<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:29849.wais]
ADDING A REAL ESTATE INVESTMENT TRUST [REIT] INDEX OPTION TO THE THRIFT
SAVINGS PLAN: CONSIDERING THE VIEWS AND ADVISORY ROLE OF THE EMPLOYEE
THRIFT ADVISORY COUNCIL [ETAC]
=======================================================================
HEARING
before the
SUBCOMMITTEE ON THE FEDERAL WORKFORCE
AND AGENCY ORGANIZATION
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
APRIL 26, 2006
__________
Serial No. 109-177
__________
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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29-849 WASHINGTON : 2006
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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
JON C. PORTER, Nevada C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia ELEANOR HOLMES NORTON, District of
PATRICK T. McHENRY, North Carolina Columbia
CHARLES W. DENT, Pennsylvania ------
VIRGINIA FOXX, North Carolina BERNARD SANDERS, Vermont
JEAN SCHMIDT, Ohio (Independent)
------ ------
David Marin, Staff Director
Lawrence Halloran, Deputy Staff Director
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
JEAN SCHMIDT, Ohio CHRIS VAN HOLLEN, Maryland
Ex Officio
HENRY A. WAXMAN, California
Ron Martinson, Staff Director
Shannon Meade, Professional Staff Member
Mark Stephenson, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on April 26, 2006................................... 1
Statement of:
Amelio, Gary A., executive director, Federal Retirement
Thrift Investment Board; and Thomas J. Trabucco, director
of external affairs, Federal Retirement Thrift Investment
Board...................................................... 89
Amelio, Gary A........................................... 89
Trabucco, Thomas J....................................... 94
Sauber, James W., chairman, Employee Thrift Advisory Council;
and Richard L. Strombotne, Employee Thrift Advisory Council
Member..................................................... 126
Sauber, James W.......................................... 126
Strombotne, Richard L.................................... 136
Letters, statements, etc., submitted for the record by:
Amelio, Gary A., executive director, Federal Retirement
Thrift Investment Board, prepared statement of............. 91
Cummings, Hon. Elijah E., a Representative in Congress from
the State of Maryland, prepared statement of............... 159
Davis, Chairman Tom, a Representative in Congress from the
State of Virginia, prepared statement of................... 35
Davis, Hon. Danny K., a Representative in Congress from the
State of Illinois:
Prepared statement of.................................... 30
Various letters.......................................... 145
Various prepared statements.............................. 13
Norton, Hon. Eleanor Holmes, a Delegate in Congress from the
District of Columbia, Federal Times articles............... 107
Porter, Hon. Jon C., a Representative in Congress from the
State of Nevada:
Exhibits 1-20............................................ 38
Letter dated April 26, 2006.............................. 135
Prepared statement of.................................... 7
Sauber, James W., chairman, Employee Thrift Advisory Council,
prepared statement of...................................... 139
Strombotne, Richard L., Employee Thrift Advisory Council
Member, prepared statement of.............................. 138
Trabucco, Thomas J., director of external affairs, Federal
Retirement Thrift Investment Board, prepared statement of.. 96
ADDING A REAL ESTATE INVESTMENT TRUST [REIT] INDEX OPTION TO THE THRIFT
SAVINGS PLAN: CONSIDERING THE VIEWS AND ADVISORY ROLE OF THE EMPLOYEE
THRIFT ADVISORY COUNCIL [ETAC]
----------
WEDNESDAY, APRIL 26, 2006
House of Representatives,
Subcommittee on Federal Workforce and Agency
Organization,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 3:03 p.m., in
room 2154, Rayburn House Office Building, Hon. Jon C. Porter
(chairman of the subcommittee) presiding.
Present: Representatives Porter, Tom Davis, Issa, Marchant,
McHenry, Schmidt, Davis of Illinois, Norton, Cummings, and Van
Hollen.
Staff present: Ronald Martinson, staff director; Chad
Bungard, deputy staff director/chief counsel; Chad
Christofferson, legislative assistant; Shannon Meade,
professional staff member; Patrick Jennings, OPM detailee/
senior counsel; Alex Cooper, legislative assistant; Mark
Stephenson and Tania Shand, minority professional staff
members; and Teresa Coufal, minority assistant clerk.
Mr. Porter. I would like to bring the meeting to order.
Today we are discussing adding a real estate investment trust
index option to the Thrift Savings Plan: considering the views
and advisory role of the Employee Thrift Advisory Council.
Welcome, everyone. I appreciate you being here today.
Mark Twain once said, ``Put all your eggs in one basket and
watch the basket.'' The point is that such a maneuver is risky
and unwise, and if you are going to do something that foolish,
you better keep your eye on the basket at all times.
Unfortunately, under the current leadership, the makeup of the
Thrift Savings Plan does not provide Federal employees with the
ability to diversify their funds for retirement. Between 2000
and 2003, the highest average annual rate of return on any
stock in the fund in the Thrift Savings Plan was minus 0.1
percent, while the rate of return on real estate investment
trusts was near plus 20 percent. During that time period, there
was no room for diversification, and Federal employees
throughout the Government lost their hard-earned money. The
fact that REITs have had a historically low correlation of
returns to the returns from other TSP funds is important to
protect an investor from market volatility. This was emphasized
by a senior analyst for Morningstar in a Washington Post
article in January in which the analyst was quoted as saying,
``Real estate stocks do not move in lockstep with the rest of
the market, and that makes them good portfolio diversifiers.''
Yale University Endowment Chief Investment Officer David
Swensen urges a real estate allocation of 20 percent for
investors, which could be accomplished through investment in
REIT stocks. This is a complete impossibility in the Thrift
Savings Plan. While REITs and real estate have performed well
in recent years, the performance of REITs and real estate over
the longer term is what makes the case and is the reason why
well-established retirement savings plans have routinely made a
significant allocation to commercial real estate investment.
For the past 30 years, REITs have outperformed the Dow Jones
Industrials, the NASDAQ Composite, the S&P 500. IBM, the
sponsor of the largest private sector 401(k) plan in the
country, offers a distinct REIT option for plan participants
and told the subcommittee last year that ``we are committed to
REITs as a core asset class for defined contribution plans . .
. Their return, volatility, diversification, dividend yield,
and taxation characteristics make the case.'' IBM is not alone.
Many large corporations offer distinct REIT options in their
401(k) plans, including General Motors, Verizon, and Ford Motor
Co.
Congressional consideration of the addition of options to
the Thrift Savings Plan is by no means unprecedented. After
sufficient congressional consideration, Congress established
the first three funds to the Thrift Savings Plan when it
created the Board. In anticipation of the need for more funds
once the Board got up and running, the ``Joint Explanatory
Statement of the Committee of the Conference'' stated, ``Should
additional investment vehicles become desirable, Congress can
authorize them.'' When crafting the enabling legislation for
the Thrift Savings Plan, according to the Conference Statement,
Congress expressed concern about political manipulation by
Board members--the kind of manipulation and lobbying that the
Board has been engaging in over the past several months. That
is why Congress set up the structure of the funds to be
passively managed by the Board, as opposed to being actively
managed. The only reference to congressional political
manipulation in the Conference Statement was a concern,
rightfully so, about the possibility of some sort of ``raid''
on the trust fund by Congress during budget cuts, not about
Congress selecting new index funds.
H.R. 1578 is simply about providing choice--not unlike the
private sector has--to Federal employees and giving them the
opportunity to diversify their portfolio. It is nothing more.
It is Congress' responsibility as ultimate fiduciaries of the
TSP to bring these opportunities within reach of every Federal
employee. Adding options to the Thrift Savings Plan in an
effort to enable proper diversification has been a priority of
this subcommittee long before I was here and for the past
couple of years starting in July 2004 when then-Subcommittee
Chairman Jo Ann Davis sent a letter to the Executive Director
of the Federal Retirement Thrift Investment Board Gary Amelio
requesting advice on potentially adding a REIT index option to
the Thrift Savings Plan. Mr. Amelio responded by briefing
subcommittee staff the next month. At that briefing, Amelio
expressed concern with the addition of a REIT index fund to the
Thrift Savings Plan at that time mostly because of the Board's
focus on rolling out lifecycle funds. He did state, however,
that if he were called upon to add another option to a
retirement plan with the same funds as those in the TSP, the
first thing he would add would be a REIT index fund option.
After several months of correspondence between the Board,
the subcommittee, and outside experts, the Board maintained
their opposition to the addition of a REITs index fund since,
according to the Board in January of last year, the ``funds
currently offered by the TSP are sufficient for the
construction of risk-optimized portfolios appropriate for TSP
participants.'' This statement is clearly untrue. Simply ask
some of the participants in the TSP--which, by the way, does
not happen currently by the Board--including some of my
colleagues up here on the dais who probably lost some money in
the TSP between 2000 and 2003 because there was no opportunity
to sufficiently diversify their portfolio.
The problem is that the TSP managers are not asking plan
participants for their opinion. According to a 2005 GAO report,
``TSP managers said that they have not surveyed participants
since the early 1990's'' and GAO found that ``because TSP
relies on customer complaints as an indicator of participant
satisfaction, its managers do not have the information
necessary to determine the degree to which participants are
satisfied with the services.'' GAO further found that the ``TSP
managers' reliance on complaints does not take into account
participants who are dissatisfied and have not complained or do
not know where to complain[.]'' Participants are left with the
burdensome task of sending letters to the TSP managers
themselves or the call center. This GAO finding belies
Executive Director Amelio's claims at last year's hearing that
he gets a great deal of feedback based on letters he received
when the TSP suffered a significant recordkeeping problem.
The GAO also found that the Employee Thrift Advisory
Council is equally unhelpful in assisting the TSP managers in
understanding the needs and wants of the participants. The GAO
found that ``while some ETAC representatives provide TSP
managers with feedback on draft TSP publications, legislative
initiatives, and other issues, ETAC representatives do not
systematically solicit feedback from their constituents. Some
ETAC representatives may receive sporadic feedback from
participants, but ETAC does not conduct surveys of plan
participants.'' I thought we were in a democracy. Apparently we
are not. GAO concluded, therefore, that ``the extent to which
participants within the represented agencies and employee
organizations provide feedback to the ETAC representative is
unclear.''
This ambiguity was demonstrated this past month when ETAC
voted on a resolution opposing the addition of a REIT index
fund at the present time. According to a letter to the
subcommittee from the Senior Executives Association, one of the
ETAC members that the SEA appointed to the Council at an ETAC
meeting took a position not held by the SEA itself. Thus, not
only did that member not survey any members of the SEA, it took
a position antithetical to the SEA policy. A further indication
that ETAC was not acting in a full representative fashion when
it considered the resolution on the addition of a REIT index
fund was demonstrated when the Board's Executive Director Gary
Amelio, who is not an ETAC member, recommended language to the
Council that was ultimately adopted stating that the
``development of a new fund must come from an independent
process developed by the Plan's fiduciaries.'' I mention the
problems with ETAC not to criticize the employee groups, who
are doing what they can with a broken process and who are
forced to take action and make recommendations without the
benefit of good tools for gathering important information from
the Federal employees they serve. I do join GAO with the
criticism of ETAC being the primary tool to get supposed
employee feedback. It simply can't do the job.
In its recommendations for executive action, GAO proposed
that the Federal Retirement Thrift Investment Board direct the
Executive Director to ``(1) develop a systematic effort to
assess TSP participants' overall satisfaction with the services
provided and (2) institutionalize the routine collection of
information and systematic assessment of industry trends and
innovations.'' According to GAO, ``the Board disagreed with our
recommendation regarding the implementation of an evaluation
effort to assess the level of customer satisfaction . . . As we
state in our report, the private sector plan managers that we
spoke with believe that direct, ongoing participant feedback is
needed to respond to the changing needs of plan participants.
Without obtaining more frequent feedback from participants, TSP
managers cannot determine what improvement would best satisfy
participants' needs.'' Understanding what a Federal employee
really wants in the Thrift Savings Plan is clearly an issue
with the Plan's current managers.
After hearing the Board's concerns and discussing the bill
with outside experts, I, along with Representative Chris Van
Hollen and full committee Chairman Tom Davis, introduced H.R.
1578, a bill that now has 169 cosponsors, ranging from House
Minority Leader Nancy Pelosi to House Majority Leader John
Boehner. This is not a partisan bill but, rather, a bipartisan
effort that boasts 71 Democrats and 98 Republican cosponsors,
all of whom want to provide Federal employees with the
opportunity to further diversify their portfolios. A week after
introduction, the subcommittee held a broad-based hearing on
the merits of adding a REITs index fund as an option to the
TSP.
At that hearing over a year ago, Executive Director Amelio
told the subcommittee that ``the Board members and I have
decided to engage a reputable investment consulting firm to
assist in analyzing various investment-related plan issues,''
including REITs, and he specifically requested that ``any
consideration of legislation be delayed at least until after
the appropriate review by the plan's fiduciaries.'' However,
the Board took no effort at that time to act on its promise to
the subcommittee. A month after the hearing, in response to the
subcommittee's question for the record with regard to when the
study of all possible additions to the TSP would be made
available, the Board made no time commitment and indicated that
it would study the options on its own timetable. In July, both
the Senate and the House sent separate letters to the Board
requesting a written report on additional investment options to
the TSP by January 1, 2006--months after our initial hearing.
The House letter emphasized the importance of a timely report
so that it could act on the Board's recommendations to this
Congress. The Board responded to the letters in August stating
that it expected to select an investment consultant by
September 2005. Although the Board expressed no intention on
meeting the Senate and the House deadline of January 2006, it
did not indicate that the study would be completed after
Congress adjourned sine die.
In January, the TSP Board's staff told Government Reform
Committee staff that it had contracted with Ennis Knupp and
Associates to conduct a four-part evaluation of the TSP and,
notwithstanding repeated congressional requests that the study
of additional options be completed with sufficient time to
consider legislation in the 109th Congress, the TSP staff
revealed that such study would be the fourth and final part of
the contract and would probably not be completed until after
Congress adjourned sine die and possibly not until 2007. A
March 2006 Government Executive article correctly characterized
the Board's actions, ``TSP administrators already have voiced
their discontent with the addition of a REIT fund, and have
stalled its progress by hiring an outside consultant who will
review a range of possible funds by the end of 2006.'' At an
April Board meeting, Board Member Thomas Fink even recognized
that the decision to call in a consultant to review existing
TSP funds and investment policy probably created a perception
on the Hill that the Board is stalling on legislation in hopes
that the REIT proposal will fade.
The Board's unresponsiveness and stall tactics to delay the
study--a study that they requested and we agreed to--of
investment options to the Thrift Savings Plan can no longer be
tolerated. We cannot have another period, like we did between
2000 and 2003, where Federal employees lost thousands of
potential dollars. As the Federal Government seeks to modernize
its recruitment and retention tools to keep pace with the
private sector, additional investment options are important in
accomplishing this goal. According to the Board's own figures,
the percentage of private companies offering five or less
options, like the TSP, dropped from 7 percent to 1 percent from
1999 to 2003. Conversely, the average number of investment
options available today in all private sector 401(k) plans is
18 and is 20 for private sector 401(k) participants with 5,000
or more participants. As the number of investment options
rises, employees can diversify their assets and protect their
investments from dramatic volatility in the market.
