[Senate Hearing 108-554]
[From the U.S. Government Publishing Office]
S. Hrg. 108-554
OVERSIGHT OF THE THRIFT SAVINGS PLAN:
ENSURING THE INTEGRITY OF FEDERAL
EMPLOYEE RETIREMENT SAVINGS
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HEARING
before the
FINANCIAL MANAGEMENT, THE BUDGET, AND INTERNATIONAL SECURITY
SUBCOMMITTEE
of the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
MARCH 1, 2004
__________
Printed for the use of the Committee on Governmental Affairs
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COMMITTEE ON GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Michael D. Bopp, Staff Director and Chief Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Amy B. Newhouse, Chief Clerk
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FINANCIAL MANAGEMENT, THE BUDGET, AND INTERNATIONAL SECURITY
SUBCOMMITTEE
PETER G. FITZGERALD, Illinois, Chairman
TED STEVENS, Alaska DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
ARLEN SPECTER, Pennsylvania THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Michael J. Russell, Staff Director
Richard J. Kessler, Minority Staff Director
Nanci E. Langley, Minority Deputy Staff Director
Tara E. Baird, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Fitzgerald........................................... 1
Senator Pryor................................................ 4
WITNESSES
Monday, March 1, 2004
Andrew M. Saul, Chairman, Federal Retirement Thrift Investment
Board.......................................................... 6
Gary A. Amelio, Executive Director, Federal Retirement Thrift
Investment Board............................................... 9
Alan D. Lebowitz, Deputy Assistant Secretary for Program
Operations, Employee Benefits Security Administration, U.S.
Department of Labor............................................ 11
James M. Sauber, Chairman, Thrift Advisory Council............... 13
Blake R. Grossman, Global Co-Chair Executive Officer and Managing
Director, Barclays Global Investors............................ 15
Alphabetical List of Witnesses
Amelio, Gary A.:
Testimony.................................................... 9
Prepared statement........................................... 37
Grossman, Blake R.:
Testimony.................................................... 15
Prepared statement........................................... 51
Lebowitz, Alan D.:
Testimony.................................................... 11
Prepared statement........................................... 40
Sauber, James M.:
Testimony.................................................... 13
Prepared statement........................................... 46
Saul, Andrew M.:
Testimony.................................................... 6
Prepared statement........................................... 33
Appendix
Questions and responses for the Record from:
Mr. Saul..................................................... 59
Mr. Amelio with attachments.................................. 63
Mr. Lebowitz................................................. 120
Mr. Sauber................................................... 121
Mr. Grossman................................................. 123
Chart entitled ``Expense Ratio Comparison As of 12/31/03'' I60124
Chart entitled ``Annual Cost Per Participant (NFC Cost Only)''... 125
OVERSIGHT OF THE THRIFT SAVINGS PLAN: ENSURING THE INTEGRITY OF FEDERAL
EMPLOYEE RETIREMENT SAVINGS
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MONDAY, MARCH 1, 2004
U.S. Senate,
Subcommittee on Financial Management,
the Budget, and International Security,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 11:06 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Peter G.
Fitzgerald, Chairman of the Subcommittee, presiding.
Present: Senators Fitzgerald and Pryor.
OPENING STATEMENT OF SENATOR FITZGERALD
Senator Fitzgerald. Good morning. This meeting will come to
order.
Today, we are conducting an oversight hearing of the
Federal Government's Thrift Savings Plan, the $131 billion
government equivalent of a private sector 401(k) plan. This
Subcommittee has jurisdiction over Federal retirement benefits,
of which the Thrift Savings Plan, or TSP for short, plays an
integral role.
The TSP was established by the Federal Employees Retirement
System Act of 1986. The TSP currently provides virtually all
Federal employees, including members of the military, the
uniformed services, and Members of Congress and their staffs,
with a tax-deferred defined contribution plan. TSP participants
can invest their retirement savings in any or all of five TSP
funds, each of which is either an equity or debt security index
fund.
I would like to first welcome the witnesses we have with us
today and thank them for taking time out of their busy
schedules to discuss their involvement with the TSP and its
operations.
It is important that Congress ensure the financial
integrity of the TSP, in which 3.2 million participants have
invested their retirement savings. Congressional oversight is
especially important now in light of a growing list of trading
abuses in the private sector mutual fund industry. I look
forward to hearing from our witnesses regarding the TSP's
oversight mechanisms, its audits, and its daily investment and
management activities, as well as its management expenses and
costs.
The TSP is the largest defined contribution plan in the
world. Since its first full year of operation in 1988, the TSP
has grown from $2.7 billion in investments held by 1.3 million
participants to its current $131 billion in investments held by
3.2 million participants. Despite its size, the TSP has been
successful in providing plan participants with high quality
service while keeping administrative fees and transaction costs
to a minimum.
This Subcommittee recently held hearings to examine abuses
in the mutual fund industry, including market timing, late
trading, and hidden fees charged to investors. Last fall,
Senator Akaka and I looked into the management of TSP
investments, and based on the information provided to us and to
the best of our knowledge, the TSP does not suffer from, nor is
it vulnerable to, these types of abuses that contribute to high
management fees and transaction costs in private index funds.
During our last hearing on January 27, I referenced the
expense ratios of the TSP--which measure administrative
expenses, management and advisory fees, and transaction costs
as a percentage of total assets--and compared them with
comparable private sector funds to illustrate the low cost of
fund management and governance at the TSP. Last year, the
expense ratio of the average government TSP fund was only 11
basis points, or 11 cents per $100 invested, and in previous
years it has been as low as 7 or 8 basis points.
Now, for those of you who can see these charts,\1\ either
that chart over there or the chart right here, the expense
ratio of the TSP C Fund, which is the large cap equity fund for
the TSP, is shown on the left as of the end of last year. The
2003 expense ratio was 11 basis points, 11 cents per $100
invested.
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\1\ The chart referred to appears in the Appendix on page 124.
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Over on the right is the average expense ratio for the
average private sector comparable mutual fund. The Lipper S&P
500 Index average, the average expense ratio for the average
private sector equity stock index fund, is 63 basis points.
That is about six times the expense ratio for the Thrift
Savings Plan.
In the middle there is the Vanguard 500 Index Fund, which
is the lowest-cost private sector index fund. Its expense ratio
last year was 18 basis points. So the expense ratio for the TSP
fund last year was quite a bit lower than Vanguard's expense
ratio--the lowest private sector fund--and it was six times
lower than the average private sector fund's expense ratio.
I would point out as well that the TSP's expense ratio
includes transaction costs, while the expense ratio for the
private sector funds does not include the transaction costs. It
just includes their management fees and so forth.
So as I said, this is extremely low when compared to the
most recent data for private sector index funds, particularly
since the TSP's expense ratio includes transaction costs
whereas expense ratios of private sector mutual funds do not.
According to the Lipper Services, comparable index funds in the
private sector have an average expense ratio of 63 basis
points, or 63 cents per $100 invested.
Contributing to the minimal costs and fees charged to each
TSP account holder is the competitive bidding of contracts,
such as the contract with Barclays Global Investors. Since
1988, Barclays has been selected to manage four of the five
funds--the F, C, S, and I funds. The competition is conducted
separately for each fund every 5 years. Each year, Barclays or
its predecessor has been selected to act as fiduciary and has
established a record of good governance and strong management.
I have long been a proponent of competitive bidding and
encourage the TSP to consider opening its nearly $52 million
contract with the National Finance Center to competition. The
National Finance Center is a division of the USDA, the U.S.
Department of Agriculture, that handles the TSP's processing
and recordkeeping in Louisiana. As of January 31, 2004, there
were 433 USDA employees assigned to the TSP, compared to 100
employees here in Washington. It is my view that the TSP could
save significant funds if this contract were opened to
competition, which would directly benefit the plan's 3.2
million participants. I look forward to hearing from our
witnesses regarding this proposal.
Based on the information known to me, TSP participants do
not need to worry about many of the problems plaguing the
mutual fund industry, such as excessive fees, directed
brokerage, revenue sharing arrangements, or soft dollar
payments. Nor do participants need to worry about an incestuous
board of directors that is beset with conflicts of interest.
TSP board members are completely independent and required by
law to act solely in the interest of plan participants and
beneficiaries.
The Federal Employees Retirement System Act of 1986 also
protects TSP participants from poor management by authorizing
the Department of Labor to conduct investigations and annual
audits of TSP activities. The Employee Benefit Security
Administration, or EBSA for short, within the U.S. Department
of Labor conducts audits on all aspects of the TSP, including
its Board and other fiduciaries. EBSA has made over 800
recommendations under its audit program, 95 percent of which
the Board has adopted. EBSA programs include an audit on
fiduciary compliance which tests for compliance with the 1986
Act. This year, EBSA plans to review customer service at the
TSP as well as the TSP's loan program to address participants'
concerns about access to the TSP website.
In addition to its strong management and oversight
protections against abuses, the TSP also strives to continually
improve the services it offers to participants. Last year, the
TSP switched from a paper-based system with quarterly valuing
of accounts to a daily automated system that provides
participants with 24-hour online access to their account
balances, as well as the opportunity to transfer investments
between funds and submit loan applications.
Initially, the system had some web access problems due to a
computer glitch. Therefore, we would like to hear from our
witnesses how these problems have been addressed and the extent
to which participants are now benefitting from the new system's
capabilities.
This year, the TSP is considering several changes to
improve and expand its services to participants. One change to
the TSP's loan program is scheduled to begin on July 1 which
will better allocate the costs of loan processing among the
applicants to the loan program. Another initiative under
consideration is the addition of one or two new funds,
lifecycle and lifestyle funds, that participants may select.
While the addition of these funds is still being reviewed, they
would provide a more tailored investment option for
participants based on their preferred investment style--
conservative, moderate, or aggressive--or on their proximity to
retirement.
