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93–478 PDF 2004

S. Hrg. 108–554

OVERSIGHT OF THE THRIFT SAVINGS PLAN:

ENSURING THE INTEGRITY OF FEDERAL

EMPLOYEE RETIREMENT SAVINGS

HEARING

BEFORE THE

FINANCIAL MANAGEMENT, THE BUDGET, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE

OF THE

COMMITTEE ON 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

MARCH 1, 2004

Printed for the use of the Committee on Governmental Affairs

(

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

ARLEN SPECTER, Pennsylvania 

ROBERT F. BENNETT, Utah 

PETER G. FITZGERALD, Illinois 

JOHN E. SUNUNU, New Hampshire 

RICHARD C. SHELBY, Alabama 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

RICHARD J. DURBIN, Illinois 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel 

AMY B. NEWHOUSE, Chief Clerk

FINANCIAL MANAGEMENT, THE BUDGET, AND INTERNATIONAL 

SECURITY SUBCOMMITTEE 

PETER G. FITZGERALD, Illinois, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

ARLEN SPECTER, Pennsylvania 

ROBERT F. BENNETT, Utah 

JOHN E. SUNUNU, New Hampshire 

RICHARD C. SHELBY, Alabama 

DANIEL K. AKAKA, Hawaii 

CARL LEVIN, Michigan 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL J. RUSSELL, Staff Director 

RICHARD J. KESSLER, Minority Staff Director 

NANCI E. LANGLEY, Minority Deputy Staff Director 

TARA E. BAIRD, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Fitzgerald ............................................................................................ 1

Senator Pryor .................................................................................................... 4

WITNESSES 

MONDAY, MARCH 1, 2004

Andrew M. Saul, Chairman, Federal Retirement Thrift Investment Board ...... 6

Gary A. Amelio, Executive Director, Federal Retirement Thrift Investment 

Board ..................................................................................................................... 9

Alan D. Lebowitz, Deputy Assistant Secretary for Program Operations, Employee Benefits Security Administration, U.S. Department of Labor .............. 11

James M. Sauber, Chairman, Thrift Advisory Council ........................................ 13

Blake R. Grossman, Global Co-Chair Executive Officer and Managing Director, Barclays Global Investors ............................................................................. 15

ALPHABETICAL LIST OF WITNESSES

Amelio, Gary A.: 

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 37

Grossman, Blake R.: 

Testimony .......................................................................................................... 15

Prepared statement .......................................................................................... 51

Lebowitz, Alan D.: 

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 40

Sauber, James M.: 

Testimony .......................................................................................................... 13

Prepared statement .......................................................................................... 46

Saul, Andrew M.: 

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 33

APPENDIX

Questions and responses for the Record from: 

Mr. Saul ............................................................................................................. 59

Mr. Amelio with attachments .......................................................................... 63

Mr. Lebowitz ..................................................................................................... 120

Mr. Sauber ........................................................................................................ 121

Mr. Grossman ................................................................................................... 123

Chart entitled ‘‘Expense Ratio Comparison As of 12/31/03’’ I60124 ....................

Chart entitled ‘‘Annual Cost Per Participant (NFC Cost Only)’’ ......................... 125

(1)

OVERSIGHT OF THE THRIFT SAVINGS PLAN: 

ENSURING THE INTEGRITY OF FEDERAL 

EMPLOYEE RETIREMENT SAVINGS 

MONDAY, MARCH 1, 2004

U.S. SENATE,

SUBCOMMITTEE ON FINANCIAL MANAGEMENT,

THE BUDGET, AND INTERNATIONAL SECURITY, 

OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 11:06 a.m., in 

room SD–342, Dirksen Senate Office Building, Hon. Peter G. Fitzgerald, Chairman of the Subcommittee, presiding. 

Present: Senators Fitzgerald and Pryor. 

OPENING STATEMENT OF SENATOR FITZGERALD 

Senator FITZGERALD. Good morning. This meeting will come to 

order. 

Today, we are conducting an oversight hearing of the Federal 

Government’s Thrift Savings Plan, the $131 billion government 

equivalent of a private sector 401(k) plan. This Subcommittee has 

jurisdiction over Federal retirement benefits, of which the Thrift 

Savings Plan, or TSP for short, plays an integral role. 

The TSP was established by the Federal Employees Retirement 

System Act of 1986. The TSP currently provides virtually all Federal employees, including members of the military, the uniformed 

services, and Members of Congress and their staffs, with a tax-deferred defined contribution plan. TSP participants can invest their 

retirement savings in any or all of five TSP funds, each of which 

is either an equity or debt security index fund. 

I would like to first welcome the witnesses we have with us 

today and thank them for taking time out of their busy schedules 

to discuss their involvement with the TSP and its operations. 

It is important that Congress ensure the financial integrity of the 

TSP, in which 3.2 million participants have invested their retirement savings. Congressional oversight is especially important now 

in light of a growing list of trading abuses in the private sector mutual fund industry. I look forward to hearing from our witnesses regarding the TSP’s oversight mechanisms, its audits, and its daily 

investment and management activities, as well as its management 

expenses and costs. 

The TSP is the largest defined contribution plan in the world. 

Since its first full year of operation in 1988, the TSP has grown 

from $2.7 billion in investments held by 1.3 million participants to 

2

1The chart referred to appears in the Appendix on page 124. 

its current $131 billion in investments held by 3.2 million participants. Despite its size, the TSP has been successful in providing 

plan participants with high quality service while keeping administrative fees and transaction costs to a minimum. 

This Subcommittee recently held hearings to examine abuses in 

the mutual fund industry, including market timing, late trading, 

and hidden fees charged to investors. Last fall, Senator Akaka and 

I looked into the management of TSP investments, and based on 

the information provided to us and to the best of our knowledge, 

the TSP does not suffer from, nor is it vulnerable to, these types 

of abuses that contribute to high management fees and transaction 

costs in private index funds. 

During our last hearing on January 27, I referenced the expense 

ratios of the TSP—which measure administrative expenses, management and advisory fees, and transaction costs as a percentage 

of total assets—and compared them with comparable private sector 

funds to illustrate the low cost of fund management and governance at the TSP. Last year, the expense ratio of the average government TSP fund was only 11 basis points, or 11 cents per $100 

invested, and in previous years it has been as low as 7 or 8 basis 

points. 

Now, for those of you who can see these charts,1 either that chart 

over there or the chart right here, the expense ratio of the TSP C 

Fund, which is the large cap equity fund for the TSP, is shown on 

the left as of the end of last year. The 2003 expense ratio was 11 

basis points, 11 cents per $100 invested. 

Over on the right is the average expense ratio for the average 

private sector comparable mutual fund. The Lipper S&P 500 Index 

average, the average expense ratio for the average private sector 

equity stock index fund, is 63 basis points. That is about six times 

the expense ratio for the Thrift Savings Plan. 

In the middle there is the Vanguard 500 Index Fund, which is 

the lowest-cost private sector index fund. Its expense ratio last year 

was 18 basis points. So the expense ratio for the TSP fund last 

year was quite a bit lower than Vanguard’s expense ratio—the lowest private sector fund—and it was six times lower than the average private sector fund’s expense ratio. 

I would point out as well that the TSP’s expense ratio includes 

transaction costs, while the expense ratio for the private sector 

funds does not include the transaction costs. It just includes their 

management fees and so forth. 

So as I said, this is extremely low when compared to the most 

recent data for private sector index funds, particularly since the 

TSP’s expense ratio includes transaction costs whereas expense ratios of private sector mutual funds do not. According to the Lipper 

Services, comparable index funds in the private sector have an average expense ratio of 63 basis points, or 63 cents per $100 invested. 

Contributing to the minimal costs and fees charged to each TSP 

account holder is the competitive bidding of contracts, such as the 

contract with Barclays Global Investors. Since 1988, Barclays has 

been selected to manage four of the five funds—the F, C, S, and 

3

I funds. The competition is conducted separately for each fund 

every 5 years. Each year, Barclays or its predecessor has been selected to act as fiduciary and has established a record of good governance and strong management. 

I have long been a proponent of competitive bidding and encour- age the TSP to consider opening its nearly $52 million contract 

with the National Finance Center to competition. The National Finance Center is a division of the USDA, the U.S. Department of 

Agriculture, that handles the TSP’s processing and recordkeeping 

in Louisiana. As of January 31, 2004, there were 433 USDA employees assigned to the TSP, compared to 100 employees here in 

Washington. It is my view that the TSP could save significant 

funds if this contract were opened to competition, which would directly benefit the plan’s 3.2 million participants. I look forward to 

hearing from our witnesses regarding this proposal. 

Based on the information known to me, TSP participants do not 

need to worry about many of the problems plaguing the mutual 

fund industry, such as excessive fees, directed brokerage, revenue 

sharing arrangements, or soft dollar payments. Nor do participants 

need to worry about an incestuous board of directors that is beset 

with conflicts of interest. TSP board members are completely independent and required by law to act solely in the interest of plan 

participants and beneficiaries. 

The Federal Employees Retirement System Act of 1986 also protects TSP participants from poor management by authorizing the 

Department of Labor to conduct investigations and annual audits 

of TSP activities. The Employee Benefit Security Administration, 

or EBSA for short, within the U.S. Department of Labor conducts 

audits on all aspects of the TSP, including its Board and other fiduciaries. EBSA has made over 800 recommendations under its audit 

program, 95 percent of which the Board has adopted. EBSA programs include an audit on fiduciary compliance which tests for 

compliance with the 1986 Act. This year, EBSA plans to review 

customer service at the TSP as well as the TSP’s loan program to 

address participants’ concerns about access to the TSP website. 

In addition to its strong management and oversight protections 

against abuses, the TSP also strives to continually improve the 

services it offers to participants. Last year, the TSP switched from 

a paper-based system with quarterly valuing of accounts to a daily 

automated system that provides participants with 24-hour online 

access to their account balances, as well as the opportunity to 

transfer investments between funds and submit loan applications. 

Initially, the system had some web access problems due to a computer glitch. Therefore, we would like to hear from our witnesses 

how these problems have been addressed and the extent to which 

participants are now benefitting from the new system’s capabilities. 

This year, the TSP is considering several changes to improve and 

expand its services to participants. One change to the TSP’s loan 

program is scheduled to begin on July 1 which will better allocate 

the costs of loan processing among the applicants to the loan program. Another initiative under consideration is the addition of one 

or two new funds, lifecycle and lifestyle funds, that participants 

may select. While the addition of these funds is still being reviewed, they would provide a more tailored investment option for 

4

participants based on their preferred investment style—conservative, moderate, or aggressive—or on their proximity to retirement. 

