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29–849 PDF 2006

ADDING A REAL ESTATE INVESTMENT TRUST

[REIT] INDEX OPTION TO THE THRIFT SAVINGS

PLAN: CONSIDERING THE VIEWS AND ADVISORY ROLE OF THE EMPLOYEE THRIFT

ADVISORY COUNCIL [ETAC]

HEARING

BEFORE THE

SUBCOMMITTEE ON THE FEDERAL WORKFORCE

AND AGENCY ORGANIZATION

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

APRIL 26, 2006

Serial No. 109–177

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

DAVID MARIN, Staff Director

LAWRENCE HALLORAN, Deputy Staff Director

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON THE FEDERAL WORKFORCE AND AGENCY ORGANIZATION

JON C. PORTER, Nevada, Chairman

JOHN L. MICA, Florida

TOM DAVIS, Virginia

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

PATRICK T. MCHENRY, North Carolina

JEAN SCHMIDT, Ohio

DANNY K. DAVIS, Illinois

MAJOR R. OWENS, New York

ELEANOR HOLMES NORTON, District of

Columbia

ELIJAH E. CUMMINGS, Maryland

CHRIS VAN HOLLEN, Maryland

EX OFFICIO

HENRY A. WAXMAN, CALIFORNIA

RON MARTINSON, Staff Director

SHANNON MEADE, Professional Staff Member

MARK STEPHENSON, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on April 26, 2006 .............................................................................. 1

Statement of:

Amelio, Gary A., executive director, Federal Retirement Thrift Investment Board; and Thomas J. Trabucco, director of external affairs, Federal Retirement Thrift Investment Board ................................................... 89

Amelio, Gary A. ......................................................................................... 89

Trabucco, Thomas J. ................................................................................. 94

Sauber, James W., chairman, Employee Thrift Advisory Council; and

Richard L. Strombotne, Employee Thrift Advisory Council Member ....... 126

Sauber, James W. ...................................................................................... 126

Strombotne, Richard L. ............................................................................. 136

Letters, statements, etc., submitted for the record by:

Amelio, Gary A., executive director, Federal Retirement Thrift Investment Board, prepared statement of ............................................................ 91

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 159

Davis, Chairman Tom, a Representative in Congress from the State of

Virginia, prepared statement of ................................................................... 35

Davis, Hon. Danny K., a Representative in Congress from the State

of Illinois:

Prepared statement of ............................................................................... 30

Various letters ........................................................................................... 145

Various prepared statements ................................................................... 13

Norton, Hon. Eleanor Holmes, a Delegate in Congress from the District

of Columbia, Federal Times articles ............................................................ 107

Porter, Hon. Jon C., a Representative in Congress from the State of

Nevada:

Exhibits 1–20 ............................................................................................. 38

Letter dated April 26, 2006 ...................................................................... 135

Prepared statement of ............................................................................... 7

Sauber, James W., chairman, Employee Thrift Advisory Council, prepared statement of ........................................................................................ 139

Strombotne, Richard L., Employee Thrift Advisory Council Member, prepared statement of ........................................................................................ 138

Trabucco, Thomas J., director of external affairs, Federal Retirement

Thrift Investment Board, prepared statement of ....................................... 96

(1)

ADDING A REAL ESTATE INVESTMENT TRUST

[REIT] INDEX OPTION TO THE THRIFT SAVINGS PLAN: CONSIDERING THE VIEWS AND

ADVISORY ROLE OF THE EMPLOYEE

THRIFT ADVISORY COUNCIL [ETAC]

WEDNESDAY, APRIL 26, 2006

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FEDERAL WORKFORCE AND AGENCY

ORGANIZATION, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 3:03 p.m., in room

2154, Rayburn House Office Building, Hon. Jon C. Porter (chairman of the subcommittee) presiding.

Present: Representatives Porter, Tom Davis, Issa, Marchant,

McHenry, Schmidt, Davis of Illinois, Norton, Cummings, and Van

Hollen.

Staff present: Ronald Martinson, staff director; Chad Bungard,

deputy staff director/chief counsel; Chad Christofferson, legislative

assistant; Shannon Meade, professional staff member; Patrick Jennings, OPM detailee/senior counsel; Alex Cooper, legislative assistant; Mark Stephenson and Tania Shand, minority professional staff

members; and Teresa Coufal, minority assistant clerk.

Mr. PORTER. I would like to bring the meeting to order. Today

we are discussing adding a real estate investment trust index option to the Thrift Savings Plan: considering the views and advisory

role of the Employee Thrift Advisory Council. Welcome, everyone.

I appreciate you being here today.

Mark Twain once said, ‘‘Put all your eggs in one basket and

watch the basket.’’ The point is that such a maneuver is risky and

unwise, and if you are going to do something that foolish, you better keep your eye on the basket at all times. Unfortunately, under

the current leadership, the makeup of the Thrift Savings Plan does

not provide Federal employees with the ability to diversify their

funds for retirement. Between 2000 and 2003, the highest average

annual rate of return on any stock in the fund in the Thrift Savings Plan was minus 0.1 percent, while the rate of return on real

estate investment trusts was near plus 20 percent. During that

time period, there was no room for diversification, and Federal employees throughout the Government lost their hard-earned money.

The fact that REITs have had a historically low correlation of returns to the returns from other TSP funds is important to protect

an investor from market volatility. This was emphasized by a senVerDate 11-MAY-2000 11:08 Dec 15, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\DOCS\29849.TXT HGOVREF1 PsN: HGOVREF1
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ior analyst for Morningstar in a Washington Post article in January in which the analyst was quoted as saying, ‘‘Real estate stocks

do not move in lockstep with the rest of the market, and that

makes them good portfolio diversifiers.’’

Yale University Endowment Chief Investment Officer David

Swensen urges a real estate allocation of 20 percent for investors,

which could be accomplished through investment in REIT stocks.

This is a complete impossibility in the Thrift Savings Plan. While

REITs and real estate have performed well in recent years, the performance of REITs and real estate over the longer term is what

makes the case and is the reason why well-established retirement

savings plans have routinely made a significant allocation to commercial real estate investment. For the past 30 years, REITs have

outperformed the Dow Jones Industrials, the NASDAQ Composite,

the S&P 500. IBM, the sponsor of the largest private sector 401(k)

plan in the country, offers a distinct REIT option for plan participants and told the subcommittee last year that ‘‘we are committed

to REITs as a core asset class for defined contribution plans . . .

Their return, volatility, diversification, dividend yield, and taxation

characteristics make the case.’’ IBM is not alone. Many large corporations offer distinct REIT options in their 401(k) plans, including General Motors, Verizon, and Ford Motor Co.

Congressional consideration of the addition of options to the

Thrift Savings Plan is by no means unprecedented. After sufficient

congressional consideration, Congress established the first three

funds to the Thrift Savings Plan when it created the Board. In anticipation of the need for more funds once the Board got up and

running, the ‘‘Joint Explanatory Statement of the Committee of the

Conference’’ stated, ‘‘Should additional investment vehicles become

desirable, Congress can authorize them.’’ When crafting the enabling legislation for the Thrift Savings Plan, according to the Conference Statement, Congress expressed concern about political manipulation by Board members—the kind of manipulation and lobbying that the Board has been engaging in over the past several

months. That is why Congress set up the structure of the funds to

be passively managed by the Board, as opposed to being actively

managed. The only reference to congressional political manipulation in the Conference Statement was a concern, rightfully so,

about the possibility of some sort of ‘‘raid’’ on the trust fund by

Congress during budget cuts, not about Congress selecting new

index funds.

H.R. 1578 is simply about providing choice—not unlike the private sector has—to Federal employees and giving them the opportunity to diversify their portfolio. It is nothing more. It is Congress’

responsibility as ultimate fiduciaries of the TSP to bring these opportunities within reach of every Federal employee. Adding options

to the Thrift Savings Plan in an effort to enable proper diversification has been a priority of this subcommittee long before I was here

and for the past couple of years starting in July 2004 when thenSubcommittee Chairman Jo Ann Davis sent a letter to the Executive Director of the Federal Retirement Thrift Investment Board

Gary Amelio requesting advice on potentially adding a REIT index

option to the Thrift Savings Plan. Mr. Amelio responded by briefing

subcommittee staff the next month. At that briefing, Amelio exVerDate 11-MAY-2000 11:08 Dec 15, 2006 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 D:\DOCS\29849.TXT HGOVREF1 PsN: HGOVREF1
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pressed concern with the addition of a REIT index fund to the

Thrift Savings Plan at that time mostly because of the Board’s

focus on rolling out lifecycle funds. He did state, however, that if

he were called upon to add another option to a retirement plan

with the same funds as those in the TSP, the first thing he would

add would be a REIT index fund option.

After several months of correspondence between the Board, the

subcommittee, and outside experts, the Board maintained their opposition to the addition of a REITs index fund since, according to

the Board in January of last year, the ‘‘funds currently offered by

the TSP are sufficient for the construction of risk-optimized portfolios appropriate for TSP participants.’’ This statement is clearly

untrue. Simply ask some of the participants in the TSP—which, by

the way, does not happen currently by the Board—including some

of my colleagues up here on the dais who probably lost some money

in the TSP between 2000 and 2003 because there was no opportunity to sufficiently diversify their portfolio.

The problem is that the TSP managers are not asking plan participants for their opinion. According to a 2005 GAO report, ‘‘TSP

managers said that they have not surveyed participants since the

early 1990’s’’ and GAO found that ‘‘because TSP relies on customer

complaints as an indicator of participant satisfaction, its managers

do not have the information necessary to determine the degree to

which participants are satisfied with the services.’’ GAO further

found that the ‘‘TSP managers’ reliance on complaints does not

take into account participants who are dissatisfied and have not

complained or do not know where to complain[.]’’ Participants are

left with the burdensome task of sending letters to the TSP managers themselves or the call center. This GAO finding belies Executive Director Amelio’s claims at last year’s hearing that he gets a

great deal of feedback based on letters he received when the TSP

suffered a significant recordkeeping problem.

The GAO also found that the Employee Thrift Advisory Council

is equally unhelpful in assisting the TSP managers in understanding the needs and wants of the participants. The GAO found that

‘‘while some ETAC representatives provide TSP managers with

feedback on draft TSP publications, legislative initiatives, and

other issues, ETAC representatives do not systematically solicit

feedback from their constituents. Some ETAC representatives may

receive sporadic feedback from participants, but ETAC does not

conduct surveys of plan participants.’’ I thought we were in a democracy. Apparently we are not. GAO concluded, therefore, that

‘‘the extent to which participants within the represented agencies

and employee organizations provide feedback to the ETAC representative is unclear.’’

This ambiguity was demonstrated this past month when ETAC

voted on a resolution opposing the addition of a REIT index fund

at the present time. According to a letter to the subcommittee from

the Senior Executives Association, one of the ETAC members that

the SEA appointed to the Council at an ETAC meeting took a position not held by the SEA itself. Thus, not only did that member not

survey any members of the SEA, it took a position antithetical to

the SEA policy. A further indication that ETAC was not acting in

a full representative fashion when it considered the resolution on

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the addition of a REIT index fund was demonstrated when the

Board’s Executive Director Gary Amelio, who is not an ETAC member, recommended language to the Council that was ultimately

adopted stating that the ‘‘development of a new fund must come

from an independent process developed by the Plan’s fiduciaries.’’

I mention the problems with ETAC not to criticize the employee

groups, who are doing what they can with a broken process and

who are forced to take action and make recommendations without

the benefit of good tools for gathering important information from

the Federal employees they serve. I do join GAO with the criticism

of ETAC being the primary tool to get supposed employee feedback.

It simply can’t do the job.

In its recommendations for executive action, GAO proposed that

the Federal Retirement Thrift Investment Board direct the Executive Director to ‘‘(1) develop a systematic effort to assess TSP participants’ overall satisfaction with the services provided and (2) institutionalize the routine collection of information and systematic

assessment of industry trends and innovations.’’ According to GAO,

‘‘the Board disagreed with our recommendation regarding the implementation of an evaluation effort to assess the level of customer

satisfaction . . . As we state in our report, the private sector plan

managers that we spoke with believe that direct, ongoing participant feedback is needed to respond to the changing needs of plan

participants. Without obtaining more frequent feedback from participants, TSP managers cannot determine what improvement

would best satisfy participants’ needs.’’ Understanding what a Federal employee really wants in the Thrift Savings Plan is clearly an

issue with the Plan’s current managers.

After hearing the Board’s concerns and discussing the bill with

outside experts, I, along with Representative Chris Van Hollen and

full committee Chairman Tom Davis, introduced H.R. 1578, a bill

that now has 169 cosponsors, ranging from House Minority Leader

Nancy Pelosi to House Majority Leader John Boehner. This is not

a partisan bill but, rather, a bipartisan effort that boasts 71 Democrats and 98 Republican cosponsors, all of whom want to provide

Federal employees with the opportunity to further diversify their

portfolios. A week after introduction, the subcommittee held a

broad-based hearing on the merits of adding a REITs index fund

as an option to the TSP.

At that hearing over a year ago, Executive Director Amelio told

the subcommittee that ‘‘the Board members and I have decided to

engage a reputable investment consulting firm to assist in analyzing various investment-related plan issues,’’ including REITs, and

he specifically requested that ‘‘any consideration of legislation be

delayed at least until after the appropriate review by the plan’s fiduciaries.’’ However, the Board took no effort at that time to act

on its promise to the subcommittee. A month after the hearing, in

response to the subcommittee’s question for the record with regard

to when the study of all possible additions to the TSP would be

made available, the Board made no time commitment and indicated that it would study the options on its own timetable. In July,

both the Senate and the House sent separate letters to the Board

requesting a written report on additional investment options to the

TSP by January 1, 2006—months after our initial hearing. The

5

House letter emphasized the importance of a timely report so that

it could act on the Board’s recommendations to this Congress. The

Board responded to the letters in August stating that it expected

to select an investment consultant by September 2005. Although

the Board expressed no intention on meeting the Senate and the

House deadline of January 2006, it did not indicate that the study

would be completed after Congress adjourned sine die.

In January, the TSP Board’s staff told Government Reform Committee staff that it had contracted with Ennis Knupp and Associates to conduct a four-part evaluation of the TSP and, notwithstanding repeated congressional requests that the study of additional options be completed with sufficient time to consider legislation in the 109th Congress, the TSP staff revealed that such study

would be the fourth and final part of the contract and would probably not be completed until after Congress adjourned sine die and

possibly not until 2007. A March 2006 Government Executive article correctly characterized the Board’s actions, ‘‘TSP administrators

already have voiced their discontent with the addition of a REIT

fund, and have stalled its progress by hiring an outside consultant

who will review a range of possible funds by the end of 2006.’’ At

an April Board meeting, Board Member Thomas Fink even recognized that the decision to call in a consultant to review existing

TSP funds and investment policy probably created a perception on

the Hill that the Board is stalling on legislation in hopes that the

REIT proposal will fade.

The Board’s unresponsiveness and stall tactics to delay the

study—a study that they requested and we agreed to—of investment options to the Thrift Savings Plan can no longer be tolerated.

We cannot have another period, like we did between 2000 and

2003, where Federal employees lost thousands of potential dollars.