Today, we will hear from witnesses with a variety of
oversight roles and perspectives on the TSP. They are
knowledgeable about the day-to-day activities of the TSP and
they possess a strong understanding of the fiduciary duties and
the investment policies regarding the TSP.
I would like to welcome Senator Pryor. I appreciate your
being here, and before I turn it over to Senator Pryor, I would
like to note that the Subcommittee's Ranking Member, Senator
Akaka, very much wanted to be here today. His schedule,
however, required him to be in Hawaii this weekend. As you
know, Hawaii is a long way away, so when he goes back to Hawaii
for the weekend, it is hard for him to be back by Monday
morning and he was not able to return to Washington in time for
this hearing.
In his absence, though, I would like to thank him for the
record for his valuable contributions that he and his staff
made in preparing for this hearing. Of course, we will include
for the record any statements or questions the Senator may wish
to submit for this hearing. Senator Akaka long has had an
interest in the TSP and has worked to ensure the TSP operates
as efficiently as possible on behalf of Federal employees. I
look forward to continuing to work with Senator Akaka on any
legislative initiatives that we might pursue regarding the TSP.
With that, I would like to again welcome Senator Pryor and
invite you to make some opening remarks. Thank you.
OPENING STATEMENT OF SENATOR PRYOR
Senator Pryor. Thank you, Mr. Chairman. If you would
entertain a motion, I would love for the next time we have this
meeting, we accommodate Senator Akaka's schedule and just hold
the meeting in Hawaii. Could we do that? [Laughter.]
Is that possible? [Laughter.]
I want to thank you, Senator Fitzgerald, for your great
leadership on this issue. I know that this is something that
you are very concerned about and have spent a lot of time on.
We truly appreciate all the work that you have done.
Considering the significant abuses in the mutual fund
industry which have recently come to light and have cost people
millions of dollars, it is important for us to know that the
Thrift Savings Plan has a lot of integrity. It is important for
Federal employees all across the country to understand that
their savings are secure and that the fund is being managed
appropriately. I really have no doubt about that, but I look
forward to hearing from the panel today about the changes in
the Thrift Savings Plan and positive things that are happening
to increase the efficiency in the operations, but at the same
time still maintaining sound investment options and benefit
selections at very low cost.
Mr. Chairman, thank you for holding this hearing today and
thank you for your leadership on this issue.
Senator Fitzgerald. Senator Pryor, thank you very much for
that.
One thing I want to say before I introduce our panel of
witnesses is that it is my hope that someday we can create
private sector mutual funds that would give every American
investor the same kind of low-cost mutual fund opportunities
that are now available to Federal employees. The fact of the
matter is that only Federal employees can get such low-cost
mutual funds. These are not available to ordinary people who
are non-Federal employees.
As shown by those charts over there, a non-Federal employee
is probably going to have to pay six times as much in costs
over years of investing as Federal employees. And those costs
may not seem like a lot, but it is estimated that one basis
point in additional costs over 30 years of investment can cut
someone's retirement nest egg by 35 to 40 percent.
So what it means when a Federal employee can have a mutual
fund that charges them 11 basis points--in fact, that is
abnormally high this year because of the costs of charging off
a computer contract, it may go back down to 6 or 7 basis points
in the next couple of years--a Federal employee who invests the
same amount for the same number of years as a non-Federal
employee who is investing in a private sector mutual fund, the
Federal employee will have much more money at retirement, and I
don't think that is fair. My hope would be that we could have
some reforms that would promote greater disclosure and liberate
free market forces so that there could be greater competition
amongst private sector mutual funds.
So I would now like to proceed to introducing our panel of
witnesses. Our first witness is the Hon. Andrew M. Saul, who
serves as Chairman of the Federal Retirement Thrift Investment
Board that administers the TSP. Mr. Saul has been general
partner in Saul Partners, LLP, in New York City since 1986. He
has served as Chairman of the Board for Cache, Inc., and is a
trustee for the Metropolitan Museum of Art and other
organizations. He is Commissioner for the Metropolitan
Transportation Authority for New York City and also sits on the
Board of Overseers for the Wharton School of Finance at the
University of Pennsylvania.
Our second witness is Gary A. Amelio, who has served as
Executive Director of the TSP since June 2003. Mr. Amelio has
extensive experience in pension plan management and
investments, having served as Senior Vice President and
Managing Director of the Retirement and Investment Services
Department of PCN Bank in Pittsburgh, Pennsylvania. In
addition, Mr. Amelio has over 20 years of banking experience,
specifically in the areas of employee benefits, executive
compensation, tax, and fiduciary duties.
Third on our panel today is Alan Lebowitz, the Deputy
Assistant Secretary for Program Operations at the Department of
Labor's Employee Benefits Security Administration, or EBSA. Mr.
Lebowitz has served in this capacity since 1984 and has
overseen the Department's annual audit program of the TSP and
its fiduciaries since the TSP's first full year of operation in
1988. Mr. Lebowitz has extensive experience with employee
benefit plans and fiduciary duties, having previously served as
Assistant Administrator for Fiduciary Standards at the Office
of Pension and Welfare Benefit Programs at the Department of
Labor.
Our fourth witness is James W. Sauber, who serves as
Chairman of the Employee Thrift Advisory Council that advises
the Federal Retirement Thrift Investment Board on matters
pertaining to the administration and investment of TSP funds.
Mr. Sauber is Director of Research for the National Association
of Letter Carriers, which is one of the 15 employee
organizations identified by statute to participate in the
Council. He has over 16 years of experience with the Council
and has served as the Council's Chairman since September 2003.
Our fifth and final witness is Blake R. Grossman, who is
Global Chief Executive and Managing Director of Barclays Global
Investors. Since 1988, Barclays or its predecessor, which was
Wells Fargo, I believe--Barclays bought Wells Fargo's Global
Investment subsidiary?
Mr. Grossman. Exactly.
Senator Fitzgerald. Since 1988, Barclays or its predecessor
has won the competitive bid to manage the investments of four
of the five TSP funds. Mr. Grossman has primary
responsibilities for Barclays' investment strategies globally,
as well as the institutional businesses based in the United
States. In this capacity, he oversees the team managing TSP and
its assets. And, for full disclosure purposes, I would like to
state that I know personally the Chairman of Barclays Bank in
London, Matthew Barrett, from the time that he was Chairman of
Bank of Montreal, with which my family is affiliated. I have no
authority over awarding the contract to Barclays, but I did
want to disclose that. [Laughter.]
Again, I would like to thank our witnesses for being here
today to testify. In the interest of time, your full statements
will be included in the record and we ask that you limit your
opening remarks to 5 minutes.
Mr. Saul, you may begin. Thank you.
TESTIMONY OF ANDREW M. SAUL,\1\ CHAIRMAN, FEDERAL RETIREMENT
THRIFT INVESTMENT BOARD
Mr. Saul. Good morning, Senator Fitzgerald and Senator
Pryor. My name is Andrew Saul and I am the Chairman of the
Federal Retirement Thrift Investment Board. The Board
administers the Thrift Savings Plan for Federal employees and
members of the uniformed services. I am accompanied today by
Gary Amelio, the Board's Executive Director.
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\1\ The prepared statement of Mr. Saul appears in the Appendix on
page 33.
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My four fellow Board members and I serve in a part-time
capacity. I might also say, Senator, that Gordon Whiting, one
of our other Board members, is here and sitting behind Mr.
Amelio.
By statute, the Board members are responsible for policy
decisions affecting the investment and management of the TSP.
The Executive Director carries out our decisions and directs
the plan's day-to-day operations. The five Board members and
the Executive Director are fiduciaries and, as such, are
required to act solely in the interest of the Thrift Savings
Plan's participants and beneficiaries.
When I and two of my fellow Board members last appeared
before this Subcommittee in November 2002 at our confirmation
hearing, then-Chairman Akaka graciously yet firmly made us
aware of the difficult situation that we faced in assuming our
new roles as Board members. This warning proved to be an
understatement as we entered an embattled agency.
The outgoing Executive Director took a number of actions
just before his abrupt departure that demoralized the staff,
many of whom had built the program from the beginning.
Expensive lawsuits and investigations were sprouting up.
Rancorous battles were underway with other agencies. The costs
of the failed recordkeeping system project had not been charged
to participants. And decisions had to be made immediately on
whether to go forward with the new recordkeeping system project
at all.
I and my fellow Board members entered this environment, and
working with the seasoned career staff, methodically sorted
through these matters, keeping the new system and other
projects on track and moving forward as we restored essential
relationships.
Our first order of business was to address the agency
leadership issue. We conducted an open and orderly nationwide
search for an Executive Director that resulted in the selection
of Gary Amelio, a private sector pension and investment expert.
The Board was confident that Mr. Amelio's 22 years of private
sector experience would result in the betterment of the Thrift
Plan for the participants and we have not been disappointed.
He immediately dealt with the implementation of the new
recordkeeping system, settled the lawsuits to the benefit of
the plan participants, and working with the Board members,
reestablished professional, respectful relationships with other
agencies without diminishing independent fiduciary leadership.
Mr. Amelio has proven his leadership of the agency's career
staff, established productive cooperation with the various
employing agencies of government, and developed an outstanding
rapport with the unions and associations that comprise the
Employee Thrift Advisory Council. As a result of his efforts,
Mr. Amelio has received favorable recognition for the plan in
the pension industry and has already received two national
awards in recognition of his performance. This achievement
signals the turnabout originally sought by this Subcommittee.
When the TSP was first conceived in the early 1980s by
Senator Ted Stevens, it was designed to be an efficient, low-
cost vehicle securing retirements for a large and diverse group
of Federal employees. Congress established the TSP using a
diversified, passively managed index fund approach with a
reasonable limit on the number of investment choices.
The Board has developed investment policies and adopted
sound administrative practices in furtherance of these
Congressional goals. The results have been what we believe
Senator Stevens and his colleagues intended when they undertook
the reform of the Federal retirement system 20 years ago.
