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INVESTING IN THE FUTURE: MINORITY

OPPORTUNITIES AND THE THRIFT SAVINGS PLAN

HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE,

POSTAL SERVICE, AND THE DISTRICT

OF COLUMBIA

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JULY 10, 2008

Serial No. 110–133

Printed for the use of the Committee on Oversight and Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

JACKIE SPEIER, California

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL SERVICE, AND THE DISTRICT OF

COLUMBIA

DANNY K. DAVIS, Illinois

ELEANOR HOLMES NORTON, District of

Columbia

JOHN P. SARBANES, Maryland

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio, Chairman

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

KENNY MARCHANT, Texas

JOHN M. MCHUGH, NEW YORK

JOHN L. MICA, Florida

DARRELL E. ISSA, California

JIM JORDAN, Ohio

TANIA SHAND, Staff Director

(III)

C O N T E N T S

Page

Hearing held on July 10, 2008 ............................................................................... 1

Statement of:

Hollingsworth, Jarvis, partner, Bracewell and Giuliani, LLP; and Edward

Swan, Jr., president, Fiduciary Investment Solutions Group ................... 32

Hollingsworth, Jarvis ................................................................................ 32

Swan, Edward, Jr. ..................................................................................... 41

Long, Greg, executive director, Federal Retirement Thrift Investment

Board; and Michael Sobel, managing director and head of U.S. Equity

Trading, Barclays Global Investors ............................................................. 8

Long, Greg ................................................................................................. 8

Sobel, Michael ............................................................................................ 16

White, Thurman, chief executive officer, Progress Investment Management; Mellody Hobson, president, Ariel Capital Management, Inc.; and

Jesse Brown, president, Krystal Investments ............................................ 57

Brown, Jesse .............................................................................................. 87

Hobson, Mellody ........................................................................................ 79

White, Thurman ........................................................................................ 57

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

Brown, Jesse, president, Krystal Investments, prepared statement of ....... 89

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

of Illinois, prepared statement of ................................................................ 3

Hobson, Mellody, president, Ariel Capital Management, Inc., prepared

statement of ................................................................................................... 81

Hollingsworth, Jarvis, partner, Bracewell and Giuliani, LLP, prepared

statement of ................................................................................................... 36

Long, Greg, executive director, Federal Retirement Thrift Investment

Board, prepared statement of ...................................................................... 11

Sobel, Michael, managing director and head of U.S. Equity Trading,

Barclays Global Investors, prepared statement of ..................................... 19

Swan, Edward, Jr., president, Fiduciary Investment Solutions Group,

prepared statement of ................................................................................... 43

White, Thurman, chief executive officer, Progress Investment Management, prepared statement of ........................................................................ 61

(1)

INVESTING IN THE FUTURE: MINORITY OPPORTUNITIES AND THE THRIFT SAVINGS

PLAN

THURSDAY, JULY 10, 2008

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL

SERVICE, AND THE DISTRICT OF COLUMBIA,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2247, Rayburn House Office Building, Hon. Danny K. Davis (chairman of the subcommittee) presiding.

Present: Representatives Davis, Cummings, Norton, Sarbanes,

and Jordan.

Staff present: Lori Hayman, counsel; William Miles, professional

staff member; and Marcus A. Williams, clerk.

Mr. DAVIS OF ILLINOIS. The subcommittee will now come to

order.

Although the ranking member hasn’t arrived yet, I expect him to

come momentarily, and given the fact that I grew up in an environment where punctuality was the essence of being, or at least my

father thought so, we will go ahead and begin.

Welcome, Ranking Member Marchant, members of the subcommittee, hearing witnesses, and all those in attendance to the

Subcommittee on the Federal Workforce, Postal Service, and District of Columbia’s hearing entitled, ‘‘Investing in the Future: Minority Opportunities and the Thrift Savings Plan.’’

The Chair, ranking member, and subcommittee members will

each have a 5-minute period to make opening statements, and all

Members will have 3 days in which to submit statements for the

record. Hearing no objection, so is the order.

I will begin with an opening statement.

We welcome Mr. Jordan. Mr. Jordan, how are you doing?

Mr. JORDAN. Good morning.

Mr. DAVIS OF ILLINOIS. Today’s hearing is intended to examine

ways to increase minority participation in the management of

Thrift Savings Plan [TSP] Funds and to explore why the Federal

Government uses passive management strategies versus active

management of TSP funds.

The TSP is the Federal Government’s retirement plan, similar to

private employer’s 401(k) plans. The TSP has over $224 billion

under its management. The Plan is unique because, unlike other

Federal Government programs, it does not receive any appropriaVerDate 11-MAY-2000 13:37 Apr 06, 2009 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\48064.TXT KATIE PsN: KATIE
2

tions of taxpayer money, nor does it have a public purpose, and all

decisions must be made for the exclusive benefit of TSP participants who invest in the program. This gives participants the confidence that the money invested will only be used in their interest

and they will not be charged astronomical fees. By law, TSP stock

and bond funds must be passively managed index funds. Passive

management funds seek to replicate the broad markets, not beat

them, often creating savings for participants because of their traditionally lower fees.

The debate over minorities participating in the TSP funds has

been a concern for quite some time; yet, the issue came to the forefront during last year’s Congressional Black Caucus legislative conference. The executive director of the Federal Retirement Thrift Investment Board revealed that there are minority firms with talent

in long-term financial management. However, most of these firms

gravitate toward the active fund management business, which is

not an investment strategy of the TSP. Research by the TSP indicates that there may be only one minority-owned firm that deals

with passive-management of index funds.

Today’s hearing will examine ways to increase minority access

and the possibility of increased profitability to members of the Plan

because of diversification to active management strategies. Several

ideas will be discussed today to try to achieve this goal, including:

one, minority firms using passive fund strategies so they can participate in the management of TSP funds; two, minority firms applying to participate in Barclays minority program; and, three, TSP

beginning to operate using active funds to increase profitability and

minority access.

The debate about active versus passive management of TSP is

not a new concept. Today we will discus some of the viable options

and explain why the TSP operates as it currently does, and why

some firms feel that it is time for the TSP to leap into the future

and change its management style of TSP funds.

I thank all of the witnesses in attendance and we look forward

to your testimony.

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

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Mr. DAVIS OF ILLINOIS. I will now yield to Mr. Jordan for any

comments that he might have.

Mr. JORDAN. I thank the chairman.

Today’s hearing will take a look at the extent to which minorityowned firms are involved in management of the Thrift Savings

Plan funds. For most Federal employees, these funds are a critical

component to their retirement plans and, as such, represent a significant positive asset for recruitment and retention of talented

civil servants.

The Federal Retirement Thrift Savings Investment Board has

managed the funds of these Federal employees in such a manner

as to ensure independence, reasonable cost, and transparency. Any

efforts to modify that system must first seek to maintain and enhance these characteristics.

It is also important to recognize that the funds controlled by this

fund are first and foremost someone else’s money. These funds belong to the women and men who have earned them through their

service to this country. There may be ways to improve the operation of this fund, but Congress should always keep in mind that

it isn’t our money. That doesn’t mean we can’t suggest changes, but

the desires and personal goals of the civil servants should always

be our guiding principle in making these sort of changes.

I look forward to the testimony of the witnesses today and want

to thank the chairman for scheduling the hearing.

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

Now I would like to ask Representative Norton if she has some

opening remarks.

Ms. NORTON. I thank the chairman for this hearing. There are

two ways to look at this hearing; to look at what the TSP is doing

generally and also look at it as a continuation of the chairman’s

concern for equal opportunity when Federal dollars are at stake or

Federal employment is involved.

We have a competitive process. We are dealing here, at least

when it comes to firms, with an area that has been traditionally

closed to minority firms; indeed, has discriminated against them.

So there is no wonder that this is one of those areas in which we

would want to make sure that minority firms understood the competitive process of the Federal Government and that we reached

out to encourage their participation in an area that is one that did

not welcome them, traditionally, in this government and in this society.

We have to satisfy ourselves that is being done, particularly

when you consider the growing number of employees who contribute to the fund who are people of color. We want to make sure that

we have done all that we can do to ensure that every part of our

government has welcomed all to participation. This may be a difficult part; therefore, it requires some specific action; perhaps action that has not yet been taken, but we will see.

I thank you again, Mr. Chairman.

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

Norton.

We will now go directly to our witnesses. Before swearing them

in, let me just introduce our first panel.

8

Our first panel is Mr. Greg Long, who is the Executive Director

of the Federal Retirement Thrift Investment Board. The Board is

responsible for administering the Thrift Savings Plan, which is currently the contribution fund for Government employees.

Thank you very much, Mr. Long, for being here.

Our second witness is Mr. Michael Sobel. Mr. Sobel is the managing director and head of U.S. Equity Trading for Barclays Global

Investors, which is the management company responsible for the

outside management of TSP funds.

Gentlemen, is it our tradition that witnesses be sworn in. If you

would stand and raise your right hands.

[Witnesses sworn.]

Mr. DAVIS OF ILLINOIS. The record will show that the witnesses

answered in the affirmative.

Again, gentlemen, we are pleased that you are here with us. We

would ask that you summarize your statement in 5 minutes. We

generally are guided by the green light, although we don’t always

adhere totally to it. But the green light indicates that you have 5

minutes. When it gets yellow, you are down to 1 minute; and, of

course, the red light means that you should summarize your statement and then we will go into questions.

Let me thank you again, and we will begin with Mr. Long.

STATEMENTS OF GREG LONG, EXECUTIVE DIRECTOR, FEDERAL RETIREMENT THRIFT INVESTMENT BOARD; AND MICHAEL SOBEL, MANAGING DIRECTOR AND HEAD OF U.S. EQUITY TRADING, BARCLAYS GLOBAL INVESTORS

STATEMENT OF GREG LONG

Mr. LONG. Chairman Davis and members of the subcommittee,

my name is Greg Long, and I am the Executive Director of the Federal Retirement Thrift Investment Board. The five members of the

Board and I serve as the fiduciaries of the Thrift Savings Plan for

Federal employees.

The TSP is the largest defined contribution retirement plan in

the world. Individual accounts are maintained for more then 3.9

million Federal employees, members of the uniformed services, and

retirees. As of June 30th, the TSP totaled $226 billion in assets.

Your letter of invitation explained that the purpose of this hearing is to examine the passive investment strategy used in the TSP

and explore ways to increase minority participation management of

the TSP. I will address both of these matters in my statement.

The TSP was created by Congress in the Federal Employees Retirement System Act of 1986, following 3 years of study and hearings by the House and Senate committees of jurisdiction. The

record of these proceedings shows that the committees received

input from pension experts, academics, employee representatives,

the financial services industry, and the Reagan administration.

Significant assistance was also provided by the Congressional Research Service and GAO.

Various investment approaches were considered and, ultimately,

the House and Senate decided on a passive investment policy for

the TSP. Passive management in the TSP is achieved through the

use of index funds. All of the stocks in an index are purchased.

9

There is no ‘‘active’’ attempt to out-perform the index through specific stock selection.

The following passage from the Joint Explanatory Statement of

the Committee of Conference explains how the conferees themselves described the crucial nature of this decision: ‘‘Most importantly, the three funds authorized in the legislation are passively

managed funds, not subject to political manipulation. A great deal

of concern was raised about the possibility of political manipulation

of large pools of thrift plan money. This legislation was designed

to preclude that possibility. Concerns over the specter of political

involvement in the thrift plan management seem to focus on two

distinct issues. One, the Board, composed of Presidential appointees, could be susceptible to pressure from an administration.