As the Federal Government seeks to modernize its recruitment and

retention tools to keep pace with the private sector, additional investment options are important in accomplishing this goal. According to the Board’s own figures, the percentage of private companies

offering five or less options, like the TSP, dropped from 7 percent

to 1 percent from 1999 to 2003. Conversely, the average number of

investment options available today in all private sector 401(k)

plans is 18 and is 20 for private sector 401(k) participants with

5,000 or more participants. As the number of investment options

rises, employees can diversify their assets and protect their investments from dramatic volatility in the market.

This subcommittee has been studying the addition of a REIT

index fund for almost 2 years, including holding two congressional

hearings and engaging in numerous discussions and correspondence with the Board and outside experts. Although it could have

been helpful to have had an additional study conducted by the

Board’s consultant, the Board does not see the TSP’s lack of diversification as a problem and has, therefore, not responded to Congress’ expressed desire to expand options this Congress. Nonetheless, the subcommittee’s study of the addition of a REIT index fund

to the TSP reveals that it is the next best option to the Thrift Savings Plan and would provide significant diversification benefits.

Burton Malkiel, a professor of economics at Princeton University,

was recently quoted in Government Executive as stating that ‘‘The

6

Federal Thrift Savings Plan serves as an excellent model for welldesigned retirement plans . . . it could be improved, however, by

including an additional class in the mix of funds—real estate investment trusts.’’ I, and at least 169 other congressional members,

agree.

I would like to thank our witnesses for being here today.

[The prepared statement of Hon. Jon C. Porter follows:]

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Mr. PORTER. Noting that we do have a quorum present, I would

like to also introduce Ranking Minority Member Mr. Davis.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman,

and I want to thank you for agreeing to hold this second hearing

on the possible addition of a real estate investment [REIT] fund to

the Thrift Savings Plan [TSP]. As you know, last month, the Democratic members of the subcommittee requested that such a hearing

be held to discuss the merits of adding a REIT fund to the TSP and

to hear the views of the Employee Thrift Advisory Council [ETAC].

While I am pleased that this hearing is being held, I must admit

that I am indeed disappointed that only one of our witnesses,

ETAC Chairman Jim Sauber, was invited to testify and that the

scope of the hearing seems to center more on ETAC and the Thrift

Board’s decisionmaking process, rather than on why ETAC took the

extraordinary step of passing a resolution in opposition to H.R.

1578, the Real Estate Investment Thrift Savings Act.

To ensure that the members of the Thrift Board remain aware

of the interests and concerns of the Thrift Plan participants and

beneficiaries, ETAC was created in the TSP’s authorizing legislation. ETAC represents over 2.6 million Federal employees and retirees, and several ETAC representatives have served on ETAC

since the TSP’s inception in 1986.

When a bill is opposed by the people it is supposed to benefit,

this subcommittee has an obligation to research the issue further.

Therefore, to gain a more comprehensive understanding of this

issue, I request that the written statements of Terrence Duffy,

chairman of the Board of the Chicago Mercantile and House need

to the TSP Board; Frank Cavanaugh, the first Executive Director

and CEO of the Board; and Mike Miles, an independent certified

financial planner licensee and registered employee benefits consultant, be submitted for the record. And I ask consent to have these

items submitted.

Mr. PORTER. Without objection.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

[The information referred to follows:]

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Mr. DAVIS OF ILLINOIS. Given the scope of the hearing and the

markup to follow, the key questions that need to be addressed are:

Why REITs? And why now? Why isn’t the subcommittee considering emerging market bonds or Treasury inflated protected securities or emerging market stocks? And why is the subcommittee moving forward before a comprehensive study of the universe of options

can be completed? A study of investment choices will include an examination of the costs to participants, costs to the TSP, the scale

at which the TSP would be able to enter the market without paying a premium, participant demand, overlapping funds, and whether or not any of those choices complement the existing investment

options. This is municipality information, not only for us but for

the Board and ETAC to know and understand, as we make decisions that will impact Federal employees’ retirement savings.

I am also concerned about a pattern of investment behavior

known as ‘‘chasing returns.’’ I understand that this occurs when individuals over-concentrate investments in securities that perform

well just prior to their investing in them. These investors run the

risk of purchasing stocks that may be overvalued and are due for

a correction. It is important to understand how chasing returns fits

into the investment equation for Federal employees.

Experts estimate that retirees will need about 70 percent of their

pre-retirement income, 90 percent or more for lower-income earners, to maintain their pre-retirement standard of living. That

makes the consideration of a fund a very serious matter. One only

has to look at the example of Enron, whose employees were allowed

and encouraged by company executives to invest in Enron stock, to

see what can happen when retirement programs are not administered solely in the interests of plan participants.

The TSP has an exemplary record. Let’s continue that tradition.

I look forward to hearing from today’s witnesses, and I still think,

Mr. Chairman, that we need to have all of the information that we

can garner before making a final decision.

Again, I thank you for holding this hearing and yield back the

balance of my time.

[The prepared statement of Hon. Danny K. Davis follows:]

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Mr. PORTER. Thank you, Mr. Davis.

Congressman Marchant.

Mr. MARCHANT. No opening.

Mr. PORTER. Mr. Van Hollen.

Mr. VAN HOLLEN. Thank you, Mr. Chairman. I thank both you

and the ranking member, Mr. Davis, for your opening statements.

I want to thank the witnesses for being here today, and you, Mr.

Chairman, for having this hearing.

As you mentioned, we have had a series of hearings on this very

important issue, and I am looking forward to the testimony of the

witnesses today.

As the chairman said, a large number of Members of Congress

have cosponsored this bill. People want to find a way to provide

Federal employees with the kind of choices that many of the major

companies in the private sector are making. The question does

arise: If IBM has a REIT option, if other major employers in the

private sector have these kind of options, which by all analyses I

think has performed well recently, why should we deny that kind

of opportunity to Federal employees? So that is the framework from

which many of us approach this issue.

And I have to say, in the process of putting together this bill, our

office approached many of the members of ETAC, some of the

major ones, and asked them for their input. And the input we got

back—and I will just mention one. AFGE, a major member of the

Advisory Council, we said, ‘‘What do you think of this bill?’’ The response we got back was, ‘‘We are not going to oppose it. In fact,

the ETAC is meeting. We are going to learn more about it and see

if we can support it.’’

So a lot has obviously happened since then, but I think it is important for everybody involved in this process to understand that

people involved in putting together this legislation reached out and

tried to solicit the views of different players here. I represent lots

of Federal employees. It seems to me that we need to make sure

they have the same options that are available to many people in

the private sector.

That having been said, I think that it is important to have this

hearing given the fact that ETAC made the recommendation they

did. I think it important for us to learn more about what factors

they considered in reaching that opinion, and I look forward to the

testimony.

So thank you, Mr. Chairman.

Mr. PORTER. Thank you, Congressman.

Congressman McHenry.

Mr. MCHENRY. Thank you, Chairman Porter. Thank you so much

for offering this legislation. I am proud to be a cosponsor of it. And

thank you, Mr. Van Hollen, for your leadership on this legislation

as well.

I look forward to hearing your testimony today because just following this legislation, it is pretty perplexing that a Board created

by Congress then opposes Congress acting on the program that it

was created to have oversight over. It is a little bit ironic that a

creation of Congress is biting Congress. And I would like to hear

that from our second panel on why they deem that appropriate.

32

I look forward to your testimony on the reason for your decision,

the reason for your approach on this, and the reason why timeliness has not been of the essence of what you are trying to achieve.

We would like to have a reasonable response in a reasonable

amount of time, and I think this committee hearing is important

for those purposes.

So thank you again, Mr. Chairman.

Mr. PORTER. Thank you, Congressman.

Congresswoman Holmes Norton, do you have an opening statement?

Ms. NORTON. Thank you very much, Mr. Chairman.

Mr. Chairman, I am almost missing a markup at the Homeland

Security Committee. I wanted to stay to say a few——

Chairman TOM DAVIS. Would the gentlelady yield just quickly?

They are voting final passage now. They are holding the vote open

at Homeland Security.

Ms. NORTON. Yes, well, since I am going to get voted down, let

me at least say these remarks. My good friend, the chairman of the

full committee, has been there, cast his vote the wrong way, so he

is prepared to stay here. [Laughter.]

I have worked closely with the real estate industry. Indeed, the

District of Columbia is a real estate town, so it comes to the table

with a fair amount of credibility with me.

I also have a unique bill that heavily involves the real estate industry. I put money in their pocket, both in the commercial sector

where real estate is one of the few big industries in town, and, of

course, my unique bill involving homebuyers.

I, of course, have attended our subcommittee hearings, and they

have been informative as far as they could go. Mr. Chairman, I

have to say, I have to give the Republican majority some credit for

taking a fully bipartisan support and trying their very best to tear

it up. I mean, you couldn’t have it better. You have the leaders, the

top leaders on my side, literally from the top of my side, and your

side on the bill, and yet there is a problem that is very unfortunate

that has come forward.

Nobody was more outspoken in favor of REITs on the committee

than I was, kept pressing the Board—I was very disappointed in

the Board. I found their answers mealy mouthed. We finally said,

OK, tell you what, we are going to find out what the real deal is,

and we asked for a study. It is pending.

We even, some of us, were concerned that the Board might be

stalling because we wanted the study to be done more quickly. I

am told that may not be the case. Some have come forward with

some dates. I am not sure about that. But one thing I did not expect was that this great interest—interest that came out of literally

the probing of our subcommittee, in which we literally brought out

in great detail what the great advantage of REITs would or might

be, would dissolve into what we are now seeing. I just cannot believe that for the first time we see, of all things, of all bodies, the

TSP maligned as being simply part of the political game vis-a-vis

the Congress—something that, by the way, is very dangerous.

Very, very dangerous. We are dealing here with one of the most

conservative funds, one of the largest funds in the marketplace.

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So I do not like headlines like this that I regard as absolutely

needless and that were completely unavoidable arriving very likely

at the position that has been sought. I do not like headlines that

say, ‘‘Playing politics with your TSP.’’ I do not want Wall Street to

hear that and see that. And I do not want our employees to see

it or hear it. And I do not like reading articles that say, ‘‘Playing

politics with your TSP.’’ I do not like reading articles—and I will

not even quote the worst of this—that say, among other things,

most of those contributions ranging from $1,000 to $7,500 and

averaging $3,300 per lawmaker were made within a month or two

of the lawmakers’ signing onto a bill, the records show.

Well, you know what? I did not sign onto the bill. I wanted to

wait until the hearing and until the study, so I did not get any of

that money, and that is not why I am bringing this up. I am a

member of the TSP, and I——

Mr. PORTER. If the Congresswoman would yield for a moment?

Ms. NORTON. I am going to finish, Mr. Chairman. You did not

stop anybody else. And I think this needs to be brought out. I think

that it is a darn shame to take what has been a process that had

no political overtones and look like we are rushing to judgment because of politics. I do not believe that people who signed onto this

bill thought any differently from the way I thought when everything I said at the meeting indicated that I thought that this might

very well be a good idea. But here we have a study that is going

to be coming in in a few months, and yet we are told that the sky

will fall—what is falling is the TSP—the sky will fall unless somehow this is done right away, that we do not need to know about

the cost to participants, the cost to the TSP. The whole study will

be moot, and I do not see why in the world, even on a committee

like this, Mr. Chairman, a subcommittee that you have run in a

bipartisan way, where you have virtually every member of this subcommittee on the record for you, you would allow this to devolve

into this. And that is what is happening here, and it is going to

hurt the TSP and it is going to hurt the relationships we have had

with you. And I want the record to show why I am concerned about

this process and why I am particularly concerned that no matter

how hard we try, this Republican majority is determined to separate us, whether it is Democrats from Republicans or whether it is

employees from Members of Congress.

And I thank you for the time, Mr. Chairman.

Mr. PORTER. Thank you, Congresswoman. If I may comment, I

think we agree. It is irresponsible—but let me take it a step further. It is irresponsible of a media outlet to report a story without

the courtesy of having an interview with the chairman of the committee. It is irresponsible, this article is irresponsible. It is not

true. It is inaccurate. And I agree with you. It is a shame that certain members have played politics with this Board. And I think it

is a discredit to every Federal employee, it is a discredit to this

Congress, when politics are being played exactly as you are saying

by the Board of TSP. It is a shame on TSP. And I am disappointed

that one news outlet can choose to be irresponsible and not have

the courtesy of interviewing the chairman of this committee. This

is absolutely false. And I appreciate your comments, and I understand what you are saying. Based upon reading the article, that is

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why it is irresponsible of this newspaper to print this article, and

I am glad you brought it up. Thank you.

Mr. Davis.

Chairman TOM DAVIS. Well, it is irresponsible. In fact, as far as

the total amounts of money that my PAC gave to you, Mr. Porter,

they are attributing somehow to some of these other interest

groups, which is absurd. The numbers do not even add up.

I guess my surprise here is that a group that is supposed to be

looking out for Federal employees has cost Federal employees literally millions of dollars. If this option had been available a year

ago, looking at the growth in REITs, Federal employees would have

been able in many cases to get a greater return on their investment by having an option that you have denied them.

In good faith, over a year ago they came before this Board and

said they were going to do a study, and now it appears that the

study results will come out and they are going to run the clock out

on us before this Congress is over, hopefully to kick it over, and

I suppose next Congress they will do the same thing. It is irresponsible.

The fastest-growing part of my own personal portfolio has been

the real estate side. I would like other Federal employees, the

54,000 Federal employees in my district, to have the same option.

This is not a mandate. This just gives Federal employees an option

to do that, and it is the height of arrogance to think that somehow

Federal employees are not intelligent enough to make the right investment decisions so you want to deny them this opportunity because they might pick it. And that is the rhetoric that we have

heard out of this group, which has been so irresponsible in some

of the other things that they have undertaken, such as the computer system and everything else as you go back.

Mr. Chairman, as you note in your opening statement, the percentage of private companies offering five or less options to their

employees has dropped from 7 percent to 1 percent over the last

4 years, and yet this group insists on keeping it at 5 percent and

running out the clock, offering one of the largest plans in the country fewer options, when the trend everywhere else—I don’t know

what they know that we don’t know, but I look forward to their testimony at this point, and to just tell you I don’t think this committee can wait for this unelected body to sit here and try to run the

clock out.

Thank you.

[The prepared statement of Chairman Tom Davis follows:]

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Mr. PORTER. Thank you, Mr. Chairman. I would just like to add

one additional comment that you started, regarding the article

written by Tim Kauffman of the Federal Times, stating contributions received from other members of leadership, again, I think this

is an insult to the whole Congress, and I appreciate you and the

Congressman bringing it forward.

So, with that, I would like to move to some procedural matters.

I ask unanimous consent that all Members have 5 legislative days

to submit written statements and questions for the hearing record,

answers to the written questions provided by the witnesses also be

included in the record. Without objection, so ordered.

I ask unanimous consent that all exhibits, documents, and other

materials referred to by Members and the witnesses may be included in the hearing record and that all Members be permitted to

revise and extend their remarks. Without objection, it’s so ordered.

Let’s see here. There are a number of documents that we will be

referring to through the course of the questioning. There are documents that will consist of correspondence relating to the subcommittee’s interaction with the TSP Board. I ask unanimous consent that these documents be placed into the record. These documents are marked as exhibits 1 through 16. So, without objection,

so ordered—correction, 1 through 20.