Over the years, Congress has carefully considered proposals
to change the TSP, adopting improvements and extending coverage
as appropriate to new employee groups. At the same time, it has
set aside seemingly well-intentioned proposals that would have
moved the TSP away from its fundamental strategy. This
restraint has preserved the basic commitment to investment
choices which are well managed, inexpensive, and appropriate
for a long-term investment strategy.
In view of Chairman Fitzgerald's recent efforts to
emphasize the value to investors of low administrative costs,
we are pleased that the Thrift Savings Plan offers participants
a diversified selection of investment options and a competitive
array of plan benefits at an extremely low cost. In 2002, total
participant expenses were 10 basis points. An additional one
basis point of expense was offset with forfeitures. Two-
thousand-and-three charges were unusually high because we had
to charge 3 basis points to account for the expense associated
with the earlier failed recordkeeping project. For 2005, we
project that the cost to participants could be as low as 6
basis points.
Legislative improvements to augment benefits, simplify plan
administration, and provide new investment funds, have been
beneficial for participants. An example is the extension of
plan participation to members of the uniformed services 2 years
ago. In only 2 years, nearly 400,000 members have become
voluntarily contributing to the plan to supplement their
retirement benefits. We are proud to have the opportunity to
make this program available to them.
I would like to bring one potential legislative improvement
to the attention of the Subcommittee today and that is the
elimination of TSP open seasons. The Board supports eliminating
open seasons because it would expand participant access to the
TSP and simplify Plan administration. We also believe it would
increase participation and contribution levels.
Open seasons were useful when the Plan was conceived
because they provided a structure for initial implementation.
They are no longer useful in a daily value plan environment.
Indeed, they restrict the opportunity for employees to make
contribution elections, and more damaging, delay eligibility
for automatic 1 percent in matching contributions to newly-
hired employees.
The Board has previously supported legislative proposals,
including one introduced by Senators Akaka and Warner on
December 13, 2001, that would have overcome the latter barrier
by providing these benefits as soon as new employees join the
TSP. We would support similar legislation again.
We are also reviewing a second potential legislative issue,
a change in the current fiduciary insurance provision in our
statute. Currently, the agency must purchase such insurance.
Self-insurance, however, is not allowed. We are in the process
of examining whether it makes better economic sense for the
Plan to cover its own risks rather than to pay premiums to
private insurers. The staff analysis is expected to be
completed this summer. Depending on the findings, the Board may
subsequently seek legislative authority allowing us the option
to either purchase insurance or self-insure as the fiduciaries
would determine.
In this first 9 months as executive director, Mr. Amelio
has dealt decisively with the major challenges facing the TSP.
He has initiated necessary changes to the TSP loan program and
is preparing a proposal to provide new investment allocation
strategies based upon the existing Plan fund options. Mr.
Amelio will also be initiating a major revision of our
communication materials with an emphasis on participant
education.
With your permission, I would like to introduce Gary Amelio
to the Subcommittee for his remarks.
Senator Fitzgerald. Mr. Amelio.
TESTIMONY OF GARY A. AMELIO,\1\ EXECUTIVE DIRECTOR, FEDERAL
RETIREMENT THRIFT INVESTMENT BOARD
Mr. Amelio. Good morning, Chairman Fitzgerald and Senator
Pryor. My name is Gary Amelio and I have served as Executive
Director of the Federal Retirement Thrift Investment Board
since June 2003. I came to the agency with 22 years of banking,
pension, and investment experience. I am pleased to appear
today to discuss the challenges the agency has addressed over
the past 9 months and to outline our future agenda. The
challenges that face the TSP today offer opportunities to
improve service for the plan's participants tomorrow.
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\1\ The prepared statement of Mr. Amelio appears in the Appendix on
page 37.
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First, however, I would like to compliment this
Subcommittee and its predecessors on the design of the TSP.
Since arriving, I have told everyone who will listen that this
plan has an excellent combination of investment options,
benefit selections, and low costs. Any retirement professional
would reference the TSP as the optimum retirement plan. That
reflects positively on the vision of its Congressional
designers as well as the fortitude of those who have kept it
true to its original principles over the past 18 years.
With 3.2 million participants and $130 billion in assets,
the TSP is the largest plan of its kind in the world. The
participation rate is very high, the contribution levels well
above average, and support among participants for the program
is strong. Our roll-out of the state-of-the-art recordkeeping
system last year ensures that we will be able to continue the
efficient delivery of investment products and benefits to
participants well into the future.
Although a variety of new features were introduced with the
new system, improvement is still needed. For example, the roll-
out of the new system last year, we experienced difficulty in
promptly servicing the increased volume of participant calls to
the service center. A request for proposals for a parallel call
center to ensure uninterrupted service and improved overflow
capacity has been issued. A selection is expected soon and the
new call center will be operating later this year.
Based upon well-documented industry standards, I am
concerned about the excessive use of the TSP loan program. At
the end of 2003, the plan held over 934,000 loans. Almost 40
percent of these were issued in the last year. During
implementation of the new system, a loan churning problem was
uncovered. The administrative burden and cost to the plan and
the inconvenience to the participants is significant. Three
reforms that will reinforce to participants the importance of
borrowing from their TSP accounts only as a last resort were
recently announced and will be implemented in July. The changes
make the system fairer for all participants and consistent with
private sector loan practices.
An important issue that required immediate attention when I
arrived was the pending litigation between the agency and a
contractor in an earlier failed effort to build a recordkeeping
system. It was my decision to settle the lawsuits and to accept
$5 million, which was paid back into the accounts of TSP
participants. A total of $41 million had been spent on the
unsuccessful project and the ultimate cost to each participant
was 36 cents per $1,000 of account balance. The settlement
allowed us to move forward and refocus on providing investments
and benefits for our participants.
Mutual fund trading and 401(k) plans has been a high
profile subject recently and I am sure there are questions
about the TSP's experience since it has become daily valued.
The staff has reviewed participant trading practices and
discovered no issues of concern. Indeed, only 146 participants,
that is 0.0046 of 1 percent, have traded more frequently than
twice a week. Interestingly, some of these traders held fewer
shares at the end of the trading period. In other words, they
lost money. The agency staff is currently reviewing guidelines
just released by the Department of Labor which describe
appropriate fiduciary actions in addressing such practices and
will develop a recommendation for handling such accounts.
In regard to product enhancement, the agency staff is
preparing a recommendation for the Board members that the TSP
offer lifestyle or lifecycle investment options for TSP
participants. The lifestyle approach is designed to reflect an
investor's investment profile, for example, aggressive,
moderate, or conservative. The lifecycle approach permits an
investor to select the date upon which he or she would start
withdrawing assets from the account, such as at retirement. In
either case, the new life options would be invested solely in
combinations of the five existing TSP investment funds using
different allocations depending upon the investment objective.
Life investment options are professional asset allocation
and rebalancing tools for participants who may not have the
time or knowledge to manage account assets on their own.
Professional research indicates that 80 to 90 percent of
defined contribution plan participants fall into this category,
as evidenced by their failure to rebalance their accounts.
Indeed, the average age of a TSP FERS participant is 43.8 years
and this group has 47 percent of its assets invested in stable
value and fixed funds. By definition, this group has at least
20 years until retirement and will likely need portfolio
diversification to achieve their retirement goals.
Agency research to date indicates that a life product is
very inexpensive to implement. There is no doubt that the
participants who embrace life professional asset allocation and
rebalancing models will enhance the retirement values of their
accounts over time.
Later this month, I expect to present to the Board and the
Employee Thrift Advisory Council the result of months of
research, including interviews with numerous investment
providers who responded to our request for information on life
options and our recommendation for this new investment product.
My goal is to obtain insight from the Council and policy
decisions from the Board that will allow us to have this option
ready for implementation next year.
In the meantime, we are moving forward to substantially
upgrade our web, print, and video communication materials. This
is, of course, a long-term project. The Board members and I
view the enhancement of communication materials as a priority.
I am also aware that the Members of the Subcommittee have
expressed concerns in this regard. A participant satisfaction
and input survey will be part of the communication upgrade
process, although such initiative is just now in the formative
stage.
Other enhancements will be reviewed in the coming year as
we, in Mr. Saul's words, take what has been an excellent plan
to the next level. We will be pleased to take your questions.
Thank you.
Senator Fitzgerald. Mr. Lebowitz.
TESTIMONY OF ALAN D. LEBOWITZ,\1\ DEPUTY ASSISTANT SECRETARY
FOR PROGRAM OPERATIONS, EMPLOYEE BENEFITS SECURITY
ADMINISTRATION, U.S. DEPARTMENT OF LABOR
Mr. Lebowitz. Good morning, Mr. Chairman and Senator Pryor.
I appreciate the opportunity to appear before you today to
address the Labor Department's activities with respect to the
Federal Employee Retirement System and its Thrift Savings Plan.
My name is Alan Lebowitz. I am the Deputy Assistant Secretary
for Program Operations of the Employee Benefits Security
Administration. Accompanying me and sitting immediately behind
me is Ian Dingwall, our Chief Accountant.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Lebowitz appears in the Appendix
on page 40.
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EBSA oversees approximately 730,000 private sector pension
plans and millions of private sector health and welfare plans
that are subject to the Employee Retirement Income Security Act
of 1974, known as ERISA. EBSA-covered pension plans hold over
$4 trillion in assets and cover more than 45 million workers.
Title I of ERISA establishes rigorous standards of
fiduciary conduct for persons who are responsible for the
administration and management of pension and other benefit
plans, including the requirement to act solely in the interests
of participants and beneficiaries, to act prudently, and to
avoid transactions defined in the statute as prohibited. Under
ERISA, fiduciaries are personally liable for losses resulting
from their breach of these standards.
The Federal Employees Retirement System Act of 1986 charges
the Department with administering and enforcing substantially
similar provisions of law governing fiduciary conduct for the
TSP.