Today, we will hear from witnesses with a variety of oversight 

roles and perspectives on the TSP. They are knowledgeable about 

the day-to-day activities of the TSP and they possess a strong understanding of the fiduciary duties and the investment policies regarding the TSP. 

I would like to welcome Senator Pryor. I appreciate your being 

here, and before I turn it over to Senator Pryor, I would like to 

note that the Subcommittee’s Ranking Member, Senator Akaka, 

very much wanted to be here today. His schedule, however, required him to be in Hawaii this weekend. As you know, Hawaii is 

a long way away, so when he goes back to Hawaii for the weekend, 

it is hard for him to be back by Monday morning and he was not 

able to return to Washington in time for this hearing. 

In his absence, though, I would like to thank him for the record 

for his valuable contributions that he and his staff made in preparing for this hearing. Of course, we will include for the record 

any statements or questions the Senator may wish to submit for 

this hearing. Senator Akaka long has had an interest in the TSP 

and has worked to ensure the TSP operates as efficiently as possible on behalf of Federal employees. I look forward to continuing 

to work with Senator Akaka on any legislative initiatives that we 

might pursue regarding the TSP. 

With that, I would like to again welcome Senator Pryor and invite you to make some opening remarks. Thank you. 

OPENING STATEMENT OF SENATOR PRYOR 

Senator PRYOR. Thank you, Mr. Chairman. If you would entertain a motion, I would love for the next time we have this meeting, 

we accommodate Senator Akaka’s schedule and just hold the meeting in Hawaii. Could we do that? [Laughter.] 

Is that possible? [Laughter.] 

I want to thank you, Senator Fitzgerald, for your great leadership on this issue. I know that this is something that you are very 

concerned about and have spent a lot of time on. We truly appreciate all the work that you have done. 

Considering the significant abuses in the mutual fund industry 

which have recently come to light and have cost people millions of 

dollars, it is important for us to know that the Thrift Savings Plan 

has a lot of integrity. It is important for Federal employees all 

across the country to understand that their savings are secure and 

that the fund is being managed appropriately. I really have no 

doubt about that, but I look forward to hearing from the panel 

today about the changes in the Thrift Savings Plan and positive 

things that are happening to increase the efficiency in the operations, but at the same time still maintaining sound investment options and benefit selections at very low cost. 

Mr. Chairman, thank you for holding this hearing today and 

thank you for your leadership on this issue. 

Senator FITZGERALD. Senator Pryor, thank you very much for 

that. 

One thing I want to say before I introduce our panel of witnesses 

is that it is my hope that someday we can create private sector muVerDate 0ct 09 2002 12:34 Aug 19, 2004 Jkt 093478 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\93478.TXT SAFFAIRS PsN: PHOGAN
5

tual funds that would give every American investor the same kind 

of low-cost mutual fund opportunities that are now available to 

Federal employees. The fact of the matter is that only Federal employees can get such low-cost mutual funds. These are not available 

to ordinary people who are non-Federal employees. 

As shown by those charts over there, a non-Federal employee is 

probably going to have to pay six times as much in costs over years 

of investing as Federal employees. And those costs may not seem 

like a lot, but it is estimated that one basis point in additional 

costs over 30 years of investment can cut someone’s retirement 

nest egg by 35 to 40 percent. 

So what it means when a Federal employee can have a mutual 

fund that charges them 11 basis points—in fact, that is abnormally 

high this year because of the costs of charging off a computer contract, it may go back down to 6 or 7 basis points in the next couple 

of years—a Federal employee who invests the same amount for the 

same number of years as a non-Federal employee who is investing 

in a private sector mutual fund, the Federal employee will have 

much more money at retirement, and I don’t think that is fair. My 

hope would be that we could have some reforms that would promote greater disclosure and liberate free market forces so that 

there could be greater competition amongst private sector mutual 

funds. 

So I would now like to proceed to introducing our panel of witnesses. Our first witness is the Hon. Andrew M. Saul, who serves 

as Chairman of the Federal Retirement Thrift Investment Board 

that administers the TSP. Mr. Saul has been general partner in 

Saul Partners, LLP, in New York City since 1986. He has served 

as Chairman of the Board for Cach ́ e, Inc., and is a trustee for the 

Metropolitan Museum of Art and other organizations. He is Commissioner for the Metropolitan Transportation Authority for New 

York City and also sits on the Board of Overseers for the Wharton 

School of Finance at the University of Pennsylvania. 

Our second witness is Gary A. Amelio, who has served as Executive Director of the TSP since June 2003. Mr. Amelio has extensive 

experience in pension plan management and investments, having 

served as Senior Vice President and Managing Director of the Retirement and Investment Services Department of PCN Bank in 

Pittsburgh, Pennsylvania. In addition, Mr. Amelio has over 20 

years of banking experience, specifically in the areas of employee 

benefits, executive compensation, tax, and fiduciary duties. 

Third on our panel today is Alan Lebowitz, the Deputy Assistant 

Secretary for Program Operations at the Department of Labor’s 

Employee Benefits Security Administration, or EBSA. Mr. Lebowitz 

has served in this capacity since 1984 and has overseen the Department’s annual audit program of the TSP and its fiduciaries 

since the TSP’s first full year of operation in 1988. Mr. Lebowitz 

has extensive experience with employee benefit plans and fiduciary 

duties, having previously served as Assistant Administrator for Fiduciary Standards at the Office of Pension and Welfare Benefit 

Programs at the Department of Labor. 

Our fourth witness is James W. Sauber, who serves as Chairman 

of the Employee Thrift Advisory Council that advises the Federal 

Retirement Thrift Investment Board on matters pertaining to the 

6

1The prepared statement of Mr. Saul appears in the Appendix on page 33. 

administration and investment of TSP funds. Mr. Sauber is Director of Research for the National Association of Letter Carriers, 

which is one of the 15 employee organizations identified by statute 

to participate in the Council. He has over 16 years of experience 

with the Council and has served as the Council’s Chairman since 

September 2003. 

Our fifth and final witness is Blake R. Grossman, who is Global 

Chief Executive and Managing Director of Barclays Global Investors. Since 1988, Barclays or its predecessor, which was Wells 

Fargo, I believe—Barclays bought Wells Fargo’s Global Investment 

subsidiary? 

Mr. GROSSMAN. Exactly. 

Senator FITZGERALD. Since 1988, Barclays or its predecessor has 

won the competitive bid to manage the investments of four of the 

five TSP funds. Mr. Grossman has primary responsibilities for 

Barclays’ investment strategies globally, as well as the institutional 

businesses based in the United States. In this capacity, he oversees 

the team managing TSP and its assets. And, for full disclosure purposes, I would like to state that I know personally the Chairman 

of Barclays Bank in London, Matthew Barrett, from the time that 

he was Chairman of Bank of Montreal, with which my family is affiliated. I have no authority over awarding the contract to Barclays, 

but I did want to disclose that. [Laughter.] 

Again, I would like to thank our witnesses for being here today 

to testify. In the interest of time, your full statements will be included in the record and we ask that you limit your opening remarks to 5 minutes. 

Mr. Saul, you may begin. Thank you. 

TESTIMONY OF ANDREW M. SAUL,1 CHAIRMAN, FEDERAL 

RETIREMENT THRIFT INVESTMENT BOARD 

Mr. SAUL. Good morning, Senator Fitzgerald and Senator Pryor. 

My name is Andrew Saul and I am the Chairman of the Federal 

Retirement Thrift Investment Board. The Board administers the 

Thrift Savings Plan for Federal employees and members of the uniformed services. I am accompanied today by Gary Amelio, the 

Board’s Executive Director. 

My four fellow Board members and I serve in a part-time capacity. I might also say, Senator, that Gordon Whiting, one of our 

other Board members, is here and sitting behind Mr. Amelio. 

By statute, the Board members are responsible for policy decisions affecting the investment and management of the TSP. The 

Executive Director carries out our decisions and directs the plan’s 

day-to-day operations. The five Board members and the Executive 

Director are fiduciaries and, as such, are required to act solely in 

the interest of the Thrift Savings Plan’s participants and beneficiaries. 

When I and two of my fellow Board members last appeared before this Subcommittee in November 2002 at our confirmation 

hearing, then-Chairman Akaka graciously yet firmly made us 

aware of the difficult situation that we faced in assuming our new 

7

roles as Board members. This warning proved to be an understatement as we entered an embattled agency. 

The outgoing Executive Director took a number of actions just 

before his abrupt departure that demoralized the staff, many of 

whom had built the program from the beginning. Expensive lawsuits and investigations were sprouting up. Rancorous battles were 

underway with other agencies. The costs of the failed recordkeeping system project had not been charged to participants. And 

decisions had to be made immediately on whether to go forward 

with the new recordkeeping system project at all. 

I and my fellow Board members entered this environment, and 

working with the seasoned career staff, methodically sorted 

through these matters, keeping the new system and other projects 

on track and moving forward as we restored essential relationships. 

Our first order of business was to address the agency leadership 

issue. We conducted an open and orderly nationwide search for an 

Executive Director that resulted in the selection of Gary Amelio, a 

private sector pension and investment expert. The Board was confident that Mr. Amelio’s 22 years of private sector experience would 

result in the betterment of the Thrift Plan for the participants and 

we have not been disappointed. 

He immediately dealt with the implementation of the new recordkeeping system, settled the lawsuits to the benefit of the plan 

participants, and working with the Board members, reestablished 

professional, respectful relationships with other agencies without 

diminishing independent fiduciary leadership. 

Mr. Amelio has proven his leadership of the agency’s career staff, 

established productive cooperation with the various employing 

agencies of government, and developed an outstanding rapport 

with the unions and associations that comprise the Employee 

Thrift Advisory Council. As a result of his efforts, Mr. Amelio has 

received favorable recognition for the plan in the pension industry 

and has already received two national awards in recognition of his 

performance. This achievement signals the turnabout originally 

sought by this Subcommittee. 

When the TSP was first conceived in the early 1980s by Senator 

Ted Stevens, it was designed to be an efficient, low-cost vehicle securing retirements for a large and diverse group of Federal employees. Congress established the TSP using a diversified, passively 

managed index fund approach with a reasonable limit on the number of investment choices. 