[The information referred to follow:]

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Mr. PORTER. It is the practice of this committee to administer the

oath to all witnesses, so if you would all please stand, I would like

to administer the oath. Please raise your right hands.

[Witnesses sworn.]

Mr. PORTER. Let the record reflect that the witnesses have answered in the affirmative. Please be seated, as you have.

The first panel, I would like to now invite the panels to come forward. Of course, you are there, and the panel will now be recognized for opening statements. I would ask you each to summarize

your testimony in about 5 minutes. Any fuller statement you may

wish to make will be included in the record. First we will hear from

Mr. Gary Amelio, Executive Director of the Federal Retirement

Thrift Investment Board. After Mr. Amelio, we will hear from Mr.

Thomas Trabucco, the Director of External Affairs for the Federal

Retirement Thrift Investment Board. I would like to thank you

both for being here.

Mr. Amelio.

STATEMENTS OF GARY A. AMELIO, EXECUTIVE DIRECTOR,

FEDERAL RETIREMENT THRIFT INVESTMENT BOARD; AND

THOMAS J. TRABUCCO, DIRECTOR OF EXTERNAL AFFAIRS,

FEDERAL RETIREMENT THRIFT INVESTMENT BOARD

STATEMENT OF GARY A. AMELIO

Mr. AMELIO. Good afternoon. My name is Gary Amelio, and I am

executive director of the Federal Retirement Thrift Investment

Board.

The duties of the executive director are established by law. One

such duty is to meet with the statutorily created Employee Thrift

Advisory Council [ETAC]. This is a duty which I find most useful

and enjoyable. Since I arrived, we have held these meetings twice

each year.

Before coming to the agency nearly 3 years ago, I had 23 years

of private sector experience in the employee benefits, fiduciary industry. Because much of it involved Taft-Hartley plans, I had a

great deal of experience with union and association leaders. I can

state unequivocally that ETAC members are as knowledgeable

about their plan and as protective of their members’ retirement security as any of the employee leaders I have worked with throughout my career.

The letter inviting me to this hearing asked that I discuss the

formulation of the ETAC resolution to oppose H.R. 1578. ETAC

meeting transcripts, which we have provided to this subcommittee,

show that the discussion began more than 2 years ago at the

March 24, 2004, ETAC meeting. At that time ETAC Chairman Jim

Sauber announced that he had been contacted by the REIT lobbyist

who requested such a meeting. As Mr. Sauber explained it, the

REIT advocates wanted to make a pitch for their proposal. He told

ETAC members he had an open mind and told other members they

may be contacted as well.

I had also been contacted by REIT representatives for a meeting.

I advised ETAC that I was also open ‘‘to listen to anything within

reason,’’ but I had sent word through their lobbyist that I did not

want ‘‘a hard sales pitch.’’ I did state for the record my displeasure

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upon learning that my position had been misrepresented as refusing to meet. Nevertheless, I told ETAC that I planned to meet with

the industry association representatives and lobbyists, which I did

on March 30, 2004.

The next ETAC meeting was held on November 9, 2004. Again,

the issue was raised, and Chairman Sauber offered to facilitate a

meeting of interested ETAC members with the REIT representatives. I explained that I had personally met with the trade association’s leaders and their lobbyist for 2 hours. I also had my senior

investment staff meet with them a second time to receive further

information and to invite them to present any additional information they wished to develop in writing.

I further advised ETAC on November 9th that Tom Trabucco and

I had met with House and Senate staff to discuss the proposal. I

again stated my openness to receiving information, but cited three

specific concerns: liquidity, fee structure, and setting precedent for

other narrowly focused fund additions to the TSP. I was helped at

this point by an ETAC member who demonstrated her knowledge

by pointing out that we already have REITs in our existing broadbased domestic stock index of funds.

The Council next met on May 4, 2005, just 2 weeks after this

subcommittee held a hearing on H.R. 1578. I was asked to and

gave Council members a brief on what I had said during the hearing. A number of Council members voiced strong concerns. Others

said they viewed it as an attempt to politicize the TSP. There was

general agreement that each ETAC member would consult with his

or her own organization’s leadership.

With regard to the resolution itself, ETAC Chairman Jim Sauber

contacted us in late January 2006 to advise that he wanted to

schedule an ETAC meeting. This is standard operating procedure

since the law requires the executive director to meet at the request

of the Council.

Tom Trabucco advised me that Mr. Sauber wanted to have a potential resolution for consideration at the meeting. Mr. Sauber had

also asked that the Board’s general counsel, who also serves as the

committee management officer, be consulted to be certain that he

was proceeding consistent with the law. I told Tom to do everything appropriate to support the Council.

The resolution was indeed developed, circulated, raised at the

March 7, 2006, meeting, discussed, amended, and approved. Nine

Council members and three alternates were in attendance. One

Council member—the representative of the uniformed services—abstained because of his unique situation of representing not an employee organization but the Department of Defense. From my perspective as the Federal official to whom the Council provides its

view, the Council had, after 2 years of discussion and review, clearly stated its opposition to the REIT bill.

Thank you.

[The prepared statement of Mr. Amelio follows:]

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Mr. PORTER. Thank you for your testimony.

Mr. Trabucco, welcome.

STATEMENT OF THOMAS J. TRABUCCO

Mr. TRABUCCO. Thank you. Good afternoon, Chairman Porter,

Congressman Davis, members of the subcommittee. My name is

Tom Trabucco, and I am the director of external affairs for the Federal Retirement Thrift Investment Board. My position includes

three main areas of responsibility: legislative affairs, the press, and

relations with the unions and associations representing Federal

and postal employees. I also serve as the agency’s spokesman when

the executive director is not available.

I have served in this position for nearly 20 years as a career

member of the Senior Executive Service. Before that, I served for

a total of 13 years, handling legislative matters for two organizations, the National Association of Retired Federal Employees and

the National Federation of Federal Employees, as well as a staff

member to the predecessor of this committee.

Since coming to the Thrift Investment Board in 1987, it has been

my great privilege to work with many outstanding individuals in

the agency, the employee organizations, the executive branch and

the Congress, who were completely dedicated to the success of the

Thrift Savings Plan. There has been a truly exceptional effort to

assure those who placed their retirement savings in the TSP, that

this plan will be managed solely in their interest by expert fiduciaries.

This does not mean there have not been different views openly

expressed. My prepared statement includes some examples.

When Congress created the TSP, it recognized that the experts

who serve as the plan fiduciaries, the board members and the executive director, would not necessarily be familiar with the Federal

work force. To ensure that the employees eligible to participate had

top-level input into all investment and administrative matters considered by the board, the House committee proposed the Employee

Thrift Advisory Council. The Council was created and has functioned exactly as envisioned ever since.

Part of my job at the board is to serve as the secretary to the

Council. In this role I am the primary point of contact between

Council members and the executive director. Council members are

appointed by the chairman of the board from organizations prescribed by law. I manage the process by which nominations are solicited from the presidents of each of these unions and associations.

I am also responsible for filing the annual reports regarding Council activities, as required by the Federal Advisory Committee Act,

and for performing other administrative support functions.

By law, the executive director meets at the request of the Council. I normally receive the first call that a meeting is being requested. I coordinate with the committee management officer to develop the meeting notice and forward the agenda for publication in

the Federal Register. As Executive Director Amelio stated, I responded to Chairman Sauber’s request regarding his resolution opposing REITs. He told me the points that he wanted in the resolution, and asked that I run them by the general counsel to ensure

that they were put in proper legal language and that he was propVerDate 11-MAY-2000 11:08 Dec 15, 2006 Jkt 000000 PO 00000 Frm 00098 Fmt 6633 Sfmt 6633 D:\DOCS\29849.TXT HGOVREF1 PsN: HGOVREF1
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erly following the statutory provision regarding Council resolutions.

I did so.

The general counsel advised me that the resolution I drafted,

based on Chairman Sauber’s specifications, was fine, and that his

actions were consistent with both the law and the ETAC charter.

A copy of that charter is attached to my testimony. She further advised that Mr. Sauber should be sure to circulate his resolution in

advance of the meeting.

I forwarded the file that I had created to Mr. Sauber. I recall

that he made two rounds of revisions, which he circulated to Council members in advance and copied to me. I also asked him before

the meeting to send me his final version so we had a copy that

could be promptly edited to reflect any amendments made at the

meeting. The resolution was indeed again revised at the ETAC

meeting. Board staff promptly produced a final version for ETAC

members at the meeting, and it was approved by the Council.

That concludes my prepared statement. I would be pleased to respond to any questions.

[The prepared statement of Mr. Trabucco follows:]

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Mr. PORTER. Thank you very much. We appreciate your testimony.

I would like to begin questioning regarding a subcommittee hearing we had last year on H.R. 1578. In our hearing on April 19,

2005, on H.R. 1578, Mr. Amelio, did you ask the subcommittee to

delay action on H.R. 1578 until after you studied the investment

options for TSP?

Mr. AMELIO. I believe that I did.

Mr. PORTER. And we have done that, correct?

Mr. AMELIO. I believe that you have, yes.

Mr. PORTER. After we held our hearing on April 19th, we sent

you written questions for the record to answer, as our usual practice after a hearing. I want to read something from the May 4,

2005 Employee Thrift Advisory Council. This is a transcript of an

exchange between you, Mr. Amelio, and Mr. Strombotne—pardon

me if I mispronounced the name—discussing the questions for the

record asked by the subcommittee following the hearing of April 19,

2005. It is exhibit No. 18.

I am quoting Mr. Amelio. ‘‘But I was startled when I read, not

only the tenor of the questions from the subcommittee, but the

tone. We’re going to respond in kind, and I’m going to make these

questions public. I’m going public. We’ll give copies, and I intend

to give the media copies. They ought to see what’s going on behind

the scenes.’’ Now, remember, this was after our meeting April 19th.

This is for the full committee. This is after our meeting. This is Mr.

Amelio. ‘‘We’re going to go public. And now I finally have these

questions in writing instead of just sitting in a room up there and

hearing it. I think everybody else should see what’s going on, although, frankly, the media knows what’s going on. Some of them

have already mentioned to me through their research they’re well

aware of what’s going on, so that’s where we are right now.

Mr. Strombotne: ‘What kind of time schedule are you on for response to their questions?’

Mr. Amelio: ‘I plan taking every day I have available.’ From a

transcript of May 4, 2005, ETAC meeting, page 77, emphasis

added.’’

Mr. Amelio, what you mean when you said, ‘‘I’m going public?’’

Were you suggesting waging a media campaign against Members

of Congress? Why were you so upset with Congress simply because

we were asking questions? Can you answer my question?

Mr. AMELIO. I have a recollection. I just saw before the meeting,

those transcripts, and my recollection is I believe that the questions that were submitted to us did not reflect an understanding

of the information that we attempted to put forth, that we were

going to do a full review. It appeared to me that they were driven

by the industry, and that they were directed at a single fund rather

than an in toto review of all available options.

Mr. PORTER. What did you mean when you said you were going

to go public?

Mr. AMELIO. Keep this—just as we’re doing now, be very open

about this so that the plan’s participants could see the board feels

that to exercise its fiduciary duty, we need to know—or the participants need to know that we as fiduciaries are going to exercise our

duty and ensure that we review every plan option and not simply

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focus on one particular option at one particular point, that we

wanted to have an independent consultant do the full review of all

investment options.

Mr. PORTER. Why then did you say you were going to wage a

media campaign against Congress?

Mr. AMELIO. I don’t recall. If it’s in there, then I said it.

Mr. PORTER. It is in there.

Mr. AMELIO. OK. Well, I haven’t, so——

Mr. PORTER. Why would you say that?

Mr. AMELIO. I have no—I don’t know why.

Mr. PORTER. Why were you so upset because Congress was asking you questions, and why did you complain about the tone of this

subcommittee, that I think is very fair?

Mr. AMELIO. Because, I believe, that the questions, as written,

seemed to be written by the industry, rather than by an independent objective group, which I assume that the subcommittee, the

role that you would take is the same role that the fiduciaries would

take.

Mr. PORTER. So you are saying that those questions were written

by the industry is why you were going to——

Mr. AMELIO. No, I don’t know who wrote them.

Mr. PORTER [continuing]. Take the time to go to the media because you thought they were written by the industry?

Mr. AMELIO. I don’t know who wrote them. It was just my own

impression.

Mr. PORTER. Or were you afraid to answer those questions?

Mr. AMELIO. Not at all.

Mr. PORTER. On July 5th, Senators Collins, Lieberman,

Voinovich, wrote to Chairman Saul. The Senators noted that the

FRTIB was undertaking a review of investment options for Thrift

Savings Plan. Senators requested a written report of the findings

and recommendations of the review by January 1, 2006. That is exhibit No. 6.

The next day, July 6th, Chairman Davis, Representatives Waxman, Danny Davis, myself, wrote to Chairman Saul to request a

written report on TSP investments by January 1st. The letter stated, ‘‘We look forward to the completion of the study and your recommendations so that we can consider them and proceed with the

REIT legislation or a version of that legislation, including your recommendations, in the 109th Congress.’’

On August 11th, you, Mr. Amelio, and five board members, respond with a letter to the subcommittee which indicated the board

had issued a request for proposals on April 29th, seeking competitive bids for ongoing expert investment consulting advice, exhibit

No. 8.

In the letter the board stated it expected to select an investment

consultant by September 2005.

Mr. Amelio, in the letter of August 11th, a study of the investment options for TSP is the last work item in the request for proposals; is that correct?

Mr. AMELIO. Is the—in terms of the work the consultant is doing

for us, the fourth item is a review of investment options, that is

correct.

Mr. PORTER. Why was it the fourth?

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Mr. AMELIO. That was a practical measure to comply with Federal procurement law.

Mr. PORTER. To put it forth was per law?

Mr. AMELIO. No, but we had to get several other things done in

advance of that that were required, and——

Mr. PORTER. And what were those things?

Mr. AMELIO. Reviewing the current indexes, which had to be

done before we take—go out for RFP on the existing fund managers, which we have to complete by the fall of 2006.

Mr. PORTER. In the letter the board states that the tasks will

need to be completed in the order listed. It is not prudent to establish firm deadlines on the completion of each task. So the study of

investment options was your lowest priority, correct?

Mr. AMELIO. In the order in which we had to satisfy law, yeah,

it had to be put fourth. I wouldn’t say it was the lowest priority.

I would simply say we had to address things that the law required

us to first.

Mr. PORTER. Why did you refuse to accelerate the study of the

investment options? Was it in defiance of Congress and the Senate?

Mr. AMELIO. Not at all. We have—the TSP is required under the

statute to operate at low expenses, and therefore, we had to do the

RFP. And in order to get the RFPs completed for the investment

manager, we had to review the indexes first. Those two things had

to be done, one, two. Obviously, then, the study would be completed

after those, which we are doing, but we have indicated we’ll get

them done before the close of 2006.

Mr. PORTER. Mr. Davis.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

Mr. Amelio, you noted in a recent Federal Times article that the

board hired Ennis Knupp to assess the plan’s current investments

and to report back by the end of the year if there were any material gaps in the TSP.