Two, the Congress might be tempted to use the large pool of thrift

money for political purposes. Neither case would be likely to occur

given present legal and constitutional restraints. The Board members and employees are subject to strict fiduciary rules. They must

invest the money and manage the funds solely for the benefit of

participants. A breach of these responsibilities would make the fiduciaries civilly and criminally liable.’’

The Conference Report goes on to describe how the passive approach is designed to insulate the TSP from political pressure while

allowing Plan participants to benefit from the long-term growth

available in the broad markets.

Since the initial policy was established by the Congress in 1986,

the Board, on its own initiative, has conducted two major investment policy reviews. Between 1993 and 1995, the Board reaffirmed

the passive strategy, while asking the Congress to authorize additional passively managed index funds for investment.

Again in 2006, with the assistance of Ennis Knupp, our Chicagobased investment consultant, the Board undertook a second major

review of TSP investment policy. This review again reaffirmed the

passive management approach, which the Board continues to endorse and pursue.

Surveys of Federal employees by the Office of Personnel Management have shown that the TSP is very highly regarded. Our own

surveys internally support the same findings. Investment legend

John Bogle, the founder of Vanguard Mutual Funds, has characterized the TSP as ‘‘the best single savings vehicle in America today.’’

The Board members and I are privileged to offer this valuable benefit to the men and women who serve our Nation, and we endorse

continuation of this passive investment philosophy, which has

served Plan participants very well over the past 21 years.

With regard to the second matter noted in your invitation, this

is the second time in 16 months that I, as Executive Director, have

been asked by a Member of Congress to publicly discuss why the

Board does not specifically seek asset management services for minority or women-owned vendors. Last September, Congresswoman

Maxine Waters invited me to address the same topic at the Congressional Black Caucus Foundation’s Financial Services Issue

Forum.

I accepted that invitation even though I knew that many vendors

in attendance would not be pleased with my message. Nevertheless, I think it is important to speak openly to all members of the

10

financial services industry so there is a clear understanding of just

what the Board is seeking when it goes to the marketplace for investment services.

First, for the reasons discussed above, the TSP offers only passive investments to participants. Consequently, we do not seek

services from the very large segment of the financial services industry that offers various active management products. Our goal

with regard to investments is to replicate the returns of the broad

indices, as our statute requires.

Second, our law requires the Board to develop investment policies which provide for low administrative costs. I, and all of my

predecessors, determine that the best way to achieve low administrative costs for the participants is to conduct a full and open competition for the asset management services we require. This process

of open competition has resulted in the hallmark of the Plan’s success, which is its very low administrative costs. In my view, this

remain the gold standard for ensuring participants that this Plan

is being administered exclusively for their benefit, as our guiding

statute requires.

Some agencies may seek to further social or political goals when

they spend taxpayer dollars to accomplish their missions. The

Board, however, does not spend taxpayer dollars. Our administrative expenses are paid first from forfeitures and then from the investment earnings of all TSP participants. These expenses reduce

the retirement savings of our participants and thus must be expended solely for their benefit. This highly focused approach governs all of our policy and business decisions, including the procurement of services.

Additionally, by statutory design, the financial services we seek

are the plainest of plain vanilla. In writing and amending our statute, the Congress clearly intended that the TSP’s funds are to be

invested efficiently, keeping market impact to an absolute minimum.

I hope this testimony helps the subcommittee in its review, and

I welcome any questions.

[The prepared statement of Mr. Long follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much.

We will now hear from Mr. Sobel.

STATEMENT OF MICHAEL SOBEL

Mr. SOBEL. Chairman Davis and members of the subcommittee,

my name is Michael Sobel. I am here to testify on behalf of

Barclays Global Investors and its role as the external manager for

the Federal Thrift Savings Plan. As head of U.S. Equity Trading

at BGI, I am responsible for equity and listed derivatives trading

originating from the United States, of which responsibilities include assuring that the execution results are in line with BGI’s

best execution principles in managing our brokerage relationships.

I will begin by discussing our investment philosophy and our

structure, both of which are focused on delivering highly reliable,

low-cost investment results to institutional investors like TSP. By

‘‘institutional,’’ I refer to defined benefit and defined contribution

pension plans sponsored by corporations or public agencies, and to

endowments, foundations, and other similar pools of capital. I will

then say a few words about the services we provide to the TSP and

elaborate on how we keep the costs associated with trading and investing as low as possible. I will conclude by discussing BGI’s

Emerging Broker Program, which has been in place since the early

1990’s.

Barclays Global Investors was founded in 1971 as part of Wells

Fargo Bank in San Francisco, CA. Today, we are owned by

Barclays PLC, one of the world’s leading financial services providers. We are headquarters in San Francisco with approximately

3,400 employees worldwide. Since our founding, BGI has remained

true to a single global investment philosophy which we call Total

Performance Management. BGI manages performance through the

core disciplines of risk, return, and cost management. The success

of our indexing methodology results from our focus on delivering

superior investment results over time while minimizing trading

and other implementation costs and rigorously controlling investment and operational risks.

We are honored to have served as an investment manager for the

TSP since 1988, a relationship that we have retained in regular,

highly competitive bidding process. BGI manages four of the investment options available for participants: the TSPC Fund, based on

large-cap U.S. equities; the S Fund, based on mid and small-cap

U.S. equities; the F Fund, based on Lehman Agg. Long-Term Bond

Index; and the I Fund, based on the MSCI Europe Australia Far

Index of non-U.S. equities. There is also a G Fund, which is managed by the U.S. Treasury and invests in U.S. Treasury securities.

In August 2005, the TSP added a series of lifecycle or target horizon options that use the existing five options as the asset class

building blocks with allocations in each lifecycle across the funds,

these options being determined by a separate vendor selected by

the TSP.

BGI provides investment management services to the TSP and

no other services. This is also true of BGI’s relationship with most

of our other clients. In general, we provide only investment management services, which we consider to be our core expertise. The

key to our success in asset management is our ability to minimize

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implementation and trading costs. High costs and expenses of investing detract from performance and investment returns; lower

costs increase the investment pool and put more money long-term

into the pockets of investors.

Let me say a few words about how we do this. Each of our index

funds is structured to match the performance of a specific index.

These indices, such as the S&P 500 or MSCI EAFE, are designed

by third-party index providers. However, these indexes are really

paper portfolios and do not include any of the trading costs that

real-world investors experience. Thus, to successfully achieve the

performance target—that is, to track the index as closely as possible—BGI strives to minimize the real-world cost through a variety of highly efficient trading approaches.

Through the size and diversity of our client base, we are able to

match or offset a significant portion of our clients’ buy and sell orders internally, thereby reducing or eliminating market transaction

costs. The internal matching of buy and sell orders is commonly referred to as crossing and is conducted and actively monitored by

BGI pursuant to the terms and conditions of an exemption issued

by the Department of Labor. All these transaction cost savings,

which we estimate are in the hundreds of millions of dollars annually, are passed directly to the clients.

When we do trade in the external markets, we utilize carefully

developed and managed trading strategies, and we access all possible sources of liquidity, including electronic marketplaces. Our

trading activities are supported by dedicated trading research team

whose sole job is to develop new trading strategies and techniques

to minimize trading costs. Our prime objective is to achieve the

highest degree of control over investment outcomes at the lowest

possible cost. BGI has developed state-of-the-art systems which use

automation to improve trading efficiencies and lower transaction

costs, which are often found at major broker-dealers.

We execute our trades through broker-dealers who are prescreened for creditworthiness, as we believe all trading relationships incorporate some level of credit exposure to the executing

broker. We rigorously monitor the prices at which our trades are

executed relative to the number of market-related benchmarks to

ensure that we are receiving best execution. We also use our scale

to negotiate fairly low per share commission rates. BGI has not and

has never used soft dollars in its trading activities on behalf of our

funds. BGI does not accept direction from investment management

clients as to its trading activities, including its selection of brokers

with which it trades.

Over the course of a long-term investment, lower management

fees and expenses can translate into considerable savings for investors. Indeed, index investing remains the most cost-effective and diversified way to gain exposure for most investors’ portfolios.

Now I would like to discuss BGI’s Emerging Broker Program.

BGI is committed to promoting and utilizing new ideas in investment services in order that we may provide our clients with the

best and widest range of execution services and alternatives that

are consistent with our fiduciary responsibilities. In keeping with

our fiduciary responsibilities, BGI has an explicit policy to select

18

the most credit-worthy counterparties that provide the best execution at the lowest possible cost.

At the same time, we recognize the diversity and complexity of

today’s business community and that recent trends in financial

services have resulted in an increasing number of firms offering

brokerage services that do not fit the traditional format of a fullservice investment firm. These emerging brokers include minority

business enterprises, women-owned business enterprises, disabled

veterans enterprises, and other small firms offering alternatives to

established and well-capitalized broker-dealers.

Within the contest of our overall trading requirements, BGI believes it is important to allow for the positive impact of innovative

ideas and differentiated service from emerging brokers. The diversity of thinking and potential for creative problem-solving is often

associated with the entrepreneurial culture of emerging brokers.

This is an advantage that we have long recognized and wish to continue to provide for our clients. As a result, we have developed a

separate program and approval requirements for emerging brokers.

Firms are selected on the basis of several criteria, including capital, business and regulatory track record, operational capabilities,

trading talent, competitive costs, and reputation. For firms that

pass the initial screening, BGI conducts due diligence, which often

includes an onsite visit by BGI trading personnel. Once selected,

our trading team works closely with the dealers to establish realtime connectivity, review order handling guidelines, and establish

the best execution framework required to do business with BGI. We

have found, in our experience, emerging brokers are most successful with us when they focus on working to match offsetting client

order flow or in handling agency orders in small or mid-cap securities that have irregular trading patterns.

The nature of the investment strategies managed by BGI means

the majority of our trading requirements will continue to be met

by those firms that provide the necessary automation and high volume, low cost execution that is part of the advantage that we offer

to our clients. However, also due to BGI’s scale, we are often within

the top 10 clients of an emerging broker in the program. We don’t

believe it is in either the broker’s interest or in the interest of BGI

and its clients to be the dominant customer of any brokerage firm,

as it creates and poses dependency risks to both sides.

Because of our commitment to innovation, which we firmly believe originates in the diversity of ideas, we continue to refine our

counterparty approval policies to ensure that they recognize the

positive potential contribution of emerging brokers.

I thank you for the opportunity to speak with you today and I

look forward to answering questions that you may have.

[The prepared statement of Mr. Sobel follows:]

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Mr. DAVIS OF ILLINOIS. Thank you, gentlemen, very much. We

will proceed directly into a line of questioning.

Let me begin with you, Mr. Long. From time to time, we hear

about possible political manipulation of TSP money and that one

of the things that the Board is very conscious about and against

is that kind of manipulation. Could you share with us some examples of what might be called political manipulation or attempts at

political manipulation?

Mr. LONG. Sure. In the past, we have seen different groups that

wanted to receive favorable treatment from the TSP. There was a

group that represented commodities that thought we should have

a commodities fund. There was another group that represented real

estate investment trusts that thought we should have a real estate

investment fund. There are groups that think they should receive

favorable treatment, and there might be rational reasons behind

those goals, but that is not what we do. We look out just for the

best interest of participants’ beneficiaries.

Mr. DAVIS OF ILLINOIS. You also mentioned in your testimony

about surveys that you have done and, of course, surveys that the

Office of Personnel Management [OPM] have done both indicate a

high level of satisfaction on the part of employees, on the part of

investors. What are some of the things that they indicated that

perhaps they liked best about what was happening?