The Board has developed investment policies and adopted sound 

administrative practices in furtherance of these Congressional 

goals. The results have been what we believe Senator Stevens and 

his colleagues intended when they undertook the reform of the Federal retirement system 20 years ago. 

Over the years, Congress has carefully considered proposals to 

change the TSP, adopting improvements and extending coverage as 

appropriate to new employee groups. At the same time, it has set 

aside seemingly well-intentioned proposals that would have moved 

the TSP away from its fundamental strategy. This restraint has 

preserved the basic commitment to investment choices which are 

8

well managed, inexpensive, and appropriate for a long-term investment strategy. 

In view of Chairman Fitzgerald’s recent efforts to emphasize the 

value to investors of low administrative costs, we are pleased that 

the Thrift Savings Plan offers participants a diversified selection of 

investment options and a competitive array of plan benefits at an 

extremely low cost. In 2002, total participant expenses were 10 

basis points. An additional one basis point of expense was offset 

with forfeitures. Two-thousand-and-three charges were unusually 

high because we had to charge 3 basis points to account for the expense associated with the earlier failed recordkeeping project. For 

2005, we project that the cost to participants could be as low as 6 

basis points. 

Legislative improvements to augment benefits, simplify plan administration, and provide new investment funds, have been beneficial for participants. An example is the extension of plan participation to members of the uniformed services 2 years ago. In only 

2 years, nearly 400,000 members have become voluntarily contributing to the plan to supplement their retirement benefits. We are 

proud to have the opportunity to make this program available to 

them. 

I would like to bring one potential legislative improvement to the 

attention of the Subcommittee today and that is the elimination of 

TSP open seasons. The Board supports eliminating open seasons 

because it would expand participant access to the TSP and simplify 

Plan administration. We also believe it would increase participation and contribution levels. 

Open seasons were useful when the Plan was conceived because 

they provided a structure for initial implementation. They are no 

longer useful in a daily value plan environment. Indeed, they restrict the opportunity for employees to make contribution elections, 

and more damaging, delay eligibility for automatic 1 percent in 

matching contributions to newly-hired employees. 

The Board has previously supported legislative proposals, including one introduced by Senators Akaka and Warner on December 

13, 2001, that would have overcome the latter barrier by providing 

these benefits as soon as new employees join the TSP. We would 

support similar legislation again. 

We are also reviewing a second potential legislative issue, a 

change in the current fiduciary insurance provision in our statute. 

Currently, the agency must purchase such insurance. Self-insurance, however, is not allowed. We are in the process of examining 

whether it makes better economic sense for the Plan to cover its 

own risks rather than to pay premiums to private insurers. The 

staff analysis is expected to be completed this summer. Depending 

on the findings, the Board may subsequently seek legislative authority allowing us the option to either purchase insurance or selfinsure as the fiduciaries would determine. 

In this first 9 months as executive director, Mr. Amelio has dealt 

decisively with the major challenges facing the TSP. He has initiated necessary changes to the TSP loan program and is preparing 

a proposal to provide new investment allocation strategies based 

upon the existing Plan fund options. Mr. Amelio will also be initiVerDate 0ct 09 2002 12:34 Aug 19, 2004 Jkt 093478 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\93478.TXT SAFFAIRS PsN: PHOGAN
9

1The prepared statement of Mr. Amelio appears in the Appendix on page 37. 

ating a major revision of our communication materials with an emphasis on participant education. 

With your permission, I would like to introduce Gary Amelio to 

the Subcommittee for his remarks. 

Senator FITZGERALD. Mr. Amelio. 

TESTIMONY OF GARY A. AMELIO,1 EXECUTIVE DIRECTOR, 

FEDERAL RETIREMENT THRIFT INVESTMENT BOARD 

Mr. AMELIO. Good morning, Chairman Fitzgerald and Senator 

Pryor. My name is Gary Amelio and I have served as Executive Director of the Federal Retirement Thrift Investment Board since 

June 2003. I came to the agency with 22 years of banking, pension, 

and investment experience. I am pleased to appear today to discuss 

the challenges the agency has addressed over the past 9 months 

and to outline our future agenda. The challenges that face the TSP 

today offer opportunities to improve service for the plan’s participants tomorrow. 

First, however, I would like to compliment this Subcommittee 

and its predecessors on the design of the TSP. Since arriving, I 

have told everyone who will listen that this plan has an excellent 

combination of investment options, benefit selections, and low 

costs. Any retirement professional would reference the TSP as the 

optimum retirement plan. That reflects positively on the vision of 

its Congressional designers as well as the fortitude of those who 

have kept it true to its original principles over the past 18 years. 

With 3.2 million participants and $130 billion in assets, the TSP 

is the largest plan of its kind in the world. The participation rate 

is very high, the contribution levels well above average, and support among participants for the program is strong. Our roll-out of 

the state-of-the-art recordkeeping system last year ensures that we 

will be able to continue the efficient delivery of investment products and benefits to participants well into the future. 

Although a variety of new features were introduced with the new 

system, improvement is still needed. For example, the roll-out of 

the new system last year, we experienced difficulty in promptly 

servicing the increased volume of participant calls to the service 

center. A request for proposals for a parallel call center to ensure 

uninterrupted service and improved overflow capacity has been 

issued. A selection is expected soon and the new call center will be 

operating later this year. 

Based upon well-documented industry standards, I am concerned 

about the excessive use of the TSP loan program. At the end of 

2003, the plan held over 934,000 loans. Almost 40 percent of these 

were issued in the last year. During implementation of the new 

system, a loan churning problem was uncovered. The administrative burden and cost to the plan and the inconvenience to the participants is significant. Three reforms that will reinforce to participants the importance of borrowing from their TSP accounts only as 

a last resort were recently announced and will be implemented in 

July. The changes make the system fairer for all participants and 

consistent with private sector loan practices. 

10

An important issue that required immediate attention when I arrived was the pending litigation between the agency and a contractor in an earlier failed effort to build a recordkeeping system. 

It was my decision to settle the lawsuits and to accept $5 million, 

which was paid back into the accounts of TSP participants. A total 

of $41 million had been spent on the unsuccessful project and the 

ultimate cost to each participant was 36 cents per $1,000 of account balance. The settlement allowed us to move forward and 

refocus on providing investments and benefits for our participants. 

Mutual fund trading and 401(k) plans has been a high profile 

subject recently and I am sure there are questions about the TSP’s 

experience since it has become daily valued. The staff has reviewed 

participant trading practices and discovered no issues of concern. 

Indeed, only 146 participants, that is 0.0046 of 1 percent, have 

traded more frequently than twice a week. Interestingly, some of 

these traders held fewer shares at the end of the trading period. 

In other words, they lost money. The agency staff is currently reviewing guidelines just released by the Department of Labor which 

describe appropriate fiduciary actions in addressing such practices 

and will develop a recommendation for handling such accounts. 

In regard to product enhancement, the agency staff is preparing 

a recommendation for the Board members that the TSP offer lifestyle or lifecycle investment options for TSP participants. The lifestyle approach is designed to reflect an investor’s investment profile, for example, aggressive, moderate, or conservative. The 

lifecycle approach permits an investor to select the date upon 

which he or she would start withdrawing assets from the account, 

such as at retirement. In either case, the new life options would be 

invested solely in combinations of the five existing TSP investment 

funds using different allocations depending upon the investment 

objective. 

Life investment options are professional asset allocation and rebalancing tools for participants who may not have the time or 

knowledge to manage account assets on their own. Professional research indicates that 80 to 90 percent of defined contribution plan 

participants fall into this category, as evidenced by their failure to 

rebalance their accounts. Indeed, the average age of a TSP FERS 

participant is 43.8 years and this group has 47 percent of its assets 

invested in stable value and fixed funds. By definition, this group 

has at least 20 years until retirement and will likely need portfolio 

diversification to achieve their retirement goals. 

Agency research to date indicates that a life product is very inexpensive to implement. There is no doubt that the participants who 

embrace life professional asset allocation and rebalancing models 

will enhance the retirement values of their accounts over time. 

Later this month, I expect to present to the Board and the Employee Thrift Advisory Council the result of months of research, 

including interviews with numerous investment providers who responded to our request for information on life options and our recommendation for this new investment product. My goal is to obtain 

insight from the Council and policy decisions from the Board that 

will allow us to have this option ready for implementation next 

year. 

11

1The prepared statement of Mr. Lebowitz appears in the Appendix on page 40. 

In the meantime, we are moving forward to substantially upgrade our web, print, and video communication materials. This is, 

of course, a long-term project. The Board members and I view the 

enhancement of communication materials as a priority. I am also 

aware that the Members of the Subcommittee have expressed concerns in this regard. A participant satisfaction and input survey 

will be part of the communication upgrade process, although such 

initiative is just now in the formative stage. 

Other enhancements will be reviewed in the coming year as we, 

in Mr. Saul’s words, take what has been an excellent plan to the 

next level. We will be pleased to take your questions. Thank you. 

Senator FITZGERALD. Mr. Lebowitz. 

TESTIMONY OF ALAN D. LEBOWITZ,1 DEPUTY ASSISTANT SECRETARY FOR PROGRAM OPERATIONS, EMPLOYEE BENEFITS 

SECURITY ADMINISTRATION, U.S. DEPARTMENT OF LABOR 

Mr. LEBOWITZ. Good morning, Mr. Chairman and Senator Pryor. 

I appreciate the opportunity to appear before you today to address 

the Labor Department’s activities with respect to the Federal Employee Retirement System and its Thrift Savings Plan. My name 

is Alan Lebowitz. I am the Deputy Assistant Secretary for Program 

Operations of the Employee Benefits Security Administration. Accompanying me and sitting immediately behind me is Ian 

Dingwall, our Chief Accountant. 

EBSA oversees approximately 730,000 private sector pension 

plans and millions of private sector health and welfare plans that 

are subject to the Employee Retirement Income Security Act of 

1974, known as ERISA. EBSA-covered pension plans hold over $4 

trillion in assets and cover more than 45 million workers. 

Title I of ERISA establishes rigorous standards of fiduciary conduct for persons who are responsible for the administration and 

management of pension and other benefit plans, including the requirement to act solely in the interests of participants and beneficiaries, to act prudently, and to avoid transactions defined in the 

statute as prohibited. Under ERISA, fiduciaries are personally liable for losses resulting from their breach of these standards. 

The Federal Employees Retirement System Act of 1986 charges 

the Department with administering and enforcing substantially 

similar provisions of law governing fiduciary conduct for the TSP. 