This subcommittee has been studying the addition of a REIT
index fund for almost 2 years, including holding two
congressional hearings and engaging in numerous discussions and
correspondence with the Board and outside experts. Although it
could have been helpful to have had an additional study
conducted by the Board's consultant, the Board does not see the
TSP's lack of diversification as a problem and has, therefore,
not responded to Congress' expressed desire to expand options
this Congress. Nonetheless, the subcommittee's study of the
addition of a REIT index fund to the TSP reveals that it is the
next best option to the Thrift Savings Plan and would provide
significant diversification benefits. Burton Malkiel, a
professor of economics at Princeton University, was recently
quoted in Government Executive as stating that ``The Federal
Thrift Savings Plan serves as an excellent model for well-
designed retirement plans . . . it could be improved, however,
by including an additional class in the mix of funds--real
estate investment trusts.'' I, and at least 169 other
congressional members, agree.
I would like to thank our witnesses for being here today.
[The prepared statement of Hon. Jon C. Porter follows:]
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Mr. Porter. Noting that we do have a quorum present, I
would like to also introduce Ranking Minority Member Mr. Davis.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman,
and I want to thank you for agreeing to hold this second
hearing on the possible addition of a real estate investment
[REIT] fund to the Thrift Savings Plan [TSP]. As you know, last
month, the Democratic members of the subcommittee requested
that such a hearing be held to discuss the merits of adding a
REIT fund to the TSP and to hear the views of the Employee
Thrift Advisory Council [ETAC]. While I am pleased that this
hearing is being held, I must admit that I am indeed
disappointed that only one of our witnesses, ETAC Chairman Jim
Sauber, was invited to testify and that the scope of the
hearing seems to center more on ETAC and the Thrift Board's
decisionmaking process, rather than on why ETAC took the
extraordinary step of passing a resolution in opposition to
H.R. 1578, the Real Estate Investment Thrift Savings Act.
To ensure that the members of the Thrift Board remain aware
of the interests and concerns of the Thrift Plan participants
and beneficiaries, ETAC was created in the TSP's authorizing
legislation. ETAC represents over 2.6 million Federal employees
and retirees, and several ETAC representatives have served on
ETAC since the TSP's inception in 1986.
When a bill is opposed by the people it is supposed to
benefit, this subcommittee has an obligation to research the
issue further. Therefore, to gain a more comprehensive
understanding of this issue, I request that the written
statements of Terrence Duffy, chairman of the Board of the
Chicago Mercantile and House need to the TSP Board; Frank
Cavanaugh, the first Executive Director and CEO of the Board;
and Mike Miles, an independent certified financial planner
licensee and registered employee benefits consultant, be
submitted for the record. And I ask consent to have these items
submitted.
Mr. Porter. Without objection.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
[The information referred to follows:]
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Mr. Davis of Illinois. Given the scope of the hearing and
the markup to follow, the key questions that need to be
addressed are: Why REITs? And why now? Why isn't the
subcommittee considering emerging market bonds or Treasury
inflated protected securities or emerging market stocks? And
why is the subcommittee moving forward before a comprehensive
study of the universe of options can be completed? A study of
investment choices will include an examination of the costs to
participants, costs to the TSP, the scale at which the TSP
would be able to enter the market without paying a premium,
participant demand, overlapping funds, and whether or not any
of those choices complement the existing investment options.
This is municipality information, not only for us but for the
Board and ETAC to know and understand, as we make decisions
that will impact Federal employees' retirement savings.
I am also concerned about a pattern of investment behavior
known as ``chasing returns.'' I understand that this occurs
when individuals over-concentrate investments in securities
that perform well just prior to their investing in them. These
investors run the risk of purchasing stocks that may be
overvalued and are due for a correction. It is important to
understand how chasing returns fits into the investment
equation for Federal employees.
Experts estimate that retirees will need about 70 percent
of their pre-retirement income, 90 percent or more for lower-
income earners, to maintain their pre-retirement standard of
living. That makes the consideration of a fund a very serious
matter. One only has to look at the example of Enron, whose
employees were allowed and encouraged by company executives to
invest in Enron stock, to see what can happen when retirement
programs are not administered solely in the interests of plan
participants.
The TSP has an exemplary record. Let's continue that
tradition. I look forward to hearing from today's witnesses,
and I still think, Mr. Chairman, that we need to have all of
the information that we can garner before making a final
decision.
Again, I thank you for holding this hearing and yield back
the balance of my time.
[The prepared statement of Hon. Danny K. Davis follows:]
[GRAPHIC] [TIFF OMITTED] T9849.022
Mr. Porter. Thank you, Mr. Davis.
Congressman Marchant.
Mr. Marchant. No opening.
Mr. Porter. Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman. I thank both you
and the ranking member, Mr. Davis, for your opening statements.
I want to thank the witnesses for being here today, and you,
Mr. Chairman, for having this hearing.
As you mentioned, we have had a series of hearings on this
very important issue, and I am looking forward to the testimony
of the witnesses today.
As the chairman said, a large number of Members of Congress
have cosponsored this bill. People want to find a way to
provide Federal employees with the kind of choices that many of
the major companies in the private sector are making. The
question does arise: If IBM has a REIT option, if other major
employers in the private sector have these kind of options,
which by all analyses I think has performed well recently, why
should we deny that kind of opportunity to Federal employees?
So that is the framework from which many of us approach this
issue.
And I have to say, in the process of putting together this
bill, our office approached many of the members of ETAC, some
of the major ones, and asked them for their input. And the
input we got back--and I will just mention one. AFGE, a major
member of the Advisory Council, we said, ``What do you think of
this bill?'' The response we got back was, ``We are not going
to oppose it. In fact, the ETAC is meeting. We are going to
learn more about it and see if we can support it.''
So a lot has obviously happened since then, but I think it
is important for everybody involved in this process to
understand that people involved in putting together this
legislation reached out and tried to solicit the views of
different players here. I represent lots of Federal employees.
It seems to me that we need to make sure they have the same
options that are available to many people in the private
sector.
That having been said, I think that it is important to have
this hearing given the fact that ETAC made the recommendation
they did. I think it important for us to learn more about what
factors they considered in reaching that opinion, and I look
forward to the testimony.
So thank you, Mr. Chairman.
Mr. Porter. Thank you, Congressman.
Congressman McHenry.
Mr. McHenry. Thank you, Chairman Porter. Thank you so much
for offering this legislation. I am proud to be a cosponsor of
it. And thank you, Mr. Van Hollen, for your leadership on this
legislation as well.
I look forward to hearing your testimony today because just
following this legislation, it is pretty perplexing that a
Board created by Congress then opposes Congress acting on the
program that it was created to have oversight over. It is a
little bit ironic that a creation of Congress is biting
Congress. And I would like to hear that from our second panel
on why they deem that appropriate.
I look forward to your testimony on the reason for your
decision, the reason for your approach on this, and the reason
why timeliness has not been of the essence of what you are
trying to achieve. We would like to have a reasonable response
in a reasonable amount of time, and I think this committee
hearing is important for those purposes.
So thank you again, Mr. Chairman.
Mr. Porter. Thank you, Congressman.
Congresswoman Holmes Norton, do you have an opening
statement?
Ms. Norton. Thank you very much, Mr. Chairman.
Mr. Chairman, I am almost missing a markup at the Homeland
Security Committee. I wanted to stay to say a few----
Chairman Tom Davis. Would the gentlelady yield just
quickly? They are voting final passage now. They are holding
the vote open at Homeland Security.
Ms. Norton. Yes, well, since I am going to get voted down,
let me at least say these remarks. My good friend, the chairman
of the full committee, has been there, cast his vote the wrong
way, so he is prepared to stay here. [Laughter.]
I have worked closely with the real estate industry.
Indeed, the District of Columbia is a real estate town, so it
comes to the table with a fair amount of credibility with me.
I also have a unique bill that heavily involves the real
estate industry. I put money in their pocket, both in the
commercial sector where real estate is one of the few big
industries in town, and, of course, my unique bill involving
homebuyers.
I, of course, have attended our subcommittee hearings, and
they have been informative as far as they could go. Mr.
Chairman, I have to say, I have to give the Republican majority
some credit for taking a fully bipartisan support and trying
their very best to tear it up. I mean, you couldn't have it
better. You have the leaders, the top leaders on my side,
literally from the top of my side, and your side on the bill,
and yet there is a problem that is very unfortunate that has
come forward.
Nobody was more outspoken in favor of REITs on the
committee than I was, kept pressing the Board--I was very
disappointed in the Board. I found their answers mealy mouthed.
We finally said, OK, tell you what, we are going to find out
what the real deal is, and we asked for a study. It is pending.
We even, some of us, were concerned that the Board might be
stalling because we wanted the study to be done more quickly. I
am told that may not be the case. Some have come forward with
some dates. I am not sure about that. But one thing I did not
expect was that this great interest--interest that came out of
literally the probing of our subcommittee, in which we
literally brought out in great detail what the great advantage
of REITs would or might be, would dissolve into what we are now
seeing. I just cannot believe that for the first time we see,
of all things, of all bodies, the TSP maligned as being simply
part of the political game vis-a-vis the Congress--something
that, by the way, is very dangerous. Very, very dangerous. We
are dealing here with one of the most conservative funds, one
of the largest funds in the marketplace.
So I do not like headlines like this that I regard as
absolutely needless and that were completely unavoidable
arriving very likely at the position that has been sought. I do
not like headlines that say, ``Playing politics with your
TSP.'' I do not want Wall Street to hear that and see that. And
I do not want our employees to see it or hear it. And I do not
like reading articles that say, ``Playing politics with your
TSP.'' I do not like reading articles--and I will not even
quote the worst of this--that say, among other things, most of
those contributions ranging from $1,000 to $7,500 and averaging
$3,300 per lawmaker were made within a month or two of the
lawmakers' signing onto a bill, the records show.
Well, you know what? I did not sign onto the bill. I wanted
to wait until the hearing and until the study, so I did not get
any of that money, and that is not why I am bringing this up. I
am a member of the TSP, and I----
Mr. Porter. If the Congresswoman would yield for a moment?
Ms. Norton. I am going to finish, Mr. Chairman. You did not
stop anybody else. And I think this needs to be brought out. I
think that it is a darn shame to take what has been a process
that had no political overtones and look like we are rushing to
judgment because of politics. I do not believe that people who
signed onto this bill thought any differently from the way I
thought when everything I said at the meeting indicated that I
thought that this might very well be a good idea. But here we
have a study that is going to be coming in in a few months, and
yet we are told that the sky will fall--what is falling is the
TSP--the sky will fall unless somehow this is done right away,
that we do not need to know about the cost to participants, the
cost to the TSP. The whole study will be moot, and I do not see
why in the world, even on a committee like this, Mr. Chairman,
a subcommittee that you have run in a bipartisan way, where you
have virtually every member of this subcommittee on the record
for you, you would allow this to devolve into this. And that is
what is happening here, and it is going to hurt the TSP and it
is going to hurt the relationships we have had with you. And I
want the record to show why I am concerned about this process
and why I am particularly concerned that no matter how hard we
try, this Republican majority is determined to separate us,
whether it is Democrats from Republicans or whether it is
employees from Members of Congress.
And I thank you for the time, Mr. Chairman.
Mr. Porter. Thank you, Congresswoman. If I may comment, I
think we agree. It is irresponsible--but let me take it a step
further. It is irresponsible of a media outlet to report a
story without the courtesy of having an interview with the
chairman of the committee. It is irresponsible, this article is
irresponsible. It is not true. It is inaccurate. And I agree
with you. It is a shame that certain members have played
politics with this Board. And I think it is a discredit to
every Federal employee, it is a discredit to this Congress,
when politics are being played exactly as you are saying by the
Board of TSP. It is a shame on TSP. And I am disappointed that
one news outlet can choose to be irresponsible and not have the
courtesy of interviewing the chairman of this committee. This
is absolutely false. And I appreciate your comments, and I
understand what you are saying. Based upon reading the article,
that is why it is irresponsible of this newspaper to print this
article, and I am glad you brought it up. Thank you.
Mr. Davis.
Chairman Tom Davis. Well, it is irresponsible. In fact, as
far as the total amounts of money that my PAC gave to you, Mr.
Porter, they are attributing somehow to some of these other
interest groups, which is absurd. The numbers do not even add
up.
I guess my surprise here is that a group that is supposed
to be looking out for Federal employees has cost Federal
employees literally millions of dollars. If this option had
been available a year ago, looking at the growth in REITs,
Federal employees would have been able in many cases to get a
greater return on their investment by having an option that you
have denied them.
In good faith, over a year ago they came before this Board
and said they were going to do a study, and now it appears that
the study results will come out and they are going to run the
clock out on us before this Congress is over, hopefully to kick
it over, and I suppose next Congress they will do the same
thing. It is irresponsible.
The fastest-growing part of my own personal portfolio has
been the real estate side. I would like other Federal
employees, the 54,000 Federal employees in my district, to have
the same option. This is not a mandate. This just gives Federal
employees an option to do that, and it is the height of
arrogance to think that somehow Federal employees are not
intelligent enough to make the right investment decisions so
you want to deny them this opportunity because they might pick
it. And that is the rhetoric that we have heard out of this
group, which has been so irresponsible in some of the other
things that they have undertaken, such as the computer system
and everything else as you go back.
Mr. Chairman, as you note in your opening statement, the
percentage of private companies offering five or less options
to their employees has dropped from 7 percent to 1 percent over
the last 4 years, and yet this group insists on keeping it at 5
percent and running out the clock, offering one of the largest
plans in the country fewer options, when the trend everywhere
else--I don't know what they know that we don't know, but I
look forward to their testimony at this point, and to just tell
you I don't think this committee can wait for this unelected
body to sit here and try to run the clock out.
Thank you.
[The prepared statement of Chairman Tom Davis follows:]
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Mr. Porter. Thank you, Mr. Chairman. I would just like to
add one additional comment that you started, regarding the
article written by Tim Kauffman of the Federal Times, stating
contributions received from other members of leadership, again,
I think this is an insult to the whole Congress, and I
appreciate you and the Congressman bringing it forward.
So, with that, I would like to move to some procedural
matters. I ask unanimous consent that all Members have 5
legislative days to submit written statements and questions for
the hearing record, 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, it's so ordered.
Let's see here. There are a number of documents that we
will be referring to through the course of the questioning.
There are documents that will consist of correspondence
relating to the subcommittee's interaction with the TSP Board.