Mr. LONG. I think the most important statistic from the survey

was the level of overall dissatisfaction. We had a level there of

about 3 percent. So some participants are highly satisfied, some

participants are kind of in the middle, but the number of people

who are dissatisfied is in the single digits; and that says, on an

overall basis, we are doing a darn good job. And when I say we,

I mean not just the agency that I help run, but OPM and the Government as a whole.

The focus on the funds, we asked about specific funds. There is

some desire for more funds, but then when you get down to the

question of are you willing to pay more money for more funds, the

answers change. What we also saw is a clear high usage and benefit of the Web site. In other words, people go to the Web site, they

use it, and the people who use it often tend to make wiser investment decisions.

Mr. DAVIS OF ILLINOIS. Have you seen any place or would you

say that there is any place in the law that would allow for consideration of social goals that could be used as part of the criteria for

investing the funds?

Mr. LONG. The Conference Report specifically—and I am going

from memory here, but the Conference Report specifically considered that and said that was not the intent of the TSP, that social

goals should not be looked at as we determine what the investment

options should be.

Mr. DAVIS OF ILLINOIS. In the 2006 bidding process, were there

any minority companies represented or did any minority companies

bid?

Mr. LONG. One moment.

[Pause.]

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Mr. LONG. The answer is no, there were none. What I was just

talking with Tom about is I can’t discuss the names of the people

who actually bid.

Mr. DAVIS OF ILLINOIS. Let me just go to you, Mr. Sobel, for a

minute. Could you tell us a little bit more about the Emerging

Broker Program?

Mr. SOBEL. Sure. Happy to. We started the program in the early

1990’s. As our size and complexity grew, we were really interested

in extending out the trading capabilities by looking to leverage the

kind of creative and entrepreneurial capabilities of smaller firms,

so we established this program. We are certainly also aware that

many clients also had a keen interest in supporting it as well,

which certainly didn’t hurt the overall approach that we had already been kind of taking. And we have found, over the years, that

by working with these brokers, that they learn from us and we

learn from them, and we are able to really leverage their keen and

intense focus on service, particularly for small and difficult names

to trade in the marketplace.

Mr. DAVIS OF ILLINOIS. I am going to actually go now to Mr. Jordan, and I am going to ask Members if we would try and hold pretty close to the 5-minute rule, and we will do another round where

we need to.

Mr. Jordan.

Mr. JORDAN. I thank the chairman. Whenever we have hearings

on this type of issue, I am always reminded of the Will Rogers line

who, I think, said, I am more concerned about the return of my

money than the return on my money, which I think is important

to keep in mind whenever we are talking about these kind of

issues.

I will just do one question. Elaborate on this whole debate between active and passive investment strategies, and specifically

tied into the fee structure typically associated with both, and

maybe even look at bear markets versus bull markets and how that

can impact. We can go with Mr. Long first and then Mr. Sobel.

Mr. LONG. We, by law, invest passively, so we do not employ an

active approach. An active approach would be one in which you pay

people, a manager, to make a determination between different

stocks: do you buy Pepsi or Coke, and which one is the best over

the long term. That is not a determination that we make in a passive style; we buy the whole marketplace.

Because you don’t need to pay people to make that decision,

these are typically very bright, well paid people, the expenses for

passive management for index funds are lower, often substantially

lower. It is not uncommon to have active management funds in excess of 100 basis points, sometimes in excess of 200 basis points.

When you take a look at the TSP, our total cost, including all services, order costs for Web sites, statements, recordkeeping, investment management trading, all those expenses in aggregate net 1.5

basis points to participants. So it is an enormous difference, and

that difference translates directly to the pocket of our participants

and beneficiaries.

Mr. JORDAN. Would some argue that even with that fee structure

in mind, bear market versus bull market, can you elaborate on that

a little bit?

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Mr. LONG. There are, and I have read them, papers out there

that say active management generally does better in a bull market

than a passive market, and in a bear market passive management

tends to do better. You can find plenty of papers supporting both

arguments. There are a lot of people that have their own self interests and research is created to support that self interest. The bottom line is, for the TSP, right now, we are required to do what we

do, which is passive management. It translates to low fees and,

over time, typically better returns than the average active manager

fund is able to produce.

Mr. JORDAN. Mr. Sobel.

Mr. SOBEL. I regretfully concur with Mr. Long; the fees are unusually low for this particular investment style. We do, as a firm,

believe that index investing, or passive investment strategies, are

kind of key and core to any investment plan, so having a component of this as an option is incredibly important, just on the basis

of the fee differential alone. So 100 or 150 basis points or 1.5 percent compared to 1/100th is a big hurdle to try to get over. So, from

the cost perspective, the overall kind of approach to passive investing I think is fairly compelling.

Bull market versus bear market, application of index funds, the

markets are incredibly complex and, depending on who you talk to,

whether they believe in efficient market theory or not, it is very

hard to beat the markets in either scenario, and market timing is

a very difficult thing.

Mr. JORDAN. I thank the chairman.

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

Mr. Sarbanes, no questions?

Ms. Norton I am sure she does, but while she is on her way back,

let me ask you, Mr. Sobel, is the Federal Government your largest

client? Do you have a client larger than that?

Mr. SOBEL. I actually don’t know the answer to that. I don’t

think the answer to that would be yes. So I think the answer to

that is no, I do not believe that they are our single largest client.

Mr. DAVIS OF ILLINOIS. Oh, OK.

I see that Ms. Norton is back. Ms. Norton.

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

Could I ask, Mr. Long, has the TSP outperformed other publicly

managed funds that are involved in active management, where the

funds are invested with active managers?

Mr. LONG. We spend our time looking at the performance relative to the benchmark.

Ms. NORTON. Sorry?

Mr. LONG. I said we spend our time, in our analysis, looking at

how we perform relative to the benchmark that we are required to

perform to, and that we don’t compare ourselves to other publicly

managed funds. However, I can say that I am sure that other publicly managed funds that employ active strategies, some have probably outperformed us.

Ms. NORTON. Well, how do you perform with respect to the market, period?

Mr. LONG. We replicate the market.

Ms. NORTON. Explain.

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Mr. LONG. Instead of buying some stocks, we buy all of them,

and that is a strategy——

Ms. NORTON. So what happens to the market happens to you?

Mr. LONG. Whatever the market happens to do. And that is an

incredibly——

Ms. NORTON. So risk-averse as you are, whatever happens to the

market happens to you.

Mr. LONG. That is correct.

Ms. NORTON. So how are you faring now, Mr. Long?

Mr. LONG. Well, the market has had a tough month, tough 6

months, and it performs badly. Beating the market is a challenging

thing to do. What you will find is some active managers are able

to beat the market some of the time; an awful lot of them don’t.

Ms. NORTON. I want to be clear, Mr. Long. I understand this is

a Federal Government fund. I am asking these questions because

I am trying to make sure this fund that was set up, with set up

guiding principles a long time ago—how long has it been—investigates, looks at those principles and doesn’t simply accept them,

as I must say I hear you saying you don’t even look at its comparison to other funds.

So I don’t mind you concentrating on your work, but it seems to

me, if anything, out of market intellectual curiosity, you want to

know something about—I have in mind, Mr. Long, for example,

there are State teachers’ funds, there are a plethora of public funds

in the market. They better not lose any more than we better not

lose, because they are generally handling, sir, funds that are far

more critical to those to whom they owe a fiduciary responsibility.

They are handling entire retirement funds.

So I sense that we are taking care of everybody, and when I look

at the plethora of public funds in the States that are infected in

an active management, at least leads me to ask questions. Why are

we so much more secure than they who have so much more at

stake than we, because we certainly are not here talking about people’s fundamental retirement.

Mr. LONG. The plans that you reference, the State plans, are, not

all, but most, defined benefit plans, meaning that the participant,

the end-user has a defined benefit that is irrespective of the way

that the funds perform. The State has the obligation to pay the employee usually a fixed percentage——

Ms. NORTON. I am quite aware of that, Mr. Long.

Mr. LONG. OK.

Ms. NORTON. I don’t see how that answers my question. You are

saying to me that the State would have to pay in any case. Are you

saying to me that the State has had to make up for losses? Is that

what you are implying? I can understand a defined benefit plan

and what it is supposed to do and what would happen if in fact

there were losses. That doesn’t answer my question. My question

is that much more is at stake, there is much more to lose, and yet

the investment is made. Why do they make the investment in that

way?

Mr. LONG. I am not sure I understand why you are saying there

is much more to lose.

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Ms. NORTON. I am talking about often whole retirement funds.

I am not talking about something like TSP, which does not involve

people’s entire retirement.

Mr. LONG. Well, the TSP is a core part of anybody who—is for

employees, certainly, but it is not their only retirement source of

income.

Ms. NORTON. Yes. So continue.

Mr. LONG. I am not sure what the question is, though.

Ms. NORTON. My question, Mr. Long, has to do with State funds

that in fact often do involve people’s entire retirement. And I want

to know why the States do not feel that they are at substantial risk

in having at least some of those funds in active management.

Mr. LONG. Well, they have experts. They sit down and they have

experts that choose the funds. They have a pension management.

The State of New York, they have a pension expert that sits down

and decides what to invest those moneys in. Those are not made

at the participant level, they are made at the trustee level.

Ms. NORTON. Obviously, Mr. Long.

Mr. Sobel, perhaps you can inform us of how—obviously these

States, these pension funds, these union pension funds have had to

calculate the consequences of a horrifically under-performing market. There is, I argue, even more of a reason to be risk-averse and,

yet, they have in fact—I think you will hardly find a State that

doesn’t have substantial funds in active management, and I am

simply trying to understand, since they have the same kind of fiduciary relationship to their employees as we do, except that they are

usually holding funds that are far more important not their employees.

I am trying to find out what is the core difference in the decisionmakers. We are one here. There would have to be a State legislature who was there. Why do they take this risk and we don’t take

this risk even with a small, let us say, part of our funds? Do these

States, do these funds feel they have a risk? How would you explain the difference in the approach, both of which require some

very high level of risk-averse in deciding which approach to use?

Mr. SOBEL. Well, I think it is a great question. It is an extremely

complicated area. It all has to do with what type of aversion to risk

do you have. Certainly, as you pointed out, even passive strategies

have a very substantial amount of market risk associated with

them. Active strategies also bear that market risk; they have an

additional layer of risk, which has to do with the stock selection.

Ms. NORTON. Have some of these active funds been able to beat

the market in this market situation, which, as Mr. Long has had

to say, has not been good for those who simply follow the market,

whichever way it goes? Have some of the funds in active management been able to beat the market in this climate, in this economy?

Mr. SOBEL. Sure, some certainly have. But I think over the long

run we have hundreds of thousands of clients from all over the

world, and there are many examples of very large, sizable funds

that make most, if not all, of their investment into passive strategies as a matter of policy, and we have seen others——

Ms. NORTON. Give me examples of those funds that make all

their investments in passive.

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Mr. SOBEL. I am not going to be at liberty to disclose any names

of any funds.

Ms. NORTON. That must be a matter of public record, because

they would want everybody to know that, especially those to whom

they are responsible.

The point of this line of questioning is—which still has, I must

say, not been responded to to my satisfaction, and I am sorry we

don’t have somebody from one of these State funds or State legislatures—is to try to get to the bottom of what it is we are afraid of

so I know what it is, whether, in fact, we could hedge against it

in some way or whether the best strategy is the strategy we have.

A strategy, of course, we have, I must say, has been based on an

economy that right under us is changing in fundamental ways that

nobody understands. I have been having debates with friends

about, well, you know, this mantra, you know, we are a robust

economy, this is part of the cycle.