I have two questions. One: what will the Ennis Knupp study entail? Can an informed decision be made about adding funds to the

TSP without this assessment? And how important is the study in

determining which funds if any should be added to the TSP?

Mr. AMELIO. Ennis Knupp is an independent nationally renowned investment consulting firm. They will—their study of the

universe of options will consist of two pieces. First, they will look

at the existing funds and determine whether there are any material gap in the funds.

The second thing they will do is, if they believe there is a material gap, look at the industry and determine whether there is any

product out there that could appropriately fill the material gap.

That study will include, but it certainly will not be limited to

REITs. It will look at emerging markets. It will look at bonds. It

will look at TIPs. It will look at any variety of investments. That

is the way any appropriate fiduciary that is charged with managing

an employee benefit plan does look at a participant directed plan.

It would, I believe, be a breach of fiduciary duty to simply look at

one fund without looking at the fund lineup and seeing what’s in

there or what isn’t and make a decision on that basis.

Mr. DAVIS OF ILLINOIS. So one would be in a better position to

make a decision with the information that would be generated than

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they are without the information that would be generated once the

study is completed?

Mr. AMELIO. Absolutely, yes, sir.

Mr. DAVIS OF ILLINOIS. Would you say that would be the common

opinion of other experts in the field?

Mr. AMELIO. I believe that every fiduciary of a participant directed defined contribution plan in this country would take the

same approach, and the larger the plan, the more important it is

that process be followed because of issues like liquidity and fees

and availability of products to the plan, yes, sir.

Mr. DAVIS OF ILLINOIS. Mr. Terrence Duffy, chairman of the

Board of the Chicago Mercantile Exchange and the House of Representatives’ nominee to the Thrift Savings Board, in written testimony submitted for this hearing, stated that a technical analysis

demonstrated that the proponents of a REIT fund overstated the

case for such a fund.

What would you think he perhaps meant by making this statement?

Mr. AMELIO. Well, I spent about 22 years in the industry—before

I came into this position—in the private sector, and when proponents of any investment vehicle—when I say ‘‘proponents’’ I’m

talking about sales people and promoters of investment products—

roll out figures, they roll out figures which put their particular

fund or their particular industry in a better light than some other

person using other figures would do it, and I believe in this case

there were several factors that went into that. We’ve had our chief

investment officer and her staff look into this, and I believe a couple of the weightings that were used in the study that the REIT

lobbyists put forth could be challenged by others.

For example, I think there was an overweighting of 40 percent

in REITs versus the allocation to equities when most other consultants might only use a 15 percent allocation. The second thing is,

the REIT industry, or the real estate industry certainly got hot for

a few years, but past performance is no indicator of future performance. I heard those kind of comments before. And if you’re investing based on past performance, it’s like driving a car by looking

through the rear view mirror. It might be reassuring at first, but

it can be dangerous.

Mr. DAVIS OF ILLINOIS. And so the continuous gathering of information really puts you in the most comfortable position to feel that

the benefits of your decisions are going to be favorable?

Mr. AMELIO. It absolutely does. I mean that’s what fiduciaries do.

You have to study all of the options, all of the materials, and I

think it’s particularly important that we get it from an independent

consultant.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Mr. PORTER. If I could just respond to a couple of the comments

that I don’t think are quite accurate. If we look at rates of return,

Thrift Savings Plan investment fund performance, G Fund from

1988–2005 was 6.5 percent, in 2000–2005 was 5 percent. The I

Fund was 7.7 percent from 1988 to 2005. The fund was from 2000

to 2005, 3.2 percent. The F Fund 7.7 percent from 1988 to 2005,

and we look at 2000 to 2005 of 6.9 percent.

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Now, given these numbers to show an analysis that was done

based upon the investment in REIT funds—and again, I think Federal employees are capable of making decisions. I trust that they

are smart and intelligent and know what they are doing.

If you look at these funds, the REIT Fund in 1988 to 2005 gained

13.8 percent, compared to the G Fund was 6.5, the I Fund was 7.7,

the F Fund was 7.7, the C Fund was 13.3, the S Fund was 13.6.

The REIT was right up there with the C and the S at 13.8 from

1988 to 2005.

From 2000 to 2005, the REIT Fund increased 20.7 percent, the

G Fund was 5 percent, the I Fund was 3.2 percent, the F Fund was

6.9 percent, the C Fund was 0.2 percent, S Fund was 4.7. The

REIT Fund was 20.7 percent. So if we look at 1988 to 2005, it is

13.8; from 2000–2005 it was 20.7 percent.

I am sorry, maybe we are reading from a different set of stats.

Mr. Davis, Chairman Davis.

OK, Mr. Marchant.

Mr. MARCHANT. Thank you.

Mr. Amelio, in some of the literature that has been given out, it

says that REITs are already a part of the core component, and I

can’t find anything in my material up here that says what part,

what percentage of the core component it is. Do you know offhand,

or is it in our material?

Mr. AMELIO. I can give it to you. I am not sure what all materials you have there, sir. It is—the REITs are a proportion of the

two domestic equity funds in proportion to their overall totality of

investment in the United States economy. So if you look at the fair

market value of REITs in the TSP as of 3–31–06, it is $1.71 billion

of the current TSP as invested in REITs. We could break that down

because some REITs are held in the C Fund, and other REITs are

held in the S Fund, and I do have those numbers here if you want

to give me a second. But it gets to—oh, here it is. I’m sorry. OK.

$564 million of that is held in the C Fund, and $1.14 billion is held

in the S Fund.

To give you an example as to how that might impact an individual participant, if you were a participant in the TSP and you put

your account in the appropriate L Fund—and this would be a participant who is younger and has a longer time horizon till retirement—approximately 2 percent of your account balance would be

in REITs. And that basically is the same allocation that you might

find if you went out and got an investment advisor to allocate your

entire account versus all the different segments, pharmaceuticals,

banking and finance, oil, energy, etc., if you were to pay an individual advisor.

And actually, that also ties back somewhat to the chairman’s

point about there’s always a debate in the industry, are you stock

picking or are you doing asset allocation? Most investment advisors

say asset allocation, and that’s what we’re intended to do with

these broad-based index funds that we have in the plan that Congress created, and what we even do more so with the L Funds,

which are completely asset allocation, as opposed to stock picking,

going out, finding something that’s hot and investing in it at that

particular point in time.

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Mr. MARCHANT. When the board made its decision to not consider this fund until it got the report, did they take into consideration their fiduciary duty, not on the downside and on the protective side, but on the upside and the potential gain that they were,

in essence, not allowing their investors to take part in? Because if

I am in TSP, and I am, and aggressively in it, and I can’t invest

that money, because of the match, I can’t invest that money anywhere else, and I have some limits on—the TSP board has in essence placed some limits on my investment horizon because I am

getting a match from the Government. To me, it has limited my

ability, not just for the upside, because while the positive returns

are very good, REITs, historically in my portfolio and portfolios

that I have dealt with at Teacher Retirement System in Texas,

Employee Retirement System in Texas, have been used as a hedge

as much as they have for upside potential.

Do you think that the board, once it receives its report, will reconsider this?

Mr. AMELIO. I think that the board will support the independent

consultant’s report, whatever is in there, as long as it appears reasonable on its face, and I have no reason to believe it wouldn’t.

I would suggest to you that contrary to what’s been said earlier,

this plan is as fully diversified as any plan could be. We cover

every U.S. domestic stock that there is between the index funds,

and Congress did this in 1986. I mean it was genius when they created this plan, that it is low cost broad-based index funds, so there

is diversity here.

I also would, to answer the first part of your question, I think

the board very much considered its fiduciary duty. This is a very

impressive board. Although they are politically appointed, they

take their fiduciary duty seriously, and I think they’re acting in the

plan participants’ best interest by wanting to see the independent

review of the expert firm before making a decision.

And, finally, we haven’t said anything bad about REITs. We’re

not saying they’re good or bad. We’re simply saying we don’t want

to recommend any fund addition to the committee until we’ve had

an opportunity to review the current lineup and all the potential

possibilities if there are any material gaps. That’s all we’re saying.

Mr. MARCHANT. Thank you.

Mr. PORTER. Just a point of order for information. Yale University Endowment Chief of Investment, I mentioned in my opening

statement, urges real estate allocation of 20 percent for investors.

Several of the largest hundred public defined plans, including California Public Employees Retirement System, which is the largest,

and the New York State Teachers Retirement System, allocated

over 6 percent of their total to commercial real estate. I just think

that should be included.

Thank you.

Mr. Van Hollen, questions? I am sorry. Congresswoman, do you

have any questions?

Ms. NORTON. Yes. Just let me make sure my comments were understood. I think they were. But my comments about the maligning

of the TSP and its danger had nothing to do with the press. I didn’t

think the press reports were distorted. I think they reported. If

there were some corrections and somebody got it wrong, I would,

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with the chairman, decry the notion of not trying to get a comment

from the chairman. One of articles said that they talked with a

spokesman for the chairman, so I think if he has something to

clear up, I would certainly welcome it, because I think it would

benefit this whole discussion.

My comments, they reported campaign contributions. They got

that from the Congressional Record. They got when they were put

in. The nexus and the link is unhealthy. It is unhealthy for this

discussion. It is unhealthy for the fund. The press is in the business of reporting. There they did not editorialize on the matter,

and I want to make that clear that I think they were doing their

job.

The fact is, that this Congress is or should be very sensitive to

appearances. We have a lobbying bill that is right this moment still

trying to get enough votes to get the rule passed. This Congress

has become all about lobbying and corruption. So the timing could

not be worse, especially when we are talking about something

where virtually every member was in agreement in the first place.

Mr. Chairman, as you know, I am so perplexed. I was glad to

hear your last question, because you asked about Yale’s 20 percent.

That was in your testimony. Frankly, I was going to ask about it.

That is my alma mater, and it is not a private sector IBM, and

frankly, I was on the board of the Yale Corp., so I know just how

conservative such boards are. That really was going to be my question.

I do have a question, because I don’t equate the TSP with IBM

and the private sector. Yale and other charitable institutions, and

their caution is, I think, more what has won the respect of the TSP

over the years. But as I sat here listening to some of the questions,

and once again, glanced at the title of this hearing, I was just perplexed. Considering the views and advisory roles of the Employee

Thrift Advisory Council, well, you know, Employee Thrift Advisory

Council is not central here, happens to be important as far as I am

concerned, because actually money is involved. And I think the reason that many of us wanted this hearing is that we should begin

to get some answers because we were being rushed to a vote right

away, got to do it right away, there is some emergency. So we wonder, my God, let’s see what we can find out.

So I just want to object that we’re talking about the Employee

Thrift Advisory Council that are kind of in the same position we

are, trying to find answers from the people who run the program

itself. Much as I sympathize with them, they can’t possibly be at

the center of our concerns today.

I would like to ask a Yale question. I would like to ask—it is the

kind of question that made me really wonder, Mr. Amelio, about

whether the TSP was stuck in the past or whether it was prepared

to move ahead at our last hearing. I like to compare apples with

apples, not private sector corporations who are in the business of

winning and losing, because the employees of the Federal Government are not in that business when they join the TSP.

I would like to ask you if you have looked at relevant, responsible institutions like educational institutions, other such institutions that are substantially invested in the market or under pressure to in fact generate revenue for their endowments and the like,

106

and how you are informed, if at all, by what other or similar funds

are doing? And if you could justify the difference between, for example—I will just use that as an example, because, Chairman, I

think rightfully—I don’t know if he is from Yale or not, but he

rightfully put this as an example. If not Yale, you can cite somebody else who hasn’t done the same thing, and that would inform

me of what I don’t yet know.

Mr. AMELIO. Am I allowed to answer?

Mr. PORTER. Please.

Ms. NORTON. You don’t have to ask his permission to answer my

question.

Mr. AMELIO. Well, I was watching the time. I’m sorry.

Ms. NORTON. Oh, I see.

Mr. AMELIO. Just basically, yes, we have. And to just draw a distinction between the plans you’re talking about, the Yale plan and

CalPERS, etc., those plans are what are called actively managed by

managers. Percentages are set up and managers actively buy and

sell in guidelines. The TSP is a participant-directed plan, and you

look at a menu of funds. What we have done, for example, is you

can look at the top 20 funds like the TSP in this country that are

participant directed. You would find, for example, only four of them

have REITs in——

Ms. NORTON. Such as, please, such as?

Mr. AMELIO. Such as IBM—they’re not public, they’re private

companies—IBM, General Motors, Ford. I’ve got a list here. Boeing,

Exxon, Lockheed, Verizon, Northrop, Procter & Gamble, to name a

few. And four of those top 20 do have REITs, but they’re all still

smaller than us, and all of the plans that have REITs have a huge

number of options compared to us, which gets into my concerns

about liquidity and fees.

Ms. NORTON. Mr. Chairman, I am sorry, if I am going over, so

I will not go further. I hope we will have another round. I would

like to ask for the record that the two articles, one from the Federal Times, the other, be made a part of the record.

Mr. PORTER. No objection.

[The information referred to follows:]

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Mr. PORTER. I would like to comment, I guess, for the record, to

make it clear. I appreciated the request by the minority to have the

hearing today. That request was very specific. That request was to

have it regarding—a hearing regarding the advisory role of the

Employees Thrift Advisory Council. That was the request, which is

why we are having the hearing today. So to answer the question

why we are doing it, it was a request from the minority.

And with that, Chairman Davis.

Chairman TOM DAVIS. Thank you.

Let me, since Ms. Norton has entered the Federal Times article

into the record, it just shows that anything can get into the record.

It is a very non-credible article, in my opinion. For example, let me

just go, Mr. Chairman, to some of the things that they have talked

about. Every Republican that is crucial was given a contribution of

$5,000, and then they gave you $10,000. That has hardly passed

through if they give—they must have invested into a REIT, I think,

to get that kind of appreciation over time. The Freedom Project did

the same thing. By the way, the time periods, the Freedom Project

was given 5,000, and gave you $10,000, some of that money before

they even gave—I mean, anyone who understands how leadership

PACs operate know that leaders get money from a lot of different

sources, and generally, give it out on the basis of candidates from

marginal districts, not to who is going to support legislation. I have

never known a leadership PAC to give out anything except with

the intent of keeping their party in power. That is why they are

established in the first place, and I think the writer of this article

is very naive in terms of understanding how those things work.

Having said that, it is certainly the right of people to petition

their government. PACs are, of course, the contributions of thousands of people who put them into one area, and it is, I don’t think

any mystery, that some of that would find its way to Members,

some sitting on this committee, many others to Members who have

nothing to do with this.

I guess what bothers me though about the way the TSP has

worked this, with leaks to the press and the other things, is you

destroyed any credibility you had with me. When you came in to

see me originally, we were going to try to get a report back, and

now, to me, it looks like you are running out the clock, that you

are going to report this at the very end of this session, where it

would be impossible for us to act. Do you care to—Mr. Amelio,

what do you have to say about that?

Mr. AMELIO. I genuinely don’t want to do that.

Chairman TOM DAVIS. When are we going to see a report?

Mr. AMELIO. Before the end of 2006, the fall.

Chairman TOM DAVIS. Yes, but we are out in October. When are

we going to see a report?

