H.R. 6500, The Thrift Savings Plan Enhancement Act of 2008
H.R. 6500, The Thrift Savings Plan
Enhancement Act of 2008
Patrick Purcell
Specialist in Income Security
Domestic Social Policy Division
Summary
On July 16, 2008, the House Committee on Oversight and Government Reform
approved H.R. 6500, the Thrift Savings Plan Enhancement Act of 2008, by voice vote.
As ordered reported by the committee, H.R. 6500 would
!provide for newly hired federal employees to be enrolled automatically
in the Thrift Savings Plan (TSP) at a default contribution rate of 3% of
pay, which would be invested in the government securities (“G”) fund;
!require the Federal Retirement Thrift Investment Board to establish
within the Thrift Savings Plan a qualified Roth contribution program
that provides for after-tax contributions and tax-free distributions;
!give the Federal Retirement Thrift Investment Board authority to
include self-directed investment options in the TSP; and
!require the Board to submit to Congress an annual report that includes
demographic information about TSP participants and fund managers.
The text of The Thrift Savings Plan Enhancement Act was added to H.R. 1108, the
Family Smoking Prevention and Tobacco Control Act, which was passed by the House
of Representatives by a vote of 326 to 102 on July 30, 2008.
Automatic Enrollment in the Thrift Savings Plan
Federal employees initially hired into permanent employment on or after January 1,
1984, participate in the Federal Employees Retirement System (FERS). The FERS
comprises three elements: Social Security, the FERS basic retirement annuity, and the
Thrift Savings Plan (TSP).1 Employees can contribute up to $15,500 to the TSP in 2008.
Employees aged 50 and older can contribute an additional $5,000. Each employee’s
employing agency automatically contributes an amount equal to 1% of pay to the TSP on
his or her behalf. In addition, employee salary deferrals up to 5% of pay are matched by
the employee’s employing agency dollar-for-dollar on the first 3% of pay contributed to
the TSP and at fifty cents on the dollar for the next 2% of pay contributed. The Federal
Retirement Thrift Investment Board reports that 52% of employees enrolled in FERS
voluntarily contribute to the TSP program in their first year of eligibility and that 86%
contribute by their sixth year of employment.
Under current law, employees must elect to defer salary into the TSP. H.R. 6500
would require newly hired federal employees to be enrolled automatically in the TSP at
a default contribution rate of 3% of pay, which would be invested in the government
securities (“G”) fund. The Federal Retirement Thrift Investment Board, which oversees
the operations of the Thrift Savings Plan, would be authorized to set the default rate of
contribution no lower than 2% of pay and no higher than 5% of pay and to designate
another fund (or funds) within the TSP as the default investment fund. Employees would
have the option to increase or decrease their contributions, to direct their contributions to
one or more other funds within the TSP, or to opt out of participating in the TSP.
Qualified Roth Contribution Option
H.R. 6500 would direct the Thrift Board to add to the TSP a qualified Roth2
contribution program. Currently, employee salary deferrals into the TSP are made with
pre-tax dollars. Income taxes are deferred until money is withdrawn from the account.
Under a qualified Roth contribution program, employee salary deferrals are made with
after-tax income. Under federal tax law, only employee contributions can be allocated to
a designated Roth account. Employer matching contributions must be allocated to a
pre-tax account. When money is withdrawn at retirement, the part of the distribution that
is attributable to the employee’s designated Roth contributions, and investment earnings
on those contributions, will be tax-free. The part of the distribution that is attributable to
employer matching contributions and investment earnings on the employer contributions
will be subject to income taxes.
Self-Directed Investment Options
Under current law, new investment funds can be added to the TSP only if authorized
by Congress. H.R. 6500 would give the Federal Retirement Thrift Investment Board the
authority, in consultation with the Employee Thrift Advisory Council, to include
1 For more information on FERS, see CRS Report 98-810, Federal Employees’ Retirement
System: Benefits and Financing, by Patrick Purcell.
2 The Roth Individual Retirement Account, named for the late Sen. William Roth, was authorized
by the Taxpayer Relief Act of 1997, P.L. 105-34. Roth treatment of employee salary deferrals
into 401(k) plans and 403(b) retirement annuities was authorized, beginning on January 1, 2006,
by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16).
For more information, see CRS Report RL34397, Traditional and Roth Individual Retirement
Accounts (IRAs): A Primer, by John Topoleski.
self-directed investment options in the TSP without further congressional approval. The
bill would require any such funds to be “low-cost, passively-managed index funds that
offer diversification benefits.” The Board could add other investment options if it
determines that those options are appropriate for inclusion in the TSP. Any additional
administrative expenses that result from adding investment options to the TSP would be
required to be borne exclusively by participants who invest in those options.