There is no cycle ever like this that we have seen. This is a perfect storm and it involves some uncontrollables that will always be

beyond our control that have now become primary in this economy.

And no one can imagine that for decades now they won’t be. New

actors in the economy, huge new hungry actors, and, of course,

commodities like oil and food going ways that are completely adverse to the way in which this country was built. So someone who

says, oh, it is a robust economy, we are having a downturn, seems

to me is not doing the kind of analysis we need to do to try to understand this.

The analysts I most respect are those who are beginning to even

question whether or not those who say the obvious, that, you know,

the new actors, that is the reason for it. Those who have looked seriously say we don’t even know the reason for it in a global economy.

So, Mr. Long, when you come and say all I do is look in my own

navel, as much as I can understand that, we may wake up 1 day

and find that we have not had fair warning, that there were other

things we should be looking at. I don’t know if one of those is piloting something in active management. I don’t know. I don’t know

enough to know. My problem is I don’t think you know enough to

know. And I believe, in an economy that is really changing right

from under you, that it is your obligation to know.

We did not know, at the time of the farm bill, for example, Mr.

Chairman, I didn’t know, I did not perceive, I hadn’t read deeply

enough to know that subsidizing ethanol was going to make us go

completely off the cliff, because we had made that decision years

ago. So here we are now eating gas and subsidizing it. So I must

say I think the only thing to do is to bring self criticism and skepticism to everything we do, and especially to handling somebody

else’s money; and that is what you are doing now, you are handling

somebody else’s money, and I would hope you would be looking at

how everybody else is handling it and what is happening to our

economy.

I thank you, Mr. Chairman.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Let me just see if I can understand. Are there reasons we can

define which suggest that teacher retirement funds, State funds

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are instances where there is a greater reliance for ultimate retirement than what is on the TSP? Are we more judicious than those

investors or are we more judicious than the handling of those pension contributions? Is there a defined rationale for that position?

Mr. LONG. Would you like me to respond?

Mr. DAVIS OF ILLINOIS. Yes.

Mr. LONG. For a teacher, for anybody who is entirely dependent

on a single pension, then I think it is a fair statement, then you

have somebody who is fully reliant on one pension plan, as opposed

to the current three-tiered structure that exists under the Federal

system. But does that change the basic fiduciary obligation to look

out solely for the best interest of the beneficiaries? No. It doesn’t

change what we do.

Mr. DAVIS OF ILLINOIS. So I guess the most that we would end

up being able to say is that we have a system and a process that

is defined that is different than some others, and, yet, the outcomes

are expected to be the ultimate protection in both instances. I am

sure the people who invest teacher retirement funds want to make

absolutely certain that, when Ms. Jones gets ready to retire, that

everything is in place and everything is there.

Let me just ask another question. Given the lay of the land,

given what we know, given the law, given what we have experienced, given what we have seen, do you see any wiggle room for

movement toward accomplishment of the goal that I am certainly

seeking, and that is the goal of finding a way that the level of diversity changes a bit from what it is in the direction of where we

are trying to take it? Mr. Long.

Mr. LONG. Yes, and as the more companies grow—right now,

BGI is our vendor. We will re-compete that again and again and

again, and whoever is the best and whoever wins that competition

will be the manager for at least some of the TSP. There is no reason to think that it has to be BGI in the future. And whether that

is a woman-owned firm, minority-owned firm, as long as it is U.S.-

based, they can compete.

Mr. DAVIS OF ILLINOIS. Mr. Sobel, let me just ask you does

Barclays have an internal diversity or diversification program or

goal or system? What is your position on diversification?

Mr. SOBEL. And this relates to our employee population that you

are referring to?

Mr. DAVIS OF ILLINOIS. Yes. I mean the overall diversification.

When I think of diversification, I really think of from top to bottom,

I think of from side to crossways, I think of from up to down, and

I think of what it is that we do.

Mr. SOBEL. I do know that we have a team focused on this, but

I have to profess it is a bit outside of my core area of expertise.

Mr. DAVIS OF ILLINOIS. OK. Could you perhaps get an answer for

us for that and get it back to us?

Mr. SOBEL. Yes, happy to.

Mr. DAVIS OF ILLINOIS. All right.

Thank you, gentlemen, very well. We appreciate your being here

and we thank you so much for your testimony.

We will go to our second panel. Our second panel is going to consist of Mr. Edward Swan. Mr. Swan has over 32 years of institutional investment management and marketing experience covering

32

major domestic and international investment sectors, most recently

as President of the Fiduciary Investment Solutions Group. Mr.

Swan, we welcome you. Thank you very much.

Mr. Jarvis Hollingsworth is a partner in the public law section

of the Houston, TX office of Bracewell and Giuliani. He also serves

as a trustee of the Teacher Retirement System of the Texas Pension Fund, after serving as chairman from 2002 to 2007.

Gentlemen, we thank you very much. If you would stand and be

sworn in.

[Witnesses sworn.]

Mr. DAVIS OF ILLINOIS. The record will show that the witnesses

answered in the affirmative.

Gentlemen, we thank you so much for being with us, and we ask

that you summarize your statements in 5 minutes. Your entire

statement, of course, will be included in the record. Yellow light indicates that you have a minute left, if you would then sum up, and

the red light indicates the time is over.

We will begin with you, Mr. Swan.

Mr. SWAN. Mr. Chair, with your permission, could I ask Mr. Hollingsworth to go before me? I think some of his comments will be

very pertinent to the discussion that just occurred.

Mr. DAVIS OF ILLINOIS. Well, I have always been taught that age

was before beauty anyway, so——

Mr. HOLLINGSWORTH. Does that imply he is older than me? Because I love that. [Laughter.]

Mr. DAVIS OF ILLINOIS. Mr. Hollingsworth, you may proceed.

Thank you.

STATEMENTS OF JARVIS HOLLINGSWORTH, PARTNER,

BRACEWELL AND GIULIANI, LLP; AND EDWARD SWAN, JR.,

PRESIDENT, FIDUCIARY INVESTMENT SOLUTIONS GROUP

STATEMENT OF JARVIS HOLLINGSWORTH

Mr. HOLLINGSWORTH. Thank you, Mr. Chairman, members of the

subcommittee. It is an honor to be here today to discuss these

issues with you. My name is Jarvis Hollingsworth. I am a lawyer

and a partner with the law firm of Bracewell and Giuliani in Houston. I was most recently the chairman of the Board of the Teacher

Retirement System. It was a privilege to serve the active and retired teachers of Texas for over 6 years as a fiduciary and steward

of their retirement dollars.

The System, typically referred to as Texas Teachers, about $112

billion as of market today, serves over 1.2 million retired and active

teachers. It is the sixth largest public pension plan in the country.

The plan pays out over $5.5 billion a year in benefits. It is a defined benefit plan and therefore is the sole retirement of the teachers and the retirees.

I will address three issues here today. First, recent changes in

the investment allocation at Texas Teachers. I will then talk about

the use of external managers and moving Texas Teachers from a

passively managed strategy to some active management. Third, I

will give the subcommittee some background on efforts under my

leadership at Texas Teachers to increase minority participation at

the fund, as you seek to do here possibly at TSP.

33

During fiscal year 2006, our Board of Trustees instituted a very

thorough review of the investment program. One objective was to

increase the return to the fund without an increase in risk. A second objective was to review the fund’s asset allocation in order to

lessen the fund’s exposure to dramatic swings in the stock market

and to achieve a more efficient and more balanced asset allocation.

We determined that these objectives would help the fund, first,

meet our future pension obligations; second, be more cost-effective;

and, third, manage our risk in a very proactive manner.

In recent past, the Texas Teachers portfolio was concentrated in

large domestic equities. Hence, in good and bad economic times, a

majority of our fund’s returns had historically been driven by the

performance of these publicly traded instruments. Prior to the

board’s reallocation of the assets in 2006, which I will get to in just

a moment, the proportions of our total investment strategies were

65 percent equities, 26.8 percent fixed income, 4.3 percent that was

spread across the various alternative assets, private equity, real estate, and hedge funds, 3 percent in cash instruments. So over 90

percent of the fund at that time was essentially invested in an enhanced index or passive management approach.

One of the things that led us to the study was, when I first came

on the board in 2002, I was there to experience the tech bust in

the stock market. Our plan was at $95 billion when I came on the

board, and within 18 months the plan was down to $65 billion. So

there are examples where you do well with the stock market and,

of course, it is both good and bad times.

After our study, we created three new major asset categories for

the fund: one, global equities, which constituted 60 percent of the

portfolio, that includes all public and private equity; 20 percent in

an allocation called stable value, which included all fixed income

credit, U.S. treasuries, hedge funds and cash; the remaining 20

percent were in our real return asset category, which included real

estate, real assets, commodities, and global inflation-linked bonds.

This reallocation that we did in 2006 moved the fund away from

the traditional large U.S. public pension model of being highly

weighted in publicly traded stocks and bonds, and allowed the fund

to guard against the downturns in certain markets and better capitalize on the strong returns of the less traditional asset classes. In

addition to being a better balanced portfolio, it offered greater diversification, the opportunity for more robust returns, and took advantage of the fund’s competitive advantages: a long investment

time horizon of 10 years and very limited short-term liquidity requirements. This asset reallocation also decreased the fund’s downside risk, lowered the volatility in the portfolio, and lowered the

correlation among the portfolio’s asset classes.

I will talk a bit about active and passive and external managers.

Texas Teachers has a very long tradition of managing the assets

internally. As of 2006, over 90 percent of our assets were managed

internally by Texas Teachers investment professionals. We are very

proud of that fact and, for the most part, it generated returns that

were at or above those of external managers.

While this internal management resulted in an effective, low-cost

system that produced consistent returns over time, staff, in conjunction with our external consultants, determined, after this

34

study, that a combination of both internal and external management would allow for a more effective portfolio design that diversifies risk across managers and investment strategies.

If I could, I would just like to take a second to talk about the

emerging manager program. I think the case has been made, and

you will hear a lot today, Members, that young talent of small and

emerging managers have outperformed their large counterparts in

both up and down markets. They also diversify a large portfolio as

they give these plans access to sectors, strategies, and geographies

that are not meaningfully available to large funds.

Texas Teachers launched our first small and emerging manager

program in 2004 primarily to diversify our private equity portfolio.

At that time, our portfolio was predominantly only large buyout

plans.

Diversity of investment professionals was also important to our

board, and we felt it very complimentary to the risk return goals

at Texas Teachers. Due to their recent emergence in the investment management area, minority and women-owned firms are

more likely to be in the small and emerging manager space and,

therefore, diversifying a portfolio to include such strategies presents additional opportunities for pension plans to develop and increase the number of meaningful relationships that it develops

with women and minority-owned funds.

Currently, small and minority manager programs have been implemented in Texas in our private equity and our hedge fund portfolio, and we are currently evaluating adding small and emerging

plans to a fund of funds in our global equities and real estate portfolios. The board’s goal is to get that allocation up to $1.5 billion;

it is currently at about $800 million.

And I am summarizing, Mr. Chairman. I apologize.

In further efforts to increase the fund’s relationships with minority and women-owned funds, in 2006, Texas Teachers launched a

minority and women-owned brokerage program. It is a 6-month

pilot program in which these firms are allowed to execute trades,

after which their execution is evaluated for a determination of

whether they should be included on the System’s approved list of

brokers. Texas Teachers has been very pleased with the results of

this program.

Finally, we felt that minority and women-owned funds are

uniquely positioned to find and take advantage of attractive demographics and opportunities for targeting high-growth ethnic and

economic sectors consistent with recent demographic changes, and

that these are very complimentary to the risk and return goals of

a plan fiduciary.

