not you should be
in some other things as well. That is very fair. That is very
fair.
But given what the long-term returns shown on REITs, given
your meager investment in REITs, then it seems to me you have
an obligation either to show us that we ought to be in REITs or
you ought to be more in REITs in terms of your own
diversification.
Thank you, Mr. Chairman.
Mr. Porter. Thank you.
Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman.
And thank both of you gentlemen for your testimony. I
understand your caution on adding a REIT option, and I
appreciate your caution. In my view, you have an institutional
responsibility to exercise an overabundance of caution and take
a very careful look at any additional options that are added to
the plan.
But I also think we all have the same goal in mind: we want
to make sure that Federal employees have a source for stable
and reliable retirement income and that they have the
opportunity to take advantage of all the options that are out
there, including options that are increasingly available in the
private sector.
Now, your testimony was that you have about $1 billion
invested in REITs, which is a lot of money in an absolute
sense, but as a percentage of your overall portfolio, as
Congresswoman Norton's questions pointed out, it really is
small. As a percentage, what is it, about 0.7 percent?
Mr. Amelio. Eight percent, 8.3, I think.
Mr. Van Hollen. I am sorry?
Mr. Amelio. It is a little over 8 percent.
Mr. Van Hollen. Eight percent of your portfolio is invested
in REITs?
Mr. Amelio. Yes.
Mr. Van Hollen. All right.
Mr. Amelio. And that is a significant number by all
industry weightings.
Mr. Van Hollen. All right. That information is somewhat at
odds with other information we have gotten, so that is
something we can flush out. One of the purposes----
Mr. Porter. Would the gentleman yield?
Mr. Van Hollen. I would be happy to yield.
Mr. Porter. You have $155 billion, correct, in assets? It
appears to me that $1 billion of $155 is less than 1 percent.
Mr. Amelio. Oh, I am sorry, it is 8 percent of the S Fund.
Mr. Van Hollen. Oh, OK. Well, that is a very different
answer.
Mr. Porter. One percent.
Mr. Saul. But you have to take out the Money Market Fund,
you have to take out the debt funds, because that really has no
bearing on any equity at all. Don't forget, 47 or 46 percent of
the Fund is invested either in the Money Market Fund or the
Lehman Brothers Bond Index Fund. So you have to really take the
debt out. So really what you have left is the equity portion
and the debt portion; you can't talk about it together.
Mr. Van Hollen. OK.
Mr. Saul. People have made that choice.
Mr. Van Hollen. OK. But in terms of the overall Fund, it is
a little less than 1 percent. But I understand the points that
you are raising.
Let me ask you. In the State of Maryland we have an
Employee Retirement Fund where I think that we have a
considerable greater amount invested in real estate options,
including the REIT option, and you raised the question about
the demand from people who are participating in the system for
this option. I haven't heard a huge demand, but I have heard
constituents of mine who say they wish they had an opportunity
to invest in a REIT option and that it would provide an
additional investment opportunity.
And, of course, in the final analysis it would be their
choice. In other words, if people are not interested, I think
that would be reflected in the demand for investment in this
fund. So I think that issue cuts both ways, and ultimately it
will be the decision for people who are making this investment.
So, Mr. Chairman, I don't have a lot of questions on this.
I would like to get more testimony on the cost issues you
raised with respect to the transaction costs. And one of the
reasons I think it is very important that we are going forward
on this hearing and pushing on this is to get out in the open,
as part of a public dialog, some of these issues.
But I guess in closing I would ask you this, because it is
my understanding that within the private sector there are a
growing number of 401(k) plans offered in the private sector
that offer a REIT-specific investment option, that it is an
upward trend in the private sector. Is that your understanding?
Mr. Amelio. Yes. I wouldn't argue with that.
Mr. Van Hollen. And I also understand that four of the six
largest 401(k) plans in the private sector now offer their
participants a REIT option. Do you know whether or not that is
the case?
Mr. Amelio. Actually, I believe that might be erroneous,
but I could be wrong. The last thing I saw did not show that,
but I could be wrong about that.
Mr. Van Hollen. But I guess the point here is that my
constituents who are working the private sector and working for
different companies increasingly have an opportunity within
their savings options to invest in REIT funds, specific REIT
funds, and the question is why shouldn't we offer Federal
employees the same option that is increasingly being offered to
individuals in the private sector? I guess I would ask you that
question.
Mr. Amelio. I want to make a point. If you look at
percentages, we are off the charts. We have 87 percent
participation amongst people eligible to participate in the
TSP. If you look at the private sector, it is about 70 percent.
So we have a higher confidence level in our participants. And
from the participants that we have talked to and from all of
the experts that have written about it, it is because of the
simplicity; there are five funds only.
And that really has a lot to do with it, it is simplicity.
Major studies by major vendors in the industry have shown that
for every 10 investment options that you offer, you lose 2
percent of the participants; they throw their hands up and walk
away. They get overwhelmed, they get confused; they don't want
to deal with it. So it is just innate, very protective, and I
would argue not conservative. I don't think we manage the plan
conservatively; we try to be protective of it. But you don't
want to drive participants away by adding a lot of funds. You
are talking about one here.
My biggest concern, and I think one of the Congress people
mentioned before, is process. This is a very bad way to add a
fund, to do a onesy, to look at one fund and say we have to add
this one fund. If you go out and talk to the fiduciary of every
major private sector plan in America, they will tell you they
get a consultant and they look at the universe; what is in the
plan, what is out of the plan, and let us figure how to fill in
the gaps, get out of funds that aren't being used, and what to
add. Nobody that I am aware of, no major fiduciary just simply
says one off, let us just throw one fund into this.
And even looking at the long-term numbers, I don't see
where they differ between the REITs and the C and S from 1988
back to technically when the plan was brought in; they are
virtually the same.