Mr. AMELIO. I can’t give you a date. I don’t know. It depends on

the length of the RFP process.

Chairman TOM DAVIS. When was the contract let for the report?

Mr. AMELIO. September 2005.

Chairman TOM DAVIS. Did you give them any time limit?

Mr. AMELIO. No. We have four steps in the process. The first step

was to prepare a report on the review of the indexes, which the

board is required to do. The second step is to give us a plan as to

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whether we should let the contract in the way in which it has been

let before, which is that the investment manager has custody in securities lending. The next step is to do the RFPs for the investment

managers, and we have to get all that done by the fall of 2006

under Federal procurement law. Then the fourth and final step is

once we have done with that, to look at the fund lineup and determine whether there is any material gaps in the fund, in the plan,

and from there, determine whether there is any available product

that would meet those gaps.

Chairman TOM DAVIS. So basically this may not be on the

timeline for the committee at all this Congress?

Mr. AMELIO. We want it all completed by the end of 2006. I’m

sure it will be done well before—when I say well before that, I

don’t know. It depends on—it’s a procurement process. It’s very difficult. We can’t even say right now how many contracts there will

be, 1, 4 or 26, and we are a small agency.

Chairman TOM DAVIS. Let’s go back to October 14th, the Employee Thrift Advisory Council, in their regular meeting, where Mr.

Sauber stated that he was pleased that the study of TSP investment has slowed down the train. What do you mean to slow down

the train? Does this mean to stall the committee? What was conceived there, do you know?

Mr. AMELIO. I don’t know.

Chairman TOM DAVIS. You don’t know? I know what it means,

and I wasn’t at the meeting, but I understand what that means.

On January 13th, you again met with the majority and the minority subcommittee staff to discuss your plans for the study of investment options. At that meeting you stated that the study of investment options would be completed no earlier than September

2006, no later than early 2007. Apparently, the subcommittee staff

didn’t understand this, because at the meeting of the Federal Retirement Thrift Investment Board on January 18, 2006, you recounted the meeting with subcommittee staff and stated, ‘‘I think

the one thing that I hope we got clarified was that there may have

been a misunderstanding. I think there was some anticipation that

we would have had all this work concluded by the end of 2005. We

wanted to point out that it was indeed 2006 that we committed to

do this.’’

Mr. Amelio, our letter clearly asked you to submit your report by

January 1, 2006. Why was there a misunderstanding regarding

when the study was to be completed?

Mr. AMELIO. There was a debate going on at the meeting, after

the board meeting of January 2006 as to what year end we were

talking about. If the letter you’re talking about was the fall of

2005——

Chairman TOM DAVIS. September 2005.

Mr. AMELIO. Right. And that was the one that asked for a deadline at the end of 2005. We couldn’t possibly have done it by then.

We have to do contracts to hire the consultant, and then they’ve

got to do the work on the other contracts for the managers.

Chairman TOM DAVIS. Last year at the hearing on H.R. 1578,

you asked us not to act on the bill until you had an opportunity

to complete a study, but if the study isn’t completed until early

2007, I want you to explain to me and the members of the subVerDate 11-MAY-2000 11:08 Dec 15, 2006 Jkt 000000 PO 00000 Frm 00119 Fmt 6633 Sfmt 6633 D:\DOCS\29849.TXT HGOVREF1 PsN: HGOVREF1
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committee how can we possibly act on the legislation in this session?

Mr. AMELIO. We plan to have the study done by the end of 2006.

Chairman TOM DAVIS. We are set to adjourn in October. We may

come back afterwards, but we are set, so basically you have run out

the clock.

Now, let’s turn to the ETAC meeting March 7th. On March 7th,

the ETAC adopted a resolution opposing the addition of a Real Estate Investment Trust Fund. Were you at that meeting?

Mr. AMELIO. Yes.

Chairman TOM DAVIS. Were you both at the meeting?

Mr. TRABUCCO. Yes.

Chairman TOM DAVIS. Mr. Trabucco, according to your written

statement, you drafted the ETAC resolution; is that correct?

Mr. TRABUCCO. That is correct.

Chairman TOM DAVIS. And the resolution was also reviewed by

the board’s counsel, correct?

Mr. TRABUCCO. That is correct.

Chairman TOM DAVIS. Did the board’s attorneys often advise

ETAC?

Mr. TRABUCCO. Yes. ETAC involved itself, for instance, in a lawsuit that we were involved in 3 years ago, and they had direct contact with our lawyer. The approach that ETAC has taken with regard to Council matters is very similar to the approach that I

have——

Chairman TOM DAVIS. So the board staff had extensive involvement with the drafting of the resolution; is that fair to say?

Mr. TRABUCCO. I drafted it to Chairman Sauber’s specifications,

and based on the statements that were made at the earlier meetings.

Chairman TOM DAVIS. Mr. Amelio, if you are not an ETAC member, and the role of the ETAC is to provide outside advice on the

TSP board and its managers, how is it that you suggested language

for the ETAC resolution?

Mr. AMELIO. I wasn’t submitting substantive language. They

were debating one sentence, and I offered a couple of words as a

matter of technical assistance. I wasn’t trying to impose intent

upon them. They were struggling with certain terms of art.

Chairman TOM DAVIS. Didn’t you make sure that the resolution

included the language you suggested, which asserts that a new

fund must come from an independent process coordinated by the

plan fiduciaries?

Mr. AMELIO. I may have suggested words. I didn’t encourage. I

was offering help. That was completely their resolution.

Chairman TOM DAVIS. That language is absolutely substantive.

That is not technical, in my opinion.

Mr. AMELIO. OK.

Chairman TOM DAVIS. Coordinated by the plan fiduciaries, in

fact, is a huge transfer of authority away from Congress and to

you. I mean that is one of the dividing lines on this.

Mr. Trabucco, did you sometimes provide your views to ETAC

members concerning what Congress intended when it enacted the

FERS Act?

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Mr. TRABUCCO. Yes, I do. I have the great fortune of having

served on this committee and worked in the legislation that created

the TSP, and I do have a box of papers going back, and I’m happy

to dig through it and help them if they have questions, and also

help this committee.

Chairman TOM DAVIS. As we have seen the views of what the

board believes the FERS Act provides are sometimes different from

what other people think. There is always controversy on that.

Mr. TRABUCCO. Well, I will say, sir, I try to go back to the law,

as I did at that hearing record. If you check it, you will find we

went for the precise words on the role of the board. The board’s role

under the law is to develop and establish investment policy. In fact,

when I couldn’t remember the second word, we sent somebody out

of the room to get the law so that we were certain we were dealing

with black letter law——

Chairman TOM DAVIS. You didn’t conduct any scientific survey of

Federal employees to see if they wanted to add a REIT index fund,

did you?

Mr. TRABUCCO. No.

Chairman TOM DAVIS. Did you make any attempt to provide objective information or collect information from Federal employees

about adding new funds before you decided that they don’t need

new investment options?

Mr. TRABUCCO. Do you want to talk about the survey?

Chairman TOM DAVIS. Yes or no?

Mr. AMELIO. Not yet. We’re doing an extensive survey in 2006 of

the participants.

Chairman TOM DAVIS. When will that survey be completed?

Mr. AMELIO. I’m hopeful that—we’ve committed to have it finished by the end of this year. We’re working on it right now. I’ve

hired a new product development manager, who’s seated behind

me, from the private sector, and we want to go out and do a full

survey. We want to find out what the participants know about——

Chairman TOM DAVIS. Let me just—just to put this in perspective.

Mr. AMELIO. OK.

Chairman TOM DAVIS. The conferees for the FERS Act, which

you claim to know something about, Mr. Trabucco, made reference

to two separate sources of potential political manipulation, pressure from the administration on board members, who would be

Presidential appointees, and pressure from Congress. This is the

language. ‘‘Concerns over the specter of political involvement in the

Thrift Plan management seemed to focus on two distinct issues: 1)

the pressure from an administration; (2) the Congress might be

tempted to use the large pool of Thrift Plan money for political purposes. Neither case would be likely to occur given the present legal

and constitutional restraints.’’

Now, in terms of political pressure from Congress, it is clear for

conferees statements at page 137, paragraphs 3 and 4, that they

were concerned about the possibility of some sort of raid of the

trust funds by Congress, not about Congress selecting new index

funds. Do you disagree with that?

Mr. TRABUCCO. I think there were many reasons, but it wasn’t

index funds. You’re right on that. I’m not suggesting that it is. The

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next sentence is also instructive. ‘‘Board members and employees

are subject to strict fiduciary rules. They must invest the money

and manage the funds solely for the benefit of participants. A

breach of these responsibilities would make the fiduciaries civilly

and criminally liable.’’

Chairman TOM DAVIS. But how do you feel when REIT funds,

over the last—while we have been talking about this, have gone up

in a very significant way, and we have deprived Federal employees

of the option of investing in that? Do you feel good about that?

Mr. TRABUCCO. I can only tell you, sir, what previous boards

have done, and I’ve had the pleasure of serving many of them.

Chairman TOM DAVIS. The previous boards were the ones that

went through computer systems that failed, with huge cost overruns coming back and everything else, and if you align yourself

with that, I think I get the picture.

Mr. TRABUCCO. No. I’m telling you——

Chairman TOM DAVIS. I will yield back, Mr. Chairman.

Mr. TRABUCCO. If I might answer on investment policy. The previous boards looked at more than returns. They looked at the design of the plan, the structure of the plan, and did in toto reviews

as they did from——

Chairman TOM DAVIS. But three of the options were an underlying statute. You didn’t add them. They were there in the underlying statute originally.

Mr. TRABUCCO. That is correct. After 3 years of congressional

study, they decided on those three.

Chairman TOM DAVIS. I yield back.

Mr. PORTER. Mr. Cummings.

Mr. CUMMINGS. Thank you very much.

Mr. PORTER. Point of order. Mr. Van Hollen.

Mr. VAN HOLLEN. Thank you, Mr. Chairman.

Mr. PORTER. My apologies.

Mr. VAN HOLLEN. Not at all.

Let me ask you, your answer to Mr. Marchant’s question, Mr.

Amelio, anticipated a little bit of my question, and that is have you

personally, at this point in time, formed an opinion as to whether

or not it would be a good or bad idea for the members of the Thrift

Savings Plan to have a separate REIT option?

Mr. AMELIO. Are you asking me personally or in my—because I

can only answer in my capacity as a fiduciary to the plan.

Mr. VAN HOLLEN. But with all due respect, I mean, I think it is

important to understand where the head of the—you know, the executive in charge is coming from with respect to this, because if you

have a—I mean, you are saying to the Members of Congress, and

it is a fair point, wait for the study. But I want to know if you personally have reached a conclusion as to whether or not this is a

good idea or a bad idea.

Mr. AMELIO. Well, I have grave concerns about the process. And

my grave concerns are I think when this plan was created in 1986,

it was ingenious, broad-based low-cost index funds. And for all the

talk about what employees in the private sector get to invest in

real estate and whatnot, every employee in the private sector

would give anything to be in this plan with its low fees and its

broad base.

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My concern is if you put one single targeted industry fund into

this plan, you’re going to open the door to a dozen other single-industry funds and then this plan will lose the beauty of its simplicity, its low cost, and its high confidence level of the participants

that it’s being managed fairly.

Mr. VAN HOLLEN. I don’t want to mischaracterize your answer,

but, I mean, it sounds to me like you—if you were to weigh this

on a 1-to–10 thing, you are pretty close to—zero being you are not

in favor of it personally, and you are pretty close to zero at this

point in time. Is that right?

Mr. AMELIO. I would have to be convinced——

Mr. VAN HOLLEN. I am not talking about the legislation. I am

talking about do you think it is—you have formed an opinion as to

whether or not it is a good idea.

Mr. AMELIO. I would have to be convinced that it is in the best

interest of all the plan’s participants, and I’m not there yet.

Mr. VAN HOLLEN. All right. Let me—do we have a copy, Mr.

Chairman, of the contract between TSP and the consultant you

have hired? Do we have a copy of that?

Mr. PORTER. Requesting for this study, correct?

Mr. VAN HOLLEN. Yes. You have no objection to providing the

committee with a copy of the contract, do you?

Mr. AMELIO. Yeah, that’s fine.

Mr. VAN HOLLEN. All right. And that contract, as I understand

it, asks them to look at a range of different options and is, I hope,

neutral in the way that it asks them to take a look at it.

Mr. AMELIO. It is absolutely—it is the entire universe of potential

options. There is no limit.

Mr. VAN HOLLEN. Let me ask you with respect to the GAP report

from January—I don’t know if you had an opportunity to look at

it—and the comments that they made with respect to the role of

the ETAC. Have you had an opportunity to look at that?

Mr. AMELIO. No, I didn’t in advance of this hearing, no, sir.

Mr. VAN HOLLEN. What I want—you know, we had a hearing

earlier, as we all know, and after that hearing we had the opinions

and the letter from the ETAC Advisory Council. And I guess one

question, and this does go to the process, because one question that

is raised, given your responses, is to what extent the ETAC is in

fact an independent advisory board. And I am not saying this in

any way to diminish the role of ETAC, but it does seem clear from

the testimony that they have no independent staff. Is that right?

In other words, the advisory council does not have an independent

staff. Is that correct?

Mr. AMELIO. That is correct.

Mr. VAN HOLLEN. So they do rely entirely for their staff and resources on you and your staff, is that right?

Mr. AMELIO. I believe that’s correct. I mean, they may use their

personal association or union staffs, I don’t know. But, you know,

they rely on us for ETAC work.

Mr. VAN HOLLEN. But to your knowledge, do they have any outside consultant and/or expert that they rely on?

Mr. AMELIO. No. No.

Mr. VAN HOLLEN. And they rely on your attorneys, I understand,

for whatever legal advice they provide.

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Mr. AMELIO. Yes.

Mr. VAN HOLLEN. Because the question is—I mean, this letter is

sort of presented in the sense that there has been an independent—at least, I think that is the perception up here—an independent group that has its own sort of resources independently looked

at this. But I guess, given the nature of what happened and the

fact that the drafting of this resolution was actually done by your

staff, would it be fair to say they are not a—they don’t have their

own resources to act independently of the board?

Mr. AMELIO. Yeah. Can I refer to——

Mr. TRABUCCO. May I answer that, Congressman? As the individual secretary to the council, I attached to my testimony the document that created the council, the charter of the council. And that

charter is consistent with the Federal Advisory Committee Act. The

way that act works is the committee, or the agency that is receiving the advice from the outside independent group, provides staff

support to that outside independent group. The notion is that there

is a benefit to the agency receiving the advice and that the outside

group should not have to pay for providing that advice. In other

words, we provide, just as I have for this committee on technical

drafting services, that technical——

Mr. VAN HOLLEN. Right, but you don’t provide them any resources to pay for advice outside yourself, right?

Mr. TRABUCCO. No. That is correct.

Mr. VAN HOLLEN. I raise this because, you know, during the

process of putting together this legislation, people sought the input.

As I mentioned in my opening statement, one of the people we

asked was AFGE, American Federation of Government Employees,

lots of Federal members. And I am just going to read the response

that we received back from them during that process.

‘‘On the REIT legislation, we will not oppose it. We are meeting

with the Thrift Investment Board employee groups in mid-April’’—

this is dated March 2005—‘‘in mid-April to learn more and see if

we can support the legislation.’’