As with private plans under ERISA, under FERS, the Secretary 

of Labor has broad investigative and auditing authority concerning 

the activities of the FERS Board and its Executive Director in the 

administration of the TSP. However, in contrast to ERISA, in 1988, 

Congress amended FERS to specifically exclude lawsuits by the 

Secretary against Board members or the Executive Director. While 

other fund fiduciaries and participants may still sue the Board and 

the Executive Director, the 1988 amendments do not permit any 

monetary recovery against these individuals. The Department and 

others may still bring actions for recovery of losses against other 

TSP fiduciaries, such as investment managers. 

FERS specifically directs the Secretary of Labor to establish a 

program to carry out audits to determine the level of compliance 

12

with the Act’s fiduciary standards and prohibitions on certain types 

of transactions. The statute specifies that the Secretary may contract with a qualified non-government organization. Currently, 

KPMG LLP conducts the audits under the supervision of EBSA’s 

Chief Accountant. 

To guide the auditors, the Department has developed a strategic 

fiduciary oversight program that uses detailed guides to test for 

compliance. Audits must cover all significant activities of the fund 

as well as the controls in place at the TSP investment manager, 

Barclays Global Investors, that ensure the accuracy of financial information, compliance with FERS, and operational efficiency and 

management effectiveness. The BGI management fee is reviewed 

for consistency with fees charged by other similar institutions in 

conformance with contractual agreements. 

At the conclusion of each audit, the Department issues a report 

for formal response by the Executive Director on behalf of the 

Board. The Department’s representative and auditor meet with the 

Board at least once a year to highlight significant issues from the 

audit, to present the Department’s future audit schedule, and to 

answer Board members’ questions. 

The Department’s audit recommendations range from compliance 

with FERS to economy and efficiency issues that may provide cost 

savings opportunities for the TSP. Most significantly, the Department communicated many recommendations over several years addressing TSP system and software control weaknesses which influenced the TSP Board’s decision to replace the TSP recordkeeping 

system in June 2003. 

Since the inception of the audit program, the Department has 

made more than 800 recommendations, 95 percent of which have 

been accepted. The remaining recommendations chiefly address 

controls for the TSP new recordkeeping system. 

Certain abusive practices within the mutual fund industry, 

namely market timing and late trading, which have recently come 

to light, have raised concerns and prompted the Department to 

take certain steps. The Department recently performed a limited 

review of BGI’s collective trust funds in which the TSP has equity 

investments to determine whether further investigation is warranted. Based upon this preliminary review, we do not believe that 

TSP participants are adversely exposed to costs and investment 

risks due to late trading and market timing. 

The Department also recently announced that it is conducting reviews of mutual funds, similar pooled investment funds, and service providers to such funds to determine whether there have been 

any violations of ERISA. The results of these reviews will be used 

to later determine if any FERS issues require further investigation. 

We are working very cooperatively with Chairman Saul and Executive Director Amelio and the members of the Board. We anticipate continuing a free and candid exchange of views that should 

benefit the TSP participants and beneficiaries and help us to fulfill 

our oversight responsibility. 

This concludes my prepared remarks. Thank you for the opportunity to testify before you today regarding this important matter. 

We look forward to working with the Members of the SubVerDate 0ct 09 2002 12:34 Aug 19, 2004 Jkt 093478 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 C:\DOCS\93478.TXT SAFFAIRS PsN: PHOGAN
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1The prepared statement of Mr. Sauber appears in the Appendix on page 46. 

committee and the Thrift Savings Plan fiduciaries in this endeavor, 

and I will be happy to answer any questions you may have. 

Senator FITZGERALD. Thank you, Mr. Lebowitz. Mr. Sauber. 

TESTIMONY OF JAMES M. SAUBER,1 CHAIRMAN, THRIFT 

ADVISORY COUNCIL 

Mr. SAUBER. Good morning, Chairman Fitzgerald and good 

morning, Senator Pryor. My name is James Sauber. Thank you for 

the invitation to participate in this hearing. 

The Employee Thrift Advisory Council is a 15-member body established by the Federal Employees Retirement System Act of 1986 

to advise the Thrift Investment Board on matters related to the 

TSP. The 15 members are nominated by organizations identified in 

the FERSA statute. These organizations represent Federal and 

postal employees, both active and retired, at all levels of the U.S. 

Government, from wage earners to senior executives. I was nominated to serve on the Council by my employer, the National Association of Letter Carriers, and was elected to serve as Chairman of 

the Council last fall. 

As you know, the TSP is a very important and popular part of 

the Federal pension system. It has remained popular despite the 

poor performance of the stock market in recent years. The TSP’s 

continued popularity reflects the wisdom of its designers from this 

Committee and on the good judgment of the Federal workforce, 

who have continued to invest and save for the long run in order 

to enjoy a more secure retirement. 

The TSP is also popular because of the solid performance of the 

Thrift Investment Board over the years and because Congress has 

continued to give it strong backing. In practical terms, that means 

the Thrift Board has provided TSP participants good service while 

keeping expense ratios very low, and Congress has protected the 

TSP by insulating it from budgetary and political pressures. We 

are confident that these positive aspects of the Plan will be maintained. 

ETAC has a constructive relationship with the Board. Lines of 

communication are wide open and the trust built up over many 

years has allowed us to work well together. That trust and communication has also helped us overcome difficulties that have occasionally arisen. 

A recent example of such difficulties was the delayed launch of 

the new recordkeeping system last year. I can assure you that none 

of the organizations that make up ETAC were happy about the illfated contract with AMS to upgrade the recordkeeping system or 

the cost it imposed on TSP participants. At our first meeting last 

fall, we were given a comprehensive briefing on the Board’s decision to reach a settlement to end the litigation with AMS and Executive Director Amelio answered all our questions. 

In the context of the Board’s long record of success, most ETAC 

members agree that the episode with the recordkeeping system 

should be seen as an aberration. We are pleased that the Board 

has finally successfully implemented the new system. Chairman 

14

Saul and Executive Director Amelio deserve great credit for managing the agency through a difficult period. 

At the most recent ETAC meeting, we also covered two other important issues, possible changes to the TSP loan program and the 

Board’s investigation of so-called lifecycle and lifestyle investment 

options. In general, there is a consensus among ETAC members 

that many TSP participants are making excessive use of the TSP 

loan program. Instead of using it as a last resort, some employees 

are using it as a short-term money management tool at the expense of their long-term financial interests. 

Most of us agree that charging a nominal fee for the loans makes 

sense as a way to discourage excessive use of the loans and to more 

fairly allocate their administrative costs. However, not all organizations that make up ETAC favor the restrictions on second TSP 

loans. We look forward to discussing the proposed changes at our 

next ETAC meeting later this month. 

There is also broad interest in the lifecycle investment options 

that the Board is investigating. Too many Federal employees fail 

to rebalance their investments as they age. A lifecycle fund that allowed the gradual reallocation of investments among the five TSP 

funds could be very useful. Although ETAC members are concerned 

about the added cost of offering a lifecycle fund, we look forward 

to reviewing the Board’s research on the issue at our next meeting. 

Finally, I would like to comment on two TSP-related legislative 

matters. First, ETAC fully supports the Board proposal to eliminate TSP open seasons, a concept that draws heavily on a bill sponsored by, or proposed by Senator Akaka in the 107th Congress. 

Open seasons made sense when the Thrift Board was a new agency 

with limited administrative capabilities. Today, with the new recordkeeping system and its capacity to value accounts daily and to 

implement investment allocations instantaneously, open seasons 

are no longer necessary. Eliminating them will save money and 

make participation in the TSP more flexible and attractive to all 

employees. 

Second, the six ETAC members from Postal employee organizations wish to alert the Subcommittee to a proposal made by the 

President’s Commission on the U.S. Postal Service that could adversely affect the TSP. The Commission recommended that Congress consider removing Postal employees from various pension, 

health insurance, and other benefit programs that currently cover 

all Federal employees. Among such programs are FERS and the 

TSP. All six organizations representing letter carriers, Postal workers, postmasters, and supervisors, strongly oppose this idea. 

In the case of the TSP, removing 800,000 employees from the 

plan would raise the cost of retirement investing for Postal employees and Federal employees alike and unfairly deny Postal employees access to this excellent program. We urge the Subcommittee to 

oppose any proposal to exclude Postal employees from the TSP. 

That concludes my oral testimony. I have submitted my full 

statement for the record. Thanks again for the opportunity to testify and I will be happy to answer your questions. 

Senator FITZGERALD. Mr. Sauber, thank you very much. Mr. 

Grossman. 

15

1The prepared statement of Mr. Grossman appears in the Appendix on page 51. 

TESTIMONY OF BLAKE R. GROSSMAN,1 GLOBAL CO-CHIEF EXECUTIVE OFFICER AND MANAGING DIRECTOR, BARCLAYS 

GLOBAL INVESTORS 

Mr. GROSSMAN. Thank you. Good morning, Chairman Fitzgerald 

and Senator Pryor. My name is Blake Grossman. I am the Co-Chief 

Executive Officer at Barclays Global Investors. Thank you for inviting me to discuss Barclays Global Investors in its role as the external asset manager for the Federal Thrift Savings Plan. 

We appreciate the concerns of this Subcommittee in safeguarding 

the interests of all investors, including Federal employees, particularly in light of certain practices in the mutual fund industry that 

have recently come under close scrutiny. We are honored to have 

served as the investment manager for the TSP since 1988 and we 

take our responsibilities for the management of the retirement assets of the Federal workforce very seriously. We take great pride 

throughout BGI in maintaining the highest ethical and fiduciary 

standards and you have our commitment that no compromises to 

these standards are acceptable. 

To understand why Federal employees should feel confident that 

BGI is managing their retirement assets responsibly, it is important to say a word about who we are, the service we provide for 

the TSP, and how we keep the costs associated with trading and 

investing as low as possible. 

BGI was founded in 1971 as part of Wells Fargo Bank in California. Today, we are owned by Barclays PLC, one of the world’s 

leading financial services providers. We remain headquartered in 

San Francisco with approximately 1,100 employees in California 

and elsewhere in the United States, and 1,000 more employees 

worldwide serving the needs of our global clients. 