I ask unanimous consent that these documents be placed into the
record. These documents are marked as exhibits 1 through 16.
So, without objection, so ordered--correction, 1 through 20.
[The information referred to follow:]
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Mr. Porter. It is the practice of this committee to
administer the oath to all witnesses, so if you would all
please stand, I would like to administer the oath. Please raise
your right hands.
[Witnesses sworn.]
Mr. Porter. Let the record reflect that the witnesses have
answered in the affirmative. Please be seated, as you have.
The first panel, I would like to now invite the panels to
come forward. Of course, you are there, and the panel will now
be recognized for opening statements. I would ask you each to
summarize your testimony in about 5 minutes. Any fuller
statement you may wish to make will be included in the record.
First we will hear from Mr. Gary Amelio, Executive Director of
the Federal Retirement Thrift Investment Board. After Mr.
Amelio, we will hear from Mr. Thomas Trabucco, the Director of
External Affairs for the Federal Retirement Thrift Investment
Board. I would like to thank you both for being here.
Mr. Amelio.
STATEMENTS OF GARY A. AMELIO, EXECUTIVE DIRECTOR, FEDERAL
RETIREMENT THRIFT INVESTMENT BOARD; AND THOMAS J. TRABUCCO,
DIRECTOR OF EXTERNAL AFFAIRS, FEDERAL RETIREMENT THRIFT
INVESTMENT BOARD
STATEMENT OF GARY A. AMELIO
Mr. Amelio. Good afternoon. My name is Gary Amelio, and I
am executive director of the Federal Retirement Thrift
Investment Board.
The duties of the executive director are established by
law. One such duty is to meet with the statutorily created
Employee Thrift Advisory Council [ETAC]. This is a duty which I
find most useful and enjoyable. Since I arrived, we have held
these meetings twice each year.
Before coming to the agency nearly 3 years ago, I had 23
years of private sector experience in the employee benefits,
fiduciary industry. Because much of it involved Taft-Hartley
plans, I had a great deal of experience with union and
association leaders. I can state unequivocally that ETAC
members are as knowledgeable about their plan and as protective
of their members' retirement security as any of the employee
leaders I have worked with throughout my career.
The letter inviting me to this hearing asked that I discuss
the formulation of the ETAC resolution to oppose H.R. 1578.
ETAC meeting transcripts, which we have provided to this
subcommittee, show that the discussion began more than 2 years
ago at the March 24, 2004, ETAC meeting. At that time ETAC
Chairman Jim Sauber announced that he had been contacted by the
REIT lobbyist who requested such a meeting. As Mr. Sauber
explained it, the REIT advocates wanted to make a pitch for
their proposal. He told ETAC members he had an open mind and
told other members they may be contacted as well.
I had also been contacted by REIT representatives for a
meeting. I advised ETAC that I was also open ``to listen to
anything within reason,'' but I had sent word through their
lobbyist that I did not want ``a hard sales pitch.'' I did
state for the record my displeasure upon learning that my
position had been misrepresented as refusing to meet.
Nevertheless, I told ETAC that I planned to meet with the
industry association representatives and lobbyists, which I did
on March 30, 2004.
The next ETAC meeting was held on November 9, 2004. Again,
the issue was raised, and Chairman Sauber offered to facilitate
a meeting of interested ETAC members with the REIT
representatives. I explained that I had personally met with the
trade association's leaders and their lobbyist for 2 hours. I
also had my senior investment staff meet with them a second
time to receive further information and to invite them to
present any additional information they wished to develop in
writing.
I further advised ETAC on November 9th that Tom Trabucco
and I had met with House and Senate staff to discuss the
proposal. I again stated my openness to receiving information,
but cited three specific concerns: liquidity, fee structure,
and setting precedent for other narrowly focused fund additions
to the TSP. I was helped at this point by an ETAC member who
demonstrated her knowledge by pointing out that we already have
REITs in our existing broad-based domestic stock index of
funds.
The Council next met on May 4, 2005, just 2 weeks after
this subcommittee held a hearing on H.R. 1578. I was asked to
and gave Council members a brief on what I had said during the
hearing. A number of Council members voiced strong concerns.
Others said they viewed it as an attempt to politicize the TSP.
There was general agreement that each ETAC member would consult
with his or her own organization's leadership.
With regard to the resolution itself, ETAC Chairman Jim
Sauber contacted us in late January 2006 to advise that he
wanted to schedule an ETAC meeting. This is standard operating
procedure since the law requires the executive director to meet
at the request of the Council.
Tom Trabucco advised me that Mr. Sauber wanted to have a
potential resolution for consideration at the meeting. Mr.
Sauber had also asked that the Board's general counsel, who
also serves as the committee management officer, be consulted
to be certain that he was proceeding consistent with the law. I
told Tom to do everything appropriate to support the Council.
The resolution was indeed developed, circulated, raised at
the March 7, 2006, meeting, discussed, amended, and approved.
Nine Council members and three alternates were in attendance.
One Council member--the representative of the uniformed
services--abstained because of his unique situation of
representing not an employee organization but the Department of
Defense. From my perspective as the Federal official to whom
the Council provides its view, the Council had, after 2 years
of discussion and review, clearly stated its opposition to the
REIT bill.
Thank you.
[The prepared statement of Mr. Amelio follows:]
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Mr. Porter. Thank you for your testimony.
Mr. Trabucco, welcome.
STATEMENT OF THOMAS J. TRABUCCO
Mr. Trabucco. Thank you. Good afternoon, Chairman Porter,
Congressman Davis, members of the subcommittee. My name is Tom
Trabucco, and I am the director of external affairs for the
Federal Retirement Thrift Investment Board. My position
includes three main areas of responsibility: legislative
affairs, the press, and relations with the unions and
associations representing Federal and postal employees. I also
serve as the agency's spokesman when the executive director is
not available.
I have served in this position for nearly 20 years as a
career member of the Senior Executive Service. Before that, I
served for a total of 13 years, handling legislative matters
for two organizations, the National Association of Retired
Federal Employees and the National Federation of Federal
Employees, as well as a staff member to the predecessor of this
committee.
Since coming to the Thrift Investment Board in 1987, it has
been my great privilege to work with many outstanding
individuals in the agency, the employee organizations, the
executive branch and the Congress, who were completely
dedicated to the success of the Thrift Savings Plan. There has
been a truly exceptional effort to assure those who placed
their retirement savings in the TSP, that this plan will be
managed solely in their interest by expert fiduciaries.
This does not mean there have not been different views
openly expressed. My prepared statement includes some examples.
When Congress created the TSP, it recognized that the
experts who serve as the plan fiduciaries, the board members
and the executive director, would not necessarily be familiar
with the Federal work force. To ensure that the employees
eligible to participate had top-level input into all investment
and administrative matters considered by the board, the House
committee proposed the Employee Thrift Advisory Council. The
Council was created and has functioned exactly as envisioned
ever since.
Part of my job at the board is to serve as the secretary to
the Council. In this role I am the primary point of contact
between Council members and the executive director. Council
members are appointed by the chairman of the board from
organizations prescribed by law. I manage the process by which
nominations are solicited from the presidents of each of these
unions and associations. I am also responsible for filing the
annual reports regarding Council activities, as required by the
Federal Advisory Committee Act, and for performing other
administrative support functions.
By law, the executive director meets at the request of the
Council. I normally receive the first call that a meeting is
being requested. I coordinate with the committee management
officer to develop the meeting notice and forward the agenda
for publication in the Federal Register. As Executive Director
Amelio stated, I responded to Chairman Sauber's request
regarding his resolution opposing REITs. He told me the points
that he wanted in the resolution, and asked that I run them by
the general counsel to ensure that they were put in proper
legal language and that he was properly following the statutory
provision regarding Council resolutions. I did so.
The general counsel advised me that the resolution I
drafted, based on Chairman Sauber's specifications, was fine,
and that his actions were consistent with both the law and the
ETAC charter. A copy of that charter is attached to my
testimony. She further advised that Mr. Sauber should be sure
to circulate his resolution in advance of the meeting.
I forwarded the file that I had created to Mr. Sauber. I
recall that he made two rounds of revisions, which he
circulated to Council members in advance and copied to me. I
also asked him before the meeting to send me his final version
so we had a copy that could be promptly edited to reflect any
amendments made at the meeting. The resolution was indeed again
revised at the ETAC meeting. Board staff promptly produced a
final version for ETAC members at the meeting, and it was
approved by the Council.
That concludes my prepared statement. I would be pleased to
respond to any questions.
[The prepared statement of Mr. Trabucco follows:]
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Mr. Porter. Thank you very much. We appreciate your
testimony.
I would like to begin questioning regarding a subcommittee
hearing we had last year on H.R. 1578. In our hearing on April
19, 2005, on H.R. 1578, Mr. Amelio, did you ask the
subcommittee to delay action on H.R. 1578 until after you
studied the investment options for TSP?
Mr. Amelio. I believe that I did.
Mr. Porter. And we have done that, correct?
Mr. Amelio. I believe that you have, yes.
Mr. Porter. After we held our hearing on April 19th, we
sent you written questions for the record to answer, as our
usual practice after a hearing. I want to read something from
the May 4, 2005 Employee Thrift Advisory Council. This is a
transcript of an exchange between you, Mr. Amelio, and Mr.
Strombotne--pardon me if I mispronounced the name--discussing
the questions for the record asked by the subcommittee
following the hearing of April 19, 2005. It is exhibit No. 18.
I am quoting Mr. Amelio. ``But I was startled when I read,
not only the tenor of the questions from the subcommittee, but
the tone. We're going to respond in kind, and I'm going to make
these questions public. I'm going public. We'll give copies,
and I intend to give the media copies. They ought to see what's
going on behind the scenes.'' Now, remember, this was after our
meeting April 19th. This is for the full committee. This is
after our meeting. This is Mr. Amelio. ``We're going to go
public. And now I finally have these questions in writing
instead of just sitting in a room up there and hearing it. I
think everybody else should see what's going on, although,
frankly, the media knows what's going on. Some of them have
already mentioned to me through their research they're well
aware of what's going on, so that's where we are right now.
Mr. Strombotne: `What kind of time schedule are you on for
response to their questions?'
Mr. Amelio: `I plan taking every day I have available.'
From a transcript of May 4, 2005, ETAC meeting, page 77,
emphasis added.''
Mr. Amelio, what you mean when you said, ``I'm going
public?'' Were you suggesting waging a media campaign against
Members of Congress? Why were you so upset with Congress simply
because we were asking questions? Can you answer my question?
Mr. Amelio. I have a recollection. I just saw before the
meeting, those transcripts, and my recollection is I believe
that the questions that were submitted to us did not reflect an
understanding of the information that we attempted to put
forth, that we were going to do a full review. It appeared to
me that they were driven by the industry, and that they were
directed at a single fund rather than an in toto review of all
available options.
Mr. Porter. What did you mean when you said you were going
to go public?
Mr. Amelio. Keep this--just as we're doing now, be very
open about this so that the plan's participants could see the
board feels that to exercise its fiduciary duty, we need to
know--or the participants need to know that we as fiduciaries
are going to exercise our duty and ensure that we review every
plan option and not simply focus on one particular option at
one particular point, that we wanted to have an independent
consultant do the full review of all investment options.
Mr. Porter. Why then did you say you were going to wage a
media campaign against Congress?
Mr. Amelio. I don't recall. If it's in there, then I said
it.
Mr. Porter. It is in there.
Mr. Amelio. OK. Well, I haven't, so----
Mr. Porter. Why would you say that?
Mr. Amelio. I have no--I don't know why.
Mr. Porter. Why were you so upset because Congress was
asking you questions, and why did you complain about the tone
of this subcommittee, that I think is very fair?
Mr. Amelio. Because, I believe, that the questions, as
written, seemed to be written by the industry, rather than by
an independent objective group, which I assume that the
subcommittee, the role that you would take is the same role
that the fiduciaries would take.
Mr. Porter. So you are saying that those questions were
written by the industry is why you were going to----
Mr. Amelio. No, I don't know who wrote them.
Mr. Porter [continuing]. Take the time to go to the media
because you thought they were written by the industry?
Mr. Amelio. I don't know who wrote them. It was just my own
impression.
Mr. Porter. Or were you afraid to answer those questions?
Mr. Amelio. Not at all.
Mr. Porter. On July 5th, Senators Collins, Lieberman,
Voinovich, wrote to Chairman Saul. The Senators noted that the
FRTIB was undertaking a review of investment options for Thrift
Savings Plan. Senators requested a written report of the
findings and recommendations of the review by January 1, 2006.
That is exhibit No. 6.
The next day, July 6th, Chairman Davis, Representatives
Waxman, Danny Davis, myself, wrote to Chairman Saul to request
a written report on TSP investments by January 1st. The letter
stated, ``We look forward to the completion of the study and
your recommendations so that we can consider them and proceed
with the REIT legislation or a version of that legislation,
including your recommendations, in the 109th Congress.''
On August 11th, you, Mr. Amelio, and five board members,
respond with a letter to the subcommittee which indicated the
board had issued a request for proposals on April 29th, seeking
competitive bids for ongoing expert investment consulting
advice, exhibit No. 8.
In the letter the board stated it expected to select an
investment consultant by September 2005.
Mr. Amelio, in the letter of August 11th, a study of the
investment options for TSP is the last work item in the request
for proposals; is that correct?
Mr. Amelio. Is the--in terms of the work the consultant is
doing for us, the fourth item is a review of investment
options, that is correct.
Mr. Porter. Why was it the fourth?
Mr. Amelio. That was a practical measure to comply with
Federal procurement law.
Mr. Porter. To put it forth was per law?
Mr. Amelio. No, but we had to get several other things done
in advance of that that were required, and----
Mr. Porter. And what were those things?
Mr. Amelio. Reviewing the current indexes, which had to be
done before we take--go out for RFP on the existing fund
managers, which we have to complete by the fall of 2006.
Mr. Porter. In the letter the board states that the tasks
will need to be completed in the order listed. It is not
prudent to establish firm deadlines on the completion of each
task. So the study of investment options was your lowest
priority, correct?
Mr. Amelio. In the order in which we had to satisfy law,
yeah, it had to be put fourth. I wouldn't say it was the lowest
priority. I would simply say we had to address things that the
law required us to first.
Mr. Porter. Why did you refuse to accelerate the study of
the investment options? Was it in defiance of Congress and the
Senate?
Mr. Amelio. Not at all. We have--the TSP is required under
the statute to operate at low expenses, and therefore, we had
to do the RFP. And in order to get the RFPs completed for the
investment manager, we had to review the indexes first. Those
two things had to be done, one, two. Obviously, then, the study
would be completed after those, which we are doing, but we have
indicated we'll get them done before the close of 2006.
Mr. Porter. Mr. Davis.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
Mr. Amelio, you noted in a recent Federal Times article
that the board hired Ennis Knupp to assess the plan's current
investments and to report back by the end of the year if there
were any material gaps in the TSP.