As with private plans under ERISA, under FERS, the
Secretary of Labor has broad investigative and auditing
authority concerning the activities of the FERS Board and its
Executive Director in the administration of the TSP. However,
in contrast to ERISA, in 1988, Congress amended FERS to
specifically exclude lawsuits by the Secretary against Board
members or the Executive Director. While other fund fiduciaries
and participants may still sue the Board and the Executive
Director, the 1988 amendments do not permit any monetary
recovery against these individuals. The Department and others
may still bring actions for recovery of losses against other
TSP fiduciaries, such as investment managers.
FERS specifically directs the Secretary of Labor to
establish a program to carry out audits to determine the level
of compliance with the Act's fiduciary standards and
prohibitions on certain types of transactions. The statute
specifies that the Secretary may contract with a qualified non-
government organization. Currently, KPMG LLP conducts the
audits under the supervision of EBSA's Chief Accountant.
To guide the auditors, the Department has developed a
strategic fiduciary oversight program that uses detailed guides
to test for compliance. Audits must cover all significant
activities of the fund as well as the controls in place at the
TSP investment manager, Barclays Global Investors, that ensure
the accuracy of financial information, compliance with FERS,
and operational efficiency and management effectiveness. The
BGI management fee is reviewed for consistency with fees
charged by other similar institutions in conformance with
contractual agreements.
At the conclusion of each audit, the Department issues a
report for formal response by the Executive Director on behalf
of the Board. The Department's representative and auditor meet
with the Board at least once a year to highlight significant
issues from the audit, to present the Department's future audit
schedule, and to answer Board members' questions.
The Department's audit recommendations range from
compliance with FERS to economy and efficiency issues that may
provide cost savings opportunities for the TSP. Most
significantly, the Department communicated many recommendations
over several years addressing TSP system and software control
weaknesses which influenced the TSP Board's decision to replace
the TSP recordkeeping system in June 2003.
Since the inception of the audit program, the Department
has made more than 800 recommendations, 95 percent of which
have been accepted. The remaining recommendations chiefly
address controls for the TSP new recordkeeping system.
Certain abusive practices within the mutual fund industry,
namely market timing and late trading, which have recently come
to light, have raised concerns and prompted the Department to
take certain steps. The Department recently performed a limited
review of BGI's collective trust funds in which the TSP has
equity investments to determine whether further investigation
is warranted. Based upon this preliminary review, we do not
believe that TSP participants are adversely exposed to costs
and investment risks due to late trading and market timing.
The Department also recently announced that it is
conducting reviews of mutual funds, similar pooled investment
funds, and service providers to such funds to determine whether
there have been any violations of ERISA. The results of these
reviews will be used to later determine if any FERS issues
require further investigation.
We are working very cooperatively with Chairman Saul and
Executive Director Amelio and the members of the Board. We
anticipate continuing a free and candid exchange of views that
should benefit the TSP participants and beneficiaries and help
us to fulfill our oversight responsibility.
This concludes my prepared remarks. Thank you for the
opportunity to testify before you today regarding this
important matter. We look forward to working with the Members
of the Subcommittee and the Thrift Savings Plan fiduciaries in
this endeavor, and I will be happy to answer any questions you
may have.
Senator Fitzgerald. Thank you, Mr. Lebowitz. Mr. Sauber.
TESTIMONY OF JAMES M. SAUBER,\1\ CHAIRMAN, THRIFT ADVISORY
COUNCIL
Mr. Sauber. Good morning, Chairman Fitzgerald and good
morning, Senator Pryor. My name is James Sauber. Thank you for
the invitation to participate in this hearing.
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\1\ The prepared statement of Mr. Sauber appears in the Appendix on
page 46.
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The Employee Thrift Advisory Council is a 15-member body
established by the Federal Employees Retirement System Act of
1986 to advise the Thrift Investment Board on matters related
to the TSP. The 15 members are nominated by organizations
identified in the FERSA statute. These organizations represent
Federal and postal employees, both active and retired, at all
levels of the U.S. Government, from wage earners to senior
executives. I was nominated to serve on the Council by my
employer, the National Association of Letter Carriers, and was
elected to serve as Chairman of the Council last fall.
As you know, the TSP is a very important and popular part
of the Federal pension system. It has remained popular despite
the poor performance of the stock market in recent years. The
TSP's continued popularity reflects the wisdom of its designers
from this Committee and on the good judgment of the Federal
workforce, who have continued to invest and save for the long
run in order to enjoy a more secure retirement.
The TSP is also popular because of the solid performance of
the Thrift Investment Board over the years and because Congress
has continued to give it strong backing. In practical terms,
that means the Thrift Board has provided TSP participants good
service while keeping expense ratios very low, and Congress has
protected the TSP by insulating it from budgetary and political
pressures. We are confident that these positive aspects of the
Plan will be maintained.
ETAC has a constructive relationship with the Board. Lines
of communication are wide open and the trust built up over many
years has allowed us to work well together. That trust and
communication has also helped us overcome difficulties that
have occasionally arisen.
A recent example of such difficulties was the delayed
launch of the new recordkeeping system last year. I can assure
you that none of the organizations that make up ETAC were happy
about the ill-fated contract with AMS to upgrade the
recordkeeping system or the cost it imposed on TSP
participants. At our first meeting last fall, we were given a
comprehensive briefing on the Board's decision to reach a
settlement to end the litigation with AMS and Executive
Director Amelio answered all our questions.
In the context of the Board's long record of success, most
ETAC members agree that the episode with the recordkeeping
system should be seen as an aberration. We are pleased that the
Board has finally successfully implemented the new system.
Chairman Saul and Executive Director Amelio deserve great
credit for managing the agency through a difficult period.
At the most recent ETAC meeting, we also covered two other
important issues, possible changes to the TSP loan program and
the Board's investigation of so-called lifecycle and lifestyle
investment options. In general, there is a consensus among ETAC
members that many TSP participants are making excessive use of
the TSP loan program. Instead of using it as a last resort,
some employees are using it as a short-term money management
tool at the expense of their long-term financial interests.
Most of us agree that charging a nominal fee for the loans
makes sense as a way to discourage excessive use of the loans
and to more fairly allocate their administrative costs.
However, not all organizations that make up ETAC favor the
restrictions on second TSP loans. We look forward to discussing
the proposed changes at our next ETAC meeting later this month.
There is also broad interest in the lifecycle investment
options that the Board is investigating. Too many Federal
employees fail to rebalance their investments as they age. A
lifecycle fund that allowed the gradual reallocation of
investments among the five TSP funds could be very useful.
Although ETAC members are concerned about the added cost of
offering a lifecycle fund, we look forward to reviewing the
Board's research on the issue at our next meeting.
Finally, I would like to comment on two TSP-related
legislative matters. First, ETAC fully supports the Board
proposal to eliminate TSP open seasons, a concept that draws
heavily on a bill sponsored by, or proposed by Senator Akaka in
the 107th Congress. Open seasons made sense when the Thrift
Board was a new agency with limited administrative
capabilities. Today, with the new recordkeeping system and its
capacity to value accounts daily and to implement investment
allocations instantaneously, open seasons are no longer
necessary. Eliminating them will save money and make
participation in the TSP more flexible and attractive to all
employees.
Second, the six ETAC members from Postal employee
organizations wish to alert the Subcommittee to a proposal made
by the President's Commission on the U.S. Postal Service that
could adversely affect the TSP. The Commission recommended that
Congress consider removing Postal employees from various
pension, health insurance, and other benefit programs that
currently cover all Federal employees. Among such programs are
FERS and the TSP. All six organizations representing letter
carriers, Postal workers, postmasters, and supervisors,
strongly oppose this idea.
In the case of the TSP, removing 800,000 employees from the
plan would raise the cost of retirement investing for Postal
employees and Federal employees alike and unfairly deny Postal
employees access to this excellent program. We urge the
Subcommittee to oppose any proposal to exclude Postal employees
from the TSP.
That concludes my oral testimony. I have submitted my full
statement for the record. Thanks again for the opportunity to
testify and I will be happy to answer your questions.
Senator Fitzgerald. Mr. Sauber, thank you very much. Mr.
Grossman.
TESTIMONY OF BLAKE R. GROSSMAN,\1\ GLOBAL CO-CHIEF EXECUTIVE
OFFICER AND MANAGING DIRECTOR, BARCLAYS GLOBAL INVESTORS
Mr. Grossman. Thank you. Good morning, Chairman Fitzgerald
and Senator Pryor. My name is Blake Grossman. I am the Co-Chief
Executive Officer at Barclays Global Investors. Thank you for
inviting me to discuss Barclays Global Investors in its role as
the external asset manager for the Federal Thrift Savings Plan.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Grossman appears in the Appendix
on page 51.
---------------------------------------------------------------------------
We appreciate the concerns of this Subcommittee in
safeguarding the interests of all investors, including Federal
employees, particularly in light of certain practices in the
mutual fund industry that have recently come under close
scrutiny. We are honored to have served as the investment
manager for the TSP since 1988 and we take our responsibilities
for the management of the retirement assets of the Federal
workforce very seriously. We take great pride throughout BGI in
maintaining the highest ethical and fiduciary standards and you
have our commitment that no compromises to these standards are
acceptable.
To understand why Federal employees should feel confident
that BGI is managing their retirement assets responsibly, it is
important to say a word about who we are, the service we
provide for the TSP, and how we keep the costs associated with
trading and investing as low as possible.
BGI was founded in 1971 as part of Wells Fargo Bank in
California. Today, we are owned by Barclays PLC, one of the
world's leading financial services providers. We remain
headquartered in San Francisco with approximately 1,100
employees in California and elsewhere in the United States, and
1,000 more employees worldwide serving the needs of our global
clients.