The REIT Fund here, the numbers that Congresswoman Norton
was talking about, the REIT, 14 percent. The S Fund is 13.8 and
the C Fund is 13.7. I mean, it is de minimis. We had the same
yields in two of the funds. Certainly the G Fund is lower, but
at 6.6, that is bigger than any money market or savings fund.
We are very competitive.
Remember with the indexes. When Congress established this
plan in 1986, they wanted to take politics out of it. They
don't want us to try and hire money managers to beat the
markets. Only 15 percent beat the markets every year; 85
percent do worse than the markets. What Congress wanted
originally, and it was ingenious, was take politics out of this
and just have it stay with the markets, rather than trying to
beat them, because most people don't on a regular basis.
Mr. Saul. Mr. Chairman, may I just add something, because I
think it is important, if I might? If you look at these
records, we have here in front of us 1988 to 2004, which is 16
years of history here. And Gary has given you the statistics of
13.7 for the C Fund, 13.8 for the S Fund, 14 percent for the
REIT Fund. That is what I was trying to refer to when I made my
statement. I think I was answering a question that you asked,
Mr. Chairman, about a long period of time.
Mr. Porter. Excuse me, Mr. Saul. The point is that the
REITs did very well, did better than any of your funds in that
period of time. And you were commenting that over a long period
of time the REITs were not a good investment, or not as good of
an investment. In fact, they were better than the other funds.
Mr. Saul. I am sorry, that is not what I meant. Anyway,
what I tried to say is over a long period of time, 16 years,
the C, S, and the REIT Fund were very close in performance. It
is true, over a 4-year period, there is no question, because
there was a downturn in the stock market, the C and S did not
nearly perform as well as the REIT. There is no question.
But what I said was you have to look at this whole thing as
a person's investment from when they basically begin investing,
as a young person, until the time they get out of the plan, how
they have done with these different investments.
Mr. Porter. If I may interrupt, the bottom line is they
would have been better off in a REIT than the G, the I, or the
F in that period of time.
Mr. Saul. Well, the G Fund is a Money Market Fund,
basically all it is is treasuries, U.S. treasuries, so you have
to take them out.
Mr. Porter. Well, said, but if you are going to compare--so
remove that. You were still better off in the REIT than the I
and the F.
Mr. Saul. Well, the F Fund you can't compare it because--
let us look at these funds. The F Fund is a bond fund, it is a
debt fund. Usually a bond fund has more stability, a debt fund,
than an equity fund. You are getting a lower return, but you
are taking less risk. So I think the F Fund you have to take
out over a long period of time, it is a bond fund. It is very
heavy-weighted to U.S. Government bonds, which we hope are the
safest thing. So that is 8 percent.
The G Fund is strictly a short-term Treasury operation
where the participants get a 3 point spread over 90 day rate
because of a long history that we have and so forth, so that--
--
Mr. Porter. I don't think we disagree on that. But what I
do disagree with is the fact that the REIT would not have been
a good investment in this period of time. It would have been.
Mr. Saul. Nobody is saying it wouldn't have been. But that
was--we are not arguing against REITs. That is my point. I
tried to say that when Congresswoman Norton asked her very
important question, I thought, before. We are not arguing
against REITs. What we are arguing for is the simplicity of the
plan for unsophisticated investors. We have----
Mr. Porter. Mr. Saul, I am sorry to interrupt again. That
is probably the fourth time I have heard about unsophisticated
investors, and I do take exception to that. I do believe that
there are folks that, as you said, have high confidence in what
you are providing for them as options. But, please, that is
probably the fourth time I have heard unsophisticated. I give
them higher regard than that. I think there are many that want
as easy a system as possible, but there are also those that
would like to choose other options.
Mr. Saul. When I said unsophisticated, I thought I
explained that in my testimony before. When I meant
unsophisticated, I didn't mean unsophisticated individuals, I
meant unsophisticated in financial investing. One could be a
very sophisticated person, for example, a man that is a captain
of a U.S. submarine could be a very sophisticated person, but
may not be a sophisticated financial investor. That is what I
meant.
Mr. Porter. Which is why we want to diversify in as many
options as possible, correct?
Mr. Saul. That is what I thought we have done.
Mr. Porter. Thank you. Appreciate your testimony.
I would like to now move on to the third panel.
We appreciate the gentlemen being here. Thank you again,
Mr. Saul and Mr. Amelio.
Welcome. We appreciate your being here today. This being
our third panel, I would like to introduce Mr. Steven Wechsler,
president and CEO of the National Association of Real Estate
Investment Trusts. We will then hear--and I guess Dr. Ibbotson?
Mr. Ibbotson. Ibbotson, yes.
Mr. Porter. You are not here to testify, but to answer
questions, is that correct, or do you have a prepared
statement?
Mr. Ibbotson. I did submit a white paper, but I am not
going to read that to you.
Mr. Porter. Fine. No problem. Thank you very much.
Mr. Ibbotson. I will maybe refer to it.
Mr. Porter. And then we will have Ms. Amy Schioldager, head
of the U.S. indexing products at Barclays Global Investors.
I would like to begin. Mr. Wechsler, you have 5 minutes.
STATEMENTS OF STEVEN WECHSLER, PRESIDENT AND CEO, NATIONAL
ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS; DR. ROGER
IBBOTSON, CHAIRMAN, IBBOTSON ASSOCIATES, PROFESSOR OF FINANCE,
YALE UNIVERSITY; AND AMY SCHIOLDAGER, MANAGING DIRECTOR, HEAD
OF U.S. INDEXING PRODUCTS, BARCLAYS GLOBAL INVESTORS
STATEMENT OF STEVEN WECHSLER
Mr. Wechsler. Good afternoon, Mr. Chairman, Mr. Davis,
members of the subcommittee. I am Steve Wechsler, president and
CEO of the National Association of Real Estate Investment
Trusts. NAREIT represents U.S. Real Estate Investment Trusts
[REITs], and publicly traded real estate companies worldwide.