Reporting Requirements
H.R. 6500 would require the Federal Retirement Thrift Investment Board to submit
to Congress, no later than March 31 of each year, an annual report on the operations of
the TSP. The report must include information on the number of participants, the median
balance in participants’ accounts, demographic information on participants, the percentage
allocation of amounts among investment funds, the status of the implementation of
self-directed investment options, and whatever other information that the Board considers
appropriate. As amended by the committee, the bill would require the annual report to
include information on the demographic makeup of TSP fund managers. A copy of the
annual report would be made available on the TSP website.
The Board would be required to include in employees’ TSP statements the amount
of investment management fees, administrative expenses, and any other fees or expenses
paid with respect to each investment fund in the Thrift Savings Plan. The statement would
also be required to include the employee’s estimated income replacement rate, on the
basis of the employee’s most recent account balance and rates of contributions, and a
statement that informs participants how they can access the annual report submitted to3
Congress.
Background Information on the
Federal Retirement Thrift Investment Board
The Thrift Savings Plan was authorized by the Federal Employees’ Retirement
System Act of 1986 (P.L. 99-335). The TSP is a retirement savings plan similar to the
“401(k)” plans provided by many employers in the private sector.4 TSP accounts are
individually owned by the plan participants. The assets of the TSP are maintained in the
Thrift Savings Fund, which invests the assets in accordance with participant instructions
in the five investment funds that Congress has authorized to be included in the plan. As
of December 31, 2007, the Thrift Savings Plan had 3.7 million participants among the
federal civilian workforce, the military services, and former federal employees who
continued to hold retirement assets in the TSP. In its annual report for 2007, the plan
reported administrative costs of $78.6 million and assets of $231.6 billion. Thus, the
administrative expenses of the Thrift Savings Plan were about 34 cents for each $1,000
3 The income replacement rate is a measure of retirement income adequacy that expresses
retirement income from one or more sources as a percentage of the individual’s pre-retirement
income. The income replacement rate from the TSP could be estimated as the annual income
from an annuity purchased with the TSP account as a percentage of the worker’s final salary.
4 “401(k)” refers to the section of the Internal Revenue Code that authorizes deferral of income
taxes on contributions to retirement savings plans.
invested. The Thrift Board has contracted with Barclays Global Investors to manage the
funds in which TSP assets are invested.5
The Thrift Savings Plan is administered by an independent government agency, the
Federal Retirement Thrift Investment Board.6 The Thrift Board is charged in statute with
operating the Thrift Plan prudently and solely in the interest of the participants and their
beneficiaries.7 The Thrift Board is responsible for developing the investment policies of
the Thrift Savings Plan and overseeing the management of the plan, which is under the
day-to-day direction of an Executive Director appointed by the Board. Three of the five
members of the Board — including the Chairman — are appointed by the President. The
President chooses a fourth member of the Board in consultation with the Speaker of the
House and the House Minority Leader and a fifth member in consultation with the
Majority and Minority Leaders of the Senate. Members of the Board serve 4-year terms.
All nominations are subject to Senate confirmation. The law requires nominees to the
Board to be individuals with “substantial experience and expertise in the management of
financial investments and pension benefit plans.”8
Background Information on TSP Investment Options
As provided for in statute, TSP participants are offered five investment funds. Three
funds were authorized by the 1986 FERS Act. These three funds were the government
bond (“G”) fund, the corporate bond (“F”) fund, and the common stock index (“C”) fund.
Two additional funds were authorized by the Thrift Savings Investment Funds Act of 1996
(§ 659 of P.L. 104-208). These two funds were the small capitalization stock index (“S”)
fund and the international stock index (“I”) fund.
Participants may allocate their contributions among any or all of the five investment
funds, and they may reallocate their account balances among the five funds. One fund
invests exclusively in U.S. government securities. The other four funds invest in private-
sector stocks and bonds. The four funds that invest in private-sector securities are all
index funds. Index funds purchase securities in the same proportion as they are
represented in an index of stocks or bonds, rather than through the decisions of an
investment manager. As a result, index funds have lower administrative costs than
actively-managed funds. Moreover, because they purchase securities in the same
proportion as they are represented in an index, there is little or no opportunity for the
purchase of securities by the fund to be influenced by third parties who might benefit from
having the fund invest in particular companies or sectors of the economy.
The five investment funds in the Thrift Savings Plan are as follows.
5 The contracts for each fund are open to competitive bids by qualified investment managers
every three to five years.
6 See 5 U.S.C. § 8472.
7 See 5 U.S.C. § 8472(h).
8 See 5 U.S.C. § 8472(d).
(1) The Government Securities Investment Fund (the “G” Fund) invests only in U.S.
Treasury securities and other securities backed by the full faith and credit of the
United States. As of December 31, 2007, the G Fund held assets of $83.9 billion.
