[FEDERAL RETIREMENT THRIFT INVESTMENT BOARD: 7 Sat ME Wathnglon, OC 20002 April 23, 2019 “The Honorable Maxine Waters ‘The Honorable Joyce Beatty Chairwoman Chair Committee on Financial Services ‘Subcommittee on Diversity and Inclusion 2129 Raybum House Orice Building ‘Committee on Financial Services Washington, D.C. 20515 2129 Raybum House Office Building Washington, D.C. 20516 ‘The Honorable Gregory W. Meeks ‘The Honorable Cory Booker Chairman US. Senate ‘Subcommittee on Consumer Protection 717 Hart Senate Office Building and Financial Institutions Washington, D.C, 20510 Committee on Financial Services 2129 Raybum House Office Building Washington, D.C. 20515 Dear Chairwoman Waters, Chairman Meeks, Chair Beatty, and Senator Booker: ‘Thank you for your letter of April 10, 2019, regarding the inclusion of minarity- and ‘women-owned (MWO) investment selections in the Thrift Savings Plan (TSP). We are pleased to have the opportunity to update you on the TSP's activities. ‘The TSP offers five Funds: the Government Securities Investment (G) Fund which is. invested in non-marketable short-term U.S. Treasury securities; the Fixec Income Index Investment (F) Fund which is invested in a bond index fund that tracks the Bloomberg Barclays U.S. Aggregate Bond Index; the Common Stock Index Investment (C) Fund \Which is invested in a stock index fund that tracks the Standard & Poor's 500 (S&P 500) Index; the Small Capitalization Stock Index Investment (S) Fund which is invested in a ‘stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market (TSM) Index; and the Intemational Stock Index Investment () Fund which is invested In a stock index fund that tracks the MCSI EAFE (Europe, Australasia, Far East) Index. The F.C, S, land I Funds are managed by a fund manager selected through full and open competition. Because of the TSP's size and its investment solely in index funds, selecing a MWO fund manager as a prime contractor for the F, C, S, and | Funds would be extremely challenging, f not impossible, The smallest TSP Fund is the F Fund with roughly $30 billion in assets under management. The 2017 Government Accountability Office (GAO) report cited in your letter (GAO 17-726) noted the following: ‘The industry shift from active management to passive management may also be a challenge. According to some asset managers, industry associations, and nonfederal plans we interviewed, MWO firms are less able to compete at defined‘contribution plans with passive management investment strategies because MWO firms lack the size and resources that larger firms have to keep asset management. ‘ees low for clients. Furthermore, because asset management fees for passive ‘management strategies are low, an asset management finn must have a volume of business large enough to be profitable. [Footnote 26} The challenges faced by MWO firms in elation to passive ‘management are not limited to defined contribution plans. As investors in defined benefit and defined contribution plans move from active to passive management strategies, MWO firms face the challenge of not being large enough or having sufficient resources for the scale needed to keep cliert fees low enough to be ‘competitive with the larger firms who can do so because they do not have size and resource constraints. According to one asset manage we interviewed, passive management is dominated by large, well-established asset management firms, which makes it dificult for new firms to break in. ‘The FRTIB has conducted a review of public pension plan policies that support this conclusion. In this review, the FRTIB found no public pension plans that use emerging managers for passively managed assets. That being said, if there were a viable MWO manager for the C, S, lor F Funds, it would be welcome to compete in the fund manager request for proposals (RFPs), Even though MWO managers do not currently have the necessary scale for the TSP. Index Funds, the Board has expressed interest in the use of MWO broker-dealers by its ‘current manager. The Board Members have discussions at least annually directly with BlackRock officials on its established program for women- and minority-owned brokerage: firms. BlackRock executes trades on behalf of the TSP and utlizes these firms for these activities to the extent consistent with its fiduciary duty to the TSP. BlackRock has shared with the FRTIB that they continue to make progress using MWO brokers. In addition, over the past four years, as the Board Chair, | heve attended the annual ‘conference of the National Association of Securities Professonals where | have interacted with women- and minority-owned firms and shared the requirements for participating in the TSP. In fact, our most senior African-American Office Director and | hosted a workshop at one of the annual conferences to educate MWO managers about the TSP. Our outreach efforts are intended to proactively seek out any MWO managers who provide index services. ‘As we have shared with you in the past, the Board has approved the addition of a mutual fund window (MFW) to provide options outside of the core TSP funds to our participants. ‘We are in the procurement process currently that will yield anew TSP recordkeeper, as, well