I want to preface my remarks by complimenting Congress and
the Federal Retirement Thrift Investment Board for providing
through the Thrift Savings Plan a well conceived base model for
defined contribution plans. The plan offers a set of core
investment choices utilizing low-cost index funds that maximize
return to participants.
I would also like to compliment Chairman Saul, the other
Board members, and TSP staff for keeping pace with the private
sector by soon providing plan participants with a set of
Lifecycle Funds.
Today's hearing is styled ``Real Estate Investment Trusts:
Can They Improve the Thrift Savings Plan?'' Based on detailed
analysis, rigorous research, and historical experience, we
believe the answer is an unqualified yes.
Investment research demonstrates that the plan can be
further improved and the retirement benefits enhanced by adding
low-cost additional asset choices with long-term investment
performance and diversification benefits. One such core asset
or distinct investment choice is commercial real estate. For
decades, traditional pension plans, also known as defined
benefit plans, as well as endowments in foundations have
included a distinct allocation to commercial real estate in
their investment portfolios.
For example, the Nation's largest corporate defined benefit
plan, that of General Motors, reported a real estate allocation
of 8 percent; the Nation's largest public defined benefit plan,
California's CalPERS, reported a real estate allocation of 7.5
percent; and Harvard University, the Nation's largest
endowment, had a real estate allocation of 10 percent.
The concept of including real estate as a distinct
investment choice in a retirement plan is neither new, nor
untested. Congress understood the importance of commercial real
estate investment for investors large and small when it created
REITs. Today, the time has come to extend that vision to 3.4
million small investors who participate in the TSP by including
a distinct REIT-based real estate option.
Our Nation's publicly traded equity REITs are companies
that generally own, rent, and manage portfolios of investment-
grade, income-producing commercial real estate, including
office buildings, distribution facilities, shopping centers,
and apartments. Because REITs must distribute their taxable
income to shareholders, their dividend yields are significantly
higher than those of other equities, three times higher than
those in the S&P 500, and produce a steady stream of growing
income.
REIT stock returns combine the growth characteristics of
other stocks and the income characteristics of bonds. When the
dividend income and price appreciation are combined, the 14
percent average annual total return to REIT stocks from 1988,
the year the TSP began full operation, through 2004 was
appreciably higher than comparable returns to bonds and above
the returns to other large and small-cap stocks. Returns to
REIT stocks during that period have come with a level of
volatility, a common measure of risk, which has been below that
of other large and small-cap stocks.
Strong returns, low volatility, and a low correlation with
the returns to other assets are key ingredients to meaningful
investment portfolio diversification, an accepted strategy for
reducing investment risk. Research has demonstrated that
investment returns from commercial real estate are different
than returns from other investments. Studies also have
concluded that the competitive returns, low volatility, and low
correlation of investment returns from REITs make them a
powerful diversification tool.
So it is not surprising that the proportion of 401(k) plans
nationwide offering a real estate fund is on the rise. In fact,
four of the six largest 401(k) plans in the private sector now
offer a real estate fund option.
In a study requested by NAREIT, Ibbotson Associates, an
authority on asset allocation, found that a distinct REIT index
fund increases returns and reduces risk when added to efficient
portfolios of the existing five TSP funds. Given that the TSP
to date only offers five choices, versus an average of 16 for
the Nation's typical 401(k) plan, it is clear that Federal
workers are far too limited in their choices. Consequently,
NAREIT believes that the TSP can be improved materially by
adding more investment choices, starting with a REIT-based real
estate option.
For the foregoing reasons, NAREIT strongly supports H.R.
1578, the Real Estate Investment Thrift Savings Act, and
commends its sponsors, especially Chairman Porter, Mr. Van
Hollen, and Chairman Davis for introducing this significant
legislation. It would give Federal workers the choice in their
retirement savings program, which is supplemental to a Federal
pension and Social Security, to specifically seize for
themselves the real estate investment opportunity Congress
created for small investors years ago.
As I close, Mr. Chairman, I want to underline that NAREIT
does not maintain that a REIT-based real estate option is the
only additional option which should be considered over time for
inclusion in the plan, but it is sure a good place to start.
I would be pleased to answer any questions, but I leave you
with a question for Congress and the Board to ponder further.
Why shouldn't the men and women who work for our Nation have
access to the range of retirement savings choices currently
available to employees of many leading private sector firms and
to large institutions saving and investing on behalf of their
workers?
Thank you.
[The prepared statement of Mr. Wechsler follows:]
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Mr. Porter. Thank you for your testimony, we appreciate it.
Mr. Chairman will wait for questions.
[The prepared statement of Mr. Ibbotson follows:]
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Mr. Porter. And the managing director, Amy Schioldager.
STATEMENT OF AMY SCHIOLDAGER
Ms. Schioldager. Good afternoon, Mr. Chairman and members
of the committee. My name is Amy Schioldager, and I am the head
of U.S. equity indexing products at Barclays Global Investors.
In that role, I am responsible for the management of our REIT
index funds. I appreciate the opportunity to discuss with you
the issues relating to adding a REIT index fund option to the
Thrift Savings Plan.
As members of this committee know, since 1988, BGI has
provided investment management services to the Thrift Savings
Plan. We take great pride in the mandates that we have been
awarded by the TSP under which we manage four of the plan's
five investment options: large and small capitalization U.S.
equities, U.S. fixed income, and international equity. The
fifth option is managed by the U.S. Treasury and invests in
U.S. Treasury securities.
As the members of this committee are well aware,
diversification of asset classes is an important element in
effective investment management. By ensuring that a portfolio
is not dependent on any one asset class for performance,
diversification improves the potential for better returns over
the long-term. Specifically, Mr. Chairman, REITs offer to the
investor the ability to gain exposure to real estate through an
investment which has, on average, sufficient liquidity to gain
access to that asset class cost-effectively.