As pension plan obligations continue to increase and the global

investment marketplace continues to rapidly change, plan fiduciaries must search for ways to invest more efficiently and more effectively, and to boost returns while reducing long-term risk. We

are confident that the investment changes made at Texas Teachers

will serve the interest of the members, the retirees, and the pension fund, and are consistent with the board’s fiduciary duty.

I hope this review of recent Texas Teachers activities has been

of assistance to this subcommittee as it carries out its vital oversight of the Federal TSP. Please feel free to contact me if any memVerDate 11-MAY-2000 13:37 Apr 06, 2009 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\DOCS\48064.TXT KATIE PsN: KATIE
35

bers of the subcommittee would like access to any of the information that was assembled in our board’s reallocation of the fund’s assets or the board’s decisions to use external managers or to implement the fund’s small and emerging manager programs. Thank

you.

[The prepared statement of Mr. Hollingsworth follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much.

We will go to Mr. Swan.

STATEMENT OF EDWARD SWAN, JR.

Mr. SWAN. Thank you, Mr. Chair and members of the committee,

for inviting me. I do want to make one correction for the record.

I am the former president of FSI Group. I happily retired last July,

after almost 35 years in the investment business. I have worked for

large firms, small firms, and across a variety of investment strategies, and that gives me a fairly distinct perspective. I have also

served as a graduate business school professor.

What I hope today, the committee certainly has a grasp of active

and passive, the definition of those two terms, but I am going to

make a few comments about the implications of active versus passive management.

The whole goal, obviously, of active management is to out-perform a series of a given benchmark. The goal of passive is to provide performance at very low fees in line with a given benchmark.

I would suggest, as the committee thinks about the TSP, that the

real goal, long-term, on behalf of the participants of the Plan is

how do you maximize their accumulations. How do they wind up,

at the point that they retire, with the maximum amount of money

against which to retire?

I will make four points. The first is that the data shows the likelihood of picking an active manager that will out-perform the

benchmark, and picking a manager on a random basis, increases

to the extent that the market that you are looking at is inefficient.

What do I mean by an inefficient market? If you are buying

treasury bonds, everybody knows just about everything there is to

know about each treasury bond, so no one has an information advantage. That is an efficient market.

An inefficient market might be small cap stocks, where I might

know about a company that my competitor doesn’t know about, or

I might be able to do better research about that company; hence,

I have an information advantage. I can choose to buy that stock or

choose not to buy that stock based on something that will give me

an edge.

So to the extent that markets are inefficient, active management

really, probably ought to play a larger role.

The second point is that—and remember, those data are based

on random selections of managers. So the second point is that a

smart staff, employing good consultants, ought to be able to select

managers more effectively than on a random basis.

The third point that I would make is that purveyors of passive

funds argue that the fees are low, and, indeed, that is quite true.

But the TSP is a huge fund; it has massive buying power. And having been at firms that have done both passive and active management, I can tell you that the TSP has the bargaining power to

squeeze active fees down in a way that it hurts active managers.

The fee spread, given TSP’s active management—the fee spread,

meaning the difference between active management fees and passive management fees—would be narrowed considerably by TSP’s

bargaining leverage.

42

The fourth point that I would make is that the availability of

software and technology now enables small firms to compete much

more effectively than they could even 5 years ago, so that it may

be a mistake in the interest of being risk-averse to overlook small

firms just so you could have a behemoth that somehow may have

some advantages, or may not.

I hope my comments have been helpful. I would welcome any

questions that you have. And I would leave you with one other

thought as you deliberate. We talk about risk aversion and we talk

about risk versus a benchmark. Bear in mind that there is nothing

magic about the benchmarks. They are not sacrosanct. They, in

fact, are passively held portfolios designed by a committee. The

S&P 500, I think it is 10 people sit around and say these are the

stocks that are going to be in the S&P 500. They are not sacrosanct.

So I hope my comments have been helpful. I would welcome any

further questions. Thank you, Mr. Chair and committee members.

[The prepared statement of Mr. Swan follows:]

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Mr. DAVIS OF ILLINOIS. Thank you both very much. We will go

into some questions.

Let me also just indicate and acknowledge that we have been

also joined by Representative Elijah Cummings from the State of

Maryland, and we are delighted that you have come, Representative Cummings.

Let me just ask you, perhaps, beginning, Mr. Swan. When I

asked Mr. Long about market manipulation and possible political

interests that people might have, he mentioned a couple of areas,

and one of them happened to be the Real Estate Investment Trust.

Do you see REITs and some other venture capital areas as necessarily risky or that much of a great risk as some people have suggested?

Mr. SWAN. Let me respond several ways. The first answer to

your question is no, I don’t see them as these terrible things. In

fact, the response was—let me go to commodities, because that

really jumped out at me. There was a suggestion by some commodities group that perhaps the TSP ought to look at a commodities

fund. I would draw the distinction between looking at real estate,

looking at venture capital, looking at private equity, looking at

commodities, areas that may in fact enhance the return of the

fund, as a good thing, and to take those suggestions as potential

manipulation kind of baffles me a little bit. Indeed, they may be

good suggestions, and I would ask the committee, maybe the committee might want to see the analysis upon which these manipulative suggestions were made, how they looked at it and why they

rejected it.

Mr. DAVIS OF ILLINOIS. I have to admit that I have been somewhat baffled by some of this along the way, especially, as we look

at how fluid things are and how some things remain fairly static,

at least in terms of their being. One of the things that I thought

about in terms of real estate is that you can’t move it to China or

someplace if it is in New York.

Mr. SWAN. Yes, sir.

Mr. DAVIS OF ILLINOIS. It is pretty difficult to do.

Mr. SWAN. And it is not going to be mass produced, either.

Mr. DAVIS OF ILLINOIS. Yes.

Mr. SWAN. There is only so much of it.

Mr. DAVIS OF ILLINOIS. The sectors with the highest returns or

that are performing, say, better than some others might be performing, if one takes a look at those, does that necessarily mean

that they are diminishing the protection of their clients?

Mr. SWAN. The answer is no. The higher performing sectors may

indeed, over time, have more volatility, the returns may bounce up

and down a bit more, but they tend to have higher volatility

around a steeper performance trend line, a steeper positive performance trend line. It may mean that, for example, you limit, if

you have a venture capital option or a pure real estate options,

that you limit the amount that the plan participants could put into

that option. But I am not sure that one necessarily says these

should be non-viable options. These are areas that you cannot or

are very difficult to index. Generally, they are not areas you would

want to index.

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Mr. DAVIS OF ILLINOIS. Mr. Hollingsworth, could you share with

us some of the thinking that surrounded the Texas Teacher Retirement Fund deciding to change a little bit or to venture into another

arena?

Mr. HOLLINGSWORTH. Mr. Chairman, this really sort of started

when I first came on the board as a trustee back in 2002, as I indicated in my earlier remarks, and that in the next year to 18

months we proceeded to lose $35 billion of the plan’s assets when

the tech bubble burst. And some of us began to ask questions about

why that was happening and whether we had the right asset mix

in our portfolio, and it took several years for us to get there because of a couple of reasons. One, at the time, Texas Teachers, we

had the lowest per member cost of any large U.S. plan in the country, and we wore that like a badge of honor. As we began to do our

asset allocation study, the study impressed upon us that there was

a cost for us to wear that badge, and the cost was being borne by

the annuitants in the area of decreased returns to our system.

The other thing is we were basically the last bastion of internal

management. We had over 90 percent, at one time, of our assets

were internally managed by internal staff, essentially in an indexed form. So we realized, one, we weren’t getting any alpha or

any increased returns in these inefficient markets—the alternative

assets, private equity, certain high-yield type strategies. Those

were strategies that were performing well in some markets and we

had no opportunity to participate in those returns.

So the board concluded that the best long-term asset allocation—

again, this is a defined benefit plan, so this is these folks’ only retirement—was to have a balanced portfolio where we were still a

majority equity fund but, for example, we now have 10 percent of

the fund allocated to private equity, 10 percent to real estate, 5

percent to real return, infrastructure, timber, 5 percent in the absolute return strategies, the hedge funds. So regardless of what is

going on in the marketplace, we felt like we always had an opportunity to participate in what was doing well, and we also minimized our downside risk in those assets classes that were not performing well.

I mean, our fund right now is probably up 2 percent, which is

not great. Had we not moved so much money out of our global equities portfolio, we would probably be down 6 percent or 7 percent.

So having basically a beta fund, a stock and bond fund, means that

you live and die with the stock market. When it is doing well, you

make a lot of money; when it is not doing well, you lose a lot of

money. So we thought a more balanced approach was a better one.

Mr. DAVIS OF ILLINOIS. Thank you, gentlemen, very well.

I will now go to Mr. Jordan.

Mr. JORDAN. Thank you, Mr. Chairman.

I too want to thank you both for coming here. Very compelling

testimony from both of you.

Mr. Swan, your four points I thought were great, particularly the

one that the passive strategy is not sacrosanct either; there are

people making decisions about what elements are going to determine the benchmark itself. So I think that is a point well taken.

The one thing, though, that you didn’t talk about, and Mr. Hollingsworth has a little bit in his opening statement—and this was

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the focus of Mr. Long’s testimony and, frankly, the Members of

Congress when they put together the act back in 1986, was making

sure we do as much as we can to safeguard against political influence, political manipulation.

To me, that is what it comes down to, because you have done

some good things in Texas to deal with this market we are in now.

I mean, I looked at my Thrift Savings Plan quarterly report last

time and it wasn’t what we would have liked to have seen, so I understand that. But talk to me about what you would suggest to

have those safeguards in place to deal with the political aspect of

this.

And then, Mr. Hollingsworth, elaborate more on what you did in

Texas when you said you moved to some partial active investment

strategies, what you did to deal with the political question as well.

Mr. SWAN. I guess I am at a little bit of a loss because you have

a defined contribution plan, it is huge, but there are defined contribution plans in many political settings. This is not unique. So I

hear this concern about political manipulation, but I am not sure

what the manipulation might be. The only example that was given

earlier was that some people showed up—I don’t know what the

group was—and said, gee, you ought to look at commodities. Well,

maybe that is a bad idea; maybe it is a good idea. But I have yet

to hear an example of political manipulation. If someone has one,

I would love to respond to it.

Mr. JORDAN. So you just think it is overstated.

Mr. SWAN. I think it is overstated and I think that——

Mr. JORDAN. And that is valid.

Mr. SWAN [continuing]. As long as those that are exercising their

fiduciary responsibility and ultimately selecting the vehicles that

the plan participants can then subsequently make their selections

from, as long as those individuals exercise their fiduciary responsibility, I am not sure what the political manipulation is.

Mr. JORDAN. I think about the plan I was involved with, the deferred compensation plan—I have to go back and look at the particulars, but I believe it was designed as you just described.

Mr. Hollingsworth.

Mr. HOLLINGSWORTH. I agree with that. You know, I think this

is a situation where there are examples. You hear stories where

one or two incidents of situations sort of hit the news. When I became chairman of this board, some people perceived me as, I now

have $110 billion to give out to people, so the phone started ringing

and everybody wants to meet with you. So that is there. But I always took the approach with our board that we can put some

things in place so that the information level is equal among board

members. But I have never been one to think that you can legislate

ethical behavior, so you have to hold each of your board members

to their ethical and fiduciary responsibilities.