With more than $1 trillion in assets under management, BGI is 

the world’s largest index manager and, in fact, created the first 

index strategy in 1971, just one of many financial innovations that 

we have pioneered. Since our founding, BGI has been focused on 

a single global investment philosophy which we call total performance management. In brief, our objective is to deliver superior investment results by efficiently capturing the returns of market indexes while rigorously controlling all risks and minimizing trading 

and other implementation costs. This simple yet profound approach 

is rather unique in the industry. It helps us avoid investment fads 

or dependence on star managers or stock pickers. It has been the 

foundation of the way that we manage money for over 30 years and 

we believe it has served our clients very well. 

As I noted, since 1988, one of those clients has been the TSP. 

BGI manages four of the five investment options, each an index 

fund that tracks a widely followed stock or fixed income benchmark 

available to TSP participants. It is important to note that we have 

successfully retained this relationship in regular highly competitive 

bidding processes. Also worthy of note is the fact that BGI’s services to the TSP are completely focused on investment management. 

We don’t provide any other services. 

Mr. Chairman, as you know, the costs and expenses of investing 

to track from investment performance, and therefore from ultimate 

16

retirement benefits. There are three primary sources of cost and 

expense: The administrative cost, transaction costs, and investment 

management fees. 

The majority of BGI’s clients are large institutional investors, 

such as the TSP, and the average account size for our clients in the 

United States, in fact, is $880 million. Because of our size and the 

ability to commingle the assets of our clients, we offer considerable 

economies of scale for our investors and, therefore, we are able to 

charge lower investment and administrative fees to these clients. 

Sophisticated trading strategies and large trading volume also enable us to minimize transaction costs in all of our investment activities, a key to both our long-term success in index management 

and the ability to keep the costs for the TSP at the very low expense levels that have been previously cited. 

I also want to emphasize that our focus on transaction is completely on obtaining best execution. We don’t use soft dollars or directed brokerage or anything else in connection with the TSP assets that would conflict with getting best execution. 

Before concluding, allow me to comment on certain practices in 

the mutual fund industry that have recently come under scrutiny. 

We recently conducted a thorough review at BGI of these issues, 

including late trading, market timing, and personal trading by BGI 

personnel. I am pleased to report that we have found no issues at 

BGI of significant concern or any practices that compromise our fiduciary responsibilities to the TSP or any of our other clients. 

Mr. Chairman, as a citizen, I appreciate the service that Federal 

employees provide for this country and every Federal employee 

should feel confident that we at BGI are managing his or her TSP 

retirement assets in a responsible fashion. We appreciate the trust 

that has been placed in BGI in this regard. We look forward to 

maintaining an open dialogue with the TSP and Members of this 

Subcommittee on these key issues in the future. 

Thank you very much for the opportunity here today to share our 

views. 

Senator FITZGERALD. Mr. Grossman, thank you very much and 

thank you for being here. 

I would like to start with Mr. Amelio, and ask about the 11 basis 

points in expenses that the TSP C Fund had last year. Several of 

your other funds also seem to come in around 11 basis points in 

gross expenses, and the expense ratio tended to go down to 10 

basis points after you netted out some forfeitures of people who 

start as Federal employees, start paying in, and then leave. Their 

money is forfeited and that goes back into the fund. 

I know your management fee is confidential. It was the subject 

of competitive bidding, but Barclays has filed to keep that confidential under the FOIA so we won’t go beyond where we can go, but 

I would like you to describe in general terms what is the breakdown of that 11 basis points in total expenses? How much, for instance, is administrative cost? 

Mr. AMELIO. I would say roughly—and this is very much of a 

ballpark based upon the overall expenses—the budget that goes in 

is about $110 million and virtually all of that, probably up over 90 

percent, I would say, is administrative cost, which is far the reVerDate 0ct 09 2002 12:34 Aug 19, 2004 Jkt 093478 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 C:\DOCS\93478.TXT SAFFAIRS PsN: PHOGAN
17

verse that you would find in the private sector where management 

fees are a lot higher than administrative costs. 

Senator FITZGERALD. OK. So talking about the 11 basis points in 

expenses in dollars and cents terms, over the five funds, the costs 

in dollars and cents terms are about $110 million, is that right? 

Mr. AMELIO. That is the total cost charged to the plan, yes, sir. 

Senator FITZGERALD. OK, and that works out to around 11 basis 

points of the total fund assets? 

Mr. AMELIO. I am giving you a general number. The 11 basis 

points is an anomaly number. The 11 basis points includes that 

settlement, which is a one-time charge. Normally, we are talking 

about a little over 7 basis points is truly the cost to the participants. 

Senator FITZGERALD. OK, so about 3 basis points last year, 

roughly, was for that anomalous charge for charging off that illfated computer contract, and this Subcommittee, by the way, is 

going to have a full Committee hearing on that issue probably 

sometime later this year, so we are not going to go deeply into that 

ill-fated computer contract at this hearing. But roughly last year, 

how much in dollars and cents was charged for the computer contract last year? 

Mr. AMELIO. Forty-one million was the lawsuit. You have to net that against the $5 million we recovered back, so about $36 million. 

Senator FITZGERALD. About $36 million? 

Mr. AMELIO. Yes, Senator. 

Senator FITZGERALD. So you had $110 million in total expenses. If we take out $36 million for the computer contract, then let us 

describe your remaining expenses. I want to say that your administrative expenses approximate about $54 million a year? 

Mr. AMELIO. That is at the NFC, yes. There are other administrative costs. I have the fact sheet in front of me. About 3 percent 

of the entire number are administrative expenses. Everything else 

is a variety. The National Finance Center in New Orleans represents roughly 44 percent of overall expenses. The AMS write-off 

was 30 percent. Other various IT contracts and what not were 

about 9 percent. The Board here in Washington is about 8 percent 

of expenses. Investments are 3 percent. Printing for employee participant communications is 3 percent. Rent is 2 percent, and everything else is 3 percent. 

Senator FITZGERALD. Printing is how much? 

Mr. AMELIO. About three percent. 

Senator FITZGERALD. OK. Now 44 percent is the National Finance Center. That is the backroom operation in Louisiana, I believe? 

Mr. AMELIO. Yes. 

Senator FITZGERALD. It has 433 Agriculture Department employees——

Mr. AMELIO. Yes. 

Senator FITZGERALD [continuing]. That are providing the backroom services to run the day-to-day operations of the TSP. Has the 

Board ever competitively bid out the administrative services? How 

did we come to have the Agriculture Department doing this? 

Mr. AMELIO. The National Finance Center, which is, I guess for 

the lack of a better term, a subsidiary of the Department of AgriVerDate 0ct 09 2002 12:34 Aug 19, 2004 Jkt 093478 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 C:\DOCS\93478.TXT SAFFAIRS PsN: PHOGAN
18

culture, actually stepped in at the plan’s creation back in the midto late-1980s, around 1986. It was always intended, and I am basically reading from the historical transcripts, that these services 

would be competitively bid out over time. There have been certain 

times when the services have been looked at up until very recently 

when we put out a request for proposal last year on the parallel 

call center. But there is certainly a history that it was understood 

that these services would be looked at to be competitively bid. 

Senator FITZGERALD. But they have never been competitively bid. 

Mr. AMELIO. That is correct. 

Senator FITZGERALD. Does the statute not require you to competitively bid out your services? 

Mr. AMELIO. The statute requires that we operate the plan at the 

lowest possible cost that we are able to. 

Senator FITZGERALD. How do we know we are operating at the 

lowest possible cost with respect to administrative services if we 

haven’t competitively bid those out? 

Mr. AMELIO. That is a very good question, Senator. That is one 

reason why we have taken the first step in looking at the parallel 

call center. We will be able to judge the existing cost versus what 

the parallel call center costs. 

Senator FITZGERALD. You are new. You just came in last 

year——

Mr. AMELIO. Yes. 

Senator FITZGERALD [continuing]. And that is one of the things 

you identified that you wanted to work on. 

Mr. SAUL. If I might just add something, I have been here actually over a year now and one of the things you have to realize, we 

could not really competitively bid out the work done by the National Finance Center prior to now because the old system wasn’t 

properly documented. With the new system that we have installed 

in July that you have heard about, the automatic daily recordkeeping system, it is much more transportable. It is transportable. 

The old system was a hodgepodge put together, as you can understand, from its inception and really was not—there was no ability 

to even have another vendor operate the system. So it wasn’t even 

a question of whether you should have, could have, would have. It 

was not a system that could have been done. 

And what we have done since we have come there, we have slowly—we have, as you heard in both of our testimonies, we had an 

awful lot of priorities that in the opinion of the Board were much 

more painstaking and had to be accomplished right away. We took 

things in order of priority. 

As you see now, we have gone forward with taking some of the 

functions at the NFC and putting them out. We now have a parallel call center, as Gary Amelio has described. We are now in the 

process of bidding out a mainframe operation, which is the actual 

mainframe computer operation, to a third party, and we are also 

now having our software of our new system done by a third party 

vendor. 

So the beginning phases are there of starting to competitively bid 

out the work that was done by the National Finance Center. But 

I think this is a very complex thing. We have just gone through a 

new system introduction and we have to be very careful that we 

19

don’t do anything at all to destabilize the system, as you can well 

appreciate, Senator. While costs are very important, and I don’t 

mean to minimize costs at all, I think it is a question of priorities 

and I think we have taken the first steps, which were well thought 

out, and we will see how these steps work and then we will go from 

there. 

Senator FITZGERALD. Just for the record, you all agree that this 

is the big expense. We had $110 million in expenses last year. 

About 30 percent of that was for charging off that one-time hit for 

the computer contract, but we are talking something like $54 million in administrative expenses, or 44 percent of the expenses of 

the funds are for administrative functions. 

By comparison, you said only 3 percent of the expenses are the 

actual investment that Mr. Grossman’s company is doing, and that 

is competitively bid out. The investment operations have been competitively bid out, but we haven’t bid out the administrative backroom operations. Instead, we have the USDA National Finance 

Center in Louisiana doing it and that is the lion’s share of the expenses for the fund. 

Have you gotten any requests for proposals back yet? You said 

you put out an RFP? 

Mr. AMELIO. Actually, we have completed the RFP process, received them, reviewed, them, and the recommendation is in the 

final stages. We will be prepared very shortly to sign a contract 

with one of the vendors and have the parallel call center up and 

running hopefully within a few months. 

In addition to the parallel call center, Senator——

Senator FITZGERALD. This is just for the call center, though? 

Mr. AMELIO. Yes, the parallel call center. 

Senator FITZGERALD. OK. 