Furthermore, REITs have a low correlation to other asset
classes. For example, the performance of REITs versus the S&P
500 Index, since 1963, shows annual return differences greater
than 20 percent, both positive and negative. It is also worth
noting, with regard to the TSP, that REITs represent 0.55
percent of the S&P 500 Index, the benchmark tracked by the C
Fund, and 8.1 percent of the Dow Jones/Wilshire 4500 Index, the
benchmark tracked by the S Fund. As a result, TSP participants
investing in these two funds are already getting an exposure to
REITs.
Mr. Chairman, BGI is the largest manager of tax-exempt REIT
index funds in the world, with approximately $10 billion of
assets under management in U.S. REITs. We have a long and deep
experience managing investments in this asset class. In that
light, there are a number of issues we would encourage the
committee to consider as it contemplates the inclusion of REITs
in the TSP. Let me focus on two critical ones, costs and
liquidity, two subjects we initially discussed in a letter
dated January 25, 2005, to Chairman Davis in response to his
January 5th letter to us.
First, consider costs. A key question is can a REIT option
be offered to TSP participants at or near the same cost as the
current investment options. There are two costs that need to be
considered: investment management fees and transaction costs.
With respect to management fees, there are many factors that
potential providers would consider in developing a fee quote
for such a product, including the complexity of managing the
investment strategy and their assessment of the competitive
landscape.
Obviously, we cannot comment on what other providers might
bid for this business. What we can say is that management fees
for institutional REIT index funds tend to be in the range of
10 to 15 basis points, while fees for REIT index mutual funds
are in the 25 basis point range. Given the potential size of
investment by TSP participants, we expect that management fees
would likely be lower than these levels. But they would also
likely be modestly higher than the fees currently charged for
some of the existing TSP investment options.
Transaction costs are also an important consideration given
the size of potential cash-flows and the frequency with which
many TSP participants trade. Depending on the size of the trade
and given current levels of market liquidity, we would estimate
that total transaction costs, including commissions, bid/ask
spread, and market impact, could range from 26 basis points for
a $10 million trade to 59 basis points for a $100 million
trade.
Given recent index methodology changes, the expected T cost
for $100 million we expect would be 40 basis points. To show
the comparative illiquidity of REITs, estimated transaction
costs for a $10 million trade in the C Fund benchmarked to S&P
500 is approximately 7 basis points, while a $100 million trade
is approximately 9 basis points.
A second important issue is whether the REIT marketplace
offers sufficient liquidity to absorb the potentially large
daily market flows, in or out, generated by TSP participants.
Our analysis of the REIT marketplace shows that most of the
REIT indices have liquidity characteristics similar to the U.S.
small capitalization equity market in which the TSP's current
Dow Jones/Wilshire 4500 Index option, the S Fund, invests.
We have worked with TSP staff to establish procedures that
have cost-effectively managed cash-flows in this market since
this option was added to the plan in 2001. Assuming that one of
the more liquid REIT indices were selected as the benchmark for
a potential new option, we believe that these same procedures
would likely work as effectively for a REIT index fund option.
Before concluding, I would like to make a further point.
When considering additional options to the Thrift Savings Plan,
there are many asset categories worthy of evaluation. We would
suggest, as the leadership of the TSP has in their testimony,
that a broad view of candidate asset classes be taken when
determining if REITs are the most appropriate potential
addition. There are indeed others worthy of consideration, such
as emerging market equities and commodities. Before selecting a
new investment option, it would be appropriate to analyze the
full spectrum of asset class options available to evaluate
their diversification potential and return opportunities, and
then select the most suitable additional options.
Mr. Chairman, I thank you for the opportunity to speak with
you today, and I look forward to answering any questions you
may have.
[The prepared statement of Ms. Schioldager follows:]
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Mr. Porter. Thank you. We appreciate your testimony.
I would like to begin. Regarding the costs, if you could
explain how costs are incurred with REITs and what we can do to
be more conservative in those expenses, if in fact we do
include these?
Ms. Schioldager. Is that management fees or transaction
costs for trading?
Mr. Porter. Both, please.
Ms. Schioldager. OK. And what exactly--I am sorry. Did you
just want----
Mr. Porter. Could you explain how the costs are incurred
for investments in the REIT?
Ms. Schioldager. OK.
Mr. Porter. You mentioned up to 25 percent. Could you
explain those costs to us, please?
Ms. Schioldager. Sure. Well, the two costs that I spoke to,
one are investment management fees, and those are the costs
that an investment manager would charge the Thrift Savings Plan
for managing those assets. What we see out there currently is
for institutional REIT index funds, fees are somewhere in the
range of 10 to 15 basis points. If you look at REIT mutual
funds--and, again, these are REIT index mutual funds--those
fees are more in the neighborhood of 25 basis points.
Now, what I would say is given the size of the TSP Fund,
that it is likely, it is possible, I should say, that those
fees would be less than that. It is also likely, given the
complexity of the management of REITs compared to the current
lineup that TSP has, that the fee would also be greater than
what they are currently paying for their other options. So that
would be the first piece, the management fee.
The second fee is the transaction costs associated with
buying and selling REITs in the marketplace. Right now all
participants, when they trade the various options, whether they
are going in or out, are paying transaction costs associated
with those trades. So the fees that I spoke to are transaction
costs associated with going to the market and completing those
trades. For an S&P 500 fund, we would expect those fees to be 7
basis points for a $10 million trade and roughly 9 basis points
for a $100 million trade.
So that gives you an idea of what the current costs are for
the S&P 500 fund. The extended market fund, which is the
Wilshire 4500 Fund, the transaction costs there, just to give
you another data point, would be 18 basis points for $10
million and 23 basis points for $100 million.