(2) The Fixed Income Investment Fund (the “F” Fund) invests in a bond index fund that
tracks the performance of the Shearson Lehman Brothers Aggregate (SLBA) bond
index, consisting of government bonds, corporate bonds, and mortgage-backed
securities. As of December 31, 2007, the F Fund held assets of $12.9 billion.
(3) The Common Stock Index Investment Fund (the “C” Fund) invests in stocks of the
500 large American corporations that are represented in the Standard and Poor’s
500 index in the same proportion as they are represented in that index. As of
December 31, 2007, the C Fund held assets of $79.4 billion.
(4) The Small Capitalization Stock Index Investment Fund (the “S” Fund) invests in the
stocks of small and medium-sized companies incorporated in the United States.
Stocks in this fund are held in the same proportion as they are represented in the
Wilshire 4500 stock index. As of December 31, 2007, the S Fund held assets of
$18.8 billion.
(5) The International Stock Index Investment Fund (the “I” Fund) invests in the stocks
of foreign corporations represented in the Morgan Stanley Capital Investment EAFE
(Europe, Australia-Asia, Far East) index. As of December 31, 2007, the I Fund held
assets of $29.6 billion.
In 2005, the TSP added five new “L” (lifecycle) funds, which invest in the five
authorized TSP funds in allocations that are based on the employee’s expected date of
retirement.9 The “L” funds include an income fund and four funds that allocate
investments based on expected retirement dates of 2010, 2020, 2030, and 2040. By
allocating assets among the five authorized TSP investment funds based on workers’
expected dates of retirement, assets are gradually moved from higher-returning but more
volatile investments when they are young to lower-returning but more stable investments
as they approach retirement age. In July 2008, for example, the L2040 fund holds 18%
of its assets in bonds and 82% in stocks. The L2010 funds holds 68% of its assets in
bonds and 32% of its assets in stocks.
Legislative History of TSP Investment Options
The legislative history of the Federal Employees’ Retirement System indicates that
Congress designed the TSP to permit employees to diversify their investments among
assets with significantly different risk and return characteristics at low cost to the
participants. The opportunity for participants to diversify their investments was provided
by including a government bond fund, a corporate bond fund, and common stock fund.
Low costs to the participants were achieved by requiring the corporate bond fund and the
common stock fund to be index funds rather than actively managed funds.
9 Because the “L” funds are invested in the five authorized TSP investment funds, they did not
require congressional authorization. The “L” funds are methods of allocating assets, not new
funds.
Index funds provide participants with low-cost investment options and also minimize
the opportunity for political influences to affect the management of the investment funds.
As the House Committee report on the FERS legislation stated
Most importantly, the three funds authorized in the legislation are passively managed
funds, not subject to political manipulation. A great deal of concern was raised about
the possibility of political manipulation of large pools of thrift plan money. This10
legislation was designed to preclude that possibility.
An index fund ... allocates its investments to the stocks in the index in the same or
similar ratio that the value of a given stock has to the total value of all of the stocks
in the index. Thus, the actual decision to buy or sell a given stock is determined by
the market place, i.e., the ratio of values of stock within the index. As the relative
values change, the investments from the fund change. Hence, no individual or group11
of individuals are capable of manipulating investments.
Likewise, the Senate committee report stated
Another concern the Committee wrestled with was the potential for market
manipulation through political pressure.... The Committee specifically designed the
plan to avoid this problem. [The legislation] provides for three investment funds that12
are essentially self-managed.
From 1993 to 1995, the Thrift Board evaluated options for adding new investment
funds to the TSP. In 1995, the Board recommended that Congress authorize two
additional investment options: a small capitalization stock index fund and an
international stock index fund. The Board concluded that these two funds would offer
opportunities for participants to diversify their assets into broad classes of equities not
represented in the “C” fund, which represents 500 large American corporations. In the
absence of empirical evidence that actively-managed funds outperform index funds over
the long term, the Board recommended that the two new funds should be index funds,
because indexing “allows investors to hold a broadly diversified portfolio at lower cost
than active management.”13 The Board’s analysis noted that “indexing is less expensive
than active management because of minimal research costs, reduced transaction costs
from lower turnover, and lower management fees.”
Section 659 of P.L. 104-208, the Omnibus Consolidated Appropriations Act for
Fiscal Year 1997, authorized the addition of a small capitalization stock index fund and
an international stock index fund to the Thrift Savings Plan. The “S” fund and the “I”
fund were added to the TSP in 2001. Congress has not authorized any other TSP
investment funds since the “S” and “I” funds were added to the TSP in 2001.
10 United States House of Representatives, Report 99-606 (May 16, 1986), p. 136.
11 United States House of Representatives, Report 99-606 (May 16, 1986), p. 137.
12 United States Senate, Report 99-166 (October 30, 1985), p. 18.
13 Analysis of Additional Thrift Savings Plan Investment Funds, Federal Retirement Thrift
Investment Board, Washington, DC, May 19, 1993.