What I am getting at is to what extent these advisory council

members have people asked advice from, whether their main

source of advice is from you. And I think it is important they get

advice from you, but it is pretty clear that is their main source of

advice. So I don’t think it is a great surprise, is what I am saying,

I guess, to find out that they would take this position.

Let me end with that, Mr. Chairman, because I think, you know,

it is important that we had this hearing, and I want to thank the

chairman for holding it. I think it is important that we move forward in a smart way. I also think it is important, as others have

said, that we not forego the opportunity for Federal employees to

have this opportunity, which is why it concerns me a little bit that

even if people at the outset of this process, members of your board,

were objective about it, given all that has happened and your comments in the transcripts, whether at the end of the day, given the

report, whether all of you can see this, put aside what has happened and reach and independent decision, and sort of put aside

your preliminary conclusions.

Thank you, Mr. Chairman.

Mr. PORTER. Thank you. Mr. McHenry.

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Mr. MCHENRY. Mr. Chairman, thank you so much. Let me start

by saying——

Ms. NORTON. Mr. Chairman, could I beg the indulgence of

the——

Mr. PORTER. Not at this moment.

Ms. NORTON. Could I just ask the member if I could, because I

am about to leave, if I could just clarify——

Mr. MCHENRY. Actually, I have something that maybe you would

like to hear first. You know, I think it is disgraceful for a member

of this committee to impugn 163 Members of Congress for simply

sponsoring this bill. I think that is really a harmful thing to this

whole process to say that those that sponsor this bill did so for

some financial gain. I think it is a very harmful thing.

Ms. NORTON. Then I am going to have to ask to respond to that.

What I was about to say is not——

Mr. MCHENRY. It obviously——

Ms. NORTON. I indicated—I indicated——

Mr. MCHENRY. I am not yielding. I am not yielding.

Mr. PORTER. Excuse me. The gentleman——

Ms. NORTON. Well, I am going to have to ask for a point of personal privilege, though.

Mr. MCHENRY. Mr. Chairman, I will say—actually, I have the

time right now, if the gentlelady will let me continue. I will just

say that is a very harmful thing, Mr. Chairman, to this whole process. The reason why I think this is a very useful option is, in North

Carolina, having served in the legislature there, the North Carolina retirement system has a real estate—pretty substantial real

estate investment to the overall State employees retirement plan.

And as someone who was involved in real estate before I got into

politics to actually make a living—heaven forbid, a politician to

make a living outside of the Government—but before my service

here, I think it is a wonderful opportunity for individuals to invest

and make a better return or a different return than just a narrowbased—well, the simple offerings that we currently offer through

the TSP. And as someone who invests in the TSP, because I do appreciate the value it brings, and I especially like the match, I think

it is a wonderful thing. And we should offer more opportunities to

expand that reach.

And so, you know, let’s look at a couple of things. First of all,

according to Barclays Global Investors, the current manager of the

TSP Index Fund—right—it says, ‘‘Investors who rely on broad cap

equity benchmarks for real estate exposure are not achieving

meaningful allocations to the asset class.’’ This is what Barclays

published in their Investment Insights in September of last year.

It is saying that you are not giving a meaningful exposure to real

estate through the TSP plan.

And what I would say is that we can go back to the question that

you asked of the consultant. What did you pose to the consultant

in terms of the bid proposal you put out? What was the request you

had of the consultant?

Mr. AMELIO. They are going to look at the existing fund line up

and determine if there is any material gap. Then they are going

to go out and look at all available options, everything—they’re not

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going to exclude or hide anything—and determine whether something should be put in.

Mr. MCHENRY. Material gap. You know, in the—there are five

funds, correct?

Mr. AMELIO. Yes. Yes.

Mr. MCHENRY. They are widely diversified.

Mr. AMELIO. Yes.

Mr. MCHENRY. So there is a little bit of everything in that one

fund, in each fund in those particular areas. Small cap fund is

widely diversified within small caps.

Mr. AMELIO. Well, let me—in the two domestic equity funds,

we’ve got the entire domestic equity market. But if you were to

look at the bond fund, you know, there might be something there

that’s missing. If you look at the international fund, that is only

developed nations. There are no emerging markets. Emerging markets are the small countries, more Third World—much higher risk,

but room for a lot of growth.

Mr. MCHENRY. I would say that the question you asked this consultant to answer is innately flawed. What is the material gap?

OK? If you have a widely diversified—one widely diversified fund

that has a little bit of everything around the world, that would suffice to answer the question you posed to the consultant. So you did

not ask the question, would real estate investment trusts be a viable and positive option for Federal employees to have within their

investment portfolio.

Mr. AMELIO. Why would I ask that question? The question——

Mr. MCHENRY. Because that was the request of the chairman of

this committee and the chairman of not just the subcommittee, but

of the entire committee; the ranking Democrat both of this subcommittee and the full committee.

Mr. AMELIO. The question I asked is one that every fiduciary of

every plan asks. And the reason is that why would I limit it to just

a REIT? REITs are included in the request. They’re included with

every other possible option.

Keep in mind, the plan’s participants are paying for this study.

It’s not taxpayer funded. The committee didn’t say we’re going to

give you money to go hire a consultant to look at REITs. The committee said we would like to see you do this, when are you going

to do it, what are you looking at? And we’re expending the participants’ money, and as fiduciaries, we have a duty to expend that

money wisely.

Mr. MCHENRY. Yes, and my point is, the question that was posed

from this committee was should—this was the request: Do you

think it is a viable option for people to have another fund that has

real estate exposure?

Mr. AMELIO. It had to be—the question had to be worded wisely—widely, or broadly. Otherwise, why wouldn’t I ask the question,

do you think we should have real estate? Do you think we should

have emerging markets? Do you think we should have TIPs? You

could answer yes or no to all of those and where would we put an

end to the questions? It wouldn’t be appropriate to just ask about

REITs.

Mr. MCHENRY. Well, a material gap would say you omit from the

whole gross domestic product of the whole United States, and real

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estate is a nice sizable chunk of that; and if you have your 2 percent exposure to that marketplace, which you currently do

through—I believe you have 1 percent in the C Fund and maybe

up to 8 with the S Fund, and that is the only real estate exposure

right now—that would actually suffice to answer your question

whether or not there is a material gap, because you at least have

some, though it is a small inkling, of exposure to real estate in the

overall TSP plan.

So the consultant will—I would predict, I mean, Mr. Chairman,

I don’t want to go well beyond my time here, but I would say that

based on the way you posed the question, the consultant’s natural

answer would be no, you do have real estate exposure, therefore

that is not a material gap. Which I think is a very limiting way

to focus on this when we are asking, in particular, whether or not

the Federal employees should have this opportunity—only opportunity—opportunity to invest in real estate.

Mr. AMELIO. Can I answer?

Mr. MCHENRY. Go ahead. I am just offering my prediction here

at the end of my time.

Mr. AMELIO. Material gap is a much broader question than just

‘‘do you have representation?’’ They want to look at the fee structure, they want to look at the percentage and proportion of assets

held. They might determine that we’ve got to break out and go to

value and growth methods of equity. There’s a whole variety of

things. It’s not just ‘‘do you have the U.S. equity market covered?’’

It’s a rather detail-oriented question. And it’s the same question

every fiduciary asks. I think it would be a blatant breach of duty

if I didn’t ask the question in that way.

Mr. PORTER. Congresswoman.

Ms. NORTON. Mr. Chairman, a personal attack on me is no more

justified than one would be justified had I personally attacked the

Members who had signed on to this bill. I could hardly have done

so. I began by saying my own minority leadership had signed on

to the bill, that the members of this committee had signed on to

the bill, and that in fact, at our subcommittee hearings, there was

bipartisan, on-the-record approval pending, of course, a study for

this matter. So it ought to be clear that there was no attack on the

chairman or anybody else. The chairman has run this committee

in a bipartisan way. The lobbyists may have rushed forward in

order to reward people who never even asked for a contribution. So

let the record show what was actually said and let us not have attacks on one another, particularly since I think my remarks were

clear in not doing that.

I do want to clarify what I have offered for the record, a Washington Post article, three Washington Times articles, an article

from Govexec.com.

And finally, as I leave—I hope to get back here—I just want to

say to Mr. Amelio, I indicated before that I think you have brought

much of this on yourself, sir. And I say so because it seems to me

when you heard the approval of REITs at our subcommittee hearing across the board on both sides of this aisle, particularly if you

had the doubts you now put on the record in answer to Mr. Van

Hollen’s questions, the very first thing you should have done was

to get that study going as fast as you could and get it before the

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Members. By not doing so, you have laid the basis for the very

hearing that is taking place here today, the doubts that are now

in the papers. So you must share the problems with the lobbyists

who are involved. Because as long as that record was left blank,

something was going to come in to fill the gap. And what has come

in to fill the gap is, well, the lobbyists wanted it; so all of us who

have spoken out that we didn’t know why employees couldn’t get

the benefit of this must be in hock to the lobbyists.

And I thank you very much for the opportunity to reply.

Mr. PORTER. Thank you.

Ms. NORTON. I hope my good friend understands that I mean no

disrespect to him for going on to the bill or for anybody who went

on to the bill. I have to believe that he shared with me the feelings

at that hearing we had when we got no answers to why in fact people shouldn’t in fact have REITs as an option. I, for one, am still

waiting for those answers.

And I thank you, Mr. Chairman.

Mr. PORTER. Thank you, Congresswoman. I appreciate your comments.

Mr. Cummings.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

I just want to—your job, you just talked a little earlier about the

fiduciary duty. That job is to do what is in the best interests of the

people who are part of the TSP. Is that correct?

Mr. AMELIO. Under the statute, it is the sole interest of the participants and their beneficiaries, yes.

Mr. CUMMINGS. And when it comes to doing that, you are trying

to figure out, I guess, part of carrying out that duty would be to

try to figure out how do you get maximum dollars in as safe a way

and as sound a way as you possibly can with as little reasonable

risk as possible. Is there something else I am leaving out there?

Mr. AMELIO. And at a low cost. That’s also in the statute.

Mr. CUMMINGS. And at a low cost, yes. So in this instance, the

REITs, when you consider the real estate market goes up and down

and that so many have, as we have seen in the local papers, including the Washington Post reporting that we have a real estate market and that sometimes they say it is on the bubble, sometimes

they say it is on the way down—talking about real estate. Is that

one of your concerns? I mean, I know you are waiting for the report

and all that kind of thing, but is that one of your concerns?

Mr. AMELIO. You mean about adding a REIT as a fund, is the

volatility a concern?

Mr. CUMMINGS. Yes.

Mr. AMELIO. No. Because if you’re an investment professional

and you have some sophistication and knowledge of the markets,

you recognize that those investments which are the most volatile,

while they are the riskiest, will over the long term, or should over

the long term, bear larger gains. That’s not always the case. That

is not my concern. My primary concern here is that up until now

the plan has only contained broad-based, low-cost index funds. This

is a narrowly focused fund into one sector, or industry, if you were,

and I have concerns about the liquidity, about the fee structure, as

well as if this would come in it could also open the door for other

particularly narrowly focused funds.

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Mr. CUMMINGS. And so, but it would provide you with additional

diversification with regard to your portfolio, would it not?

Mr. AMELIO. I think that’s arguable. This fund is incredibly diverse. We’ve got the entire universe of domestic stock as well as all

of the developed international stocks and bonds. It’s a very diverse

fund. As long as——

Mr. CUMMINGS. Let me ask you this. You mean the fund as it

is right now?

Mr. AMELIO. Yes.

Mr. CUMMINGS. OK. But I am just asking you, would the REITs

add to that diversification?

I know it is very diverse; I understand that. I got that piece. So

would it add to that? That is all I am asking you.

And I am not saying whether it is a great fund or—I mean, a

great piece to bring in. I am just asking you would it add to the

areas that you would then be able to invest?

Mr. AMELIO. I don’t think so, because REITs are already included

to the extent of their proportion of the overall domestic investable

markets.

Mr. CUMMINGS. So what do we expect—not the results, but what,

when you give the people who are doing the research the research

assignment, what are they looking for?

Mr. AMELIO. Well, they know what to look for. They do this for

many plans. They’re going to look at what we have and they’re

going to look at what’s out there. And they’ll make a recommendation based on whether they think anything should be added.

Mr. CUMMINGS. So basically, the board’s position is, as I understand it, be safe rather than possibly sorry later on? Is that reasonable?

Mr. AMELIO. It’s reasonable. The term would be, the board wants

to do what’s prudent, and that’s to hire an expert to review everything. And that’s what——

Mr. CUMMINGS. That is being safe, rather than being sorry later

on.

Mr. AMELIO. Yes.

Mr. CUMMINGS. OK. All right, I don’t have anything. I see we are

running out of time, Mr. Chairman.

Mr. PORTER. Thank you, Mr. Cummings.

We are going to go into recess. We are taking votes on the floor.

I think we have three. We should probably take about, outside, 45

minutes, 30 to 45 minutes. So we will go into recess. We still have

one panel, and then action after that. So we are going to be in recess.

[Recess.]

Mr. PORTER. I would like to bring the committee back to order.

For some of you that have been attending a few of our hearings,

I have been requesting now for about a year that we have all these

held in Las Vegas. But no one seems to listen to me. So maybe next

time we will meet in Las Vegas, and everyone will be welcome.

Mr. DAVIS OF ILLINOIS. I second that.

Mr. PORTER. And it is seconded by our ranking member, Mr.

Davis.

Thank you all for being here. I appreciate your patience and understanding. I would like to announce that Chairman Davis has reVerDate 11-MAY-2000 11:08 Dec 15, 2006 Jkt 000000 PO 00000 Frm 00129 Fmt 6633 Sfmt 6633 D:\DOCS\29849.TXT HGOVREF1 PsN: HGOVREF1
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quested that action be taken at the full committee. And we are

going to continue with the hearing today, but I would like to make

that notice known for those that are in the audience.

Also would like to say thank you to our last two panelists, who

are still here. Thank you very much. Appreciate what you are

doing. Also understand that you have a tough job and know that

the purpose of our hearing is to do the best we can for all of your

colleagues and Federal employees.

So with that, we do have James Sauber, who is chairman of the

Employee Thrift Advisory Council, and then Richard Strombotne,

who will be second.

So we begin with Mr. Sauber. We appreciate your being here.

STATEMENTS OF JAMES W. SAUBER, CHAIRMAN, EMPLOYEE

THRIFT ADVISORY COUNCIL; AND RICHARD L.

STROMBOTNE, EMPLOYEE THRIFT ADVISORY COUNCIL

MEMBER

STATEMENT OF JAMES SAUBER

Mr. SAUBER. Thank you, Mr. Chairman. Thank you, Congressman Davis and members of the subcommittee, for this opportunity

to present the views of the Employee Thrift Advisory Council on

the proposed addition of a real estate investment fund to the Thrift

Savings Plan.

My name is Jim Sauber. I’m the chief of staff to the president

of the National Association of Letter Carriers, William H. Young,

and I serve as chairman of the Employee Thrift Advisory Council.

I have been actively involved with the council since its creation in

1987. ETAC is comprised of 15 organizations that collectively represent 2.6 million active and retired Federal employees.