On the same magnitude, what I was looking at was a broad-
based REIT index where the costs would be approximately 40
basis points for a $100 million trade and approximately 16\1/2\
basis points for a $10 million trade. So that gives you an idea
of the difference in costs associated with REITs versus the
current fund options.
Mr. Porter. Is there a way that we can minimize those
costs?
Ms. Schioldager. Well----
Mr. Porter. I know we are not negotiating today.
Ms. Schioldager. Right. Thank you. The investment
management fees would go out for competitive bid, so depending
on what the competitive landscape is and the competitors that
are involved, that would determine the final bid on that.
Mr. Porter. Thank you. I appreciate that.
Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman.
Mr. Wechsler, Ms. Schioldager manages REITs index funds for
Barclays Global Investors, and she raised the issue as to
whether or not REITs offer sufficient liquidity to absorb the
potentially large daily market flows, in or out, generated by
TSP participants. How would you respond to that concern, and do
REITs offer the liquidity to absorb the large flows in and out
of the participants?
Mr. Wechsler. Mr. Davis, it is my understanding that as far
as liquidity is concerned, there is more than sufficient
liquidity to operate an index fund. Barclays does that through
their exchange traded fund on a regular basis, and it has been
represented, I believe, in the past that liquidity, at least by
the TSP staff, is not a significant issue in their mind at this
point. And I think the larger issue is tied, in my
understanding, to some of these transaction costs and how they
can be driven down.
Mr. Davis. Ms. Schioldager, do you agree that is not----
Ms. Schioldager. Well, we looked at how--there is
approximately $1 billion worth of REITs that change hands every
day, so that gives you an idea of the marketplace for REITs. In
contrast to that, it is many billion in S&P 500 space. So they
are less liquid than you would see in the other plan options.
If we were to assume, as a starting point, that the TSP could
be approximately 10 percent of average daily volume, that would
mean that we could handle up to $100 million a day from the
plan participants within the fund. I would consider that to be
on the high side in terms of what we would be able to trade on
a daily basis.
Mr. Davis. Dr. Ibbotson, I understand that your firm was
commissioned by the National Association of Real Estate
Investment Trusts to study a REITs fund to the TSP. However, as
an investment research firm, what asset classes other than
REITs could you recommend that the Board and Congress consider
for the TSP, if any?
Mr. Ibbotson. Well, there are many asset classes that you
could consider. You could consider--I mean, things were brought
up such as alternative investments, hedge funds, commodities,
energy. These are all possibilities.
I will say that real estate is sort of the natural place to
look for the next addition because real estate is such a huge
part of the economy and, actually, not all of real estate is
represented by the stock market. REITs are, and it is
understandable that you are looking at real estate investment
through REITs, because you don't have all these agency
problems; you don't have to worry about the direct real estate
and you don't have to worry about who is pocketing what. It is
a much more straightforward investment to invest in REITs.
So real estate is a natural place to go as a next category,
but there is a myriad of categories, and many of them were
brought up. I think it would be reasonable to look at the whole
set of categories.
Mr. Davis. Do you have specific knowledge of TSP
participants' investment behavior?
Mr. Ibbotson. I am not an investor in TSP, and I have not
managed any TSP funds, so I have no direct knowledge of the
participants other than general knowledge of who they are.
Mr. Davis. Ms. Schioldager, are there other asset classes
aside from REITs that you would consider worth reviewing by the
Board.
Ms. Schioldager. Yes, I think there are. A couple of them I
mentioned in my statement. I think emerging markets would be
worthwhile looking at; I would also add commodities and TIPS as
possible other investment options when looking at what else the
TSP could add in terms of their lineup.
Mr. Davis. Thank you very much, Mr. Chairman.
Mr. Porter. Thank you.
Congresswoman.
Ms. Norton. Thank you, Mr. Chairman.
Mr. Wechsler, you don't have any objection, do you, to
their looking at the whole universe of funds in order to decide
whether any funds should be added, REIT among them?
Mr. Wechsler. I have no objection whatsoever. In fact, I
would concur with Ms. Schioldager's expression of some of the
other areas worth looking at.
Ms. Norton. That, it seems to me, was the best point the
prior panel made, that if you are going to do it, look at all
your options before jumping, even though this option looks
particularly attractive now.
Mr. Wechsler, during questioning we brought out the rather
minute investment in REITs now. I wasn't able to determine why
that was the case, given the returns, long-term and short-term.
I wonder whether you have any hypothesis about that, No. 1?
And, No. 2, whether TSP might accomplish something close to
what you advocate simply by increasing the percentage of
investment in REITs among the funds they already have?
Mr. Wechsler. I will answer the two parts you presented. I
see there is one reason why the Thrift Savings Plan
participants today have, on a relative basis, such a small
exposure to real estate, given its size in the economy, and
that is because commercial real estate investment is
significantly under-represented through the stock market.
So you are not capturing that part of our economy, that
part of our productivity, that part of our services when you
invest solely in the stock market. But for a plan like the TSP,
a low-cost index plan, the way you will capture real estate,
and the only way you can capture real estate consistent with
the other five options, is through an index fund based on
publicly traded equity REITs today.
That is why we are here. That is why we are talking about
it, because, as you heard in my testimony, large institutional
investors routinely allocate 10 percent, 8 percent, 7 percent
to real estate. There is no earthly way possible you can do
that through the TSP today unless you vastly over-allocate to
the S Fund. And even if you did you wouldn't get there. As you
see in exhibit 13 of my written statement, you would have to
have taken 80 percent allocation to the S Fund to have a 5
percent allocation to real estate. No one would recommend that.
Ms. Norton. Ms. Schioldager, it seems to me that is a very
important point that Mr. Wechsler has just made. What do you
say to the point he has just made about what looks to be the
inability of the TSP to capture the growth in real estate,
given the way it is now structured, except by going into REITs?