With more than $1 trillion in assets under management, BGI
is the world's largest index manager and, in fact, created the
first index strategy in 1971, just one of many financial
innovations that we have pioneered. Since our founding, BGI has
been focused on a single global investment philosophy which we
call total performance management. In brief, our objective is
to deliver superior investment results by efficiently capturing
the returns of market indexes while rigorously controlling all
risks and minimizing trading and other implementation costs.
This simple yet profound approach is rather unique in the
industry. It helps us avoid investment fads or dependence on
star managers or stock pickers. It has been the foundation of
the way that we manage money for over 30 years and we believe
it has served our clients very well.
As I noted, since 1988, one of those clients has been the
TSP. BGI manages four of the five investment options, each an
index fund that tracks a widely followed stock or fixed income
benchmark available to TSP participants. It is important to
note that we have successfully retained this relationship in
regular highly competitive bidding processes. Also worthy of
note is the fact that BGI's services to the TSP are completely
focused on investment management. We don't provide any other
services.
Mr. Chairman, as you know, the costs and expenses of
investing to track from investment performance, and therefore
from ultimate retirement benefits. There are three primary
sources of cost and expense: The administrative cost,
transaction costs, and investment management fees.
The majority of BGI's clients are large institutional
investors, such as the TSP, and the average account size for
our clients in the United States, in fact, is $880 million.
Because of our size and the ability to commingle the assets of
our clients, we offer considerable economies of scale for our
investors and, therefore, we are able to charge lower
investment and administrative fees to these clients.
Sophisticated trading strategies and large trading volume also
enable us to minimize transaction costs in all of our
investment activities, a key to both our long-term success in
index management and the ability to keep the costs for the TSP
at the very low expense levels that have been previously cited.
I also want to emphasize that our focus on transaction is
completely on obtaining best execution. We don't use soft
dollars or directed brokerage or anything else in connection
with the TSP assets that would conflict with getting best
execution.
Before concluding, allow me to comment on certain practices
in the mutual fund industry that have recently come under
scrutiny. We recently conducted a thorough review at BGI of
these issues, including late trading, market timing, and
personal trading by BGI personnel. I am pleased to report that
we have found no issues at BGI of significant concern or any
practices that compromise our fiduciary responsibilities to the
TSP or any of our other clients.
Mr. Chairman, as a citizen, I appreciate the service that
Federal employees provide for this country and every Federal
employee should feel confident that we at BGI are managing his
or her TSP retirement assets in a responsible fashion. We
appreciate the trust that has been placed in BGI in this
regard. We look forward to maintaining an open dialogue with
the TSP and Members of this Subcommittee on these key issues in
the future.
Thank you very much for the opportunity here today to share
our views.
Senator Fitzgerald. Mr. Grossman, thank you very much and
thank you for being here.
I would like to start with Mr. Amelio, and ask about the 11
basis points in expenses that the TSP C Fund had last year.
Several of your other funds also seem to come in around 11
basis points in gross expenses, and the expense ratio tended to
go down to 10 basis points after you netted out some
forfeitures of people who start as Federal employees, start
paying in, and then leave. Their money is forfeited and that
goes back into the fund.
I know your management fee is confidential. It was the
subject of competitive bidding, but Barclays has filed to keep
that confidential under the FOIA so we won't go beyond where we
can go, but I would like you to describe in general terms what
is the breakdown of that 11 basis points in total expenses? How
much, for instance, is administrative cost?
Mr. Amelio. I would say roughly--and this is very much of a
ballpark based upon the overall expenses--the budget that goes
in is about $110 million and virtually all of that, probably up
over 90 percent, I would say, is administrative cost, which is
far the reverse that you would find in the private sector where
management fees are a lot higher than administrative costs.
Senator Fitzgerald. OK. So talking about the 11 basis
points in expenses in dollars and cents terms, over the five
funds, the costs in dollars and cents terms are about $110
million, is that right?
Mr. Amelio. That is the total cost charged to the plan,
yes, sir.
Senator Fitzgerald. OK, and that works out to around 11
basis points of the total fund assets?
Mr. Amelio. I am giving you a general number. The 11 basis
points is an anomaly number. The 11 basis points includes that
settlement, which is a one-time charge. Normally, we are
talking about a little over 7 basis points is truly the cost to
the participants.
Senator Fitzgerald. OK, so about 3 basis points last year,
roughly, was for that anomalous charge for charging off that
ill-fated computer contract, and this Subcommittee, by the way,
is going to have a full Committee hearing on that issue
probably sometime later this year, so we are not going to go
deeply into that ill-fated computer contract at this hearing.
But roughly last year, how much in dollars and cents was
charged for the computer contract last year?
Mr. Amelio. Forty-one million was the lawsuit. You have to
net that against the $5 million we recovered back, so about $36
million.
Senator Fitzgerald. About $36 million?
Mr. Amelio. Yes, Senator.
Senator Fitzgerald. So you had $110 million in total
expenses. If we take out $36 million for the computer contract,
then let us describe your remaining expenses. I want to say
that your administrative expenses approximate about $54 million
a year?
Mr. Amelio. That is at the NFC, yes. There are other
administrative costs. I have the fact sheet in front of me.
About 3 percent of the entire number are administrative
expenses. Everything else is a variety. The National Finance
Center in New Orleans represents roughly 44 percent of overall
expenses. The AMS write-off was 30 percent. Other various IT
contracts and what not were about 9 percent. The Board here in
Washington is about 8 percent of expenses. Investments are 3
percent. Printing for employee participant communications is 3
percent. Rent is 2 percent, and everything else is 3 percent.
Senator Fitzgerald. Printing is how much?
Mr. Amelio. About three percent.
Senator Fitzgerald. OK. Now 44 percent is the National
Finance Center. That is the backroom operation in Louisiana, I
believe?
Mr. Amelio. Yes.
Senator Fitzgerald. It has 433 Agriculture Department
employees----
Mr. Amelio. Yes.
Senator Fitzgerald [continuing]. That are providing the
backroom services to run the day-to-day operations of the TSP.
Has the Board ever competitively bid out the administrative
services? How did we come to have the Agriculture Department
doing this?
Mr. Amelio. The National Finance Center, which is, I guess
for the lack of a better term, a subsidiary of the Department
of Agriculture, actually stepped in at the plan's creation back
in the mid- to late-1980s, around 1986. It was always intended,
and I am basically reading from the historical transcripts,
that these services would be competitively bid out over time.
There have been certain times when the services have been
looked at up until very recently when we put out a request for
proposal last year on the parallel call center. But there is
certainly a history that it was understood that these services
would be looked at to be competitively bid.
Senator Fitzgerald. But they have never been competitively
bid.
Mr. Amelio. That is correct.
Senator Fitzgerald. Does the statute not require you to
competitively bid out your services?
Mr. Amelio. The statute requires that we operate the plan
at the lowest possible cost that we are able to.
Senator Fitzgerald. How do we know we are operating at the
lowest possible cost with respect to administrative services if
we haven't competitively bid those out?
Mr. Amelio. That is a very good question, Senator. That is
one reason why we have taken the first step in looking at the
parallel call center. We will be able to judge the existing
cost versus what the parallel call center costs.
Senator Fitzgerald. You are new. You just came in last
year----
Mr. Amelio. Yes.
Senator Fitzgerald [continuing]. And that is one of the
things you identified that you wanted to work on.
Mr. Saul. If I might just add something, I have been here
actually over a year now and one of the things you have to
realize, we could not really competitively bid out the work
done by the National Finance Center prior to now because the
old system wasn't properly documented. With the new system that
we have installed in July that you have heard about, the
automatic daily recordkeeping system, it is much more
transportable. It is transportable. The old system was a
hodgepodge put together, as you can understand, from its
inception and really was not--there was no ability to even have
another vendor operate the system. So it wasn't even a question
of whether you should have, could have, would have. It was not
a system that could have been done.
And what we have done since we have come there, we have
slowly--we have, as you heard in both of our testimonies, we
had an awful lot of priorities that in the opinion of the Board
were much more painstaking and had to be accomplished right
away. We took things in order of priority.
As you see now, we have gone forward with taking some of
the functions at the NFC and putting them out. We now have a
parallel call center, as Gary Amelio has described. We are now
in the process of bidding out a mainframe operation, which is
the actual mainframe computer operation, to a third party, and
we are also now having our software of our new system done by a
third party vendor.
So the beginning phases are there of starting to
competitively bid out the work that was done by the National
Finance Center. But I think this is a very complex thing. We
have just gone through a new system introduction and we have to
be very careful that we don't do anything at all to destabilize
the system, as you can well appreciate, Senator. While costs
are very important, and I don't mean to minimize costs at all,
I think it is a question of priorities and I think we have
taken the first steps, which were well thought out, and we will
see how these steps work and then we will go from there.
Senator Fitzgerald. Just for the record, you all agree that
this is the big expense. We had $110 million in expenses last
year. About 30 percent of that was for charging off that one-
time hit for the computer contract, but we are talking
something like $54 million in administrative expenses, or 44
percent of the expenses of the funds are for administrative
functions.
By comparison, you said only 3 percent of the expenses are
the actual investment that Mr. Grossman's company is doing, and
that is competitively bid out. The investment operations have
been competitively bid out, but we haven't bid out the
administrative backroom operations. Instead, we have the USDA
National Finance Center in Louisiana doing it and that is the
lion's share of the expenses for the fund.
Have you gotten any requests for proposals back yet? You
said you put out an RFP?
Mr. Amelio. Actually, we have completed the RFP process,
received them, reviewed, them, and the recommendation is in the
final stages. We will be prepared very shortly to sign a
contract with one of the vendors and have the parallel call
center up and running hopefully within a few months.
In addition to the parallel call center, Senator----
Senator Fitzgerald. This is just for the call center,
though?
Mr. Amelio. Yes, the parallel call center.
Senator Fitzgerald. OK.
Mr. Amelio. There are two other pieces that were recently
discussed and voted on at the last Board meeting, as well, and
one is we will be moving the mainframe computer, and a separate
function is the software support of that mainframe and we will
also be moving those.