I have two questions. One: what will the Ennis Knupp study
entail? Can an informed decision be made about adding funds to
the TSP without this assessment? And how important is the study
in determining which funds if any should be added to the TSP?
Mr. Amelio. Ennis Knupp is an independent nationally
renowned investment consulting firm. They will--their study of
the universe of options will consist of two pieces. First, they
will look at the existing funds and determine whether there are
any material gap in the funds.
The second thing they will do is, if they believe there is
a material gap, look at the industry and determine whether
there is any product out there that could appropriately fill
the material gap. That study will include, but it certainly
will not be limited to REITs. It will look at emerging markets.
It will look at bonds. It will look at TIPs. It will look at
any variety of investments. That is the way any appropriate
fiduciary that is charged with managing an employee benefit
plan does look at a participant directed plan. It would, I
believe, be a breach of fiduciary duty to simply look at one
fund without looking at the fund lineup and seeing what's in
there or what isn't and make a decision on that basis.
Mr. Davis of Illinois. So one would be in a better position
to make a decision with the information that would be generated
than they are without the information that would be generated
once the study is completed?
Mr. Amelio. Absolutely, yes, sir.
Mr. Davis of Illinois. Would you say that would be the
common opinion of other experts in the field?
Mr. Amelio. I believe that every fiduciary of a participant
directed defined contribution plan in this country would take
the same approach, and the larger the plan, the more important
it is that process be followed because of issues like liquidity
and fees and availability of products to the plan, yes, sir.
Mr. Davis of Illinois. Mr. Terrence Duffy, chairman of the
Board of the Chicago Mercantile Exchange and the House of
Representatives' nominee to the Thrift Savings Board, in
written testimony submitted for this hearing, stated that a
technical analysis demonstrated that the proponents of a REIT
fund overstated the case for such a fund.
What would you think he perhaps meant by making this
statement?
Mr. Amelio. Well, I spent about 22 years in the industry--
before I came into this position--in the private sector, and
when proponents of any investment vehicle--when I say
``proponents'' I'm talking about sales people and promoters of
investment products--roll out figures, they roll out figures
which put their particular fund or their particular industry in
a better light than some other person using other figures would
do it, and I believe in this case there were several factors
that went into that. We've had our chief investment officer and
her staff look into this, and I believe a couple of the
weightings that were used in the study that the REIT lobbyists
put forth could be challenged by others.
For example, I think there was an overweighting of 40
percent in REITs versus the allocation to equities when most
other consultants might only use a 15 percent allocation. The
second thing is, the REIT industry, or the real estate industry
certainly got hot for a few years, but past performance is no
indicator of future performance. I heard those kind of comments
before. And if you're investing based on past performance, it's
like driving a car by looking through the rear view mirror. It
might be reassuring at first, but it can be dangerous.
Mr. Davis of Illinois. And so the continuous gathering of
information really puts you in the most comfortable position to
feel that the benefits of your decisions are going to be
favorable?
Mr. Amelio. It absolutely does. I mean that's what
fiduciaries do. You have to study all of the options, all of
the materials, and I think it's particularly important that we
get it from an independent consultant.
Mr. Davis of Illinois. Thank you very much.
Mr. Porter. If I could just respond to a couple of the
comments that I don't think are quite accurate. If we look at
rates of return, Thrift Savings Plan investment fund
performance, G Fund from 1988-2005 was 6.5 percent, in 2000-
2005 was 5 percent. The I Fund was 7.7 percent from 1988 to
2005. The fund was from 2000 to 2005, 3.2 percent. The F Fund
7.7 percent from 1988 to 2005, and we look at 2000 to 2005 of
6.9 percent.
Now, given these numbers to show an analysis that was done
based upon the investment in REIT funds--and again, I think
Federal employees are capable of making decisions. I trust that
they are smart and intelligent and know what they are doing.
If you look at these funds, the REIT Fund in 1988 to 2005
gained 13.8 percent, compared to the G Fund was 6.5, the I Fund
was 7.7, the F Fund was 7.7, the C Fund was 13.3, the S Fund
was 13.6. The REIT was right up there with the C and the S at
13.8 from 1988 to 2005.
From 2000 to 2005, the REIT Fund increased 20.7 percent,
the G Fund was 5 percent, the I Fund was 3.2 percent, the F
Fund was 6.9 percent, the C Fund was 0.2 percent, S Fund was
4.7. The REIT Fund was 20.7 percent. So if we look at 1988 to
2005, it is 13.8; from 2000-2005 it was 20.7 percent.
I am sorry, maybe we are reading from a different set of
stats.
Mr. Davis, Chairman Davis.
OK, Mr. Marchant.
Mr. Marchant. Thank you.
Mr. Amelio, in some of the literature that has been given
out, it says that REITs are already a part of the core
component, and I can't find anything in my material up here
that says what part, what percentage of the core component it
is. Do you know offhand, or is it in our material?
Mr. Amelio. I can give it to you. I am not sure what all
materials you have there, sir. It is--the REITs are a
proportion of the two domestic equity funds in proportion to
their overall totality of investment in the United States
economy. So if you look at the fair market value of REITs in
the TSP as of 3-31-06, it is $1.71 billion of the current TSP
as invested in REITs. We could break that down because some
REITs are held in the C Fund, and other REITs are held in the S
Fund, and I do have those numbers here if you want to give me a
second. But it gets to--oh, here it is. I'm sorry. OK. $564
million of that is held in the C Fund, and $1.14 billion is
held in the S Fund.
To give you an example as to how that might impact an
individual participant, if you were a participant in the TSP
and you put your account in the appropriate L Fund--and this
would be a participant who is younger and has a longer time
horizon till retirement--approximately 2 percent of your
account balance would be in REITs. And that basically is the
same allocation that you might find if you went out and got an
investment advisor to allocate your entire account versus all
the different segments, pharmaceuticals, banking and finance,
oil, energy, etc., if you were to pay an individual advisor.
And actually, that also ties back somewhat to the
chairman's point about there's always a debate in the industry,
are you stock picking or are you doing asset allocation? Most
investment advisors say asset allocation, and that's what we're
intended to do with these broad-based index funds that we have
in the plan that Congress created, and what we even do more so
with the L Funds, which are completely asset allocation, as
opposed to stock picking, going out, finding something that's
hot and investing in it at that particular point in time.
Mr. Marchant. When the board made its decision to not
consider this fund until it got the report, did they take into
consideration their fiduciary duty, not on the downside and on
the protective side, but on the upside and the potential gain
that they were, in essence, not allowing their investors to
take part in? Because if I am in TSP, and I am, and
aggressively in it, and I can't invest that money, because of
the match, I can't invest that money anywhere else, and I have
some limits on--the TSP board has in essence placed some limits
on my investment horizon because I am getting a match from the
Government. To me, it has limited my ability, not just for the
upside, because while the positive returns are very good,
REITs, historically in my portfolio and portfolios that I have
dealt with at Teacher Retirement System in Texas, Employee
Retirement System in Texas, have been used as a hedge as much
as they have for upside potential.
Do you think that the board, once it receives its report,
will reconsider this?
Mr. Amelio. I think that the board will support the
independent consultant's report, whatever is in there, as long
as it appears reasonable on its face, and I have no reason to
believe it wouldn't.
I would suggest to you that contrary to what's been said
earlier, this plan is as fully diversified as any plan could
be. We cover every U.S. domestic stock that there is between
the index funds, and Congress did this in 1986. I mean it was
genius when they created this plan, that it is low cost broad-
based index funds, so there is diversity here.
I also would, to answer the first part of your question, I
think the board very much considered its fiduciary duty. This
is a very impressive board. Although they are politically
appointed, they take their fiduciary duty seriously, and I
think they're acting in the plan participants' best interest by
wanting to see the independent review of the expert firm before
making a decision.
And, finally, we haven't said anything bad about REITs.
We're not saying they're good or bad. We're simply saying we
don't want to recommend any fund addition to the committee
until we've had an opportunity to review the current lineup and
all the potential possibilities if there are any material gaps.
That's all we're saying.
Mr. Marchant. Thank you.
Mr. Porter. Just a point of order for information. Yale
University Endowment Chief of Investment, I mentioned in my
opening statement, urges real estate allocation of 20 percent
for investors. Several of the largest hundred public defined
plans, including California Public Employees Retirement System,
which is the largest, and the New York State Teachers
Retirement System, allocated over 6 percent of their total to
commercial real estate. I just think that should be included.
Thank you.
Mr. Van Hollen, questions? I am sorry. Congresswoman, do
you have any questions?
Ms. Norton. Yes. Just let me make sure my comments were
understood. I think they were. But my comments about the
maligning of the TSP and its danger had nothing to do with the
press. I didn't think the press reports were distorted. I think
they reported. If there were some corrections and somebody got
it wrong, I would, with the chairman, decry the notion of not
trying to get a comment from the chairman. One of articles said
that they talked with a spokesman for the chairman, so I think
if he has something to clear up, I would certainly welcome it,
because I think it would benefit this whole discussion.
My comments, they reported campaign contributions. They got
that from the Congressional Record. They got when they were put
in. The nexus and the link is unhealthy. It is unhealthy for
this discussion. It is unhealthy for the fund. The press is in
the business of reporting. There they did not editorialize on
the matter, and I want to make that clear that I think they
were doing their job.
The fact is, that this Congress is or should be very
sensitive to appearances. We have a lobbying bill that is right
this moment still trying to get enough votes to get the rule
passed. This Congress has become all about lobbying and
corruption. So the timing could not be worse, especially when
we are talking about something where virtually every member was
in agreement in the first place.
Mr. Chairman, as you know, I am so perplexed. I was glad to
hear your last question, because you asked about Yale's 20
percent. That was in your testimony. Frankly, I was going to
ask about it. That is my alma mater, and it is not a private
sector IBM, and frankly, I was on the board of the Yale Corp.,
so I know just how conservative such boards are. That really
was going to be my question.
I do have a question, because I don't equate the TSP with
IBM and the private sector. Yale and other charitable
institutions, and their caution is, I think, more what has won
the respect of the TSP over the years. But as I sat here
listening to some of the questions, and once again, glanced at
the title of this hearing, I was just perplexed. Considering
the views and advisory roles of the Employee Thrift Advisory
Council, well, you know, Employee Thrift Advisory Council is
not central here, happens to be important as far as I am
concerned, because actually money is involved. And I think the
reason that many of us wanted this hearing is that we should
begin to get some answers because we were being rushed to a
vote right away, got to do it right away, there is some
emergency. So we wonder, my God, let's see what we can find
out.
So I just want to object that we're talking about the
Employee Thrift Advisory Council that are kind of in the same
position we are, trying to find answers from the people who run
the program itself. Much as I sympathize with them, they can't
possibly be at the center of our concerns today.
I would like to ask a Yale question. I would like to ask--
it is the kind of question that made me really wonder, Mr.
Amelio, about whether the TSP was stuck in the past or whether
it was prepared to move ahead at our last hearing. I like to
compare apples with apples, not private sector corporations who
are in the business of winning and losing, because the
employees of the Federal Government are not in that business
when they join the TSP.
I would like to ask you if you have looked at relevant,
responsible institutions like educational institutions, other
such institutions that are substantially invested in the market
or under pressure to in fact generate revenue for their
endowments and the like, and how you are informed, if at all,
by what other or similar funds are doing? And if you could
justify the difference between, for example--I will just use
that as an example, because, Chairman, I think rightfully--I
don't know if he is from Yale or not, but he rightfully put
this as an example. If not Yale, you can cite somebody else who
hasn't done the same thing, and that would inform me of what I
don't yet know.
Mr. Amelio. Am I allowed to answer?
Mr. Porter. Please.
Ms. Norton. You don't have to ask his permission to answer
my question.
Mr. Amelio. Well, I was watching the time. I'm sorry.
Ms. Norton. Oh, I see.
Mr. Amelio. Just basically, yes, we have. And to just draw
a distinction between the plans you're talking about, the Yale
plan and CalPERS, etc., those plans are what are called
actively managed by managers. Percentages are set up and
managers actively buy and sell in guidelines. The TSP is a
participant-directed plan, and you look at a menu of funds.
What we have done, for example, is you can look at the top 20
funds like the TSP in this country that are participant
directed. You would find, for example, only four of them have
REITs in----
Ms. Norton. Such as, please, such as?
Mr. Amelio. Such as IBM--they're not public, they're
private companies--IBM, General Motors, Ford. I've got a list
here. Boeing, Exxon, Lockheed, Verizon, Northrop, Procter &
Gamble, to name a few. And four of those top 20 do have REITs,
but they're all still smaller than us, and all of the plans
that have REITs have a huge number of options compared to us,
which gets into my concerns about liquidity and fees.
Ms. Norton. Mr. Chairman, I am sorry, if I am going over,
so I will not go further. I hope we will have another round. I
would like to ask for the record that the two articles, one
from the Federal Times, the other, be made a part of the
record.
Mr. Porter. No objection.
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Mr. Porter. I would like to comment, I guess, for the
record, to make it clear. I appreciated the request by the
minority to have the hearing today. That request was very
specific. That request was to have it regarding--a hearing
regarding the advisory role of the Employees Thrift Advisory
Council. That was the request, which is why we are having the
hearing today. So to answer the question why we are doing it,
it was a request from the minority.
And with that, Chairman Davis.
Chairman Tom Davis. Thank you.
Let me, since Ms. Norton has entered the Federal Times
article into the record, it just shows that anything can get
into the record. It is a very non-credible article, in my
opinion. For example, let me just go, Mr. Chairman, to some of
the things that they have talked about. Every Republican that
is crucial was given a contribution of $5,000, and then they
gave you $10,000. That has hardly passed through if they give--
they must have invested into a REIT, I think, to get that kind
of appreciation over time. The Freedom Project did the same
thing. By the way, the time periods, the Freedom Project was
given 5,000, and gave you $10,000, some of that money before
they even gave--I mean, anyone who understands how leadership
PACs operate know that leaders get money from a lot of
different sources, and generally, give it out on the basis of
candidates from marginal districts, not to who is going to
support legislation. I have never known a leadership PAC to
give out anything except with the intent of keeping their party
in power. That is why they are established in the first place,
and I think the writer of this article is very naive in terms
of understanding how those things work.
Having said that, it is certainly the right of people to
petition their government. PACs are, of course, the
contributions of thousands of people who put them into one
area, and it is, I don't think any mystery, that some of that
would find its way to Members, some sitting on this committee,
many others to Members who have nothing to do with this.
I guess what bothers me though about the way the TSP has
worked this, with leaks to the press and the other things, is
you destroyed any credibility you had with me. When you came in
to see me originally, we were going to try to get a report
back, and now, to me, it looks like you are running out the
clock, that you are going to report this at the very end of
this session, where it would be impossible for us to act. Do
you care to--Mr. Amelio, what do you have to say about that?