Ms. Schioldager. I believe that is a true statement. What
Mr. Wechsler is saying is that the real estate market as a
whole is roughly a $4 to $10 trillion market, depending on what
you include in that calculation. So if you include governmental
land, for instance, it is a much larger number. What is
available to invest in the public market through REITs is about
$250 billion. So you can't capture, in the current TSP lineup,
a 10 percent allocation to REITs or to real estate through
purchasing REITs. That is an accurate statement.
The question of what is the appropriate allocation to REITs
I think is a completely different question. My experience has
been that defined benefit plans typically hold somewhere in the
neighborhood of 4 to 5 percent in a real estate allocation, not
the 7 to 10 percent that Mr. Wechsler has spoken to.
Ms. Norton. He is saying you couldn't even hold that.
Aren't you saying you couldn't even hold that in TSP?
Mr. Wechsler. What I am saying is the only way you could
hold it, no one would advise you to do under the current plan
lineup. And I would agree with Ms. Schioldager's comment that,
on average, traditional pension plans generally have an
allocation of plus or minus 5 percent.
But some of the larger plans I have cited, such as CalPERS
in California, such as General Motors and others, some of the
larger have had traditionally and have larger allocations to
real estate for all the reasons I talked about in my statement,
which is the significant income overtime, the price
appreciation overtime that more than keeps pace with inflation,
and the low correlation of real estate with other stocks and
bonds. And those are very significant investment attributes
that few other asset classes provide, and it is provided to the
public markets by REITs representing real estate, which is
what----
Ms. Norton. Well, one of the things I hope this study
brings out is, in addition to whether or not REITs is the best
among several possible expansions, whether or not there is any
increase beyond the less than 1 percent in REITs that would be
consistent with even the present structure of TSP. That is very
bothersome, that we are unable to take hold of real estate in
any appreciable way.
I have to ask you, though, Mr. Wechsler, is this the right
time to be talking about--would a prudent TSP be looking--let
us assume the following scenario, that for the first time you
could go into real estate and you look at what has happened to
real estate, because everything else is you know where. Real
estate is one of the few growth opportunities that has not
seemed to dissolve under us, and that leads many to believe
that real estate is, if anything, overpriced.
And watch out, I live in Washington, DC. That being the
case, even if this is done or even if this proves prudent to do
at some point, would this not be perhaps the time to pass and
do it a little later?
Mr. Wechsler. There is no time like the present generally
in life to do things, and it seems to me, as was indicated
earlier, it has been many, many years since the Thrift Savings
Plan added new options. There are only five options today, one
of which is----
Ms. Norton. Mr. Wechsler, I am talking about the price of
adding options on top of the transaction costs. Very
specifically, my question is isn't real estate overpriced
everywhere you look, in large part because everything else has
gone--I am trying to think of a polite word for what has
happened to everything else, but surely you know what I mean.
And I am simply saying one of the things that surely a prudent
fund would have to watch out for is when is the best time to do
this, and I don't think that you mean it when you say there is
no time like the present, because you don't mean that for each
and every investment you would make. There are some you
wouldn't make and there are some you would make now.
Mr. Wechsler. And what we advocate and I believe, and I
think you have heard it not only from this panel, from Chairman
Saul and Mr. Amelio as well, is that diversification is the
object here, to provide Federal workers with the ability to
diversify their investment portfolios for retirement savings.
And we are talking about a program that is supplemental to a
pension and Social Security, and can withstand and should
benefit from additional choices and asset classes such as real
estate.
And I think it is important to distinguish between the
single-family housing market and the commercial real estate
market. Both have done well over recent years, but we are not
resting our case on the performance of the last 1 year, 3
years, 5 years. As I think the chairman pointed out earlier,
the track record is strong for a decade, for 20 years, for 30
years.
Ms. Norton. Mr. Wechsler, that is a fair point. That is a
fair point, and I take your point.
Let me ask you one more question, and that is, goodness,
Ms. Schioldager's testimony about this huge difference in basis
points between the transaction costs. These are not just little
differences, 59 basis points, 9 basis points. They are huge.
There was testimony without this kind of particularity in the
last panel that would make anyone stop, that, hey, this is a
different kind of investment. There is something different
here. I would like you to speak to the difference and how you
respond to such huge transaction costs, very much larger than
anything TSP has ever contemplated before.
Mr. Wechsler. I think it is a very good question, and I
would respond in two parts. The first part is I believe--and I
am not the expert and Ms. Schioldager is the expert on this--
but the reason the transaction costs, until further determined,
looks somewhat higher than the other funds is because we are
talking about a narrower basket.
We have been talking about five baskets, now possibly
having a sixth. The plan testified earlier they may want to
look at multiple additions or slicing and dicing the current
options into more by slimming some of them down. It seems to me
that part of the issue here is the number of securities in the
basket that are being traded, so it is a narrower base in terms
of the transaction costs and the way the market operates to
withstand that. And I am sure Ms. Schioldager will----
Ms. Norton. Mr. Wechsler, I am not getting it. It sounds to
me to be something structurally different between the kinds of
investments, very traditional investments that TSP makes and
real estate. Perhaps Ms. Schioldager would add to what you have
said to clarify.
Mr. Wechsler. I would just want to complete, and then I am
very eager to hear what she has to say. But they are not
structurally different. These are publicly traded companies;
they were equity securities, the same as in the S and C Fund.
And what is important to note when we consider cost is also
benefit.
So you cannot only look at the transaction costs. If it is
somewhat higher, what benefit is added by having this option?
And I think what our testimony shows is that over long periods
of time the added return in combination with the lower
volatility and the low correlation with the other categories
brings a benefit to the portfolio that is well worth any
marginal additional costs.
Ms. Norton. Now, Ms. Schioldager, just based on what the
figures show, which is real estate has done better over the
long-term, I am sure, taking into account--please correct me if
I am wrong--what are the transaction costs? I mean, when one
looks at those figures that the panel had and that the chairman
had, and those figures are at least comparable and, in fact,
better, does that take into account transaction costs?