Now, having said that, when we did move to more strategies

where the board and senior staff were more involved in meeting

with managers, reviewing portfolios, making decisions, and obligating assets, we did do some things such as have certain ethical disclosures in place, such that when a board member met with a potential manager who wanted to be part of our private equity portfolio or part of our real estate portfolio, that information, under the

53

old policy, had to be disclosed. You had to disclose that information

so that when that manager came before the board, that board

member would reveal I have met with this individual, I am or am

not biased, I think I can or cannot be objective in voting.

So I think there are some disclosure rules and some other things

that you can do if there is concern about inappropriate influence

on the investment process.

Mr. JORDAN. OK.

Mr. SWAN. None of these, by the way, if I might add, have anything to do with the efficacy of the plan and its ultimate goal,

which I think should be how to help the participants maximize the

amount of money that they have when they retire.

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

I thought Mr. Cummings was there, but I see he has left. I, then,

just have one, perhaps, additional question. Given our purpose,

how does each one of you view the possibility—and I think all of

us want to make sure that fiduciary responsibilities are in place,

and obviously that is inherent in any discussion. How do you see

the possibility of some movement to provide opportunities that currently seemingly are distanced or, to some degree, does not exist?

Mr. HOLLINGSWORTH. I am sorry, the last part of your sentence

dropped off, Mr. Chairman. What was that?

Mr. DAVIS OF ILLINOIS. I really was saying that it is difficult to

break into this with minority companies. What do you see as a possibility?

Before I do that, though, let me ask Mr. Cummings if he has any

questions. And if so, Elijah, go right ahead.

Mr. SWAN. There are two, I think, pretty obvious ways right up

front. The first one is who do the providers of your investment

service, who are their vendors? Who do they execute trades in, and

in what kind of volume? That is one issue.

There is another issue, and that is—and it is a sidebar, it is only

partial response to your question, and you asked it earlier—what

does the staff of your vendors look like? Because that is also about

opportunity.

Finally, over the last 10 years, there has been the development

of something called managers of emerging managers. These are

firms that hire smaller firms, many of which, if not most of which,

are women-owned and minority-owned firms, package them so that,

indeed, large plan sponsors can hire the firm and give it a lot of

money. It is very difficult to give a lot of money to a firm that only

manages $20 million. But if a minority firm or woman-owned firm

comes to the table and they have $1 billion under management, or

$2 billion or $3 billion, then a very large plan can do business with

them, and should be able to do business with them; and that is the

economic function that managers of managers provide. And I think

you will hear testimony from someone from one of the very excellent firms, and they have produced terrific returns on an active

basis.

Mr. HOLLINGSWORTH. And that is the way we have approached

it at Texas. Manager managers, fund to funds, as they are also referred to. We instituted a small and emerging manager program

that we are basically going to have in every asset class and every

strategy, and basically you are hiring a manager that goes out and

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evaluates these funds. The dollars can be allocated different ways,

but typically the dollars are allocated to the fund-to-funds manager, and that fund-to-funds manager then has discretion to distribute those dollars in smaller increments to small and emerging

managers.

It just so happens that because of the recent emergence of minorities and women in this space, if you are investing in a small

and emerging manager program, be it in private equity, be it in

global equities or real estate, you are inherently going to be developing and increasing the number of relationships that your entity

has with women and minority-owned firms completely consistent

with your fiduciary duty.

Our small and emerging manager program does a few things.

First, it typically gives us access to strategies sectors where those

managers are more on the ground and have more access to. But we

are also looking for those great investors, those investors who are

going to be the stars of the future. So we are helping to build,

many times, these small and growing firms into substantial firms

that can come back and in which we can invest directly into them,

because they have size, they have bandwidth, they have the track

record, they now have the experience.

So instead of going through a fund-to-funds, where they may get an allocation between $5 million to $25 million, we can then invest

in that fund directly at amounts up to $500, $600, $700 million. So

we are trying to have a relationship with the stars of the future,

but also help grow and build firms that have the requisite skill and

abilities to help us in our fiduciary duty.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Mr. Cummings.

Mr. CUMMINGS. This whole issue takes me back to Maryland,

when I was in State legislature trying to make sure that minority

firms had an opportunity to participate. In Maryland, we had a situation, of course, where a huge percentage of our employees were

minorities and they were concerned, as were members of the legislature, that when it came to participation investments, minorities

were basically locked out. It was not a question of whether it was

fair; it was unfair and it was basically an old boys system, and the

old boys system basically said we have done it this way and we are

going to continue to do it this way.

The second thing that they said implicitly was that they feared

that if this money was put under the jurisdiction of minority firms,

that because many of them were new, as compared to some of the

older firms, that they worried about what might happen to the

money. It was deep. So we had a situation where, if you took particularly the latter argument, the question is when do those firms

get the opportunities to even grow, to not only grow, but to survive

and then thrive.

So that leads me to—I was listening to all you are saying here—

what do you—and maybe you said this—what do you all see that

the legislature—this is the Congress—should be doing to basically

level the playing field? I am just wondering what you had in mind.

Mr. HOLLINGSWORTH. Well, I will address a couple things we did.

In Texas, we did not have authority to do a number of things.

Mr. CUMMINGS. I am sorry, you didn’t have what?

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Mr. HOLLINGSWORTH. We did not have the authority to do a

number of things at the pension plan. And I haven’t really looked

in depth at the TSP to really know exactly what its legal authorities are, but, for example, we had to go to the legislature and get

authority to use external managers in our program, and we went

to the legislature and basically laid out that there were these inefficient areas, that we didn’t have the expertise on staff, we needed

the ability to go out and take advantage some external managers

who were really good at what they did.

We also talked about the fact that we were going to use fundto-funds, as well, to help us get access to these younger, smaller

funds that are just starting out, because what the fund-to-funds

does is it gives a little bit of cover, because they have gone through

one level of scrutiny already. So the legislature gave us the approval to put out up to 30 percent of our plan’s assets to external

managers, so equivalent to about $30 billion or so.

So, again, I haven’t looked in depth to the TSP to know where

you are constrained right now, but most plans do require some

level of authority to begin to use external managers. From the

presentation I heard earlier, I guess you are mandated legally to

invest passively, so obviously I think you would have to go and

seek some sort of legislative approval for some active management

so that you could take advantage of some of those other less efficient markets out there and use some other creative strategies to

make sure that you have a balanced portfolio here at TSP.

Mr. SWAN. What many, if not most, small firms, minority firms,

women-owned firms do, the sector that they are involved in, or the

sectors, are precisely the sectors that would allow the plan participants the opportunity to maximize their total accumulation. Again,

I keep coming back to that point that index funds aren’t the issue.

The issue is how do you help plan participants maximize their accumulation. There are very powerful arguments that women and

minority-owned firms are operating in those sectors—active equity,

to some extent active fixed income, even now in the international

area, venture capital, private equity. These are sectors that can

drive return well executed.

Mr. HOLLINGSWORTH. I would add one more point, if I might,

Representative Cummings. Texas is a defined benefit plan, so our

board makes the decisions for the annuitants. You have a defined

contribution plan, so it is just a matter of what choices they have

as relates to options.

When we created the portfolio that we did that was balanced and

diversified, one option to think about—you were asking us about

ways to do this—would be maybe to have a pooled option, meaning

you have one option for your members that is a diversified fund

where a certain percentage is in equities or maybe a small segment

to private equity, there might be a small segment to real estate.

I know there is always the concern of protecting your annuitants

from themselves. You don’t want them to go out and put all their

money in a fund that is all private equity or all real estate, but

maybe an option where it is a pooled opportunity where they are

diversified across several asset classes, maybe that is an option

that could be added to a defined contribution plan.

Mr. CUMMINGS. One last thing, Mr. Chairman.

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I think there are so many of us who get frustrated, and it is not

just in this area, but it is in a lot of areas, and there are all kinds

of excuses that are found not to be inclusive and not to have a diverse group of folk working on these kinds of issues. Some kind of

way we have to come to a solution so that we can have some impact. Other than that, our grandchildren will be talking about

these same issues and opportunities will have passed so many people by and so many people will have been deprived of the opportunities to grow and to be a participant.

I will never forget my father—Mr. Chairman, I will be real

brief—my father, who only had a first grade education, he had one

accident in his life, automobile accident, and that accident came 3

days after I got admitted to the bar, and he said, I want you to

take my case. I said, Daddy, I don’t know nothing about accident

cases; I just got admitted to the bar. And he said something that

I will never forget. I said, why do you want me to do this? He said,

if I don’t use you, who is going to use you?

So we prepare our young people to go forward, to be the best that

they can be; we educate them, we give them opportunity—and it

is not just young people, but people—and they do the right things

and then they have this window called life, their life, and when the

window is shut, game over, opportunity lost. So I just want to work

with our chairman to see what we can do to try to address the rest

of these issues.

Mr. SWAN. I don’t know if there is a legislative remedy embodied

in this, but one of the things that I think is very helpful is if those

that are making the decisions about who is hired are a diverse

group.

Mr. HOLLINGSWORTH. I will add just one other point to that, and

I think you will probably hear more of this later with some of the

other panelists. I have always thought that these small emerging

manager programs were important. Not everybody agrees. Not

even all my board members agreed when I first became chair. But

I think what you might hear about later is that I think the empirical evidence is now there to make the business case that small and

emerging managers, which includes a lot of women and minorityowned funds, are simply out-performing their counterpart. So that

is a bit more compelling when there may be those who don’t share

the same sentiments. So I think you have to go to a much, much

stronger case now.

Mr. SWAN. One of the things that certainly could be done is to

ask the GAO to participate in a survey about changing the law to

allow active management. That would open the door potentially to

greater accumulation on the part of the plan participants and

greater opportunity on the part of the vendors.

Mr. DAVIS OF ILLINOIS. Well, thank you, gentlemen so very

much.

Mr. Swan, at the end of your opening statement you sort of said

I hope that my testimony will be beneficial. Well, I can tell you

that both of your testimony has been very beneficial. We appreciate

the fact that you have come and shared with us, and we thank you

so very much.

Mr. SWAN. Thank you, Mr. Chair.

Mr. HOLLINGSWORTH. Thank you, Mr. Chair, for having us.

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Mr. DAVIS OF ILLINOIS. We will then proceed to our next panel.

Our third panel, while they are being seated, consists of Mr. Thurman White, who has been chief executive officer of Progress Investment Management since 2004. Progress is a leader in creating

emerging manager of manager portfolios for a diverse group of clients. We welcome you, Mr. White.

Ms. Mellody Hobson is the president of Ariel Capital Management, a Chicago investment firm. And I might also indicate that

they are headquartered in my congressional district and I consider

them to be one of my most prized constituents and we are delighted that they are there. She is also the chairman of the Board

of Trustees of Ariel Mutual Funds and a spokesperson for the Annual Area Swap Black Investor Survey. Ms. Hobson, we welcome

you and thank you.

Mr. Jesse Brown is a principal at Krystal Investments. He has

worked extensively with deferred compensation retirement plans

and is an author who has written extensively on investment and

the generation of capital, especially Black capital, I would assume,

although, all of it is green.

Of course, it is our tradition that witnesses be sworn in, so if you

would stand and raise your right hands.

[Witnesses sworn.]

Mr. DAVIS OF ILLINOIS. The record will show that the witnesses

answered in the affirmative.

We would appreciate it if you would summarize your statement

in 5 minutes. Of course, your entire statement is in the record. The

lights indicate timing, and we will simply be governed by what is

going on. Thank you very much.

We will begin with you, Mr. White.