Senator Fitzgerald. How much will be left in the National
Finance Center then?
Mr. Amelio. A significant amount. Well, all of the jobs,
but a significant portion----
Senator Fitzgerald. What will they be doing?
Mr. Amelio. Still a significant portion of the call center
as well as what we call data input. When the forms come in,
they get processed into the system. All of the mailing of the
statements, check processing, things of that nature.
Senator Fitzgerald. OK.
Mr. Amelio. And the accounting.
Senator Fitzgerald. So you are a long way from--couldn't
you bundle everything that the National Finance Center is doing
and bid out that, or are there not firms out there that would
do the full range of services?
Mr. Amelio. We are not there yet. I don't know if there is
any vendor out there that would be big enough that would be
able to absorb everything. We haven't got that far down the
pike yet.
Senator Fitzgerald. OK. Mr. Lebowitz, has the Department of
Labor ever looked at the various services of the TSP and
questioned whether the TSP Board was getting the lowest cost
services?
Mr. Lebowitz. Many of the questions you asked were
questions that we have asked over the years in the course of
our audit program. My understanding is that the Board in the
past had done a couple of feasibility studies as to the
appropriateness, or in statutory terms, prudence of continuing
the relationship with the National Finance Center.
But as Chairman Saul and Mr. Amelio have both said, it was
not terribly feasible to consider moving outside of the
National Finance Center when the underlying software was not
portable. It was, as described, a hodgepodge of systems tied
together. Documentation for that system was lacking in a number
of respects, as our auditors pointed out many times over the
years.
Now that the new system is completed and up and running, a
whole range of options present themselves to the Board that, as
a practical matter, were not available before.
Senator Fitzgerald. Now, here in Washington, we have 100
employees who are doing the management of the Government Bond
Fund, in which we have the non-marketable government securities
that are not traded publicly, but which the TSP Government Bond
Fund--what fund is that, Mr. Amelio?
Mr. Amelio. You are referring to the G Fund, which we refer
to as the Stable Value Fund.
Senator Fitzgerald. The Stable Value Fund.
Mr. Amelio. Yes.
Senator Fitzgerald. That is invested in government bonds--
--
Mr. Amelio. Yes.
Senator Fitzgerald [continuing]. But non-marketable
government bonds, is that not correct?
Mr. Amelio. That is correct.
Senator Fitzgerald. And for those assets, the
administrative work and the investment work, or just the
investment work for that, is done here in Washington?
Mr. Amelio. The Board's staff in Washington does handle
the--I don't want to call it an investment piece because we are
not actively managing, but they handle all of the work with
respect to the G Fund, which is administrative processing, the
movement of money back and forth, the accounting of it. In
addition, we have a legal staff, a benefits policy staff,
product development----
Senator Fitzgerald. Do you need 100 people to do that?
Mr. Amelio. Well, no. I was just going through each of the
offices. We do a lot of things other than just the G Fund, as
well.
Senator Fitzgerald. How many people are dedicated to just
the G Fund?
Mr. Amelio. It would probably--I don't know, maybe a dozen.
Senator Fitzgerald. OK. So that is only a small portion of
the 100 people that you mentioned.
Mr. Amelio. Yes.
Senator Fitzgerald. OK. Now, Mr. Saul, in your written
testimony you discussed, and in your oral testimony you
discussed, two possible legislative changes regarding the TSP.
One was that you would like the legislative authority for the
TSP to self-insure, and it is your impression that the current
statute does not grant the TSP the authority to self-insure, is
that correct?
Mr. Saul. That is correct, Senator. The general counsel of
our agency has issued a legal opinion that we do not have the
ability to self-insure under the existing statutes as she reads
them. We are not even 100 percent sure at this point, as I said
in my testimony. We need to do some more research on this.
What has happened is because of the costs, as you are
aware, of D&O insurance skyrocketing because of all the abuse
that has been out there in the corporate sector, our rates for
our insurance have skyrocketed and we are paying----
Senator Fitzgerald. Do you know how much you are paying?
Mr. Saul. Yes. I was just going to say, we are paying--last
year, I think it was approximately $400,000 for $5 million
worth of liability insurance, and this insurance, by the way,
does not cover the Board or the Executive Director because that
is, as I think you said in your opening statement, it is
statutory. We cannot be sued under the Federal statutes. What
this policy does is provide insurance for the other employees
of the agency.
The Board was very upset that we were paying $400,000 or
$500,000. As a matter of fact, the year before, we were paying
$500,000 for this kind of coverage and, therefore, it became an
issue as to whether we could use this $5 million pool that we
have that is actually paid--filled in by the other----
Senator Fitzgerald. Did your insurer suggest any steps that
you could take to lower your----
Mr. Saul. There is none. As a matter of fact, it was very
difficult even to get some carrier to bid on this thing. We had
quite a bit of problems when the RFP went out. There were very
few insurance firms that even wanted to participate in this
endeavor, so----
Senator Fitzgerald. You suggest it sounds very high risk--
--
Mr. Saul. Well, it is----
Senator Fitzgerald [continuing]. And I wouldn't think it
would be.
Mr. Saul. Frankly, I don't think it is so high risk, but
the industry assumes that it is high risk because of what has
happened in the corporate sector. But at any rate, we are
paying a lot of money for very little coverage at this point,
Senator.
Senator Fitzgerald. Mr. Sauber, has your council looked
into this issue?
Mr. Sauber. No. This is a subject that has arisen only
recently--the first time we discussed it was at our last
meeting and I am sure we will continue to discuss it.
I would like to, if I could, just comment on an earlier
subject, when you mentioned the National Finance Center. I
think it, and this is just coming from my life representing
workers, that it deserves to be said that the National Finance
Center has served the Thrift Savings Plan quite well. One of
the reasons the TSP's expense ratios are so low is that the
Finance Center has done a very good job.
So I think it is worth stating that and I think a number of
the organizations in the Thrift Savings Plan that represent
public employees would be very concerned about decisions to
contract out NFC work if it led to the creation of jobs that
didn't have health insurance, pensions and that sort of thing.
So I think as a body, our ETAC Council would be concerned about
any decision to look at outside vendors and would want these
issues to be given a fair hearing.
Senator Fitzgerald. Even if it is lower cost and it would
benefit the postal workers that you represent by lowering the
cost?
Mr. Sauber. We certainly are interested in having the
lowest cost plan possible, but we also care that decent jobs be
available to our members, as well. So I think there is an issue
of balance for us. We are, of course, interested in the lowest
possible cost and I think we have gotten a really good deal
from the National Finance Center over the years.
Senator Fitzgerald. What about the printing costs? That
was, did you say, 2 or 3 percent of the overall cost too, Mr.
Amelio?
Mr. Amelio. I did, Senator. That is right.
Senator Fitzgerald. And who does the printing for the TSP?
Mr. Amelio. We have an outside service. UNICOR, the Federal
Prison Industries does the printing.
Senator Fitzgerald. The Federal Prison Industries, OK. Is
that competitively bid?
Mr. Amelio. Not in the past.
Senator Fitzgerald. It hasn't been in the past?
Mr. Amelio. I am advised that we were not able to in the
past. Apparently, there was a rule that Federal agencies had to
utilize this particular agency for their printing services in
the past.
Senator Fitzgerald. So that could be contradictory to the
statutory requirement that you use the lowest cost.
Mr. Amelio. I would--I believe so.
Senator Fitzgerald. You might want to look at all these
things in preparing legislative recommendations, such as with
respect to self-insurance. You might want to catalog some of
these discrepancies because I would like to help you keep this
as low cost as possible.
Mr. Grossman, with respect to Barclays, you apparently
commingle the TSP funds with the funds of hundreds, presumably,
of other plan managers that you bring together. You have over
$1 trillion invested, or you manage and you have presumably
hundreds of 401(k) plans and other types of plans with an
average size of $800 million, correct?
Mr. Grossman. That is correct, yes. The TSP assets are
commingled with other qualified investors in our collective
funds, and qualified investors being primarily defined benefit
and defined contribution plans, also foundations and
endowments. However, it is important to note that the funds in
which the TSP has invested are not open to hedge funds or
individual investors. Individual investors can only invest, let
us say, in a defined contribution plan in these funds.
Senator Fitzgerald. OK. So you have both defined
contribution and defined benefit plans participating in your
index funds, and you commingle all of those monies together.
Mr. Grossman. That is correct.
Senator Fitzgerald. OK. And that allows you to achieve a
lot of these economies that you are talking about?
Mr. Grossman. Yes. And we have a series of different funds
depending on the particular characteristics. So in the funds
that we are managing for TSP, I could tell you that in terms of
the assets, they are predominately defined benefit plans as
opposed to defined contribution, but there are some defined
contribution plans in there, as well.
Senator Fitzgerald. OK. And this all began as Wells Fargo
years ago, you said 1971. Was it Wells Fargo that came up with
what is now Barclays Global Investors?
Mr. Grossman. That is right. It was operating at that time
as a division of Wells Fargo Bank called Wells Fargo Investment
Advisors that was the pioneer in developing index strategies,
particularly for institutional clients in the United States.
Senator Fitzgerald. It sounds like you invented indexing
before Vanguard, which claims to have invented indexing.
Mr. Grossman. Technically, yes, we did. [Laughter.]
They get more publicity than we do, but they advertise
more.
Senator Fitzgerald. OK. Now, you actually have some
interesting strategies to keep the costs as low as possible. As
I understand it, if--let us say that I buy, today, some of your
C Fund, but Senator Pryor sells an equivalent amount of his C
Fund shares. You will, in fact, try to net out our transaction
before you go into the market and adjust your holdings of the
S&P 500 Index, for example, is that correct? Could you explain
how that works?
Mr. Grossman. Yes, that is correct. What we do on the
trading side is, first, look for any opportunities to cross or
offset activity such as that, and it can happen at a couple
different levels. The first level is at the fund level. So
within a particular pool fund looking to offset contributions
and redemptions to the full extent possible and therefore
eliminating the need to trade completely at that level.