Mr. Amelio. I genuinely don't want to do that.
Chairman Tom Davis. When are we going to see a report?
Mr. Amelio. Before the end of 2006, the fall.
Chairman Tom Davis. Yes, but we are out in October. When
are we going to see a report?
Mr. Amelio. I can't give you a date. I don't know. It
depends on the length of the RFP process.
Chairman Tom Davis. When was the contract let for the
report?
Mr. Amelio. September 2005.
Chairman Tom Davis. Did you give them any time limit?
Mr. Amelio. No. We have four steps in the process. The
first step was to prepare a report on the review of the
indexes, which the board is required to do. The second step is
to give us a plan as to whether we should let the contract in
the way in which it has been let before, which is that the
investment manager has custody in securities lending. The next
step is to do the RFPs for the investment managers, and we have
to get all that done by the fall of 2006 under Federal
procurement law. Then the fourth and final step is once we have
done with that, to look at the fund lineup and determine
whether there is any material gaps in the fund, in the plan,
and from there, determine whether there is any available
product that would meet those gaps.
Chairman Tom Davis. So basically this may not be on the
timeline for the committee at all this Congress?
Mr. Amelio. We want it all completed by the end of 2006.
I'm sure it will be done well before--when I say well before
that, I don't know. It depends on--it's a procurement process.
It's very difficult. We can't even say right now how many
contracts there will be, 1, 4 or 26, and we are a small agency.
Chairman Tom Davis. Let's go back to October 14th, the
Employee Thrift Advisory Council, in their regular meeting,
where Mr. Sauber stated that he was pleased that the study of
TSP investment has slowed down the train. What do you mean to
slow down the train? Does this mean to stall the committee?
What was conceived there, do you know?
Mr. Amelio. I don't know.
Chairman Tom Davis. You don't know? I know what it means,
and I wasn't at the meeting, but I understand what that means.
On January 13th, you again met with the majority and the
minority subcommittee staff to discuss your plans for the study
of investment options. At that meeting you stated that the
study of investment options would be completed no earlier than
September 2006, no later than early 2007. Apparently, the
subcommittee staff didn't understand this, because at the
meeting of the Federal Retirement Thrift Investment Board on
January 18, 2006, you recounted the meeting with subcommittee
staff and stated, ``I think the one thing that I hope we got
clarified was that there may have been a misunderstanding. I
think there was some anticipation that we would have had all
this work concluded by the end of 2005. We wanted to point out
that it was indeed 2006 that we committed to do this.''
Mr. Amelio, our letter clearly asked you to submit your
report by January 1, 2006. Why was there a misunderstanding
regarding when the study was to be completed?
Mr. Amelio. There was a debate going on at the meeting,
after the board meeting of January 2006 as to what year end we
were talking about. If the letter you're talking about was the
fall of 2005----
Chairman Tom Davis. September 2005.
Mr. Amelio. Right. And that was the one that asked for a
deadline at the end of 2005. We couldn't possibly have done it
by then. We have to do contracts to hire the consultant, and
then they've got to do the work on the other contracts for the
managers.
Chairman Tom Davis. Last year at the hearing on H.R. 1578,
you asked us not to act on the bill until you had an
opportunity to complete a study, but if the study isn't
completed until early 2007, I want you to explain to me and the
members of the subcommittee how can we possibly act on the
legislation in this session?
Mr. Amelio. We plan to have the study done by the end of
2006.
Chairman Tom Davis. We are set to adjourn in October. We
may come back afterwards, but we are set, so basically you have
run out the clock.
Now, let's turn to the ETAC meeting March 7th. On March
7th, the ETAC adopted a resolution opposing the addition of a
Real Estate Investment Trust Fund. Were you at that meeting?
Mr. Amelio. Yes.
Chairman Tom Davis. Were you both at the meeting?
Mr. Trabucco. Yes.
Chairman Tom Davis. Mr. Trabucco, according to your written
statement, you drafted the ETAC resolution; is that correct?
Mr. Trabucco. That is correct.
Chairman Tom Davis. And the resolution was also reviewed by
the board's counsel, correct?
Mr. Trabucco. That is correct.
Chairman Tom Davis. Did the board's attorneys often advise
ETAC?
Mr. Trabucco. Yes. ETAC involved itself, for instance, in a
lawsuit that we were involved in 3 years ago, and they had
direct contact with our lawyer. The approach that ETAC has
taken with regard to Council matters is very similar to the
approach that I have----
Chairman Tom Davis. So the board staff had extensive
involvement with the drafting of the resolution; is that fair
to say?
Mr. Trabucco. I drafted it to Chairman Sauber's
specifications, and based on the statements that were made at
the earlier meetings.
Chairman Tom Davis. Mr. Amelio, if you are not an ETAC
member, and the role of the ETAC is to provide outside advice
on the TSP board and its managers, how is it that you suggested
language for the ETAC resolution?
Mr. Amelio. I wasn't submitting substantive language. They
were debating one sentence, and I offered a couple of words as
a matter of technical assistance. I wasn't trying to impose
intent upon them. They were struggling with certain terms of
art.
Chairman Tom Davis. Didn't you make sure that the
resolution included the language you suggested, which asserts
that a new fund must come from an independent process
coordinated by the plan fiduciaries?
Mr. Amelio. I may have suggested words. I didn't encourage.
I was offering help. That was completely their resolution.
Chairman Tom Davis. That language is absolutely
substantive. That is not technical, in my opinion.
Mr. Amelio. OK.
Chairman Tom Davis. Coordinated by the plan fiduciaries, in
fact, is a huge transfer of authority away from Congress and to
you. I mean that is one of the dividing lines on this.
Mr. Trabucco, did you sometimes provide your views to ETAC
members concerning what Congress intended when it enacted the
FERS Act?
Mr. Trabucco. Yes, I do. I have the great fortune of having
served on this committee and worked in the legislation that
created the TSP, and I do have a box of papers going back, and
I'm happy to dig through it and help them if they have
questions, and also help this committee.
Chairman Tom Davis. As we have seen the views of what the
board believes the FERS Act provides are sometimes different
from what other people think. There is always controversy on
that.
Mr. Trabucco. Well, I will say, sir, I try to go back to
the law, as I did at that hearing record. If you check it, you
will find we went for the precise words on the role of the
board. The board's role under the law is to develop and
establish investment policy. In fact, when I couldn't remember
the second word, we sent somebody out of the room to get the
law so that we were certain we were dealing with black letter
law----
Chairman Tom Davis. You didn't conduct any scientific
survey of Federal employees to see if they wanted to add a REIT
index fund, did you?
Mr. Trabucco. No.
Chairman Tom Davis. Did you make any attempt to provide
objective information or collect information from Federal
employees about adding new funds before you decided that they
don't need new investment options?
Mr. Trabucco. Do you want to talk about the survey?
Chairman Tom Davis. Yes or no?
Mr. Amelio. Not yet. We're doing an extensive survey in
2006 of the participants.
Chairman Tom Davis. When will that survey be completed?
Mr. Amelio. I'm hopeful that--we've committed to have it
finished by the end of this year. We're working on it right
now. I've hired a new product development manager, who's seated
behind me, from the private sector, and we want to go out and
do a full survey. We want to find out what the participants
know about----
Chairman Tom Davis. Let me just--just to put this in
perspective.
Mr. Amelio. OK.
Chairman Tom Davis. The conferees for the FERS Act, which
you claim to know something about, Mr. Trabucco, made reference
to two separate sources of potential political manipulation,
pressure from the administration on board members, who would be
Presidential appointees, and pressure from Congress. This is
the language. ``Concerns over the specter of political
involvement in the Thrift Plan management seemed to focus on
two distinct issues: 1) the pressure from an administration;
(2) the Congress might be tempted to use the large pool of
Thrift Plan money for political purposes. Neither case would be
likely to occur given the present legal and constitutional
restraints.''
Now, in terms of political pressure from Congress, it is
clear for conferees statements at page 137, paragraphs 3 and 4,
that they were concerned about the possibility of some sort of
raid of the trust funds by Congress, not about Congress
selecting new index funds. Do you disagree with that?
Mr. Trabucco. I think there were many reasons, but it
wasn't index funds. You're right on that. I'm not suggesting
that it is. The next sentence is also instructive. ``Board
members and employees are subject to strict fiduciary rules.
They must invest the money and manage the funds solely for the
benefit of participants. A breach of these responsibilities
would make the fiduciaries civilly and criminally liable.''
Chairman Tom Davis. But how do you feel when REIT funds,
over the last--while we have been talking about this, have gone
up in a very significant way, and we have deprived Federal
employees of the option of investing in that? Do you feel good
about that?
Mr. Trabucco. I can only tell you, sir, what previous
boards have done, and I've had the pleasure of serving many of
them.
Chairman Tom Davis. The previous boards were the ones that
went through computer systems that failed, with huge cost
overruns coming back and everything else, and if you align
yourself with that, I think I get the picture.
Mr. Trabucco. No. I'm telling you----
Chairman Tom Davis. I will yield back, Mr. Chairman.
Mr. Trabucco. If I might answer on investment policy. The
previous boards looked at more than returns. They looked at the
design of the plan, the structure of the plan, and did in toto
reviews as they did from----
Chairman Tom Davis. But three of the options were an
underlying statute. You didn't add them. They were there in the
underlying statute originally.
Mr. Trabucco. That is correct. After 3 years of
congressional study, they decided on those three.
Chairman Tom Davis. I yield back.
Mr. Porter. Mr. Cummings.
Mr. Cummings. Thank you very much.
Mr. Porter. Point of order. Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman.
Mr. Porter. My apologies.
Mr. Van Hollen. Not at all.
Let me ask you, your answer to Mr. Marchant's question, Mr.
Amelio, anticipated a little bit of my question, and that is
have you personally, at this point in time, formed an opinion
as to whether or not it would be a good or bad idea for the
members of the Thrift Savings Plan to have a separate REIT
option?
Mr. Amelio. Are you asking me personally or in my--because
I can only answer in my capacity as a fiduciary to the plan.
Mr. Van Hollen. But with all due respect, I mean, I think
it is important to understand where the head of the--you know,
the executive in charge is coming from with respect to this,
because if you have a--I mean, you are saying to the Members of
Congress, and it is a fair point, wait for the study. But I
want to know if you personally have reached a conclusion as to
whether or not this is a good idea or a bad idea.
Mr. Amelio. Well, I have grave concerns about the process.
And my grave concerns are I think when this plan was created in
1986, it was ingenious, broad-based low-cost index funds. And
for all the talk about what employees in the private sector get
to invest in real estate and whatnot, every employee in the
private sector would give anything to be in this plan with its
low fees and its broad base.
My concern is if you put one single targeted industry fund
into this plan, you're going to open the door to a dozen other
single-industry funds and then this plan will lose the beauty
of its simplicity, its low cost, and its high confidence level
of the participants that it's being managed fairly.
Mr. Van Hollen. I don't want to mischaracterize your
answer, but, I mean, it sounds to me like you--if you were to
weigh this on a 1-to-10 thing, you are pretty close to--zero
being you are not in favor of it personally, and you are pretty
close to zero at this point in time. Is that right?
Mr. Amelio. I would have to be convinced----
Mr. Van Hollen. I am not talking about the legislation. I
am talking about do you think it is--you have formed an opinion
as to whether or not it is a good idea.
Mr. Amelio. I would have to be convinced that it is in the
best interest of all the plan's participants, and I'm not there
yet.
Mr. Van Hollen. All right. Let me--do we have a copy, Mr.
Chairman, of the contract between TSP and the consultant you
have hired? Do we have a copy of that?
Mr. Porter. Requesting for this study, correct?
Mr. Van Hollen. Yes. You have no objection to providing the
committee with a copy of the contract, do you?
Mr. Amelio. Yeah, that's fine.
Mr. Van Hollen. All right. And that contract, as I
understand it, asks them to look at a range of different
options and is, I hope, neutral in the way that it asks them to
take a look at it.
Mr. Amelio. It is absolutely--it is the entire universe of
potential options. There is no limit.
Mr. Van Hollen. Let me ask you with respect to the GAP
report from January--I don't know if you had an opportunity to
look at it--and the comments that they made with respect to the
role of the ETAC. Have you had an opportunity to look at that?
Mr. Amelio. No, I didn't in advance of this hearing, no,
sir.
Mr. Van Hollen. What I want--you know, we had a hearing
earlier, as we all know, and after that hearing we had the
opinions and the letter from the ETAC Advisory Council. And I
guess one question, and this does go to the process, because
one question that is raised, given your responses, is to what
extent the ETAC is in fact an independent advisory board. And I
am not saying this in any way to diminish the role of ETAC, but
it does seem clear from the testimony that they have no
independent staff. Is that right? In other words, the advisory
council does not have an independent staff. Is that correct?
Mr. Amelio. That is correct.
Mr. Van Hollen. So they do rely entirely for their staff
and resources on you and your staff, is that right?
Mr. Amelio. I believe that's correct. I mean, they may use
their personal association or union staffs, I don't know. But,
you know, they rely on us for ETAC work.
Mr. Van Hollen. But to your knowledge, do they have any
outside consultant and/or expert that they rely on?
Mr. Amelio. No. No.
Mr. Van Hollen. And they rely on your attorneys, I
understand, for whatever legal advice they provide.
Mr. Amelio. Yes.
Mr. Van Hollen. Because the question is--I mean, this
letter is sort of presented in the sense that there has been an
independent--at least, I think that is the perception up here--
an independent group that has its own sort of resources
independently looked at this. But I guess, given the nature of
what happened and the fact that the drafting of this resolution
was actually done by your staff, would it be fair to say they
are not a--they don't have their own resources to act
independently of the board?
Mr. Amelio. Yeah. Can I refer to----
Mr. Trabucco. May I answer that, Congressman? As the
individual secretary to the council, I attached to my testimony
the document that created the council, the charter of the
council. And that charter is consistent with the Federal
Advisory Committee Act. The way that act works is the
committee, or the agency that is receiving the advice from the
outside independent group, provides staff support to that
outside independent group. The notion is that there is a
benefit to the agency receiving the advice and that the outside
group should not have to pay for providing that advice. In
other words, we provide, just as I have for this committee on
technical drafting services, that technical----
Mr. Van Hollen. Right, but you don't provide them any
resources to pay for advice outside yourself, right?
Mr. Trabucco. No. That is correct.
Mr. Van Hollen. I raise this because, you know, during the
process of putting together this legislation, people sought the
input. As I mentioned in my opening statement, one of the
people we asked was AFGE, American Federation of Government
Employees, lots of Federal members. And I am just going to read
the response that we received back from them during that
process.
``On the REIT legislation, we will not oppose it. We are
meeting with the Thrift Investment Board employee groups in
mid-April''--this is dated March 2005--``in mid-April to learn
more and see if we can support the legislation.''