STATEMENTS OF THURMAN WHITE, CHIEF EXECUTIVE OFFICER, PROGRESS INVESTMENT MANAGEMENT; MELLODY

HOBSON, PRESIDENT, ARIEL CAPITAL MANAGEMENT, INC.;

AND JESSE BROWN, PRESIDENT, KRYSTAL INVESTMENTS

STATEMENT OF THURMAN WHITE

Mr. WHITE. Thank you, Mr. Chairman. Thank you for allowing

me to have the opportunity to appear before you this morning, and

thank you for convening this hearing on a very important topic for

our industry. Again, my name is Thurman White, and I am president and CEO of Progress Investment Management Co., located in

San Francisco, CA.

For the past 18 years, our firm has had extensive experience

working exclusively with large institutional investors who are looking to, one, access new investment talent and, second, capture the

above-market returns that talent can provide. This pool of underresearched and under-utilized talent is what we refer to in the industry today as emerging managers. Typically, this includes smaller entrepreneurial firms, in many cases less than $2 billion to $3

billion in assets under management, who are maybe new in their

investment firms but are not new investors. Many of these owners

and portfolio managers and emerging manager firms have gotten

experience at large investment houses and have left to start their

own firms. So that is the niche within which we specialize.

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I would like to make three brief points and then conclude. The

first is that emerging managers do add value; the second point is

that diversification makes a meaningful difference; and the third is

that best practices among large institutional plans are inclusive,

and not exclusive.

With respect to the first point, emerging managers do add value.

Many times there will be some question as to why take the risk

of hiring emerging firms? Aren’t they inexperienced? Aren’t they in

fact more risky than large firms? The simple answer is no. Again,

as I mentioned, the fact that they are emerging, the fact that they

may be minority and women-owned firms does not mean that they

are inexperienced investors. In fact, we manage $7 billion in assets

for 29 institutional clients. We work with 60 firms in 20 different

multi-management investment portfolios. Now, when we did a recent survey of the experience level of the portfolio managers and

founders of our firms, we found that 70 percent of those who had

founded and started those firms had more than 20 years of investment experience. So these are not new investors.

More importantly, because of their passion, because of their commitment, because of their access now to technology, because of

their certainly absence of bureaucracy, and, more importantly, in

most cases these are employee-owned firms, which means there is

an alignment between their economic interest, their professional

and financial interest, these are some qualitative reasons that

these firms out-perform.

But as you heard earlier, our own investor performance on behalf

of our clients, the investment performance of others in the industry, as well as a growing body of academic research all support the

notion that emerging and minority-owned firms do out-perform

market benchmarks; they do out-perform, in many cases, their

larger counterparts, and particularly in the inefficient asset classes, both in bull and bear markets, and that is particularly relevant

given the kind of market volatility that we have had most recently.

In the small-cap areas, mid-cap areas, emerging managers do outperform both benchmarks, as well as the large firm counterparts.

The second point I would like to kind of focus on is this idea of

diversification and it does make a difference in terms of institutional portfolios. Diversification is a time-honored and kind of proven strategy for mitigating all kinds of risk. Diversification of the

kinds of managers that a plan may work with; diversification in

terms of the kinds of strategies that an institutional investor may

employ.

Now, the interesting thing that we have in the situation with the

Thrift Savings Plan is you have both single manager and specific

company risk. Quite unusual to have such a large pool of assets

managed by one firm. As we have seen most recently with a lot of

the large investment firms, there are a lot of unexpected, unknown,

certainly unintended risk that are resident in those firms. So having that single manager and specific kind of manager risk is a bit

unusual.

The second thing that you have here is a single style risk, and

that is the risk of the market. Again, this is something that perhaps poses an undue risk for the Federal employees and retirees

that are participants in this plan, and that risk, again, is a market

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risk. When a market is doing well, as you have heard, annuitants

do well. When the market is doing poorly, as we have had in the

last few months, annuitants do not do as well. So having a single

style, a passive style risk, again, is perhaps an undue risk, and certainly one could question the fiduciary responsibility of the Thrift

Investment Board and its advisory council for exposing annuitants

to that level of undue risk.

Finally, this idea of best practices in the industry being inclusive,

and not exclusive. In Exhibit 2 in my written testimony, we have

identified over 50 defined benefit, primarily, pension plans, institutional investors of a size and stature and certainly similar investment objective to the Federal Thrift Savings Plan. These 50 funds

probably represent a couple of trillion dollars in assets. All of them

have utilized targeted investment strategies to be inclusive of

emerging and minority investment firms.

Why have they done this? Not for social reasons, not for political

reasons, but for performance reasons. They want to win in the global marketplace. They want to diversify the range of managers that

they work with; they want to get access to new talent, to the innovation and new ideas that small businesses bring to management

and investment portfolios. They also want to build on and create

opportunities for the next generation of talent to make the industry

itself more competitive.

So these are the reasons that all of these pension plans have utilized—and increasingly, also, defined contribution plans are beginning to utilize—emerging and minority investment firms.

Finally, I would like to conclude with a bit of an analogy. Since

it is the summer, it has to do with baseball and sports. As we have

seen, we have seen this paradigm, whether it is entertainment,

whether it is politics, in a variety of industries, and that is, simply,

this: whenever the playing field is leveled and new participants are

allowed to participate, the game is enriched. We saw this in baseball after World War II, when Branch Ricky of the Brooklyn Dodgers wanted to do one thing, he wanted to win. So like the Thrift

Savings Plan, there was this pool of talent in the Negro baseball

leagues that had been overlooked and not used at all. So Branch

Ricky, of course, identified Jackie Robinson, brought him in to

major league baseball, and the rest is history.

Similarly, even out in San Francisco, with our Giants, there was

a scout there, a man by the name of Alex Pompeii, who also knew

of another under-utilized, overlooked pool of talent, and that was

Latino-based ball players in the Caribbean and South America. So

he began to scout that area, signed people like Juan Marichal and

Orlando Sepeda and the Allou brothers, and that brought in another underused pool of talent and the game was enriched.

So as we think about these issues with respect to the Federal

Thrift Plan and the other Federal retirement plans, if we can make

them more inclusive, make them include the talent potential and

performance potential of emerging and minority managers, and

have active investment strategies be a part of their overall asset

allocation, I think the Federal retirees and employees will be similarly enriched and will have a win-win situation.

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Thank you for the opportunity to be here. I would be happy to

answer any questions you have.

[The prepared statement of Mr. White follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much. We thank you for

your testimony.

We will go to Ms. Hobson.

STATEMENT OF MELLODY HOBSON

Ms. HOBSON. Thank you very much. Thank you, Chairman Davis

and Ranking Member Marchant, as well as members of the subcommittee. My name is Mellody Hobson, and I am president of

Ariel Investments, an executive board member of the Investment

Company Institute and a board member of NASP. I greatly appreciate the opportunity to be here today and provide you with a brief

overview of our firm, our business, and our larger social mission.

Our chairman and CEO, John Rogers, founded the firm in 1983

when he was just 24 years old. Based in Chicago, Ariel Investments serves individual investors and 401(k) plans through our noload mutual funds. Additionally, we manage separate accounts for

large corporate, public, union, and non-profit organizations.

Throughout our firm’s 25-year history, patience has served as the

bedrock of our investment philosophy and approach to building our

firm. By adhering to a consistent and disciplined approach, we

have grown from 2 to 100 employees, with $8.9 billion in assets

under management. Currently, we have more than 1.4 million investors in our mutual funds.

As the country’s first African-American-owned money management firm, we have a unique viewpoint and perspective on the retirement challenges facing our County. Even today, we are still the

only minority firm with mutual funds priced daily in the newspaper.

Just to give you a little insight on our investment approach, we

look for leading brands in established industries with high quality

management teams.

We analyze all financial statements to ensure that we are buying

financially strong businesses.

As value investors, we don’t just buy cheap stocks; we buy quality businesses at very low prices.

The financial industry has recognized our firm’s performance in

a number of ways. Through our research process, our discipline,

and our focus, we have established a proven long-term track record,

a record that has been widely, widely recognized in the media.

On the specific question of active versus passive management in

the Thrift Savings Plan, I would say that over the long haul many

money management firms, including ours, have out-performed the

market. I am a firm believer in active management, and want to

make that clear. The greatest investor of all time, Warren Buffet,

has proved this success over and over again.

But there is a larger issue at stake. The question of who is being

left behind in defined contribution retirement plans, like the ones

we are moving toward, rather than the defined benefit system that

is rapidly disappearing from many corporations, and even some

sectors of government.

The harsh fact is that minorities, who have less exposure, experience, and comfort with the stock market, we as a community are

falling behind. That is why, in addition to our corporate mission to

manage money for our clients and to give them exemplary returns,

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we also have a social mission to promote saving and investment

and wealth-building in minority communities. My personal goal is

to make the stock market a subject of dinner table conversation in

the Black community.

To that end, for the past 10 years, we have partnered with

Charles Schwab and Co. on an annual survey comparing saving

and investment habits of Black and White Americans. We have released the results each year to highlight the barriers to greater

wealth-building among African-Americans, including the lack of

knowledge and exposure, the lack of trust in financial services industry, partly due to the lack of diversity in our industry; and historical preferences that keep us from the stock market. Because of

these factors, we have learned that our community typically has

half as much money saved for retirement as our White counterparts at the same income levels.

We were very hopeful that the story will be different in large corporations that offer company-sponsored retirement plans, but in

the first few companies that we checked, we found alarming discrepancies between Black and White savings rates, sometimes by

a factor of three or four. Many of us as a community do not even

contribute enough to take advantage of the company match, the

free money that companies give us for participating in the plan. We

also have learned that African-Americans tend to borrow more

against 401(k) plans, we are less diversified in our investment

choices, and less likely to roll over our retirement money into an

IRA when we switch jobs.

Recently, we secured a significant grant from the Rockefeller

Foundation to conduct a study with leading benefits administrator

on minority participation in 401(k) plans at America’s largest corporations. That work is just beginning and we are very hopeful

that we will be able to spark a national conversation to boost minority participation in company-sponsored retirement plans.

Finally, and most importantly, we are introducing financial literacy programs in the Chicago public schools to help educate future

generations of African-American children on the importance of saving and investing. At Ariel, we have sponsored a public school

called the Ariel Community Academy for over a decade that teaches inner-city children how to invest in the stock market using

$20,000 per class of real money. When they graduate, they are allowed to keep their profits and have them matched with up to an

additional $1,000 if they invest in a 529 plan for their college savings.

So you can see, beyond our reputation as a leading investment

firm for our long-term results, Ariel has also established itself as

a national expert on minority saving investment habits and a leader in promoting financial literacy in our community. Our research

suggests that proactive and targeted efforts on the part of employers, especially in seeking out minority managers, can help minorities who work in government and private sector to invest at a level

that secures and guarantees a comfortable retirement for them.

We welcome any and all opportunities to be involved and appreciate your giving me the opportunity to speak on this issue.

[The prepared statement of Ms. Hobson follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much.

We will go to Mr. Brown.

STATEMENT OF JESSE BROWN

Mr. BROWN. Thank you, Mr. Chairman. It is my honor to be here

to add to the discussion of the importance of improving minority

access in the management of the Federal Thrift Savings Plan. I am

giving my perspective from someone who has little, if anything, to

individually gain from the results of this discourse, but, more importantly, I have an interest in the topic from a fairness in the

whole financial arena perspective.

Because we only have so much time today to discuss this topic,

I would like to reserve the right to revise and extend my remarks

for the record at a later date, with the permission of the chairman

and the members of the committee.

Mr. DAVIS OF ILLINOIS. So ordered.

Mr. BROWN. Let me be clear. The statement ‘‘improving minority

access’’ implies there is access. But the access is wanting, not good

enough, inadequate, deficient.

But is that really the case? From where I sit, Mr. Chairman, that

access is not deficient, it is simply not there.