Senator Fitzgerald. And you want to eliminate the need to
trade because trading drives up transaction costs, is that
correct?
Mr. Grossman. Exactly.
Senator Fitzgerald. And who do you use to execute your
trades? Who does Barclays use? Do you have your own in-house
trading firm?
Mr. Grossman. For executing trades for the TSP plan, we use
strictly outside broker dealers that we choose based on best
execution.
Senator Fitzgerald. And you are not allowing--you said you
don't use soft dollar arrangements, so in other words, you are
not giving anybody permission to charge you an exorbitant
brokerage commission in return for them providing you with
research.
Mr. Grossman. That is exactly right. We don't use soft
dollars anywhere in the business. We don't believe in them. We
think they present a conflict of interest.
Senator Fitzgerald. Do you do any directed brokerage?
Mr. Grossman. We don't do any directed brokerage for the
TSP assets or the funds in which they are invested. We do some
directed brokerage in other parts of our business, where a
client is hiring us to do something on a custom transition or
restructuring basis, and there, we do have an affiliated broker
that we use for that activity, but it is on a fully disclosed
basis where the client is hiring us to do that, or in the case
of a mutual fund, where it is approved by the fund board.
Senator Fitzgerald. Do you do any revenue sharing?
Mr. Grossman. Any revenue sharing? Certainly not in
connection with the TSP assets in any way, no, we do not.
Senator Fitzgerald. When you say not in connection with the
TSP assets, could you be more specific? You may do revenue
sharing with another client's funds that may be commingled with
the TSP funds, is that not correct?
Mr. Grossman. I am not sure, Senator, exactly what the
definition of revenue sharing is, because I don't know that
there is a standard definition out there. In our mutual funds,
for example, we do provide revenue, we do provide funds to
intermediaries in exchange for shareholder servicing, services
that they are providing on those funds and it is something that
is part of the ongoing regular business relationship.
Senator Fitzgerald. Do you share part of your investment
fee with brokerage firms in return for the brokerage firms
distributing your funds?
Mr. Grossman. We do not engage in any revenue sharing like
that in exchange for shelf space. It is strictly where they are
providing shareholder servicing for us. For example, they are
providing aggregating account orders, they are putting together
buy and sell activity which we get on an aggregate basis from
those entities. They are providing recordkeeping. They are
providing account servicing, covering telephone call centers
and so on for the clients that they are servicing. There are
costs associated with that, they get compensated by us for
providing those services. But that is something that is quite
different, as we look at it, than paying for shelf space, which
we do not believe in.
Senator Fitzgerald. Does Barclays only have index funds or
do you have actively managed funds that you offer?
Mr. Grossman. We have actively managed funds, as well.
Senator Fitzgerald. That are open to retail investors? Can
retail investors invest in your index funds?
Mr. Grossman. In our index funds, they can. The primary
avenue for retail investors to invest in our index funds is
through our I shares, strategies which are exchange traded
funds. So those trade on the exchanges. They are open and
available to any investor. That is the primary avenue for
retail investors or other mutual funds, that they can be
obtained by retail investors, but generally, they are really
targeted at defined contribution plans as opposed to the direct
retail marketplace.
Senator Fitzgerald. Now, it is my understanding that you
have some pretty sophisticated software that enables you to
match the S&P 500 index. As one company in the index gets
larger, you will make purchases to reflect the changes in
composition of the S&P 500 index fund and the other indexes
that you track. Can you describe your sophisticated software,
or what I hear is sophisticated software?
Mr. Grossman. Yes, certainly. I would be happy to. We do
have a variety of analytics and software that we use for
tracking not only the S&P 500 index but all of the indexes that
we are tracking, including all of those that we are using on
behalf of the Thrift Savings Plan. And the way the software
works is it allows us to monitor with a very high degree of
precision what is the composition of each of the indexes we are
looking to track and to understand any changes in that index.
So, for example, if Standard and Poors makes a change in
the index, if they remove a company and add a company, as they
periodically do in rebalancing the S&P 500 index, we will then
make the appropriate changes in the underlying portfolios,
selling, if necessary, the company that is being removed from
the index, buying the company being added, doing that in a way
that looks to control the tracking error very precisely while
also minimizing any trading cost, any frictional cost
associated with that.
One other point to make with respect to index funds is that
if you look at something like the S&P 500, it really does
provide a good mirror of a buy and hold strategy, because if
there are no constituent changes to the S&P 500, then one could
track it quite well by an old approach, because if, for
example, the weighting of a company goes up because its stock
price has increased, that doesn't directly trigger any need for
a trade to take place because the weight in the index and the
weight in the fund will go up or down pretty much in lockstep
with each other.
So the trading activity and the sophisticated software we
use is primarily around facilitating client contributions and
redemptions and dealing with changes to the index itself as
opposed to the need to track it just because of market
fluctuations.
Senator Fitzgerald. Mr. Saul.
Mr. Saul. I am sorry, Senator. I would like to go back, if
I might have permission, to this whole questioning of the
National Finance Center, because I think it is important from
the Board's perspective and my perspective as chairman of the
agency to be very clear where we stand with this issue.
We have had a very successful historical relationship with
the National Finance Center. The agency and the National
Finance Center grew together from really ground zero. As you
know, there was $1 billion in here to $131 billion, very few
participants, there are now over 3.2 million participants that
are availing themselves of the TSP.
So I think the Board has to be very careful, and the
executive director, how we proceed with the National Finance
Center because cost is very important and you know from our
record where we have run one of the most competitive, as you
stated, funds in the country, cost is certainly on our radar
scope. I don't mean to minimalize this and I respect your
concern with cost, but we have to be very careful about the
reliability and the service, also, because the last thing we
need is any kind of a breakdown or any kind of questioning of
the reliability and the accuracy of the numbers that our
participants are getting.
So while in 1986 it was very clear that the NFC did not
have a lockhold on this agency and that it was to be bid out,
as I stated, the system that developed was an antiquated
system. There was no way it could have been bid out until this
summer when we put this new documented, automated system in.
Senator Fitzgerald. I want to ask you about that. I was in
banking in the private sector and was general counsel for a
bank holding company that managed a number of small community
banks. It was common for smaller banks to enter into a contract
with the large money center bank to manage their backroom
operations, and the computer operations of the small bank would
not be compatible initially with the large money center bank's
computer systems. As part of the contract to manage the
computer records, the large money center bank would come in and
do a conversion of the small bank's computer systems over to
the new system.
Certainly, I appreciate the efforts of the people in the
national call center, and I am very conscious about their jobs
as well. But at the same time, you have a statutory obligation
to provide this at the lowest cost and I am concerned that we
have no evidence that we are getting the lowest possible cost
here or even anything close to the lowest possible cost.
Mr. Saul. But if you follow the histories, when this
present Board and this executive director took over
approximately 14 months ago, we had priorities here and the
first thing we were faced with was a failed system. We were in
the midst of developing a new system. So the most important
thing to the Board was to be sure that we got our new computer
system up and running, that it was running successfully. It was
never a question of ignoring the cost. Now once the new system
is up, if you take a look at what Gary Amelio and the Board----
Senator Fitzgerald. Now, is the new system compatible with
that in which other backroom operations, such as that provided
by, say, Hewitt and Associates----
Mr. Amelio. Yes.
Senator Fitzgerald [continuing]. Could adapt and run?
Mr. Amelio. Yes, sir.
Senator Fitzgerald. It is?
Mr. Amelio. Yes. We have a state-of-the-art system now.
Senator Fitzgerald. OK, and it is used by other 401(k)
managers, employers around the country, I presume?
Mr. Amelio. It is very widely utilized. The vendors that
have put our system in have put many systems in around the
country.
Senator Fitzgerald. Who was the vendor who ultimately did
it after they replaced AMS?
Mr. Amelio. MATCOM was the primary vendor, but under them
doing a lot of the specific work vis-a-vis the concept of daily
defined contribution is SunGard, and you will find their name
throughout the banking industry.
Senator Fitzgerald. It is very common.
Mr. Saul. So if I just might go on, what happened was as
the new system came up, it became evident to us that we would
look into some of these other concerns, and in the last 6
months we have now established or are in the process of
establishing a back-up call center. We have now taken the
software maintenance of the new software away from the National
Finance Center and given that to the vendor that has----
Senator Fitzgerald. Are you getting lower fees now from the
National Finance Center as a result of taking----
Mr. Saul. We are getting lower fees, yes.
Senator Fitzgerald. They charged you about $54 million last
year. What would they have been charging historically the year
before and 10 years ago? Would you know those fees? What
direction have those fees at the National Finance Center been
going in dollars and cents terms?
Mr. Amelio. The overall numbers have been going up, but
obviously as the size of the plan goes up, the overall cost
goes up every year. What has concerned me is the cost per
participant has risen significantly.
Senator Fitzgerald. So instead of getting an economy of
scale, we are getting the reverse with the National Finance
Center?
Mr. Amelio. That is correct. I have a chart in front of me
that was provided \1\ and the cost per participant started in
1991 at a little over $6 per participant and it has now worked
its way up to over $18 per participant.
---------------------------------------------------------------------------
\1\ The chart referred to appears in the Appendix on page 125.
---------------------------------------------------------------------------
Senator Fitzgerald. So it has tripled?
Mr. Amelio. Yes.
Senator Fitzgerald. Now, you weren't in a mutual fund
before you came to the TSP, you were in pension management?
Mr. Amelio. Yes. I was with a large bank----
Senator Fitzgerald. PNC Bank.
Mr. Amelio [continuing]. The PNC, and we provided the
services like the National Finance Center would do for private
sector companies and State and local government----
Senator Fitzgerald. Well, in your experience, as a fund
grew larger, weren't you trying to get an economy of scale so
that the cost would go down per participant?