What I am getting at is to what extent these advisory
council members have people asked advice from, whether their
main source of advice is from you. And I think it is important
they get advice from you, but it is pretty clear that is their
main source of advice. So I don't think it is a great surprise,
is what I am saying, I guess, to find out that they would take
this position.
Let me end with that, Mr. Chairman, because I think, you
know, it is important that we had this hearing, and I want to
thank the chairman for holding it. I think it is important that
we move forward in a smart way. I also think it is important,
as others have said, that we not forego the opportunity for
Federal employees to have this opportunity, which is why it
concerns me a little bit that even if people at the outset of
this process, members of your board, were objective about it,
given all that has happened and your comments in the
transcripts, whether at the end of the day, given the report,
whether all of you can see this, put aside what has happened
and reach and independent decision, and sort of put aside your
preliminary conclusions.
Thank you, Mr. Chairman.
Mr. Porter. Thank you. Mr. McHenry.
Mr. McHenry. Mr. Chairman, thank you so much. Let me start
by saying----
Ms. Norton. Mr. Chairman, could I beg the indulgence of
the----
Mr. Porter. Not at this moment.
Ms. Norton. Could I just ask the member if I could, because
I am about to leave, if I could just clarify----
Mr. McHenry. Actually, I have something that maybe you
would like to hear first. You know, I think it is disgraceful
for a member of this committee to impugn 163 Members of
Congress for simply sponsoring this bill. I think that is
really a harmful thing to this whole process to say that those
that sponsor this bill did so for some financial gain. I think
it is a very harmful thing.
Ms. Norton. Then I am going to have to ask to respond to
that. What I was about to say is not----
Mr. McHenry. It obviously----
Ms. Norton. I indicated--I indicated----
Mr. McHenry. I am not yielding. I am not yielding.
Mr. Porter. Excuse me. The gentleman----
Ms. Norton. Well, I am going to have to ask for a point of
personal privilege, though.
Mr. McHenry. Mr. Chairman, I will say--actually, I have the
time right now, if the gentlelady will let me continue. I will
just say that is a very harmful thing, Mr. Chairman, to this
whole process. The reason why I think this is a very useful
option is, in North Carolina, having served in the legislature
there, the North Carolina retirement system has a real estate--
pretty substantial real estate investment to the overall State
employees retirement plan. And as someone who was involved in
real estate before I got into politics to actually make a
living--heaven forbid, a politician to make a living outside of
the Government--but before my service here, I think it is a
wonderful opportunity for individuals to invest and make a
better return or a different return than just a narrow-based--
well, the simple offerings that we currently offer through the
TSP. And as someone who invests in the TSP, because I do
appreciate the value it brings, and I especially like the
match, I think it is a wonderful thing. And we should offer
more opportunities to expand that reach.
And so, you know, let's look at a couple of things. First
of all, according to Barclays Global Investors, the current
manager of the TSP Index Fund--right--it says, ``Investors who
rely on broad cap equity benchmarks for real estate exposure
are not achieving meaningful allocations to the asset class.''
This is what Barclays published in their Investment Insights in
September of last year. It is saying that you are not giving a
meaningful exposure to real estate through the TSP plan.
And what I would say is that we can go back to the question
that you asked of the consultant. What did you pose to the
consultant in terms of the bid proposal you put out? What was
the request you had of the consultant?
Mr. Amelio. They are going to look at the existing fund
line up and determine if there is any material gap. Then they
are going to go out and look at all available options,
everything--they're not going to exclude or hide anything--and
determine whether something should be put in.
Mr. McHenry. Material gap. You know, in the--there are five
funds, correct?
Mr. Amelio. Yes. Yes.
Mr. McHenry. They are widely diversified.
Mr. Amelio. Yes.
Mr. McHenry. So there is a little bit of everything in that
one fund, in each fund in those particular areas. Small cap
fund is widely diversified within small caps.
Mr. Amelio. Well, let me--in the two domestic equity funds,
we've got the entire domestic equity market. But if you were to
look at the bond fund, you know, there might be something there
that's missing. If you look at the international fund, that is
only developed nations. There are no emerging markets. Emerging
markets are the small countries, more Third World--much higher
risk, but room for a lot of growth.
Mr. McHenry. I would say that the question you asked this
consultant to answer is innately flawed. What is the material
gap? OK? If you have a widely diversified--one widely
diversified fund that has a little bit of everything around the
world, that would suffice to answer the question you posed to
the consultant. So you did not ask the question, would real
estate investment trusts be a viable and positive option for
Federal employees to have within their investment portfolio.
Mr. Amelio. Why would I ask that question? The question----
Mr. McHenry. Because that was the request of the chairman
of this committee and the chairman of not just the
subcommittee, but of the entire committee; the ranking Democrat
both of this subcommittee and the full committee.
Mr. Amelio. The question I asked is one that every
fiduciary of every plan asks. And the reason is that why would
I limit it to just a REIT? REITs are included in the request.
They're included with every other possible option.
Keep in mind, the plan's participants are paying for this
study. It's not taxpayer funded. The committee didn't say we're
going to give you money to go hire a consultant to look at
REITs. The committee said we would like to see you do this,
when are you going to do it, what are you looking at? And we're
expending the participants' money, and as fiduciaries, we have
a duty to expend that money wisely.
Mr. McHenry. Yes, and my point is, the question that was
posed from this committee was should--this was the request: Do
you think it is a viable option for people to have another fund
that has real estate exposure?
Mr. Amelio. It had to be--the question had to be worded
wisely--widely, or broadly. Otherwise, why wouldn't I ask the
question, do you think we should have real estate? Do you think
we should have emerging markets? Do you think we should have
TIPs? You could answer yes or no to all of those and where
would we put an end to the questions? It wouldn't be
appropriate to just ask about REITs.
Mr. McHenry. Well, a material gap would say you omit from
the whole gross domestic product of the whole United States,
and real estate is a nice sizable chunk of that; and if you
have your 2 percent exposure to that marketplace, which you
currently do through--I believe you have 1 percent in the C
Fund and maybe up to 8 with the S Fund, and that is the only
real estate exposure right now--that would actually suffice to
answer your question whether or not there is a material gap,
because you at least have some, though it is a small inkling,
of exposure to real estate in the overall TSP plan.
So the consultant will--I would predict, I mean, Mr.
Chairman, I don't want to go well beyond my time here, but I
would say that based on the way you posed the question, the
consultant's natural answer would be no, you do have real
estate exposure, therefore that is not a material gap. Which I
think is a very limiting way to focus on this when we are
asking, in particular, whether or not the Federal employees
should have this opportunity--only opportunity--opportunity to
invest in real estate.
Mr. Amelio. Can I answer?
Mr. McHenry. Go ahead. I am just offering my prediction
here at the end of my time.
Mr. Amelio. Material gap is a much broader question than
just ``do you have representation?'' They want to look at the
fee structure, they want to look at the percentage and
proportion of assets held. They might determine that we've got
to break out and go to value and growth methods of equity.
There's a whole variety of things. It's not just ``do you have
the U.S. equity market covered?'' It's a rather detail-oriented
question. And it's the same question every fiduciary asks. I
think it would be a blatant breach of duty if I didn't ask the
question in that way.
Mr. Porter. Congresswoman.
Ms. Norton. Mr. Chairman, a personal attack on me is no
more justified than one would be justified had I personally
attacked the Members who had signed on to this bill. I could
hardly have done so. I began by saying my own minority
leadership had signed on to the bill, that the members of this
committee had signed on to the bill, and that in fact, at our
subcommittee hearings, there was bipartisan, on-the-record
approval pending, of course, a study for this matter. So it
ought to be clear that there was no attack on the chairman or
anybody else. The chairman has run this committee in a
bipartisan way. The lobbyists may have rushed forward in order
to reward people who never even asked for a contribution. So
let the record show what was actually said and let us not have
attacks on one another, particularly since I think my remarks
were clear in not doing that.
I do want to clarify what I have offered for the record, a
Washington Post article, three Washington Times articles, an
article from Govexec.com.
And finally, as I leave--I hope to get back here--I just
want to say to Mr. Amelio, I indicated before that I think you
have brought much of this on yourself, sir. And I say so
because it seems to me when you heard the approval of REITs at
our subcommittee hearing across the board on both sides of this
aisle, particularly if you had the doubts you now put on the
record in answer to Mr. Van Hollen's questions, the very first
thing you should have done was to get that study going as fast
as you could and get it before the Members. By not doing so,
you have laid the basis for the very hearing that is taking
place here today, the doubts that are now in the papers. So you
must share the problems with the lobbyists who are involved.
Because as long as that record was left blank, something was
going to come in to fill the gap. And what has come in to fill
the gap is, well, the lobbyists wanted it; so all of us who
have spoken out that we didn't know why employees couldn't get
the benefit of this must be in hock to the lobbyists.
And I thank you very much for the opportunity to reply.
Mr. Porter. Thank you.
Ms. Norton. I hope my good friend understands that I mean
no disrespect to him for going on to the bill or for anybody
who went on to the bill. I have to believe that he shared with
me the feelings at that hearing we had when we got no answers
to why in fact people shouldn't in fact have REITs as an
option. I, for one, am still waiting for those answers.
And I thank you, Mr. Chairman.
Mr. Porter. Thank you, Congresswoman. I appreciate your
comments.
Mr. Cummings.
Mr. Cummings. Thank you very much, Mr. Chairman.
I just want to--your job, you just talked a little earlier
about the fiduciary duty. That job is to do what is in the best
interests of the people who are part of the TSP. Is that
correct?
Mr. Amelio. Under the statute, it is the sole interest of
the participants and their beneficiaries, yes.
Mr. Cummings. And when it comes to doing that, you are
trying to figure out, I guess, part of carrying out that duty
would be to try to figure out how do you get maximum dollars in
as safe a way and as sound a way as you possibly can with as
little reasonable risk as possible. Is there something else I
am leaving out there?
Mr. Amelio. And at a low cost. That's also in the statute.
Mr. Cummings. And at a low cost, yes. So in this instance,
the REITs, when you consider the real estate market goes up and
down and that so many have, as we have seen in the local
papers, including the Washington Post reporting that we have a
real estate market and that sometimes they say it is on the
bubble, sometimes they say it is on the way down--talking about
real estate. Is that one of your concerns? I mean, I know you
are waiting for the report and all that kind of thing, but is
that one of your concerns?
Mr. Amelio. You mean about adding a REIT as a fund, is the
volatility a concern?
Mr. Cummings. Yes.
Mr. Amelio. No. Because if you're an investment
professional and you have some sophistication and knowledge of
the markets, you recognize that those investments which are the
most volatile, while they are the riskiest, will over the long
term, or should over the long term, bear larger gains. That's
not always the case. That is not my concern. My primary concern
here is that up until now the plan has only contained broad-
based, low-cost index funds. This is a narrowly focused fund
into one sector, or industry, if you were, and I have concerns
about the liquidity, about the fee structure, as well as if
this would come in it could also open the door for other
particularly narrowly focused funds.
Mr. Cummings. And so, but it would provide you with
additional diversification with regard to your portfolio, would
it not?
Mr. Amelio. I think that's arguable. This fund is
incredibly diverse. We've got the entire universe of domestic
stock as well as all of the developed international stocks and
bonds. It's a very diverse fund. As long as----
Mr. Cummings. Let me ask you this. You mean the fund as it
is right now?
Mr. Amelio. Yes.
Mr. Cummings. OK. But I am just asking you, would the REITs
add to that diversification?
I know it is very diverse; I understand that. I got that
piece. So would it add to that? That is all I am asking you.
And I am not saying whether it is a great fund or--I mean,
a great piece to bring in. I am just asking you would it add to
the areas that you would then be able to invest?
Mr. Amelio. I don't think so, because REITs are already
included to the extent of their proportion of the overall
domestic investable markets.
Mr. Cummings. So what do we expect--not the results, but
what, when you give the people who are doing the research the
research assignment, what are they looking for?
Mr. Amelio. Well, they know what to look for. They do this
for many plans. They're going to look at what we have and
they're going to look at what's out there. And they'll make a
recommendation based on whether they think anything should be
added.
Mr. Cummings. So basically, the board's position is, as I
understand it, be safe rather than possibly sorry later on? Is
that reasonable?
Mr. Amelio. It's reasonable. The term would be, the board
wants to do what's prudent, and that's to hire an expert to
review everything. And that's what----
Mr. Cummings. That is being safe, rather than being sorry
later on.
Mr. Amelio. Yes.
Mr. Cummings. OK. All right, I don't have anything. I see
we are running out of time, Mr. Chairman.
Mr. Porter. Thank you, Mr. Cummings.
We are going to go into recess. We are taking votes on the
floor. I think we have three. We should probably take about,
outside, 45 minutes, 30 to 45 minutes. So we will go into
recess. We still have one panel, and then action after that. So
we are going to be in recess.
[Recess.]
Mr. Porter. I would like to bring the committee back to
order.
For some of you that have been attending a few of our
hearings, I have been requesting now for about a year that we
have all these held in Las Vegas. But no one seems to listen to
me. So maybe next time we will meet in Las Vegas, and everyone
will be welcome.
Mr. Davis of Illinois. I second that.
Mr. Porter. And it is seconded by our ranking member, Mr.
Davis.
Thank you all for being here. I appreciate your patience
and understanding. I would like to announce that Chairman Davis
has requested that action be taken at the full committee. And
we are going to continue with the hearing today, but I would
like to make that notice known for those that are in the
audience.
Also would like to say thank you to our last two panelists,
who are still here. Thank you very much. Appreciate what you
are doing. Also understand that you have a tough job and know
that the purpose of our hearing is to do the best we can for
all of your colleagues and Federal employees.
So with that, we do have James Sauber, who is chairman of
the Employee Thrift Advisory Council, and then Richard
Strombotne, who will be second.
So we begin with Mr. Sauber. We appreciate your being here.
STATEMENTS OF JAMES W. SAUBER, CHAIRMAN, EMPLOYEE THRIFT
ADVISORY COUNCIL; AND RICHARD L. STROMBOTNE, EMPLOYEE THRIFT
ADVISORY COUNCIL MEMBER
STATEMENT OF JAMES SAUBER
Mr. Sauber. Thank you, Mr. Chairman. Thank you, Congressman
Davis and members of the subcommittee, for this opportunity to
present the views of the Employee Thrift Advisory Council on
the proposed addition of a real estate investment fund to the
Thrift Savings Plan.
My name is Jim Sauber. I'm the chief of staff to the
president of the National Association of Letter Carriers,
William H. Young, and I serve as chairman of the Employee
Thrift Advisory Council. I have been actively involved with the
council since its creation in 1987. ETAC is comprised of 15
organizations that collectively represent 2.6 million active
and retired Federal employees.