I’m here today to explain why ETAC took the unusual step of

adopting a resolution in opposition to the proposal to create a REIT

fund for the TSP. It’s unusual because, historically, the Congress,

the Thrift Board, and ETAC have worked together to enact numerous improvements in the plan, whether it was the creation of the

S&I funds or the elimination of the need for open seasons, we generally supported legislation designed to improve the TSP, which I

am certain is the intention of H.R. 1578.

It gives nobody on the council pleasure to oppose a proposal that

many of you have cosponsored. This subcommittee and Chairman

Davis’s full committee have a long history of bipartisan cooperation

on matters affecting the TSP. I know that you and your colleagues

believe that a REIT fund would be a good option for Federal employees who participate in the plan. But with all due respect, the

members of the ETAC have not reached that same conclusion, at

least not yet. There are two major reasons for this.

First, we are reluctant to support the legislative addition of a

REIT fund over the unanimous objection of the TSP’s fiduciaries,

the members of the Federal Retirement Thrift Investment Board.

We believe this would set a bad precedent for the consideration of

future new funds. Such a precedent is important because, in our

view, the addition of one sector fund will leave groups representing

other sectors to seek equitable access to the TSP. The investment

policy of the TSP would become more politicized, the cost and comVerDate 11-MAY-2000 11:08 Dec 15, 2006 Jkt 000000 PO 00000 Frm 00130 Fmt 6633 Sfmt 6633 D:\DOCS\29849.TXT HGOVREF1 PsN: HGOVREF1
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plexity of the plan could increase, and participation rates could suffer.

Second, we are equally reluctant to add a new fund option to the

TSP, whether it’s a REIT fund or any other kind of fund, before

a complete and independent analysis of its merits is undertaken.

The strong performance of REIT equities in recent years has resulted in the inclusion of more REITs in the equity indices that the

C and S funds track, but we are not certain that this success warrants the creation of a special fund just for 170 or 180 REIT companies that are included in those indices.

Before a decision is made, the TSP’s fiduciaries and independent

experts should thoroughly study the issues involved. As you know,

the board has hired an investment consulting firm, Ennis Knupp,

to do a comprehensive review of the TSP’s investment options. I

can assure this subcommittee that, should Ennis Knupp recommend the addition of a REIT fund to the TSP, the members of

ETAC would certainly reconsider our position.

In my written testimony for this hearing, I have summarized

ETAC’s discussions about the REIT fund proposal over the past 2

years. These discussions took place during four meetings of the

council during November 2004 and March 2006, and included several meetings individually as unions and as a group with the National Association of Real Estate Investment Trusts. The resolutions we adopted on March 7th reflect the concerns raised by members of ETAC during this time.

In addition to the two major concerns I raised earlier, I want to

emphasize that the council members believe that adding a sector

fund like a real estate fund to the TSP could fundamentally alter

the structure of the plan, which is designed around broad-based

index funds. Before we take this major step, we should pause to

consider its full ramifications, because once you open the TSP to

one sector, it will be difficult to deny other sectors equal treatment.

I would like to conclude with two final points. First, Our view is

that both Congress and the Thrift Board share responsibility for

the Thrift Savings Plan’s investment policies. The FERSA law

clearly gives the five Presidential appointees of the Thrift Board a

role in developing and establishing investment policy for the TSP.

Any changes in that policy, however, must be enacted by Congress.

In adopting our resolution, ETAC is not arguing that Congress cannot change the investment options on its own. However, we do

think the TSP works best when Congress and the board reach a

consensus before making any significant change in the law. We

urge you to keep this in mind as you contemplate further action on

H.R. 1578.

Second, if the subcommittee decides to adopt this bill today, I

want to offer the assistance of ETAC to you and the other members

of the full Government Reform Committee as the debate over this

legislation proceeds. It is our hope that we can help build the consensus, which unfortunately does not exist today, on any new legislation that might emerge.

The organizations that make up ETAC, the members of the

Thrift Board, and the members of both the subcommittee and the

full committee share the same goal, to help millions of hardworking

Federal employees prepare a decent and secure retirement and to

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maintain that the TSP is the most successful retirement savings

program in the country.

Thanks again for this opportunity to testify. I will be happy to

answer any of your questions.

[The prepared statement of Mr. Sauber follows:]

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Mr. PORTER. Thank you very much. We appreciate your testimony. And you said it quite well, we share the same goal. Thank

you for stating that.

And certainly we appreciate the views of all Federal employees

and organizations. In that vein, I would like to ask unanimous consent to enter into the record a letter we received today from the

National Air Traffic Controllers Association, which is endorsing the

legislation. And I just will summarize it, that ‘‘we are writing to

express our thanks for your continuing efforts to provide participants in the Federal Thrift Savings Plan with additional investment options. The more than 20,000 Federal employees who make

up the NATCA want and deserve the opportunity to diversify their

retirement savings beyond the limited options that are currently

available. NATCA believes that the TSP should offer retirement

savings options at least as good as those found in the leading private sector defined contribution plans. Employees in large 401(k)

plans in the private marketplace are offered far more than five core

investment options from which they can chose to diversify their retirement savings. Our members deserve no less. We think that

H.R. 1578 is an important first step in offering our members additional investment choices. Traditional pension plans have allocated

substantial funds to the commercial real estate investment as a

discrete asset class and our members, along with TSP participants,

should have the same freedom to do so. NATCA is pleased to lend

its support to this important legislation. We thank you for your

leadership in providing TSP participants additional flexibility in

planning.’’

So without objection, so ordered.

[The information referred to follows:]

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Mr. PORTER. Next, Mr. Strombotne, an Employee Thrift Advisory

Council member. Welcome. Thank you.

STATEMENT OF RICHARD STROMBOTNE

Mr. STROMBOTNE. Good afternoon, Chairman Porter and Congressman Davis and members of the committee. For the record, I’m

Richard L. Strombotne. I live in Gaithersburg, MD. I’m the nominee of the Senior Executives Association to the Employee Thrift

Advisory Council, and I’m serving my second term on the council.

I’m testifying as an individual and not as a representative of any

organization to which I belong.

You have my prepared testimony, and so I’ll offer some of its

highlights here. It’s fairly lengthy. I have included some suggestions for improvements in the Thrift Savings Plan, so I hope you

will give it your consideration.

It’s a distinct pleasure to be here and have the opportunity to

discuss the resolution recently approved by the council and my support of that resolution. I retired in August 1996 from the Federal

service after 341⁄2 years, most of it as a member of the Senior Executive Service. In 1979 I became a charter member of the SES, and

a year later, I joined the Senior Executives Association when it was

being formed. I served on the board of directors for 8 years, was

acting president for 3 months, and chairman of the board for a

year.

While the legislation establishing the Federal Employees Retirement System was under consideration in the mid-1980’s, I chaired

SEA’s task force on retirement issues. This task force recommended a number of policy positions for the SEA, many of which

the SEA adopted.

One such recommendation was to permit the CSRS to contribute

up to 5 percent of their pay to the new Thrift Savings Plan. As you

know, this feature ultimately was included in the FERS legislation.

And as they say, success has many fathers. I consider myself fortunate to be one of the many fathers of the Thrift Savings Plan.

Now, right around 2000, I was asked to serve on the ETAC as

the SEA nominee. I accepted the nomination and subsequent appoint with pleasure. I serve as a volunteer. I receive no compensation from the Senior Executives Association or any other organization or individual for providing my time, energy, and judgment to

serve on the council. I bring to the table the sum of my experiences

as a Federal employee, a senior executive, a retiree, and an advocate for retirees and my fellow citizens. As such, I exercise my

independent judgment about the issues that come before the council—even as you do, I’m sure.

Early in 2005, I received—I attended a briefing by representatives of NAREIT regarding the potential benefits of including a

REIT index fund. The briefing suggested that including that index

fund would offer TSP participants the opportunity for greater investment return. After looking into the matter further—and this is

described more fully in my prepared testimony—I became skeptical

of the conclusion and the way it was presented.

Earlier this year, Jim Sauber, at my right, chairman of the council, proposed the resolution that’s the focus of this hearing. After

reviewing it, I decided to support that resolution. It was thoroughly

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discussed at the council meeting, revised somewhat, approved by

the council with the sole exception of the representative of the Department of Defense, who abstained from voting. And you’ve heard

the explanation for that.

Before giving my reasons for not suggesting—pardon me, for supporting the resolution, let me correct a misunderstanding that I

heard in your earlier statement, Mr. Chairman. At the time of my

vote in early March, the Senior Executives Association had taken

no position on the resolution. So let me point out the statement in

Carol Bonasaro’s letter of April 4th, which I believe is one of the

exhibits, about 4 weeks after my vote: ‘‘SEA has full confidence in

the ETAC representative we have recommended, and we trust him

to exercise his independent judgment on matters coming before

ETAC that impact the Thrift Savings Plan.’’ I certainly appreciate

that from Carol Bonasaro.

Now, the reasons for support. I thought it was premature to pick

out a REIT fund as the next investment option for the Thrift Savings Plan in the absence of an analytical comparison with other potential options. There are other options that may be even more attractive for addition to the Thrift Savings Plan than a REIT index.

And some of these are listed in my prepared testimony. You’ll see

that recently a number of EFTs—exchange traded funds, ETFs,

have been doing better than real estate, and that is included in my

prepared testimony.

Next, I have concerns about including a REIT index at a time

when real estate may be entering a down market. I know that’s a

personal opinion, but I’ve been around long enough to see both

booms and busts in real estate, and I’m concerned that it would be

very easy for a person to make a big allocation to the REIT index

fund because it’s hot, and then take a big loss when the real estate

market drops.

And finally, in my review of the resolution, in going over each

of the whereas clauses, I agreed with each of them and agreed to

support the resolution.

If the board study of potential investment options for the Thrift

Savings Plan concludes that Federal employees and retirees would

benefit by including additional funds in the TSP, and if a REIT

index fund is among those funds being recommended, I would be

very happy to join in supporting that expansion of options. However, in my judgment it is premature to require that a REIT index

fund be offered absent the analytical examination of the full range

of options.

And that completes my testimony. I appreciate your hearing me.

I would be happy to respond to any questions that you may have,

either on what I’ve just said or on the prepared testimony.

[The prepared statement of Mr. Strombotne follows:]

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Mr. PORTER. Thank you very much. We appreciate your testimony.

I have a few questions. Please know that these will be very reasonable questions. You are lucky you are up at this hour, not a lot

earlier. [Laughter.]

Mr. STROMBOTNE. Yes, we appreciate that.

Mr. PORTER. Thank you again for being here and, as I said, we

appreciate what you are doing.

Mr. Sauber, did ETAC conduct any scientific survey of all Federal employees to see if they wanted to add a REIT index to the

TSP?

And let me followup with a second question. Do you have the resources to do such a study?

Mr. SAUBER. No, we haven’t—we did not conduct any scientific

surveys of our members. However, I think there is a misimpression

about——

Mr. PORTER. I am not sure, is your microphone on? Try it one

more time.

Mr. SAUBER. I’m not sure if there’s been a misimpression about

the role of ETAC and how we work. Our organizations are unions

and associations that have elected leaders. And what I did—because we don’t have the resources to do a survey of the kind that

you ask about, we rely on our members to bring their experience

and their meetings, their interactions with their members, with

their State conventions, with their legislative conferences.

Just speaking for myself on behalf of the NALC, in the NALC we

hold 50 State legislative conferences every year. Every State association has a legislative conference. We have multiple regional

training sessions. At our national convention every year since 1988,

we have had a Thrift Savings Plan seminar. In the course of all

those years—I’ve been involved from day one with this Thrift Savings Plan. In the course of all those years, I can say with great confidence that members of the NALC have not indicated a desire for

a REIT fund.

Now, if we did a survey of them, how they would respond, I don’t

know. I’m not saying I can predict exactly what our members

would want or wouldn’t want or to what extent they’re in a position

to make this judgment. I think they’re relying on their union to exercise judgment for them. And so for that reason, based on that,

I asked all members of the organizations in ETAC repeatedly over

several meetings, are you hearing from your members? Do they

want—you know, the REITS are the hot item. They’re the item

that are getting a lot of attention of the financial press. And every

time I’ve asked, they said no.

That being said, I think our judgment is not really on the merits,

the pro or con of REITs. We haven’t made that judgment. We don’t

pretend to be investment experts. What we’ve focused on are two

things: the process and the policy. We think it’s not only important

what funds we add, but how we add them, so that we set a good

precedent for the future. And I think up to this point, it’s been a

good cooperation between the board, ETAC, and Congress. We’ve

tried to reach consensus before making big changes in the law. And

I think that we’d be well advised to continue down that road because I think it builds trust in the plan. It makes sure—I think

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Congressman Cummings talked a bit earlier about rather being

safe than sorry later.

That really is what motivates us. We’re not making a judgment

one way or the other on REITs. We want to have all the information. We want to know how much it’s going to cost, what are the

pros and cons, and we want to, frankly, test some of the very interesting information that we got from NAREIT. I went out of my way

to make sure that all our members met with NAREIT. So when

Congressman Van Hollen was saying earlier, is our only source of

information the board, that is not the case. We went out of our way

to talk to the folks who know most about this industry.

Now, should we take their presentation on faith? I don’t think

we’d be responsible representatives to do that. I think that’s why

we’ve asked for—we really do think it’s important to have an independent review before making a final judgment. And I understand

the frustration you have, this—I sat through the hearing. I understand the frustration you have about the time it’s taken to get this

study done. Nonetheless, despite that, I just think it would be wise

for us to try to wait until we get a full understanding of these

issues before we proceed.

Mr. STROMBOTNE. May I comment?

Mr. PORTER. Yes.

Mr. STROMBOTNE. After the NAREIT briefing, as a retiree I had

some time available that people who are more busy don’t have, and

I took it on myself to go into the Internet and look up the literature

associated with asset allocation. I received quite an education. I

went through a lot of the pertinent literature, and I think on the

back of my—at the end of my prepared statement, you will see a

very short, selected bibliography. But I came away from that with

a much greater appreciation of both the benefits of what is called

the efficient frontier method for asset allocation, but also with an

appreciation for its pitfalls.

One of those pitfalls is if you have two funds or two investment

classes with very similar yields, but one has a great deal more volatility or risk than the other, small changes in the yield can lead

to big changes in the proportion of assets in the optimum allocation.

And so my reading into the literature on asset allocation is what

I brought with me when I decided to support the resolution, that

it was just premature at this stage to pick out one particular asset

class.

Mr. PORTER. Thank you.

I guess just a couple additional questions at this point. Of the

five funds now in existence, didn’t Congress create three of those

funds without the TSP Board?

Mr. STROMBOTNE. I am sorry. I didn’t hear you.

Mr. PORTER. Of the five funds that are available today, didn’t

Congress create three of the five without the TSP Board?

Mr. SAUBER. Yes, that is correct. When the legislation was drafted, it was created by Congress, that is correct. And the new funds

were created by Congress as well.

Mr. PORTER. Thank you. I guess just one additional question. Did

you understand that Congress was encouraging to have the study

done as soon as possible? Was that made aware to you folks?