Mr. Amelio. There is no question that costs needed to go
down. The larger the plan, the larger the scale, the lower the
cost per participant. That is undisputed.
Senator Fitzgerald. But that normal economy of scale is
being turned on its head in this case with the fees from the
National Finance Center tripling over the last 10 or 12 years.
Let me shift to just a few more issues I want to get into,
and this does relate to costs, as well. A lot of people are
taking loans from their TSP plans. It was mentioned by several
of the panelists that loans are a bad idea unless you
absolutely have to have them as a last resort. Do you think
there may be evidence that some TSP participants are taking
them not as a last resort, but just as available credit, and
you want to take some steps to deter people from taking loans
except as a last resort? One of your ideas is to charge a $50
administrative fee.
Let us talk about the loans. How many people took loans
last year? There are 3.2 million participants----
Mr. Amelio. We have 934,000 loans. Forty percent of that
number was issued last year.
Senator Fitzgerald. So a lot of the loans came last year?
Mr. Amelio. They were reissued, yes.
Senator Fitzgerald. Reissued?
Mr. Amelio. Some of them were new. We don't have the
breakdown between what is new and what was a loan that existed
and paid off----
Senator Fitzgerald. It sounds like about 25 percent of TSP
participants have a loan outstanding?
Mr. Amelio. That is correct, because many of the people
that have a loan actually have two outstanding. So about a
quarter of the plan's participants have outstanding loans.
Three-quarters have no loans.
Senator Fitzgerald. Now, do the TSP fund make money or lose
money on the loans they make?
Mr. Amelio. I am sorry, Senator?
Senator Fitzgerald. Do we make money on the loans, are they
done at cost, or do we lose money on the loans?
Mr. Amelio. At this point, prior to the implementation of
the new procedures, it does cost the plan's participants money
because there is a cost involved with processing the loans. So
we are----
Senator Fitzgerald. But we are charging an interest rate,
right?
Mr. Amelio. Yes, but that is paid back into the
participant's account.
Senator Fitzgerald. So there is a cost that the other
participants bear when somebody--and what was the cost? Can you
quantify the cost for last year?
Mr. Amelio. We can. It was about $47 a loan, which is why
we came up with the $50 number, which actually is in line with
industry standards.
Senator Fitzgerald. So we have at least a cost of $47 per
900,000 employees that has been charged back to the rest of the
fund. That is costing a lot of money.
Mr. Amelio. Yes.
Senator Fitzgerald. Do you know system-wide how much it is
costing per year, on average?
Mr. Amelio. Without multiplying it out, and I don't want to
make an inaccurate number----
Senator Fitzgerald. OK.
Mr. Amelio [continuing]. But it is big. That was one of the
reasons that we imposed the loan cost as a user fee so that
participants who----
Senator Fitzgerald. Is the TSP providing sufficient
education to participants that they shouldn't do this unless
they are really in dire financial straits? Does anyone want to
comment on that? Maybe Mr. Sauber?
Mr. Sauber. I believe that the kinds of education programs
available for TSP participants really varies across Federal
agencies. Many agencies do a very good job of holding seminars
on how to learn about the TSP, to learn about the TSP loan
program, but I am not aware of a systemwide effort to educate
TSP participants. I know that is an issue that Senator Akaka is
very concerned about and something that the ETAC would like to
talk about in the context of introducing new lifecycle or
lifestyle funds.
Senator Fitzgerald. What is the reason for allowing the
loans?
Mr. Amelio. Loans are not a retirement plan feature. The
reason that they are so popular in the industry is they are an
inducement to get participants to participate in the plan.
Participants are----
Senator Fitzgerald. Don't you have enough inducements here
in that you have the lowest cost mutual fund in the world?
Isn't that a sufficient inducement?
Mr. Amelio. It was pointed out to me, the loan program is
statutory, certainly, so it is mandated by statute. But to go
on, it is just well known----
Senator Fitzgerald. Is it in the original statute?
Mr. Amelio. Yes.
Senator Fitzgerald. It was?
Mr. Amelio. Yes.
Senator Fitzgerald. OK. So that is one thing we could look
at at the statutory level.
Mr. Amelio. You could. I do think if you eliminated loans--
I am an opponent of loans personally, professionally, but I
would tell you that if you eliminated loans, your participation
rates would decrease significantly, and that is not just true
with the Federal workforce. That is true across the entire
American workforce. I think every study bears that out.
Senator Fitzgerald. Do you think a $50 fee will defray the
cost to the other members of the TSP?
Mr. Amelio. I definitely do. I believe it will cover costs,
yes.
Senator Fitzgerald. OK. Mr. Sauber, did you want to
comment?
Mr. Sauber. I was just going to say, that it struck us as a
very nice option that employees like to have because there is
resistance when you first sign up: Employees ask themselves,
``Well, what if I really need the money? What if I really get
in a jam? '' This loan program answers that issue. So I do
think it is important, at least, for some participants, to
overcome that first barrier to actually join the plan.
But I think our primary concern is to ensure that these
costs be allocated fairly and I think applying a nominal fee
like that would cover the cost would be fair to the rest of the
participants. As Gary Amelio mentioned, three-quarters don't
have loans.
Senator Fitzgerald. I would think the cost per loan has got
to be higher than $50. There is loan documentation that goes
along with this. You have a lot of involvement of your people
at the Finance Center.
Mr. Amelio. It is difficult to quantify these costs because
many of the people and the systems that are doing the work of
processing loans at other times do other things. But we believe
that we are fairly close. And at $47--somebody back here did
the math without a calculator--the cost to the plan is about
$43 million. Now, that is over a period of time. That is not 1
year, because some of these loans extend out over 5 years, some
15 for residential. But for the existing loan base, it costs
the participants $43 million, all participants.
Senator Fitzgerald. When you say a residential loan, are
you referring to something like a mortgage?
Mr. Amelio. It would not be secured, but yes, the purpose
of the loan would be to purchase a principal residence.
Senator Fitzgerald. Or provide the down payment before they
get a mortgage from a commercial----
Mr. Amelio. Yes.
Senator Fitzgerald [continuing.] So they are borrowing the
down payment?
Mr. Amelio. Yes. That is probably what is going on.
Senator Fitzgerald. Mr. Lebowitz.
Mr. Lebowitz. Mr. Sauber actually, I think, made most of
the points I was going to make. We have certainly heard over
the years in the private sector context of regulating plans
under ERISA that the availability of loans is generally
regarded as critical to inducing employees to participate and
to participate at the higher levels permitted under the plan.
Generally speaking, the surveys seem to show that employees are
concerned about not having access to the money in circumstances
when they might need it.
Senator Fitzgerald. What about the cost of the lifestyle
fund that you may create? Mr. Amelio, would you care to comment
on that? What do you think the likely cost of that would be? It
sounds like a good idea, but if it winds up costing a lot of
money, that may alter the calculation.
Mr. Amelio. Obviously, I need to temper my remarks by the
fact that we have completed the RFI process but have not yet
gotten approval to go through the RFP process, so I want to be
careful not to violate any Federal procurement laws.
I would tell you based upon the extensive research we have
done with over 20 vendors already, we believe the cost will be
extremely minimal. I just think it is--to use lay terms, dirt
cheap, and I believe that this feature is the greatest thing to
hit plans since sliced bread. I mean, it is just badly needed
and it is very inexpensive. I don't think it will alter those
numbers you have behind you on the chart in the least.
Senator Fitzgerald. What effort do you undertake to monitor
customer satisfaction with the services of the TSP? Is there a
survey that you ask people to fill out, or----
Mr. Amelio. At this point, I don't believe historically any
customer survey has ever been done by the TSP, but we do have
one in the works now. It is just in the initial stages and will
be rolled out with our new communications plan.
Senator Fitzgerald. Will you do that online as opposed to
printing at great expense?
Mr. Amelio. I believe we will limit it to online because
that is the most cost effective way to do it.
Senator Fitzgerald. Are more TSP members declining to take
their TSP prospectus in the mail annually and instead getting
them to just look it up online?
Mr. Amelio. I don't have those numbers, because actually,
participants don't make requests of us. They make their
requests through individual agencies, so it depends on what
each agency is looking at. The figures I can give you are this.
We recently went to what we will call the paperless statement
route, since we have gone from two statements a year to
quarterly, and what we have indicated to the participants are
you can get your statements through the website online or you
can call and get your balances over the thrift line. If you
want a paper statement, you have got to request one.
Now, at this point, over 300,000 participants, or about 10
percent, have requested paper statements. That is very low.
What I think is interesting is about a third of those made
their requests online, so---- [Laughter.]
The complaints that the folks who need paper statements
because they don't have access to the Internet just doesn't
hold water.
Senator Fitzgerald. So you are going to continue your
efforts to try and go in a more paperless direction?
Mr. Amelio. Absolutely. It saves us $10 million a year. We
will continue to make them available if somebody wants it, but
we are going to continue to strive----
Senator Fitzgerald. Note to the Federal Prison Industies,
right?
Mr. Amelio. Yes.
Senator Fitzgerald. OK. That pretty much does it. I think
this has been a good hearing. I want to compliment all those
who are involved in the TSP, from the auditors at the
Department of Labor to the Board members, to the outside
vendors. I want to compliment you because I think despite a few
bumps in the road, such as that computer contract in the last
couple of years, I think it is a very well managed fund, and I
think those numbers speak for themselves. It is much more low
cost than any of the private sector funds that are out there,
and, in fact, as I said at the beginning, I hope some day that
we can give members of the general public the same kind of low
cost investing options that we have given Members of Congress
and other Federal employees.
So I want to thank you for coming here. I compliment you on
the job you are doing, and we will look forward to staying in
touch with you as new issues arise. Please give Senator Akaka
and me a recommendation of legislative changes that you would
like to see because we will try and help you with that.
Thank you very much. This hearing is adjourned.
[Whereupon, at 12:49 p.m., the Subcommittee was adjourned.]
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