I'm here today to explain why ETAC took the unusual step of
adopting a resolution in opposition to the proposal to create a
REIT fund for the TSP. It's unusual because, historically, the
Congress, the Thrift Board, and ETAC have worked together to
enact numerous improvements in the plan, whether it was the
creation of the S&I funds or the elimination of the need for
open seasons, we generally supported legislation designed to
improve the TSP, which I am certain is the intention of H.R.
1578.
It gives nobody on the council pleasure to oppose a
proposal that many of you have cosponsored. This subcommittee
and Chairman Davis's full committee have a long history of
bipartisan cooperation on matters affecting the TSP. I know
that you and your colleagues believe that a REIT fund would be
a good option for Federal employees who participate in the
plan. But with all due respect, the members of the ETAC have
not reached that same conclusion, at least not yet. There are
two major reasons for this.
First, we are reluctant to support the legislative addition
of a REIT fund over the unanimous objection of the TSP's
fiduciaries, the members of the Federal Retirement Thrift
Investment Board. We believe this would set a bad precedent for
the consideration of future new funds. Such a precedent is
important because, in our view, the addition of one sector fund
will leave groups representing other sectors to seek equitable
access to the TSP. The investment policy of the TSP would
become more politicized, the cost and complexity of the plan
could increase, and participation rates could suffer.
Second, we are equally reluctant to add a new fund option
to the TSP, whether it's a REIT fund or any other kind of fund,
before a complete and independent analysis of its merits is
undertaken. The strong performance of REIT equities in recent
years has resulted in the inclusion of more REITs in the equity
indices that the C and S funds track, but we are not certain
that this success warrants the creation of a special fund just
for 170 or 180 REIT companies that are included in those
indices.
Before a decision is made, the TSP's fiduciaries and
independent experts should thoroughly study the issues
involved. As you know, the board has hired an investment
consulting firm, Ennis Knupp, to do a comprehensive review of
the TSP's investment options. I can assure this subcommittee
that, should Ennis Knupp recommend the addition of a REIT fund
to the TSP, the members of ETAC would certainly reconsider our
position.
In my written testimony for this hearing, I have summarized
ETAC's discussions about the REIT fund proposal over the past 2
years. These discussions took place during four meetings of the
council during November 2004 and March 2006, and included
several meetings individually as unions and as a group with the
National Association of Real Estate Investment Trusts. The
resolutions we adopted on March 7th reflect the concerns raised
by members of ETAC during this time.
In addition to the two major concerns I raised earlier, I
want to emphasize that the council members believe that adding
a sector fund like a real estate fund to the TSP could
fundamentally alter the structure of the plan, which is
designed around broad-based index funds. Before we take this
major step, we should pause to consider its full ramifications,
because once you open the TSP to one sector, it will be
difficult to deny other sectors equal treatment.
I would like to conclude with two final points. First, Our
view is that both Congress and the Thrift Board share
responsibility for the Thrift Savings Plan's investment
policies. The FERSA law clearly gives the five Presidential
appointees of the Thrift Board a role in developing and
establishing investment policy for the TSP. Any changes in that
policy, however, must be enacted by Congress. In adopting our
resolution, ETAC is not arguing that Congress cannot change the
investment options on its own. However, we do think the TSP
works best when Congress and the board reach a consensus before
making any significant change in the law. We urge you to keep
this in mind as you contemplate further action on H.R. 1578.
Second, if the subcommittee decides to adopt this bill
today, I want to offer the assistance of ETAC to you and the
other members of the full Government Reform Committee as the
debate over this legislation proceeds. It is our hope that we
can help build the consensus, which unfortunately does not
exist today, on any new legislation that might emerge.
The organizations that make up ETAC, the members of the
Thrift Board, and the members of both the subcommittee and the
full committee share the same goal, to help millions of
hardworking Federal employees prepare a decent and secure
retirement and to maintain that the TSP is the most successful
retirement savings program in the country.
Thanks again for this opportunity to testify. I will be
happy to answer any of your questions.
[The prepared statement of Mr. Sauber follows:]
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Mr. Porter. Thank you very much. We appreciate your
testimony. And you said it quite well, we share the same goal.
Thank you for stating that.
And certainly we appreciate the views of all Federal
employees and organizations. In that vein, I would like to ask
unanimous consent to enter into the record a letter we received
today from the National Air Traffic Controllers Association,
which is endorsing the legislation. And I just will summarize
it, that ``we are writing to express our thanks for your
continuing efforts to provide participants in the Federal
Thrift Savings Plan with additional investment options. The
more than 20,000 Federal employees who make up the NATCA want
and deserve the opportunity to diversify their retirement
savings beyond the limited options that are currently
available. NATCA believes that the TSP should offer retirement
savings options at least as good as those found in the leading
private sector defined contribution plans. Employees in large
401(k) plans in the private marketplace are offered far more
than five core investment options from which they can chose to
diversify their retirement savings. Our members deserve no
less. We think that H.R. 1578 is an important first step in
offering our members additional investment choices. Traditional
pension plans have allocated substantial funds to the
commercial real estate investment as a discrete asset class and
our members, along with TSP participants, should have the same
freedom to do so. NATCA is pleased to lend its support to this
important legislation. We thank you for your leadership in
providing TSP participants additional flexibility in
planning.''
So without objection, so ordered.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T9849.094
Mr. Porter. Next, Mr. Strombotne, an Employee Thrift
Advisory Council member. Welcome. Thank you.
STATEMENT OF RICHARD STROMBOTNE
Mr. Strombotne. Good afternoon, Chairman Porter and
Congressman Davis and members of the committee. For the record,
I'm Richard L. Strombotne. I live in Gaithersburg, MD. I'm the
nominee of the Senior Executives Association to the Employee
Thrift Advisory Council, and I'm serving my second term on the
council. I'm testifying as an individual and not as a
representative of any organization to which I belong.
You have my prepared testimony, and so I'll offer some of
its highlights here. It's fairly lengthy. I have included some
suggestions for improvements in the Thrift Savings Plan, so I
hope you will give it your consideration.
It's a distinct pleasure to be here and have the
opportunity to discuss the resolution recently approved by the
council and my support of that resolution. I retired in August
1996 from the Federal service after 34\1/2\ years, most of it
as a member of the Senior Executive Service. In 1979 I became a
charter member of the SES, and a year later, I joined the
Senior Executives Association when it was being formed. I
served on the board of directors for 8 years, was acting
president for 3 months, and chairman of the board for a year.
While the legislation establishing the Federal Employees
Retirement System was under consideration in the mid-1980's, I
chaired SEA's task force on retirement issues. This task force
recommended a number of policy positions for the SEA, many of
which the SEA adopted.
One such recommendation was to permit the CSRS to
contribute up to 5 percent of their pay to the new Thrift
Savings Plan. As you know, this feature ultimately was included
in the FERS legislation. And as they say, success has many
fathers. I consider myself fortunate to be one of the many
fathers of the Thrift Savings Plan.
Now, right around 2000, I was asked to serve on the ETAC as
the SEA nominee. I accepted the nomination and subsequent
appoint with pleasure. I serve as a volunteer. I receive no
compensation from the Senior Executives Association or any
other organization or individual for providing my time, energy,
and judgment to serve on the council. I bring to the table the
sum of my experiences as a Federal employee, a senior
executive, a retiree, and an advocate for retirees and my
fellow citizens. As such, I exercise my independent judgment
about the issues that come before the council--even as you do,
I'm sure.
Early in 2005, I received--I attended a briefing by
representatives of NAREIT regarding the potential benefits of
including a REIT index fund. The briefing suggested that
including that index fund would offer TSP participants the
opportunity for greater investment return. After looking into
the matter further--and this is described more fully in my
prepared testimony--I became skeptical of the conclusion and
the way it was presented.
Earlier this year, Jim Sauber, at my right, chairman of the
council, proposed the resolution that's the focus of this
hearing. After reviewing it, I decided to support that
resolution. It was thoroughly discussed at the council meeting,
revised somewhat, approved by the council with the sole
exception of the representative of the Department of Defense,
who abstained from voting. And you've heard the explanation for
that.
Before giving my reasons for not suggesting--pardon me, for
supporting the resolution, let me correct a misunderstanding
that I heard in your earlier statement, Mr. Chairman. At the
time of my vote in early March, the Senior Executives
Association had taken no position on the resolution. So let me
point out the statement in Carol Bonasaro's letter of April
4th, which I believe is one of the exhibits, about 4 weeks
after my vote: ``SEA has full confidence in the ETAC
representative we have recommended, and we trust him to
exercise his independent judgment on matters coming before ETAC
that impact the Thrift Savings Plan.'' I certainly appreciate
that from Carol Bonasaro.
Now, the reasons for support. I thought it was premature to
pick out a REIT fund as the next investment option for the
Thrift Savings Plan in the absence of an analytical comparison
with other potential options. There are other options that may
be even more attractive for addition to the Thrift Savings Plan
than a REIT index. And some of these are listed in my prepared
testimony. You'll see that recently a number of EFTs--exchange
traded funds, ETFs, have been doing better than real estate,
and that is included in my prepared testimony.
Next, I have concerns about including a REIT index at a
time when real estate may be entering a down market. I know
that's a personal opinion, but I've been around long enough to
see both booms and busts in real estate, and I'm concerned that
it would be very easy for a person to make a big allocation to
the REIT index fund because it's hot, and then take a big loss
when the real estate market drops.
And finally, in my review of the resolution, in going over
each of the whereas clauses, I agreed with each of them and
agreed to support the resolution.
If the board study of potential investment options for the
Thrift Savings Plan concludes that Federal employees and
retirees would benefit by including additional funds in the
TSP, and if a REIT index fund is among those funds being
recommended, I would be very happy to join in supporting that
expansion of options. However, in my judgment it is premature
to require that a REIT index fund be offered absent the
analytical examination of the full range of options.
And that completes my testimony. I appreciate your hearing
me. I would be happy to respond to any questions that you may
have, either on what I've just said or on the prepared
testimony.
[The prepared statement of Mr. Strombotne follows:]
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Mr. Porter. Thank you very much. We appreciate your
testimony.
I have a few questions. Please know that these will be very
reasonable questions. You are lucky you are up at this hour,
not a lot earlier. [Laughter.]
Mr. Strombotne. Yes, we appreciate that.
Mr. Porter. Thank you again for being here and, as I said,
we appreciate what you are doing.
Mr. Sauber, did ETAC conduct any scientific survey of all
Federal employees to see if they wanted to add a REIT index to
the TSP?
And let me followup with a second question. Do you have the
resources to do such a study?
Mr. Sauber. No, we haven't--we did not conduct any
scientific surveys of our members. However, I think there is a
misimpression about----
Mr. Porter. I am not sure, is your microphone on? Try it
one more time.
Mr. Sauber. I'm not sure if there's been a misimpression
about the role of ETAC and how we work. Our organizations are
unions and associations that have elected leaders. And what I
did--because we don't have the resources to do a survey of the
kind that you ask about, we rely on our members to bring their
experience and their meetings, their interactions with their
members, with their State conventions, with their legislative
conferences.
Just speaking for myself on behalf of the NALC, in the NALC
we hold 50 State legislative conferences every year. Every
State association has a legislative conference. We have
multiple regional training sessions. At our national convention
every year since 1988, we have had a Thrift Savings Plan
seminar. In the course of all those years--I've been involved
from day one with this Thrift Savings Plan. In the course of
all those years, I can say with great confidence that members
of the NALC have not indicated a desire for a REIT fund.
Now, if we did a survey of them, how they would respond, I
don't know. I'm not saying I can predict exactly what our
members would want or wouldn't want or to what extent they're
in a position to make this judgment. I think they're relying on
their union to exercise judgment for them. And so for that
reason, based on that, I asked all members of the organizations
in ETAC repeatedly over several meetings, are you hearing from
your members? Do they want--you know, the REITS are the hot
item. They're the item that are getting a lot of attention of
the financial press. And every time I've asked, they said no.
That being said, I think our judgment is not really on the
merits, the pro or con of REITs. We haven't made that judgment.
We don't pretend to be investment experts. What we've focused
on are two things: the process and the policy. We think it's
not only important what funds we add, but how we add them, so
that we set a good precedent for the future. And I think up to
this point, it's been a good cooperation between the board,
ETAC, and Congress. We've tried to reach consensus before
making big changes in the law. And I think that we'd be well
advised to continue down that road because I think it builds
trust in the plan. It makes sure--I think Congressman Cummings
talked a bit earlier about rather being safe than sorry later.
That really is what motivates us. We're not making a
judgment one way or the other on REITs. We want to have all the
information. We want to know how much it's going to cost, what
are the pros and cons, and we want to, frankly, test some of
the very interesting information that we got from NAREIT. I
went out of my way to make sure that all our members met with
NAREIT. So when Congressman Van Hollen was saying earlier, is
our only source of information the board, that is not the case.
We went out of our way to talk to the folks who know most about
this industry.
Now, should we take their presentation on faith? I don't
think we'd be responsible representatives to do that. I think
that's why we've asked for--we really do think it's important
to have an independent review before making a final judgment.
And I understand the frustration you have, this--I sat through
the hearing. I understand the frustration you have about the
time it's taken to get this study done. Nonetheless, despite
that, I just think it would be wise for us to try to wait until
we get a full understanding of these issues before we proceed.
Mr. Strombotne. May I comment?
Mr. Porter. Yes.
Mr. Strombotne. After the NAREIT briefing, as a retiree I
had some time available that people who are more busy don't
have, and I took it on myself to go into the Internet and look
up the literature associated with asset allocation. I received
quite an education. I went through a lot of the pertinent
literature, and I think on the back of my--at the end of my
prepared statement, you will see a very short, selected
bibliography. But I came away from that with a much greater
appreciation of both the benefits of what is called the
efficient frontier method for asset allocation, but also with
an appreciation for its pitfalls.
One of those pitfalls is if you have two funds or two
investment classes with very similar yields, but one has a
great deal more volatility or risk than the other, small
changes in the yield can lead to big changes in the proportion
of assets in the optimum allocation.
And so my reading into the literature on asset allocation
is what I brought with me when I decided to support the
resolution, that it was just premature at this stage to pick
out one particular asset class.
Mr. Porter. Thank you.
I guess just a couple additional questions at this point.
Of the five funds now in existence, didn't Congress create
three of those funds without the TSP Board?
Mr. Strombotne. I am sorry. I didn't hear you.
Mr. Porter. Of the five funds that are available today,
didn't Congress create three of the five without the TSP Board?
Mr. Sauber. Yes, that is correct. When the legislation was
drafted, it was created by Congress, that is correct. And the
new funds were created by Congress as well.
Mr. Porter. Thank you. I guess just one additional
question. Did you understand that Congress was encouraging to
have the study done as soon as possible? Was that made aware to
you folks?
Mr. Sauber. Yes. In fact, I think Congressman Davis, Tom
Davis, mentioned one of our meetings where we discussed it. And
I was very concerned about this issue, and that is why I asked
the question to Mr. Amelio and Mr. Trabucco: Where were your
discussions with Congress on this study? Because I understood
the frustration and that there was concern about whether or not
the study was going forward.