Mr. AMELIO. There are two other pieces that were recently discussed and voted on at the last Board meeting, as well, and one 

is we will be moving the mainframe computer, and a separate function is the software support of that mainframe and we will also be 

moving those. 

Senator FITZGERALD. How much will be left in the National Finance Center then? 

Mr. AMELIO. A significant amount. Well, all of the jobs, but a significant portion——

Senator FITZGERALD. What will they be doing? 

Mr. AMELIO. Still a significant portion of the call center as well 

as what we call data input. When the forms come in, they get processed into the system. All of the mailing of the statements, check 

processing, things of that nature. 

Senator FITZGERALD. OK. 

Mr. AMELIO. And the accounting. 

Senator FITZGERALD. So you are a long way from—couldn’t you 

bundle everything that the National Finance Center is doing and 

bid out that, or are there not firms out there that would do the full 

range of services? 

Mr. AMELIO. We are not there yet. I don’t know if there is any 

vendor out there that would be big enough that would be able to 

absorb everything. We haven’t got that far down the pike yet. 

20

Senator FITZGERALD. OK. Mr. Lebowitz, has the Department of 

Labor ever looked at the various services of the TSP and questioned whether the TSP Board was getting the lowest cost services? 

Mr. LEBOWITZ. Many of the questions you asked were questions 

that we have asked over the years in the course of our audit program. My understanding is that the Board in the past had done a 

couple of feasibility studies as to the appropriateness, or in statutory terms, prudence of continuing the relationship with the National Finance Center. 

But as Chairman Saul and Mr. Amelio have both said, it was not 

terribly feasible to consider moving outside of the National Finance 

Center when the underlying software was not portable. It was, as 

described, a hodgepodge of systems tied together. Documentation 

for that system was lacking in a number of respects, as our auditors pointed out many times over the years. 

Now that the new system is completed and up and running, a 

whole range of options present themselves to the Board that, as a 

practical matter, were not available before. 

Senator FITZGERALD. Now, here in Washington, we have 100 employees who are doing the management of the Government Bond 

Fund, in which we have the non-marketable government securities 

that are not traded publicly, but which the TSP Government Bond 

Fund—what fund is that, Mr. Amelio? 

Mr. AMELIO. You are referring to the G Fund, which we refer to 

as the Stable Value Fund. 

Senator FITZGERALD. The Stable Value Fund. 

Mr. AMELIO. Yes. 

Senator FITZGERALD. That is invested in government bonds——

Mr. AMELIO. Yes. 

Senator FITZGERALD [continuing]. But non-marketable government bonds, is that not correct? 

Mr. AMELIO. That is correct. 

Senator FITZGERALD. And for those assets, the administrative 

work and the investment work, or just the investment work for 

that, is done here in Washington? 

Mr. AMELIO. The Board’s staff in Washington does handle the—

I don’t want to call it an investment piece because we are not actively managing, but they handle all of the work with respect to 

the G Fund, which is administrative processing, the movement of 

money back and forth, the accounting of it. In addition, we have 

a legal staff, a benefits policy staff, product development——

Senator FITZGERALD. Do you need 100 people to do that? 

Mr. AMELIO. Well, no. I was just going through each of the offices. We do a lot of things other than just the G Fund, as well. 

Senator FITZGERALD. How many people are dedicated to just the 

G Fund? 

Mr. AMELIO. It would probably—I don’t know, maybe a dozen. 

Senator FITZGERALD. OK. So that is only a small portion of the 

100 people that you mentioned. 

Mr. AMELIO. Yes. 

Senator FITZGERALD. OK. Now, Mr. Saul, in your written testimony you discussed, and in your oral testimony you discussed, two 

possible legislative changes regarding the TSP. One was that you 

would like the legislative authority for the TSP to self-insure, and 

21

it is your impression that the current statute does not grant the 

TSP the authority to self-insure, is that correct? 

Mr. SAUL. That is correct, Senator. The general counsel of our 

agency has issued a legal opinion that we do not have the ability 

to self-insure under the existing statutes as she reads them. We 

are not even 100 percent sure at this point, as I said in my testimony. We need to do some more research on this. 

What has happened is because of the costs, as you are aware, of 

D&O insurance skyrocketing because of all the abuse that has been 

out there in the corporate sector, our rates for our insurance have 

skyrocketed and we are paying——

Senator FITZGERALD. Do you know how much you are paying? 

Mr. SAUL. Yes. I was just going to say, we are paying—last year, 

I think it was approximately $400,000 for $5 million worth of liability insurance, and this insurance, by the way, does not cover 

the Board or the Executive Director because that is, as I think you 

said in your opening statement, it is statutory. We cannot be sued 

under the Federal statutes. What this policy does is provide insurance for the other employees of the agency. 

The Board was very upset that we were paying $400,000 or 

$500,000. As a matter of fact, the year before, we were paying 

$500,000 for this kind of coverage and, therefore, it became an 

issue as to whether we could use this $5 million pool that we have 

that is actually paid—filled in by the other——

Senator FITZGERALD. Did your insurer suggest any steps that you 

could take to lower your——

Mr. SAUL. There is none. As a matter of fact, it was very difficult 

even to get some carrier to bid on this thing. We had quite a bit 

of problems when the RFP went out. There were very few insurance firms that even wanted to participate in this endeavor, so——

Senator FITZGERALD. You suggest it sounds very high risk——

Mr. SAUL. Well, it is——

Senator FITZGERALD [continuing]. And I wouldn’t think it would 

be. 

Mr. SAUL. Frankly, I don’t think it is so high risk, but the industry assumes that it is high risk because of what has happened in 

the corporate sector. But at any rate, we are paying a lot of money 

for very little coverage at this point, Senator. 

Senator FITZGERALD. Mr. Sauber, has your council looked into 

this issue? 

Mr. SAUBER. No. This is a subject that has arisen only recently—

the first time we discussed it was at our last meeting and I am 

sure we will continue to discuss it. 

I would like to, if I could, just comment on an earlier subject, 

when you mentioned the National Finance Center. I think it, and 

this is just coming from my life representing workers, that it deserves to be said that the National Finance Center has served the 

Thrift Savings Plan quite well. One of the reasons the TSP’s expense ratios are so low is that the Finance Center has done a very 

good job. 

So I think it is worth stating that and I think a number of the 

organizations in the Thrift Savings Plan that represent public employees would be very concerned about decisions to contract out 

NFC work if it led to the creation of jobs that didn’t have health 

22

insurance, pensions and that sort of thing. So I think as a body, 

our ETAC Council would be concerned about any decision to look 

at outside vendors and would want these issues to be given a fair 

hearing. 

Senator FITZGERALD. Even if it is lower cost and it would benefit 

the postal workers that you represent by lowering the cost? 

Mr. SAUBER. We certainly are interested in having the lowest 

cost plan possible, but we also care that decent jobs be available 

to our members, as well. So I think there is an issue of balance for 

us. We are, of course, interested in the lowest possible cost and I 

think we have gotten a really good deal from the National Finance 

Center over the years. 

Senator FITZGERALD. What about the printing costs? That was, 

did you say, 2 or 3 percent of the overall cost too, Mr. Amelio? 

Mr. AMELIO. I did, Senator. That is right. 

Senator FITZGERALD. And who does the printing for the TSP? 

Mr. AMELIO. We have an outside service. UNICOR, the Federal 

Prison Industries does the printing. 

Senator FITZGERALD. The Federal Prison Industries, OK. Is that 

competitively bid? 

Mr. AMELIO. Not in the past. 

Senator FITZGERALD. It hasn’t been in the past? 

Mr. AMELIO. I am advised that we were not able to in the past. 

Apparently, there was a rule that Federal agencies had to utilize 

this particular agency for their printing services in the past. 

Senator FITZGERALD. So that could be contradictory to the statutory requirement that you use the lowest cost. 

Mr. AMELIO. I would—I believe so. 

Senator FITZGERALD. You might want to look at all these things 

in preparing legislative recommendations, such as with respect to 

self-insurance. You might want to catalog some of these discrepancies because I would like to help you keep this as low cost as 

possible. 

Mr. Grossman, with respect to Barclays, you apparently commingle the TSP funds with the funds of hundreds, presumably, of 

other plan managers that you bring together. You have over $1 trillion invested, or you manage and you have presumably hundreds 

of 401(k) plans and other types of plans with an average size of 

$800 million, correct? 

Mr. GROSSMAN. That is correct, yes. The TSP assets are commingled with other qualified investors in our collective funds, and 

qualified investors being primarily defined benefit and defined contribution plans, also foundations and endowments. However, it is 

important to note that the funds in which the TSP has invested are 

not open to hedge funds or individual investors. Individual investors can only invest, let us say, in a defined contribution plan in 

these funds. 

Senator FITZGERALD. OK. So you have both defined contribution 

and defined benefit plans participating in your index funds, and 

you commingle all of those monies together. 

Mr. GROSSMAN. That is correct. 

Senator FITZGERALD. OK. And that allows you to achieve a lot of 

these economies that you are talking about? 

23

Mr. GROSSMAN. Yes. And we have a series of different funds depending on the particular characteristics. So in the funds that we 

are managing for TSP, I could tell you that in terms of the assets, 

they are predominately defined benefit plans as opposed to defined 

contribution, but there are some defined contribution plans in 

there, as well. 

Senator FITZGERALD. OK. And this all began as Wells Fargo 

years ago, you said 1971. Was it Wells Fargo that came up with 

what is now Barclays Global Investors? 

Mr. GROSSMAN. That is right. It was operating at that time as 

a division of Wells Fargo Bank called Wells Fargo Investment Advisors that was the pioneer in developing index strategies, particularly for institutional clients in the United States. 

Senator FITZGERALD. It sounds like you invented indexing before 

Vanguard, which claims to have invented indexing. 

Mr. GROSSMAN. Technically, yes, we did. [Laughter.] 

They get more publicity than we do, but they advertise more. 

Senator FITZGERALD. OK. Now, you actually have some interesting strategies to keep the costs as low as possible. As I understand it, if—let us say that I buy, today, some of your C Fund, but 

Senator Pryor sells an equivalent amount of his C Fund shares. 

You will, in fact, try to net out our transaction before you go into 

the market and adjust your holdings of the S&P 500 Index, for example, is that correct? Could you explain how that works? 

Mr. GROSSMAN. Yes, that is correct. What we do on the trading 

side is, first, look for any opportunities to cross or offset activity 

such as that, and it can happen at a couple different levels. The 

first level is at the fund level. So within a particular pool fund 

looking to offset contributions and redemptions to the full extent 

possible and therefore eliminating the need to trade completely at 

that level. 