Mr. Saul. Can I comment on that? Because I think you are
talking about my figures here.
The NAREIT figures are a cap-weighted index, there are no
transaction costs in there. However, the transaction costs,
although they are higher on the REITs than they are on, say,
the S Fund or the C Fund, these are index funds, and you have
to buy them on the way in and you have to buy and sell some to
take care of some cash inflows and outflows.
But, for the most part, the transaction costs are a one-
time occurrence; they occur when you go in. And since you are
not trading a very high percentage of the portfolio--and
perhaps Ms. Schioldager can address that--but since the
portfolio is not heavily traded, the transaction costs are
actually the smaller part of the fee, compared to, say, the
management fee that she was also talking about.
Ms. Norton. Ms. Schioldager.
Ms. Schioldager. The transaction costs that I spoke to were
based on the MSREIT Index, which is an index that holds about
120 securities. Remember that the REITs that are available in
the public market are just over 200 to 250 REITs available in
the market, comparing that to the broader U.S. equity market,
where you have 5,000 securities that are available. So it is a
very small subset of the U.S. equity market.
The transaction costs are more expensive simply because of
the liquidity associated with REITs. Most REITs are small-cap
and mid-cap stocks, so, given that, the liquidity associated
with small-cap stocks mean that you pay more when you are
buying them. It is the case that the transaction costs are only
occurred [sic] at the time that you purchase a fund, so this
isn't--you know, if you were to purchase once and you are a
long-term holder, that is one transaction cost that is
incurred, and there are no additional transaction costs. But if
you are buying and selling the fund, that is what you would
expect to pay each time there is a purchase or a sale.
Ms. Norton. Thank you very much, Mr. Chairman.
Mr. Porter. Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman.
I just want to pursue the issue of what the trend is in the
private sector, especially with respect to large employers,
because my understanding is that the trend is toward allowing
employees to have a REIT specific option within the portfolio
and that is especially true among some of the largest
employers. Could you just all respond to that so we can get the
facts on the table?
Mr. Wechsler. I would say that as far as the defined
benefit world, the traditional pension plans out there, they
have long invested in real estate, and increasingly the trend
is that part of their real estate investment is taking place in
REITs, in some cases all, in some cases part.
As far as 401(k) plans, which have been a newer addition,
relatively speaking, on the retirement savings playing field,
we have begun to see a substantial up-tick in the number of
plans that have a distinct real estate option for their
employees, utilizing REITs generally, and that has, in the
last, I would say, 4 or 5 or 6 years, tripled or quadrupled
percentage-wise. It is a significant upward trend.
Mr. Van Hollen. Any other comments on that?
Ms. Schioldager. The only thing, I would agree that most
defined benefit plans do have a real estate allocation. Many of
them gain their real estate allocation through direct access to
real estate, so they are buying individual properties. Smaller
defined benefit plans are utilizing REITs for their access to
real estate. In terms of defined contribution, the statistics
that I have show on that one in eight defined contribution
plans have a real estate or a REIT option in their lineup of
funds.
Mr. Van Hollen. Do you know what the trend is, though? Has
it been increasing?
Ms. Schioldager. It is increasing.
Mr. Van Hollen. And is that true especially among some of
the larger employers?
Ms. Schioldager. Absolutely.
Mr. Van Hollen. The other question I had is on the issue of
taking a time to look at various new investment options among
the TSP, and whether or not the REIT option can be
distinguished from others because it is under-represented in
the stock market and the other options, the plans that we are
talking about. Is that something that distinguishes the REIT
option from some of the other investment proposals that we
might be looking at, or would they also be things that are
under-represented?
Ms. Schioldager. The other investment proposals that I
spoke to in terms of emerging markets, commodities, and TIPS,
are not represented in the current lineup of funds; so, whereas
you are getting some real estate exposure through both the S&P
500 Fund and the Wilshire 4500 Fund, you are not getting
exposure to commodities or emerging markets in any of the plan
options.
Mr. Van Hollen. In any of the options.
Ms. Schioldager. That is correct.
Mr. Wechsler. But, Mr. Van Hollen, I think part of the
thrust of your question was the broader economy, and whether
the stock market and the bond market adequately reflects other
aspects of the economy. And I think it is fair to say that the
commercial real estate sector of the economy is probably the
last major sector that has been moving into the public capital
markets, both in terms of debt and equity. And that has
happened over the last few decades in a very significant
manner, but there is still much more to be done.
So I think you would be hard-pressed to find in the public
capital markets another sector of the economy that is under-
represented in the public markets the way commercial real
estate is.
Mr. Van Hollen. Well, that is why I asked to the extent
that the real estate portion.
Mr. Wechsler. Which, by the way, is why, for many years, as
Ms. Schioldager pointed out, defined benefit plans have
directly purchased real estate. However, that is not a solution
for the Thrift Savings Plan. I don't think Congress will be
having it directly by office buildings and shopping malls
around the country, only indirectly, hopefully, through REITs.
Mr. Van Hollen. Thank you.
Thank you, Mr. Chairman.
Mr. Porter. Thank you very much. That will conclude the
testimony today. We sure appreciate your being here, all those
folks----
Ms. Norton. Mr. Chairman, could I ask one more question?
Mr. Porter. Yes, you can.
Ms. Norton. There is a concern among employees and there
was a concern with the Board that people fall away given
increased complexity, and that is one of reasons they want to
just keep it simple, keep it simple. Particularly given the
testimony we have just heard about the difference in basis
points between the two kinds of funds on the down side, and on
the upside, if I may simply refer to Mr. Wechsler's testimony
that REIT stock returns combine the growth characteristics of
other stocks and the income characteristics of bonds, there is
something to that, I think. He also talks about the low
volatility.