And when we met in October 2005, I was under the impression
that, based on their August 11th letter, there had been some
meeting of the minds about how you were going to proceed. And I
learned by the end of the year, certainly by the beginning of
2006, that certainly had broken down.
So we were aware of it, and we were under the impression
that you had reached some sort of accommodation. That clearly
did not happen.
Mr. Porter. Thank you.
Mr. Davis.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
Before I ask any questions, I have a number of letters from
various associations and organizations that I would like to ask
be submitted for the record in opposition to passage at this
time, from the American Federation of Government Employees, the
National Treasury Employees Union, the American Postal Workers
Union, the Federal Managers Association, the National
Association of Letter Carriers, and the Senior Executives
Association. If these could be submitted for the record, I
would appreciate that.
Mr. Porter. No. [Laughter.]
Without objection, certainly. But these are all ETAC
members, correct?
Mr. Davis of Illinois. Yes.
Mr. Porter. Thank you.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
Mr. Porter. Caught you, didn't I?
Mr. Davis of Illinois. Yes.
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Mr. Davis of Illinois. Mr. Sauber, let me ask a couple of
questions. Francis Cavanaugh, who was the first executive
director of the TSP, stated in testimony submitted for the
record that TSP participants were concerned that the management
of their TSP funds would be subject to political influences.
Therefore, the Federal Employees Retirement Act of 1986
required that all TSP stock funds be broad-based index funds
that do not favor any particular industry.
Do plan participants still have these concerns? And do you
know why the TSP was exempted from the OMB budget
appropriations and regulatory controls?
Mr. Sauber. Well, I cannot testify that I have been aware
of any sort of increase or growth in concerns among TSP
participants about political manipulation, and the reason is
the Thrift Savings Plan over its history has kept--politics
have been kept out of it pretty well. We have had a good,
long--I mean, this Congress and the Board can be very proud of
how popular the TSP is and the level of trust and the high
level of participation. Our participation rates are much, much
higher than typical 401(k) plans, and I think in part because
there is a lot of trust in it.
I think in terms of why the Congress exempted the Thrift
Board from the appropriations cycle, I think in general the
idea was the funds that are invested in the TSP are the funds
of the employees. That $180 billion belong to the workers, the
employees who are saving for their retirement. These are not
taxpayer money, and I think that was the main reason for
exempting and for creating some independence for the Board and
for creating the Board as fiduciaries whose job is to look out
solely for the interests of the participants and beneficiaries.
Mr. Davis of Illinois. Mr. Strombotne, you have obviously
spent a great deal of time, energy, and effort in this arena.
Would you care to comment?
Mr. Strombotne. I think Mr. Sauber hit it right on the
head. The money that is in the Thrift Savings Plan is the
employees'--active employees and retired employees' money. And
that is sufficient reason for OMB to keep its hands off.
And I must say that I have heard the concerns expressed at
the meeting about potential politicization of decisions
regarding the funds that go into the Thrift Savings Plan, and I
think that is something that I would be concerned about and I
would hope that all of you would be concerned about, because
the Thrift Savings Plan is just a tremendous success, and I
have watched it progress over the years. You know, at the very
beginning, we only had the three funds, and we could only make
changes in our contributions in limited periods. And we could
only invest so much money, and it was limited to civilians. And
since then, it has expanded in practically every aspect. We
have more funds. We have more flexibility. We can now change
our asset allocation daily if we wanted to. The military is a
part of that.
I think it is just a tremendous asset for Federal
employees, retirees, military and civilian.
Mr. Davis of Illinois. Mike Miles, an independent financial
adviser, has stated that a reduced diversification results when
there is an overconcentration of investment in securities that
performed well just prior to investment. He also stated that if
history is any indicator, investors are likely to be the
victims rather than the beneficiaries if increased portfolio
concentration of a REIT fund is added.
Do either one of you share Mr. Miles' concerns? And if so,
why?
Mr. Strombotne. Well, if I may be the first one on this,
what I have seen from some of the investment advisers that I
listen to or read, Vanguard and Fidelity mostly, there is some
concern about offering too many options to people who are in
401(k) plans so that, you know, they want to--too many choices
are not so great, like too many choices for breakfast cereal.
You need to have a certain number that you can get your arms
around and really understand, and I think that is where the
Thrift Savings Plan is today, particularly with the
introduction of the five lifecycle funds. The Federal employee
now is not looking just at five funds. It is looking at five
different options on lifecycle. And to some degree, there is a
mix and match there. And it is already beginning to get
complicated.
Mr. Davis of Illinois. Well, I still like Corn Flakes but,
Mr. Sauber?
Mr. Sauber. Yes, I do not think there is anything magic
about five funds. I do not have an objection to adding more
funds. I think Dick raises an interesting point. At one of our
meetings we discussed a Wall Street Journal article about there
is a diminished--there is a point of diminishing returns. When
you get too many options, it does start to decrease
participation rates. But I am not arguing that we are at that
point. Just whatever funds we add, I want to make sure that we
have all the data and all the information in and that we take
our time and make a considered judgment. So I am not so
concerned about that.
In terms of return chasing, I think there is some evidence
in the behavior of Federal employees that they are just like a
lot of private sector investors. It is a problem for people in
general in defined contribution plans, and this is in part, I
think, the fact that, you know, we have made this big change in
this country over the last 20 years, shifting from defined
benefit plans where the companies sort of invested people's
retirement for them and employees had no role in it. And so in
some ways we are in this transition period where employees are
taking a more and more--have to take a more and more active
role in managing their own retirement funds. And as a result,
they are learning as they are going, and I think there is
considerable evidence that there is a lot of return chasing
that goes on, people chasing the latest hot thing. And,
unfortunately, Federal employees are not immune from that
activity. The Board has done studies to show that people tend
to do that. They tend to dump their C Fund shares after a big
downturn, and they tend to buy when things get hot. And that is
something we have to guard against.
Mr. Davis of Illinois. Thank you, gentlemen, very much.
Mr. Porter. Thank you, Congressman.
Congressman Marchant.
Mr. Marchant. Yes, sir. Mr.--is it Strombotne?
Mr. Strombotne. Strombotne, yes.
Mr. Marchant. Is that an Irish name?
Mr. Strombotne. No. It is Norwegian. [Laughter.]
Mr. Marchant. What process did you go--how many people are
in the Senior Executives Association?
Mr. Strombotne. The Senior Executives Association, I have
lost track. I think there is somewhere between 2,000 and 3,000.
I am not an active participant on the board of SEA any longer.
I am retired. I was nominated by SEA to exercise my judgment,
and I am not that involved in day-to-day activities of SEA.
Mr. Marchant. OK. So there was no process to poll the SEA
membership as to whether----
Mr. Strombotne. No, there was not.
Mr. Marchant. What level of interest they had?
Mr. Strombotne. No. But I must say that I was a senior
executive for, I believe, if I do the math right, 17 years,
about half of my 34\1/2\ years as a Federal employee. And in my
experience, senior executives are pretty darn busy doing their
own jobs, which are of high-level and significant importance,
and I did not hear a lot of my colleagues talking to me about
their investment decisions and whether or not they should be
investing in the C Fund or the F Fund. That is not uppermost on
their minds, and I suspect that is true today.
Mr. Marchant. Do you see any problem with the fact that you
went to the meeting and voted basically to postpone this
decision and then write a letter and said you did not really
have--that you really did not have any objection to it, but--
you voted not to do it, but then you wrote the letter and said
you really didn't have any objection to it?
Mr. Strombotne. I tried to explain that earlier in my
testimony, and that is, I voted in March based on the
information that I had. The letter from Carol Bonasaro,
president of SEA, came out in April. And between my vote and
her letter, the SEA Board decided that they would take no
position on the bill. That does not change my position.
Mr. Marchant. OK. So in this case, your research and your
decision would supersede the Association's that you were
elected to represent.
Mr. Strombotne. Yes. They did not elect me. They nominated
me to be their representative, a task that I take very
seriously. And so I bring my best judgment to bear on the
issues that come before the Council. And I do not go back to
SEA and ask how I should vote.
Mr. Marchant. OK. Mr. Sauber, do you recall a similar
exercise 2 years ago that the executive director recommended to
you where you would go to an outside consultant and get the
first three things, a study done on the first three things that
were listed?
Mr. Sauber. Do I recall them saying that they made plans to
go to an investment consultant for just the first three and not
the fourth?
Mr. Marchant. No. I mean, in previous budget cycles, you
have to go out for this--you have to rebid this Barclay
account.
Mr. Sauber. Right.
Mr. Marchant. In previous budget cycles did you go into a
consulting firm and get the first three items----
Mr. Sauber. I am not certain it is--these contracts have
been 4 and 5 years in duration, so I do not know how many
iterations of management contracts they have been through. But
I do know that they have an RFP process, but I frankly at this
moment don't recall whether or not they engaged an outside
consultant for that. I would just have to check with my
records. I would be happy to answer what I find out.
Mr. Marchant. Does it seem strange to you with the kind of
empirical data that is available, just period, that it would
take a consultant as long as it is going to take this consult
to come up with the answer to that question?
Mr. Sauber. Well, there are four questions that they have
asked him, so----
Mr. Marchant. No, but the first three were just about
bidding out the contract.
Mr. Sauber. Well, I know--I do not have any independent----
Mr. Marchant. Wouldn't you stumble on the answer to No. 4
along the way?
Mr. Sauber. I was sort of interested earlier today. I see
the tension between the agency and the Congress. I understand
this. You guys, by the nature of your job, you work in 2-year
increments and you have to move legislation, and I know that
you are here to get things done, and I totally respect that.
I just want to tell you, from our point of view, not from
the Board's point of view--from our point of view as
representatives of employees, and they have the $180 billion
invested, our time horizon is not the same as yours. And I
understand you are frustrated with the Board, and that is
something that I really want the two sides to resolve. But from
our point of view, we look at these funds as being available
for 20, 30, 40 years. Our members are going to rely on it. So
we do not really quite--so when I think of your question, I
have a much longer time horizon. I think whether they are
taking too long or too short is in the eye of the beholder. And
obviously from your point of view, it is taking too long.
I frankly have been frustrated. I would like to know, too.
There are certain questions that I wish we had the answer to
before we came here. I would like to know how much----
Mr. Marchant. There are 50 States out there. The State of
Texas, their fund is almost this big. I think CalPERS is. There
is empirical data out there readily available to answer this
question.
Mr. Sauber. Right.
Mr. Marchant. You do not have to go pay--what was the
amount of the contract, consulting contract?
Mr. Sauber. I am not sure exactly. I think they revealed it
to us, but I don't recall it at the moment. But I could find
that out for you.
Mr. Marchant. As chairman, do you convene the meetings?
Mr. Sauber. Yes, I do.
Mr. Marchant. And in your absence, who convenes the
meetings?
Mr. Sauber. Well, we have a vice chair that we consult
together, if we want to call a meeting. Either he or I are
there. I have been to every one we have had.
Mr. Marchant. OK. So do you set the agenda for the meeting
or does----
Mr. Sauber. Yes, I do.
Mr. Marchant [continuing]. The executive director set the--
--
Mr. Sauber. I set the agenda.
Mr. Marchant. OK. Thank you, Mr. Chairman.
Mr. Porter. Thank you.
I guess just in closing, a couple questions, or maybe more
of a comment and you are welcome to respond.
I really sense and certainly respect that as members you
are trying to get as much information as you can because you
have a huge responsibility, not unlike we do. And I believe
that you are, with the information that you have and very
little budget, if any, trying to do the right thing for the
right reasons, and I certainly respect that.
If this legislation moves forward and there were some more
safeguards and some more pieces that may help give you comfort,
would that--I guess would that give you more comfort with the
legislation?
Mr. Sauber. I certainly would like to hear about those
ideas, and we are open to work with the committee, the
subcommittee and the full committee, on that. That would be an
appropriate role for us, and I would welcome the opportunity.
Mr. Porter. And after today's hearing--you get big points
for sitting through it all--are there some things that you may
look at differently in your roles that may help you in working
with the Board itself?
Mr. Sauber. Well, actually, there was. I did want to
comment on a few things because I got the sense that there was
some misapprehension, I think, about how we work under the
Federal Advisory Committee Act. From day one, the way the
Council was set up was we had a secretary of the Council, which
is the general counsel of the Thrift Board. The lawyers have
always been involved. We have had a very sort of cooperative
relationship, and I get the sense that there is some discomfort
with that in Congress and that you think we should have a more
arm's-length relationship.
I think there are pros and cons to that. You know, do I
wish we had a budget that we could undertake all these things?
Sure, everybody wants a budget. But I am very convinced that
our organizations--again, I am going to speak for my
organization. We are a very democratic union. Ninety-two
percent of letter carriers in this country belong to the NALC
voluntarily. They are very active politically and
legislatively. They are very knowledgeable. At every one of our
conventions, we have legislative resolutions, and we hear from
our members what they want. So I am absolutely convinced I have
a sense of where our members are, and I am convinced that most
of the organizations in ETAC are similarly structured. These
are democratic organizations with elections, and I think the
Board benefits from hearing from our organizations, and I think
the Congress benefits from having the ETAC available to serve
as that conduit.
Unfortunately, I get the sense that, just from hearing
today's hearing on this particular issue, things have not gone
very well between the committee and the Board. And whatever
role we can do to help build a consensus we are willing to do.
Mr. Porter. I appreciate that, and if there is anything
that you have gleaned today that would give you the tools that
you need to--what you think to perform at a different level, if
you had those tools, please let us know.
Mr. Sauber. Thank you very much. I appreciate that offer.
Mr. Porter. Thank you very much.
I am going to be proposing legislation based upon the GAO
report, and the GAO report pointed out a few areas that need
some assistance. That is a systematic effort to assess TSP's
participants' overall satisfaction with the service being
provided, which I think is just good business to find out, and
to institutionalize the routine collection of information and
systematic assessment of industry trends and innovations. So
you will have more tools available to you as a committee as you
make your recommendations. So I will be introducing
legislation.
And I am very open for any other ideas. It does not have to
be tonight, but as we put this together, I would like to get
some of your thoughts to help improve and help you with your
role.
Also for the record, I mentioned it earlier but in a more
formal perspective, I want to reiterate that Chairman Davis has
asked that we postpone consideration of H.R. 1578, instead
consider the bill in full committee at a later date so there
could be a full and fair debate about the proposals among the
members of the entire committee and stakeholder groups. So he
wants additional input. I just want to make sure that is
understood.
And with that, thank you all very much for being here and
we will adjourn the meeting.
[Whereupon, at 6:48 p.m., the subcommittee was adjourned.]
[The prepared statement of Hon. Elijah E. Cummings and
additional information submitted for the hearing record
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<all>