Senator FITZGERALD. And you want to eliminate the need to 

trade because trading drives up transaction costs, is that correct? 

Mr. GROSSMAN. Exactly. 

Senator FITZGERALD. And who do you use to execute your trades? 

Who does Barclays use? Do you have your own in-house trading 

firm? 

Mr. GROSSMAN. For executing trades for the TSP plan, we use 

strictly outside broker dealers that we choose based on best execution. 

Senator FITZGERALD. And you are not allowing—you said you 

don’t use soft dollar arrangements, so in other words, you are not 

giving anybody permission to charge you an exorbitant brokerage 

commission in return for them providing you with research. 

Mr. GROSSMAN. That is exactly right. We don’t use soft dollars 

anywhere in the business. We don’t believe in them. We think they 

present a conflict of interest. 

Senator FITZGERALD. Do you do any directed brokerage? 

Mr. GROSSMAN. We don’t do any directed brokerage for the TSP 

assets or the funds in which they are invested. We do some directed brokerage in other parts of our business, where a client is 

hiring us to do something on a custom transition or restructuring 

basis, and there, we do have an affiliated broker that we use for 

that activity, but it is on a fully disclosed basis where the client 

24

is hiring us to do that, or in the case of a mutual fund, where it 

is approved by the fund board. 

Senator FITZGERALD. Do you do any revenue sharing? 

Mr. GROSSMAN. Any revenue sharing? Certainly not in connection with the TSP assets in any way, no, we do not. 

Senator FITZGERALD. When you say not in connection with the 

TSP assets, could you be more specific? You may do revenue sharing with another client’s funds that may be commingled with the 

TSP funds, is that not correct? 

Mr. GROSSMAN. I am not sure, Senator, exactly what the definition of revenue sharing is, because I don’t know that there is a 

standard definition out there. In our mutual funds, for example, we 

do provide revenue, we do provide funds to intermediaries in exchange for shareholder servicing, services that they are providing 

on those funds and it is something that is part of the ongoing regular business relationship. 

Senator FITZGERALD. Do you share part of your investment fee 

with brokerage firms in return for the brokerage firms distributing 

your funds? 

Mr. GROSSMAN. We do not engage in any revenue sharing like 

that in exchange for shelf space. It is strictly where they are providing shareholder servicing for us. For example, they are providing aggregating account orders, they are putting together buy 

and sell activity which we get on an aggregate basis from those entities. They are providing recordkeeping. They are providing account servicing, covering telephone call centers and so on for the 

clients that they are servicing. There are costs associated with 

that, they get compensated by us for providing those services. But 

that is something that is quite different, as we look at it, than paying for shelf space, which we do not believe in. 

Senator FITZGERALD. Does Barclays only have index funds or do 

you have actively managed funds that you offer? 

Mr. GROSSMAN. We have actively managed funds, as well. 

Senator FITZGERALD. That are open to retail investors? Can retail 

investors invest in your index funds? 

Mr. GROSSMAN. In our index funds, they can. The primary 

avenue for retail investors to invest in our index funds is through 

our I shares, strategies which are exchange traded funds. So those 

trade on the exchanges. They are open and available to any investor. That is the primary avenue for retail investors or other mutual 

funds, that they can be obtained by retail investors, but generally, 

they are really targeted at defined contribution plans as opposed to 

the direct retail marketplace. 

Senator FITZGERALD. Now, it is my understanding that you have 

some pretty sophisticated software that enables you to match the 

S&P 500 index. As one company in the index gets larger, you will 

make purchases to reflect the changes in composition of the S&P 

500 index fund and the other indexes that you track. Can you describe your sophisticated software, or what I hear is sophisticated 

software? 

Mr. GROSSMAN. Yes, certainly. I would be happy to. We do have 

a variety of analytics and software that we use for tracking not 

only the S&P 500 index but all of the indexes that we are tracking, 

including all of those that we are using on behalf of the Thrift SavVerDate 0ct 09 2002 12:34 Aug 19, 2004 Jkt 093478 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 C:\DOCS\93478.TXT SAFFAIRS PsN: PHOGAN
25

ings Plan. And the way the software works is it allows us to monitor with a very high degree of precision what is the composition 

of each of the indexes we are looking to track and to understand 

any changes in that index. 

So, for example, if Standard and Poors makes a change in the 

index, if they remove a company and add a company, as they periodically do in rebalancing the S&P 500 index, we will then make 

the appropriate changes in the underlying portfolios, selling, if necessary, the company that is being removed from the index, buying 

the company being added, doing that in a way that looks to control 

the tracking error very precisely while also minimizing any trading 

cost, any frictional cost associated with that. 

One other point to make with respect to index funds is that if 

you look at something like the S&P 500, it really does provide a 

good mirror of a buy and hold strategy, because if there are no constituent changes to the S&P 500, then one could track it quite well 

by an old approach, because if, for example, the weighting of a company goes up because its stock price has increased, that doesn’t directly trigger any need for a trade to take place because the weight 

in the index and the weight in the fund will go up or down pretty 

much in lockstep with each other. 

So the trading activity and the sophisticated software we use is 

primarily around facilitating client contributions and redemptions 

and dealing with changes to the index itself as opposed to the need 

to track it just because of market fluctuations. 

Senator FITZGERALD. Mr. Saul. 

Mr. SAUL. I am sorry, Senator. I would like to go back, if I might 

have permission, to this whole questioning of the National Finance 

Center, because I think it is important from the Board’s perspective and my perspective as chairman of the agency to be very clear 

where we stand with this issue. 

We have had a very successful historical relationship with the 

National Finance Center. The agency and the National Finance 

Center grew together from really ground zero. As you know, there 

was $1 billion in here to $131 billion, very few participants, there 

are now over 3.2 million participants that are availing themselves 

of the TSP. 

So I think the Board has to be very careful, and the executive 

director, how we proceed with the National Finance Center because 

cost is very important and you know from our record where we 

have run one of the most competitive, as you stated, funds in the 

country, cost is certainly on our radar scope. I don’t mean to 

minimalize this and I respect your concern with cost, but we have 

to be very careful about the reliability and the service, also, because the last thing we need is any kind of a breakdown or any 

kind of questioning of the reliability and the accuracy of the numbers that our participants are getting. 

So while in 1986 it was very clear that the NFC did not have 

a lockhold on this agency and that it was to be bid out, as I stated, 

the system that developed was an antiquated system. There was no 

way it could have been bid out until this summer when we put this 

new documented, automated system in. 

Senator FITZGERALD. I want to ask you about that. I was in 

banking in the private sector and was general counsel for a bank 

26

holding company that managed a number of small community 

banks. It was common for smaller banks to enter into a contract 

with the large money center bank to manage their backroom operations, and the computer operations of the small bank would not 

be compatible initially with the large money center bank’s computer systems. As part of the contract to manage the computer 

records, the large money center bank would come in and do a conversion of the small bank’s computer systems over to the new system. 

Certainly, I appreciate the efforts of the people in the national 

call center, and I am very conscious about their jobs as well. But 

at the same time, you have a statutory obligation to provide this 

at the lowest cost and I am concerned that we have no evidence 

that we are getting the lowest possible cost here or even anything 

close to the lowest possible cost. 

Mr. SAUL. But if you follow the histories, when this present 

Board and this executive director took over approximately 14 

months ago, we had priorities here and the first thing we were 

faced with was a failed system. We were in the midst of developing 

a new system. So the most important thing to the Board was to be 

sure that we got our new computer system up and running, that 

it was running successfully. It was never a question of ignoring the 

cost. Now once the new system is up, if you take a look at what 

Gary Amelio and the Board——

Senator FITZGERALD. Now, is the new system compatible with 

that in which other backroom operations, such as that provided by, 

say, Hewitt and Associates——

Mr. AMELIO. Yes. 

Senator FITZGERALD [continuing]. Could adapt and run? 

Mr. AMELIO. Yes, sir. 

Senator FITZGERALD. It is? 

Mr. AMELIO. Yes. We have a state-of-the-art system now. 

Senator FITZGERALD. OK, and it is used by other 401(k) managers, employers around the country, I presume? 

Mr. AMELIO. It is very widely utilized. The vendors that have put 

our system in have put many systems in around the country. 

Senator FITZGERALD. Who was the vendor who ultimately did it 

after they replaced AMS? 

Mr. AMELIO. MATCOM was the primary vendor, but under them 

doing a lot of the specific work vis-a-vis the concept of daily defined 

contribution is SunGard, and you will find their name throughout 

the banking industry. 

Senator FITZGERALD. It is very common. 

Mr. SAUL. So if I just might go on, what happened was as the 

new system came up, it became evident to us that we would look 

into some of these other concerns, and in the last 6 months we 

have now established or are in the process of establishing a backup call center. We have now taken the software maintenance of the 

new software away from the National Finance Center and given 

that to the vendor that has——

Senator FITZGERALD. Are you getting lower fees now from the 

National Finance Center as a result of taking——

Mr. SAUL. We are getting lower fees, yes. 

27

1The chart referred to appears in the Appendix on page 125. 

Senator FITZGERALD. They charged you about $54 million last 

year. What would they have been charging historically the year before and 10 years ago? Would you know those fees? What direction 

have those fees at the National Finance Center been going in dollars and cents terms? 

Mr. AMELIO. The overall numbers have been going up, but obviously as the size of the plan goes up, the overall cost goes up every 

year. What has concerned me is the cost per participant has risen 

significantly. 

Senator FITZGERALD. So instead of getting an economy of scale, 

we are getting the reverse with the National Finance Center? 

Mr. AMELIO. That is correct. I have a chart in front of me that 

was provided 1 and the cost per participant started in 1991 at a little over $6 per participant and it has now worked its way up to 

over $18 per participant. 

Senator FITZGERALD. So it has tripled? 

Mr. AMELIO. Yes. 

Senator FITZGERALD. Now, you weren’t in a mutual fund before 

you came to the TSP, you were in pension management? 

Mr. AMELIO. Yes. I was with a large bank——

Senator FITZGERALD. PNC Bank. 

Mr. AMELIO [continuing]. The PNC, and we provided the services 

like the National Finance Center would do for private sector companies and State and local government——

Senator FITZGERALD. Well, in your experience, as a fund grew 

larger, weren’t you trying to get an economy of scale so that the 

cost would go down per participant? 