There is every reason to want to capture some of that,
frankly, conservatism for Federal employees. I wonder if a fund
like this or similar funds, given the huge difference in
transaction costs, which would give me some pause in simply
saying to employees which do you want to invest in, here is
REITs and then here are all the rest of them. Would you think
it appropriate to red flag transaction costs? I am sure people
are told about transaction costs.
But when you have this kind of difference in transaction
costs, and somebody looks and sees the return on real estate or
lives in a city like Mr. Davis and I live in, where they just
think real estate is going to go through the roof and be this
way forever, don't you think it would be important to alert
people that the transaction costs for this stock is
considerably greater than for another stock, and maybe we could
get some of the problem on simplicity and people wondering what
this is all about dealt with?
Mr. Wechsler. The short answer is yes, I think more
education in general about the costs and benefits of all
investing is incredibly important, and I think that Federal
workers of the Thrift Savings Plan should have full disclosure
of any costs as well as the potential benefits.
Ms. Norton. They already have that. They already have that.
I am asking a very specific question. If you are going to do
something where the transaction costs are many times what
people are used to, and it is down in a footnote, I am
wondering if we are being fair to ordinary workers like me who
don't know this kind of stuff and don't read footnotes.
Mr. Wechsler. What I took from Ms. Schioldager's
explanation is that the transaction costs for REIT stocks were
comparable to small and mid-cap stocks, and that certainly
should be disclosed.
Ms. Norton. Ms. Schioldager.
Ms. Schioldager. I would agree with that, and I would say
that full disclosure is the appropriate way to educate plan
participants from the standpoint of buying a fund like this.
And I would expect that if this was added to any lineup, that
there would be some type of an educational process to inform
participants about the investment in REITs and what that means,
and part of that education would include the costs associated
with it.
These stocks, as I said, are small-cap and mid-cap stocks,
as are the funds in the Wilshire 4500 Fund. With that, the
liquidity, because of the number of stocks that are available,
is still quite a bit greater than what we see in the Wilshire
4500. So, by comparison, in the Wilshire 4500, a $100 million
trade is 23 basis points. The number that I had quoted in my
testimony was 59 basis points, although there are some
structural changes in the index that we were using that changes
that to 40 basis points. So it still is quite a bit more
expensive than what we see in the 4500 Fund.
Ms. Norton. Does the average person think about the basis
points when exercising her option to go from one fund to
another, as far as you know?
Ms. Schioldager. I wouldn't be able to comment on what plan
participants are looking at. I certainly do.
Ms. Norton. I hope you do.
Mr. Wechsler.
Mr. Wechsler. I just want to clarify one thing that would
be helpful, not tied to the transaction costs, but to the other
fees which have been discussed today. If my understanding is
correct--and Mr. Ibbotson can correct me if not--but the work
that we have done in this and that Ibbotson Associates has done
has assumed higher fees because they were modeled on what is
available out there publicly, although the testimony today has
been that the management fees would be possibly only slightly
higher than the other options.
But the numbers that we have presented to you today already
factor in somewhat higher costs. So notwithstanding the higher
costs, we think the benefits are still there, which is why I
responded earlier to you, Ms. Norton, on not only the costs,
but you have to look at the benefit.
And we think even at a little higher cost, the benefits are
documentable and are the type of choice that Federal workers,
as well as workers in 401(k) plans generally, should have in
terms of permitting them to include a meaningful allocation to
commercial real estate in a diversified investment portfolio
over a long period of time.
Ms. Norton. There are very substantial benefits here,
including the lack of volatility after the stock market
volatility I have seen, and it is certainly true you cannot get
something for nothing. If you want return on your investment,
you better understand how this operates; and within TSP I would
expect it to operate conservatively and to give back a
considerable sum.
I think we should be interested in capturing what the real
estate market has to offer. I am concerned about this notion of
simplicity. I know, frankly, that I don't ask my investment
advisor about transaction costs. I trust her; I know her. I go
buy the stock.
So I just want to say that the characteristics that Mr.
Wechsler points out in his testimony are very attractive. In a
market economy, you simply have to look at those kinds of
characteristics: strong returns, low volatility, low
correlation with returns to other assets. That is something one
would want to look at in a conservative fund.
At the same time, we in the Government would have to be
very concerned. I would think it a tragedy if people began to
fall away from TSP because they say, OK, now you have me, I
don't quite know what to do.
And one of the things it seems to me we would have to do is
to pay attention. The Advisory Committee also indicated that
they had compunctions about moving forward now. I am sure they
haven't heard all we have heard, but they do talk about
simplicity. The Board talks about people falling away. Terrible
thing to fall away from, since the Government puts its own
money in as well.
I think perhaps there is a way to do this. If you are
making a change that is very different, at least I think
different from what you have done before in basis points, I
think you would have to find some way to more than ``educate''
people. I think you would have to do something to warn people.
In any case, I will look forward to the work that is being
done, work that you say, Mr. Wechsler, you have no opposition
to, that would look at the entire range of options and then
look at whether, given the range, this should be the one or if
any ones should come forward consistent with the kind of fund
we are trying to have here in the Government.
Thank you very much, Mr. Chairman.
Mr. Porter. Again, I thank you all very much for being here
and for your testimony. Very lively debate and discussion. I
think it has elevated an additional option for Federal
employees, and I would not say that this discussion will end
only on this particular option.
I think that we should, as we move forward, look at some of
the other plans that were mentioned today. And if there is one
thing that has been consistent throughout the testimony is that
the REITs have had a very strong return, and it is something we
should give very strong consideration to. I appreciate everyone
being here. Thank you all very much.
Mr. Wechsler. Thank you.
Mr. Ibbotson. Thank you.
[Whereupon, at 4:19 p.m., the subcommittee was adjourned.]
[The prepared statement of Hon. Elijah E. Cummings and
additional information submitted for the hearing record
follows:]
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