as a MFW provider. On June 28, 2018, we posted information on the Federal Business Opportunity website regarding the procurement. We have enclosed the press release we issued at that time. We have also enclosed our Statement of Objectives for this procurement, as well as the narrative describing the inital parameters for a mutual und window to be offered by the contractor. We currently articipate a contract award by ‘September of 2020 with a full implementation by September 2022.Below are the responses to your questions: 1 . The Board's most recent policies on the fund selection process, inclu ‘The number and name of MWO firms offered as selections since 2015, if any; None; the only fund management procurement since 2015 was for the F Fund and ‘was awarded in May of 2018. As mentioned above, the fund manager contract was awarded through a full and open competion ‘The number and name of MWO firms that have been considered, whether offered as selections or not, since 2015: None; no MWO firms bid on the F Fund contract. . Asset class of MWO firm mutual fund offerings since 2015, if any; ‘The TSP does not yet offer mutual funds. 0 any policies and priorities to include more MWO firms, if any; Because the funds offered by the TSP are described in statute, the Office of Investments does not have a policy on fund selection. As noted, fund managers are chosen through a full and open competition. The Office of Investments does have policies and procedures regarding the monitoring of fund managers; those policies are enclosed. . The total number of all firms offering mutual fund selections since 204 ‘The TSP does not yet offer mutual funds. . The total number of all firms that have been considered, whether offered as. selection or not, since 2015; Four firms bid on the F Fund contract. The number and name of firms offering mutual funds, and specifically MWO, that were disqualified since 2015 and why, if any: ‘The TSP does not yet offer mutual funds. |. Update on the use of investment consulting firms to identify mutual fund offerings, and the extent to which, if at all, those consulting firms have been directed to prioritize the inclusion of more NWO firms in their searches; and ‘The TSP has not used investment consulting firms to identify mutual fund offerings, |. Demographic information (race and gender) of Board staff participating in the investment selection process, including the Board of Directors, investment committee members, investment officer and staff and/or investment consultants that assist with selecting firms. Per statute, the FRTIB Board Members are responsible for setting investment policy (5 U.S.C. 8472(f)). The Board members review and approve the criteria included in the fund manager RFPs. However, the 3Beard Members are not involved in the final selection of the fund manager. ‘The Executive Director is the individual responsible for making the selection for the investment manager. While the Office of investments uses investment consultants to assist with its analysis of investment manager proposals, the investment consultants do not assist with the recommendation of investment managers. That responsibility is borne by FRTIB employees. Of the individuals involved in the Source Selection Team, 30 percent are female and 60 percent identify as non-Caucasian. Information regarding individual FRTIB employees’ race and gender is considered privacy sensitive and cannot be released absent clear legal authority. Before we can release the requested details, please identify the legal authority upon which this request for this information is being made. Name Title Role in Contract Award | Michael Kennedy | Cheimnan ‘None David Jones: Board Member ‘None Dana Bilyeu Board Member None. on McCray Board Member None Wiliam Jasien [Board Member None: Ravindra Deo | Executive Director ‘Source Selection Authority [Sean WeCafirey | Direcior of the Offce of Chair, Source Selection Investments Team Benjamin Gong | Financial Analyst, Ofce of | Member, Source Selection Investments Team Michadl Jerue | Financial Analyst, Office of | Member, Source Selection Investments Team Wiliam Jacobson | Deputy Chief Financial Officer, | Member, Source Selection Office of Chief Financial Officer_| Team Financial Analyst, Office of Non-voting Member, Source Investments Selection Team ‘Wonique Michell | Contracting Officer, Office of the | Contracting Officer Chief Financial Officer Ellie Sagastizado Matthew Hamilton | Contracting Specialist, Contracting Specialist Office of the Chief Financial | Officer _ ‘Wegan Grumbine | General Counsel ‘Advisor to the Source Selection Team ‘Andrew Wiliamson | Attomey Advisor, Office of “Advisor to the Source General Counsel Selection TeamWe hope this information is helpful. Should you have any questions, we would be happy to answer any additional questions. Sincerely, Feaniea de Trichet Kenosdeg Ravindra Deo Michael Kennedy Executive Director Chairman Enclosures Ce: The Honorable Patrick McHenry Ranking Member, Committee on Financial Service The Honorable Ann Wagner Ranking Member, Subcommittee on Diversity and Inclusion ‘The Honorable Blaine Luetkemeyer Ranking Member, Subcommittee on Consumer Protection and Financial institutions