Mr. AMELIO. There is no question that costs needed to go down. 

The larger the plan, the larger the scale, the lower the cost per 

participant. That is undisputed. 

Senator FITZGERALD. But that normal economy of scale is being 

turned on its head in this case with the fees from the National Finance Center tripling over the last 10 or 12 years. 

Let me shift to just a few more issues I want to get into, and 

this does relate to costs, as well. A lot of people are taking loans 

from their TSP plans. It was mentioned by several of the panelists 

that loans are a bad idea unless you absolutely have to have them 

as a last resort. Do you think there may be evidence that some TSP 

participants are taking them not as a last resort, but just as available credit, and you want to take some steps to deter people from 

taking loans except as a last resort? One of your ideas is to charge 

a $50 administrative fee. 

Let us talk about the loans. How many people took loans last 

year? There are 3.2 million participants——

Mr. AMELIO. We have 934,000 loans. Forty percent of that number was issued last year. 

Senator FITZGERALD. So a lot of the loans came last year? 

Mr. AMELIO. They were reissued, yes. 

Senator FITZGERALD. Reissued? 

Mr. AMELIO. Some of them were new. We don’t have the breakdown between what is new and what was a loan that existed and 

paid off——

28

Senator FITZGERALD. It sounds like about 25 percent of TSP participants have a loan outstanding? 

Mr. AMELIO. That is correct, because many of the people that 

have a loan actually have two outstanding. So about a quarter of 

the plan’s participants have outstanding loans. Three-quarters 

have no loans. 

Senator FITZGERALD. Now, do the TSP fund make money or lose 

money on the loans they make? 

Mr. AMELIO. I am sorry, Senator? 

Senator FITZGERALD. Do we make money on the loans, are they 

done at cost, or do we lose money on the loans? 

Mr. AMELIO. At this point, prior to the implementation of the 

new procedures, it does cost the plan’s participants money because 

there is a cost involved with processing the loans. So we are——

Senator FITZGERALD. But we are charging an interest rate, right? 

Mr. AMELIO. Yes, but that is paid back into the participant’s account. 

Senator FITZGERALD. So there is a cost that the other participants bear when somebody—and what was the cost? Can you quantify the cost for last year? 

Mr. AMELIO. We can. It was about $47 a loan, which is why we came up with the $50 number, which actually is in line with industry standards. 

Senator FITZGERALD. So we have at least a cost of $47 per 

900,000 employees that has been charged back to the rest of the 

fund. That is costing a lot of money. 

Mr. AMELIO. Yes. 

Senator FITZGERALD. Do you know system-wide how much it is 

costing per year, on average? 

Mr. AMELIO. Without multiplying it out, and I don’t want to 

make an inaccurate number——

Senator FITZGERALD. OK. 

Mr. AMELIO [continuing]. But it is big. That was one of the reasons that we imposed the loan cost as a user fee so that participants who——

Senator FITZGERALD. Is the TSP providing sufficient education to 

participants that they shouldn’t do this unless they are really in 

dire financial straits? Does anyone want to comment on that? 

Maybe Mr. Sauber? 

Mr. SAUBER. I believe that the kinds of education programs 

available for TSP participants really varies across Federal agencies. Many agencies do a very good job of holding seminars on how 

to learn about the TSP, to learn about the TSP loan program, but 

I am not aware of a systemwide effort to educate TSP participants. 

I know that is an issue that Senator Akaka is very concerned about 

and something that the ETAC would like to talk about in the context of introducing new lifecycle or lifestyle funds. 

Senator FITZGERALD. What is the reason for allowing the loans? 

Mr. AMELIO. Loans are not a retirement plan feature. The reason 

that they are so popular in the industry is they are an inducement 

to get participants to participate in the plan. Participants are——

Senator FITZGERALD. Don’t you have enough inducements here in 

that you have the lowest cost mutual fund in the world? Isn’t that 

a sufficient inducement? 

29

Mr. AMELIO. It was pointed out to me, the loan program is statutory, certainly, so it is mandated by statute. But to go on, it is just 

well known——

Senator FITZGERALD. Is it in the original statute? 

Mr. AMELIO. Yes. 

Senator FITZGERALD. It was? 

Mr. AMELIO. Yes. 

Senator FITZGERALD. OK. So that is one thing we could look at 

at the statutory level. 

Mr. AMELIO. You could. I do think if you eliminated loans—I am 

an opponent of loans personally, professionally, but I would tell you 

that if you eliminated loans, your participation rates would decrease significantly, and that is not just true with the Federal 

workforce. That is true across the entire American workforce. I 

think every study bears that out. 

Senator FITZGERALD. Do you think a $50 fee will defray the cost 

to the other members of the TSP? 

Mr. AMELIO. I definitely do. I believe it will cover costs, yes. 

Senator FITZGERALD. OK. Mr. Sauber, did you want to comment? 

Mr. SAUBER. I was just going to say, that it struck us as a very 

nice option that employees like to have because there is resistance 

when you first sign up: Employees ask themselves, ‘‘Well, what if 

I really need the money? What if I really get in a jam? ’’ This loan 

program answers that issue. So I do think it is important, at least, 

for some participants, to overcome that first barrier to actually join 

the plan. 

But I think our primary concern is to ensure that these costs be 

allocated fairly and I think applying a nominal fee like that would 

cover the cost would be fair to the rest of the participants. As Gary 

Amelio mentioned, three-quarters don’t have loans. 

Senator FITZGERALD. I would think the cost per loan has got to be higher than $50. There is loan documentation that goes along 

with this. You have a lot of involvement of your people at the Finance Center. 

Mr. AMELIO. It is difficult to quantify these costs because many 

of the people and the systems that are doing the work of processing 

loans at other times do other things. But we believe that we are 

fairly close. And at $47—somebody back here did the math without 

a calculator—the cost to the plan is about $43 million. Now, that 

is over a period of time. That is not 1 year, because some of these 

loans extend out over 5 years, some 15 for residential. But for the 

existing loan base, it costs the participants $43 million, all participants. 

Senator FITZGERALD. When you say a residential loan, are you 

referring to something like a mortgage? 

Mr. AMELIO. It would not be secured, but yes, the purpose of the 

loan would be to purchase a principal residence. 

Senator FITZGERALD. Or provide the down payment before they 

get a mortgage from a commercial——

Mr. AMELIO. Yes. 

Senator FITZGERALD [continuing.] So they are borrowing the 

down payment? 

Mr. AMELIO. Yes. That is probably what is going on. 

Senator FITZGERALD. Mr. Lebowitz. 

30

Mr. LEBOWITZ. Mr. Sauber actually, I think, made most of the 

points I was going to make. We have certainly heard over the years 

in the private sector context of regulating plans under ERISA that 

the availability of loans is generally regarded as critical to inducing 

employees to participate and to participate at the higher levels permitted under the plan. Generally speaking, the surveys seem to 

show that employees are concerned about not having access to the 

money in circumstances when they might need it. 

Senator FITZGERALD. What about the cost of the lifestyle fund 

that you may create? Mr. Amelio, would you care to comment on 

that? What do you think the likely cost of that would be? It sounds 

like a good idea, but if it winds up costing a lot of money, that may 

alter the calculation. 

Mr. AMELIO. Obviously, I need to temper my remarks by the fact 

that we have completed the RFI process but have not yet gotten 

approval to go through the RFP process, so I want to be careful not 

to violate any Federal procurement laws. 

I would tell you based upon the extensive research we have done 

with over 20 vendors already, we believe the cost will be extremely 

minimal. I just think it is—to use lay terms, dirt cheap, and I believe that this feature is the greatest thing to hit plans since sliced 

bread. I mean, it is just badly needed and it is very inexpensive. 

I don’t think it will alter those numbers you have behind you on 

the chart in the least. 

Senator FITZGERALD. What effort do you undertake to monitor 

customer satisfaction with the services of the TSP? Is there a survey that you ask people to fill out, or——

Mr. AMELIO. At this point, I don’t believe historically any customer survey has ever been done by the TSP, but we do have one 

in the works now. It is just in the initial stages and will be rolled 

out with our new communications plan. 

Senator FITZGERALD. Will you do that online as opposed to printing at great expense? 

Mr. AMELIO. I believe we will limit it to online because that is 

the most cost effective way to do it. 

Senator FITZGERALD. Are more TSP members declining to take 

their TSP prospectus in the mail annually and instead getting 

them to just look it up online? 

Mr. AMELIO. I don’t have those numbers, because actually, participants don’t make requests of us. They make their requests 

through individual agencies, so it depends on what each agency is 

looking at. The figures I can give you are this. We recently went 

to what we will call the paperless statement route, since we have 

gone from two statements a year to quarterly, and what we have 

indicated to the participants are you can get your statements 

through the website online or you can call and get your balances 

over the thrift line. If you want a paper statement, you have got 

to request one. 

Now, at this point, over 300,000 participants, or about 10 percent, have requested paper statements. That is very low. What I 

think is interesting is about a third of those made their requests 

online, so—— [Laughter.] 

The complaints that the folks who need paper statements because they don’t have access to the Internet just doesn’t hold water. 

31

Senator FITZGERALD. So you are going to continue your efforts to 

try and go in a more paperless direction? 

Mr. AMELIO. Absolutely. It saves us $10 million a year. We will 

continue to make them available if somebody wants it, but we are 

going to continue to strive——

Senator FITZGERALD. Note to the Federal Prison Industies, right? 

Mr. AMELIO. Yes. 

Senator FITZGERALD. OK. That pretty much does it. I think this 

has been a good hearing. I want to compliment all those who are 

involved in the TSP, from the auditors at the Department of Labor 

to the Board members, to the outside vendors. I want to compliment you because I think despite a few bumps in the road, such 

as that computer contract in the last couple of years, I think it is 

a very well managed fund, and I think those numbers speak for 

themselves. It is much more low cost than any of the private sector 

funds that are out there, and, in fact, as I said at the beginning, 

I hope some day that we can give members of the general public 

the same kind of low cost investing options that we have given 

Members of Congress and other Federal employees. 

So I want to thank you for coming here. I compliment you on the 

job you are doing, and we will look forward to staying in touch with 

you as new issues arise. Please give Senator Akaka and me a recommendation of legislative changes that you would like to see because we will try and help you with that. 

Thank you very much. This hearing is adjourned. 

[Whereupon, at 12:49 p.m., the Subcommittee was adjourned.] 

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