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Mr. SAUBER. Yes. In fact, I think Congressman Davis, Tom

Davis, mentioned one of our meetings where we discussed it. And

I was very concerned about this issue, and that is why I asked the

question to Mr. Amelio and Mr. Trabucco: Where were your discussions with Congress on this study? Because I understood the frustration and that there was concern about whether or not the study

was going forward.

And when we met in October 2005, I was under the impression

that, based on their August 11th letter, there had been some meeting of the minds about how you were going to proceed. And I

learned by the end of the year, certainly by the beginning of 2006,

that certainly had broken down.

So we were aware of it, and we were under the impression that

you had reached some sort of accommodation. That clearly did not

happen.

Mr. PORTER. Thank you.

Mr. Davis.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

Before I ask any questions, I have a number of letters from various

associations and organizations that I would like to ask be submitted for the record in opposition to passage at this time, from the

American Federation of Government Employees, the National

Treasury Employees Union, the American Postal Workers Union,

the Federal Managers Association, the National Association of Letter Carriers, and the Senior Executives Association. If these could

be submitted for the record, I would appreciate that.

Mr. PORTER. No. [Laughter.]

Without objection, certainly. But these are all ETAC members,

correct?

Mr. DAVIS OF ILLINOIS. Yes.

Mr. PORTER. Thank you.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

Mr. PORTER. Caught you, didn’t I?

Mr. DAVIS OF ILLINOIS. Yes.

[The information referred to follow:]

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Mr. DAVIS OF ILLINOIS. Mr. Sauber, let me ask a couple of questions. Francis Cavanaugh, who was the first executive director of

the TSP, stated in testimony submitted for the record that TSP

participants were concerned that the management of their TSP

funds would be subject to political influences. Therefore, the Federal Employees Retirement Act of 1986 required that all TSP stock

funds be broad-based index funds that do not favor any particular

industry.

Do plan participants still have these concerns? And do you know

why the TSP was exempted from the OMB budget appropriations

and regulatory controls?

Mr. SAUBER. Well, I cannot testify that I have been aware of any

sort of increase or growth in concerns among TSP participants

about political manipulation, and the reason is the Thrift Savings

Plan over its history has kept—politics have been kept out of it

pretty well. We have had a good, long—I mean, this Congress and

the Board can be very proud of how popular the TSP is and the

level of trust and the high level of participation. Our participation

rates are much, much higher than typical 401(k) plans, and I think

in part because there is a lot of trust in it.

I think in terms of why the Congress exempted the Thrift Board

from the appropriations cycle, I think in general the idea was the

funds that are invested in the TSP are the funds of the employees.

That $180 billion belong to the workers, the employees who are

saving for their retirement. These are not taxpayer money, and I

think that was the main reason for exempting and for creating

some independence for the Board and for creating the Board as fiduciaries whose job is to look out solely for the interests of the participants and beneficiaries.

Mr. DAVIS OF ILLINOIS. Mr. Strombotne, you have obviously

spent a great deal of time, energy, and effort in this arena. Would

you care to comment?

Mr. STROMBOTNE. I think Mr. Sauber hit it right on the head.

The money that is in the Thrift Savings Plan is the employees’—

active employees and retired employees’ money. And that is sufficient reason for OMB to keep its hands off.

And I must say that I have heard the concerns expressed at the

meeting about potential politicization of decisions regarding the

funds that go into the Thrift Savings Plan, and I think that is

something that I would be concerned about and I would hope that

all of you would be concerned about, because the Thrift Savings

Plan is just a tremendous success, and I have watched it progress

over the years. You know, at the very beginning, we only had the

three funds, and we could only make changes in our contributions

in limited periods. And we could only invest so much money, and

it was limited to civilians. And since then, it has expanded in practically every aspect. We have more funds. We have more flexibility.

We can now change our asset allocation daily if we wanted to. The

military is a part of that.

I think it is just a tremendous asset for Federal employees, retirees, military and civilian.

Mr. DAVIS OF ILLINOIS. Mike Miles, an independent financial adviser, has stated that a reduced diversification results when there

is an overconcentration of investment in securities that performed

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well just prior to investment. He also stated that if history is any

indicator, investors are likely to be the victims rather than the

beneficiaries if increased portfolio concentration of a REIT fund is

added.

Do either one of you share Mr. Miles’ concerns? And if so, why?

Mr. STROMBOTNE. Well, if I may be the first one on this, what

I have seen from some of the investment advisers that I listen to

or read, Vanguard and Fidelity mostly, there is some concern about

offering too many options to people who are in 401(k) plans so that,

you know, they want to—too many choices are not so great, like too

many choices for breakfast cereal. You need to have a certain number that you can get your arms around and really understand, and

I think that is where the Thrift Savings Plan is today, particularly

with the introduction of the five lifecycle funds. The Federal employee now is not looking just at five funds. It is looking at five different options on lifecycle. And to some degree, there is a mix and

match there. And it is already beginning to get complicated.

Mr. DAVIS OF ILLINOIS. Well, I still like Corn Flakes but, Mr.

Sauber?

Mr. SAUBER. Yes, I do not think there is anything magic about

five funds. I do not have an objection to adding more funds. I think

Dick raises an interesting point. At one of our meetings we discussed a Wall Street Journal article about there is a diminished—

there is a point of diminishing returns. When you get too many options, it does start to decrease participation rates. But I am not arguing that we are at that point. Just whatever funds we add, I

want to make sure that we have all the data and all the information in and that we take our time and make a considered judgment.

So I am not so concerned about that.

In terms of return chasing, I think there is some evidence in the

behavior of Federal employees that they are just like a lot of private sector investors. It is a problem for people in general in defined contribution plans, and this is in part, I think, the fact that,

you know, we have made this big change in this country over the

last 20 years, shifting from defined benefit plans where the companies sort of invested people’s retirement for them and employees

had no role in it. And so in some ways we are in this transition

period where employees are taking a more and more—have to take

a more and more active role in managing their own retirement

funds. And as a result, they are learning as they are going, and I

think there is considerable evidence that there is a lot of return

chasing that goes on, people chasing the latest hot thing. And, unfortunately, Federal employees are not immune from that activity.

The Board has done studies to show that people tend to do that.

They tend to dump their C Fund shares after a big downturn, and

they tend to buy when things get hot. And that is something we

have to guard against.

Mr. DAVIS OF ILLINOIS. Thank you, gentlemen, very much.

Mr. PORTER. Thank you, Congressman.

Congressman Marchant.

Mr. MARCHANT. Yes, sir. Mr.—is it Strombotne?

Mr. STROMBOTNE. Strombotne, yes.

Mr. MARCHANT. Is that an Irish name?

Mr. STROMBOTNE. No. It is Norwegian. [Laughter.]

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Mr. MARCHANT. What process did you go—how many people are

in the Senior Executives Association?

Mr. STROMBOTNE. The Senior Executives Association, I have lost

track. I think there is somewhere between 2,000 and 3,000. I am

not an active participant on the board of SEA any longer. I am retired. I was nominated by SEA to exercise my judgment, and I am

not that involved in day-to-day activities of SEA.

Mr. MARCHANT. OK. So there was no process to poll the SEA

membership as to whether——

Mr. STROMBOTNE. No, there was not.

Mr. MARCHANT. What level of interest they had?

Mr. STROMBOTNE. No. But I must say that I was a senior executive for, I believe, if I do the math right, 17 years, about half of

my 341⁄2 years as a Federal employee. And in my experience, senior

executives are pretty darn busy doing their own jobs, which are of

high-level and significant importance, and I did not hear a lot of

my colleagues talking to me about their investment decisions and

whether or not they should be investing in the C Fund or the F

Fund. That is not uppermost on their minds, and I suspect that is

true today.

Mr. MARCHANT. Do you see any problem with the fact that you

went to the meeting and voted basically to postpone this decision

and then write a letter and said you did not really have—that you

really did not have any objection to it, but—you voted not to do it,

but then you wrote the letter and said you really didn’t have any

objection to it?

Mr. STROMBOTNE. I tried to explain that earlier in my testimony,

and that is, I voted in March based on the information that I had.

The letter from Carol Bonasaro, president of SEA, came out in

April. And between my vote and her letter, the SEA Board decided

that they would take no position on the bill. That does not change

my position.

Mr. MARCHANT. OK. So in this case, your research and your decision would supersede the Association’s that you were elected to

represent.

Mr. STROMBOTNE. Yes. They did not elect me. They nominated

me to be their representative, a task that I take very seriously.

And so I bring my best judgment to bear on the issues that come

before the Council. And I do not go back to SEA and ask how I

should vote.

Mr. MARCHANT. OK. Mr. Sauber, do you recall a similar exercise

2 years ago that the executive director recommended to you where

you would go to an outside consultant and get the first three

things, a study done on the first three things that were listed?

Mr. SAUBER. Do I recall them saying that they made plans to go

to an investment consultant for just the first three and not the

fourth?

Mr. MARCHANT. No. I mean, in previous budget cycles, you have

to go out for this—you have to rebid this Barclay account.

Mr. SAUBER. Right.

Mr. MARCHANT. In previous budget cycles did you go into a consulting firm and get the first three items——

Mr. SAUBER. I am not certain it is—these contracts have been 4

and 5 years in duration, so I do not know how many iterations of

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management contracts they have been through. But I do know that

they have an RFP process, but I frankly at this moment don’t recall

whether or not they engaged an outside consultant for that. I

would just have to check with my records. I would be happy to answer what I find out.

Mr. MARCHANT. Does it seem strange to you with the kind of empirical data that is available, just period, that it would take a consultant as long as it is going to take this consult to come up with

the answer to that question?

Mr. SAUBER. Well, there are four questions that they have asked

him, so——

Mr. MARCHANT. No, but the first three were just about bidding

out the contract.

Mr. SAUBER. Well, I know—I do not have any independent——

Mr. MARCHANT. Wouldn’t you stumble on the answer to No. 4

along the way?

Mr. SAUBER. I was sort of interested earlier today. I see the tension between the agency and the Congress. I understand this. You

guys, by the nature of your job, you work in 2-year increments and

you have to move legislation, and I know that you are here to get

things done, and I totally respect that.

I just want to tell you, from our point of view, not from the

Board’s point of view—from our point of view as representatives of

employees, and they have the $180 billion invested, our time horizon is not the same as yours. And I understand you are frustrated

with the Board, and that is something that I really want the two

sides to resolve. But from our point of view, we look at these funds

as being available for 20, 30, 40 years. Our members are going to

rely on it. So we do not really quite—so when I think of your question, I have a much longer time horizon. I think whether they are

taking too long or too short is in the eye of the beholder. And obviously from your point of view, it is taking too long.

I frankly have been frustrated. I would like to know, too. There

are certain questions that I wish we had the answer to before we

came here. I would like to know how much——

Mr. MARCHANT. There are 50 States out there. The State of

Texas, their fund is almost this big. I think CalPERS is. There is

empirical data out there readily available to answer this question.

Mr. SAUBER. Right.

Mr. MARCHANT. You do not have to go pay—what was the

amount of the contract, consulting contract?

Mr. SAUBER. I am not sure exactly. I think they revealed it to

us, but I don’t recall it at the moment. But I could find that out

for you.

Mr. MARCHANT. As chairman, do you convene the meetings?

Mr. SAUBER. Yes, I do.

Mr. MARCHANT. And in your absence, who convenes the meetings?

Mr. SAUBER. Well, we have a vice chair that we consult together,

if we want to call a meeting. Either he or I are there. I have been

to every one we have had.

Mr. MARCHANT. OK. So do you set the agenda for the meeting

or does——

Mr. SAUBER. Yes, I do.

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Mr. MARCHANT [continuing]. The executive director set the——

Mr. SAUBER. I set the agenda.

Mr. MARCHANT. OK. Thank you, Mr. Chairman.

Mr. PORTER. Thank you.

I guess just in closing, a couple questions, or maybe more of a

comment and you are welcome to respond.

I really sense and certainly respect that as members you are trying to get as much information as you can because you have a huge

responsibility, not unlike we do. And I believe that you are, with

the information that you have and very little budget, if any, trying

to do the right thing for the right reasons, and I certainly respect

that.

If this legislation moves forward and there were some more safeguards and some more pieces that may help give you comfort,

would that—I guess would that give you more comfort with the legislation?

Mr. SAUBER. I certainly would like to hear about those ideas, and

we are open to work with the committee, the subcommittee and the

full committee, on that. That would be an appropriate role for us,

and I would welcome the opportunity.

Mr. PORTER. And after today’s hearing—you get big points for

sitting through it all—are there some things that you may look at

differently in your roles that may help you in working with the

Board itself?

Mr. SAUBER. Well, actually, there was. I did want to comment on

a few things because I got the sense that there was some misapprehension, I think, about how we work under the Federal Advisory

Committee Act. From day one, the way the Council was set up was

we had a secretary of the Council, which is the general counsel of

the Thrift Board. The lawyers have always been involved. We have

had a very sort of cooperative relationship, and I get the sense that

there is some discomfort with that in Congress and that you think

we should have a more arm’s-length relationship.

I think there are pros and cons to that. You know, do I wish we

had a budget that we could undertake all these things? Sure, everybody wants a budget. But I am very convinced that our organizations—again, I am going to speak for my organization. We are

a very democratic union. Ninety-two percent of letter carriers in

this country belong to the NALC voluntarily. They are very active

politically and legislatively. They are very knowledgeable. At every

one of our conventions, we have legislative resolutions, and we hear

from our members what they want. So I am absolutely convinced

I have a sense of where our members are, and I am convinced that

most of the organizations in ETAC are similarly structured. These

are democratic organizations with elections, and I think the Board

benefits from hearing from our organizations, and I think the Congress benefits from having the ETAC available to serve as that conduit.

Unfortunately, I get the sense that, just from hearing today’s

hearing on this particular issue, things have not gone very well between the committee and the Board. And whatever role we can do

to help build a consensus we are willing to do.

Mr. PORTER. I appreciate that, and if there is anything that you

have gleaned today that would give you the tools that you need

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to—what you think to perform at a different level, if you had those

tools, please let us know.

Mr. SAUBER. Thank you very much. I appreciate that offer.

Mr. PORTER. Thank you very much.

I am going to be proposing legislation based upon the GAO report, and the GAO report pointed out a few areas that need some

assistance. That is a systematic effort to assess TSP’s participants’

overall satisfaction with the service being provided, which I think

is just good business to find out, and to institutionalize the routine

collection of information and systematic assessment of industry

trends and innovations. So you will have more tools available to

you as a committee as you make your recommendations. So I will

be introducing legislation.

And I am very open for any other ideas. It does not have to be

tonight, but as we put this together, I would like to get some of

your thoughts to help improve and help you with your role.

Also for the record, I mentioned it earlier but in a more formal

perspective, I want to reiterate that Chairman Davis has asked

that we postpone consideration of H.R. 1578, instead consider the

bill in full committee at a later date so there could be a full and

fair debate about the proposals among the members of the entire

committee and stakeholder groups. So he wants additional input.

I just want to make sure that is understood.

And with that, thank you all very much for being here and we

will adjourn the meeting.

[Whereupon, at 6:48 p.m., the subcommittee was adjourned.]

[The prepared statement of Hon. Elijah E. Cummings and additional information submitted for the hearing record follow:]

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