Mr. Chairman, the Federal work force is more than 50 percent

historically under-represented ethnic and racially diverse individuals, as committee Member Norton indicated earlier. Likewise, that

diversity should be reflected in the enrollment and professional advice given and available to all the plan participants. We all know

that advice is very important in the financial arena, so who better

to give that advice then people who share the culture and common

interests of those who are actually investing their money?

The dilemma is that the criteria for competing for the opportunity to manage the Federal Thrift Savings Plan ‘‘is capability of

managing billions of dollars.’’ The fact of the matter is AfricanAmerican and other minority-owned companies do not manage billions of dollars or maybe I should say manage less than the status

quo, except for one or two firms which have been mentioned here

today. Therefore, minority managers cannot bid on these proposals

until the criteria for eligibility has been changed.

What I want to leave with you today is not only a discussion

about what has evolved over time, where there is now a monopoly,

if you will, in place, but I want to make sure that you understand

that there is an opportunity to change the current practices and

create so much more good with just a few and a little more attention of the course and the willingness to embrace diversity at its

highest and most significant level. I am talking about inclusion,

Mr. Chairman.

This is the 21st century, and I know I don’t have to tell you that

much has changed. I must say, as one who traditionally is very deliberate about change, much of the change we have experienced

with diversity has been for the greater good. Let’s face it, we all

know an inclusive environment can enhance the status of much of

what we do in our day-to-day life. We have all read the studies,

heard the presentations by experts in the field like R. Roosevelt

Thomas, who has published several books on diversity and has a

consulting firm, or Bea Smith, founder of the Kaleidoscope Group

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years ago who is a leader in the whole area of diversity, and more

than likely we have pretty much experienced the positive outcomes

of diversity ourselves on a daily basis. So I don’t pretend to be telling you anything that you don’t know.

If we can just take what we have learned from other arenas and

apply it here, I believe we would agree that diversity participation

at the management level of the Federal Thrift Savings program

and the investment companies that are fiduciaries of those accounts can offer opportunities for inclusion, as well as serve as a

catalyst for improved decisionmaking, increased productivity and

make a competitive advantage. You might ask the proverbial question, if it ain’t broke, why fix it? Let’s not get too comfortable with

the familiar, Mr. Chairman. The practice of offering American businesses the opportunity to participate is inherent in our existence.

At the very minimum, Mr. Chairman, I think the principles of

affirmative action, or, should I say, diversity should take force.

Even the very large and successful contractors of the Federal Thrift

Savings program have a very poor record of diversity in their own

work force. I would welcome the committee’s aggressive demand

upon all of the contractors to the Federal Thrift Savings Board and

the Thrift Savings Plan itself to set and meet goals of internal minority employment, hiring and promotion. They should be able to

name individuals of minority groups that head major divisions of

their firm. They should report back to the committee their hiring

practices and recruiting practices. They should show that they are

doing everything they can to meet the goals of the industry as a

whole, and especially as relates to the management of the Federal

Government employees’ money.

For that matter, the Federal Thrift Savings Board itself is not diverse. Has there ever been an African-American or woman appointed to the Board? Why not? Diversity begins at the top.

Mr. Chairman, the executive director of the Federal Thrift Savings Board should be challenged and directed to begin the diversity

movement within his own office and staff, and then in the various

departments and divisions. This should be a part of every vendor’s

report, the number of minorities that are employed. And if there

are none, why, and what recruiting efforts are under way.

So reaching these goals should be a criteria for compensation of

the executive director and his staff, beginning at the Federal Thrift

Savings Board itself, and should be legislated as part of his job description and responsibility.

In closing, the Federal Thrift Savings Board should be about

Federal employees, and not just the administration of the funds.

The employees should be first in the minds of the Federal Thrift

Savings Plan. At this point, the Federal Thrift Savings Board and

the administration primarily worry about managing the funds.

They give off the responsibility of educating the members of the

Federal Thrift Savings Plan to the Office of Personnel Management. This could be legislated in a different way as time moves on.

With that, I will conclude my remarks and answer questions, and

leave the rest for the credit document.

[The prepared statement of Mr. Brown follows:]

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

Let me thank all three of you for your testimony.

As we pursue change and as we continue to move, it struck me

that change is often a slow and subtle process. It also struck me

that change is often more covert than it is overt; that it is more

evolutionary than revolutionary.

As I was thinking of that, Mr. White, I wanted to ask you do you

think pursuit of a more active strategy on the part of the Thrift

Board would constitute a breach of fiduciary responsibility?

Mr. WHITE. Well, the short answer to your question, Mr. Chairman, is absolutely no. It would not be a breach of fiduciary responsibility. Again, as I mentioned, many, many U.S.-based plans, both

defined benefit as well as defined contribution, have both active as

well as passive management as part of their overall asset allocation.

It was interesting when Representative Norton asked Mr. Long

the question earlier about benchmarking, and benchmarking the

TSP versus other similarly sized pension plans, and why that

doesn’t occur. Certainly, if one were to do that survey, I think you

would find that plans of that size, with exclusively passive investment as well as a single manager are probably in the minority

among any similarly sized plans within this country, and perhaps

even worldwide.

Mr. DAVIS OF ILLINOIS. Ms. Hobson, let me ask you, given the experiences of Ariel, given its success, given the approach that it

takes, and as you look at the scenario of TSP, its statutory requirements, its investment approaches, do you see any minority firms

that you think could handle at least a substantial piece of investment for the TSP?

Ms. HOBSON. The way I would answer the question is this: I

think that no minority firm could handle the entire Plan; it would

not be possible. But I do think that a number of minority firms can

participate in helping to manage the assets for the existing Plan

participants. Moreover, I think the participants would welcome

more choices. And at the end of the day, that is all you are doing,

is giving people another choice; and at the end of the day they vote

with their feet based upon the actual performance results of the

funds.

Mr. DAVIS OF ILLINOIS. Not that you necessarily delved into

every aspect of the TSP, but just given what you know about it and

about its statutory requirements and all, do you think that they

would have the authority to let such a piece of action, where they

kind of broke things up some.

Ms. HOBSON. I absolutely think they would have the authority to

expand and include more firms in the current process than what

currently exists with the sole provider, being Barclays. I also think

that, again, when you look at benchmarking of other plans, I am

not sure that there are many plans around the world that are of

this size.

So it is hard to go apples to apples in terms of the pure scale

of this Plan. But when you do look at very large defined contribution plans around the country, many of whom we work for, the biggest in the country, the United States, when you look at those

plans, you do see more options, more opportunities, and you tend

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not to see a solely indexed option or set of options for the plan participants. So you can look at, again, major, major corporations and

see that there is a more diversified lineup of offerings.

The TSP, from what I understand, will use the cost argument as

their major defense—that is what I would assume—and say we get

to do this at the lowest possible price. We would come back and

argue that you may be giving up investment results in exchange

for that 1.5 basis point fee, which I am not sure that is all-inclusive

in terms of the costs, but we would say that there may be more

upside for your participants in terms of more offerings. And again,

at the end of the day—I cannot emphasize it enough—they get to

vote with their feet; they get to go where they want to be, look at

the returns of the funds side-by-side and decide to invest in that

manner.

Mr. DAVIS OF ILLINOIS. Mr. Brown, let me ask you. In your testimony, you talked a great deal about change, and I know that you

were present as other witnesses testified and as we talked about

different possibilities and different ways of changing the activities

of the TSP. You even mentioned the board and the whole diversification effort.

What would you view as an option? Obviously, we are searching

for ways to change the way the TSP operates, not because we are

just opposed to the way that they may operate, but because we believe in fairness, we believe in equity, we believe in open opportunity. So what would you view as something that we can do legislatively or that we can do from the vantage point of this subcommittee?

Mr. BROWN. Mr. Chairman, the law is rather specific as to what

can and cannot be done, so obviously the most specific thing is to

actually look at the legislation itself. The way the law is put together, it gives a tremendous amount of authority to the Federal

Thrift Savings Board, those individuals who are appointed by the

President and, in some cases, with the advice and consent of the

Speaker and the Majority Leader or the Senate. So although the

committee may have an interest in doing one thing or another, the

original law has some handcuffs, if you will.

Specifically in terms of diversity and change, the suggestion that

there be other funds allowed in the mix of funds of the Thrift Savings Plan is something specifically that this committee could suggest. In the past, there have been suggestions, as you indicated

earlier, that various other types of investments—commodities, real

estate investment trusts, precious metals; the list goes on—the

Federal Thrift Savings Board has the ultimate responsibility in

making this decision, but certainly the committee and Congress

can make those suggestions. So I think that is one very specific

thing that you might want to look at.

In terms of the management of the funds, the Federal Thrift Savings Board has responsibility of actually just kind of managing the

funds itself. That is kind of administrative role more than actually

passive-active. They administer it. The Board makes the decision

as to what choices are going to be in the Plan. Actually, the Board,

a year or so ago, moved toward a lifestyle set of funds in addition

to their lettered funds for bonds and equities and such. So I would

think that this committee has a tremendous responsibility in that

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regard in terms of making that suggestion to the Federal Thrift

Savings Board.

So, in summary, it is the Board itself that really requires some

attention, and until that Board is dealt with, then it is going to be

very, very difficult, even at hearings like this, to make any kind of

change because of the cushion that was given to them in terms of

political intervention.

Ms. HOBSON. If I could respectfully also add to that, in terms of

how the Board considers the provider for the plan. In many situations, and Ariel very frequently responds to proposals, fills out requests for proposals from city and State pension funds around the

country, as well as defined contribution plans, and in those RFPs

there are specific questions about the diversity of the organization.

And while there is no mandate or requirement around any kind of

diversity, by mere virtue of asking the question, it does behoove

people to want to answer the question in a way that shows off their

firm in the best light. When all things are considered and firms are

set side-by-side, perhaps it will add one more opportunity for consideration or actually being selected.

So I would use that as a means of saying while not legislating

it, when the RFP is written again, 3 years from now, when the contract ends, that there might be a conversation about adding to that

RFP discussions about the diversity of the provider, as well as their

board of directors. As far as we can tell from our research, there

is no diversity on the board of the current provider, none, and no

diversity, as far as we can find, in terms of the upper management

ranks of the provider. And while we do not say that in a way to

pass judgment, we say it in a way that the question at least should

be asked.

Mr. DAVIS OF ILLINOIS. Let me just agree with you, because I

kind of liken this to the merit selection of judges, and we used to

laugh about it in terms of who was determining that some people

had merit and other people didn’t. And then we decided to change

the system and found out that a lot of people have merit, and it

is very possible that the chief judge of our court system may not

have become a judge if we had not moved from the way that this

notion of merit selection, where insulated groups were making determinations about the credentials and viability and possibility of

lots of other people.

Let me ask this. Legislating is not the easiest thing in the world.

I mean, there are many factors that always contribute to legislative

determinations and decisionmaking, and people who are defenders

of the system, they like the idea of suggesting that there is some

insulation from politics, that they really don’t have to be concerned

about external pressures, I guess, or efforts of external intervention. And when I hear that, I am always reminded that you can’t

always determine what goes on around you, but you ought to be

able to determine how you react and respond to it.

Also, how do you think—and each one of you, if you would, and

perhaps this will even be our last question—how do we maintain

the integrity of systems and at the same time try and move them

toward the inclusiveness that we all talk about and hope to see and

fight for, and still maintain what would be called the integrity of

a process involving investment of these huge sums of money?

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Mr. BROWN. Mr. Chairman, one idea is the inclusiveness that the

legislation speaks of in the first place, and that is to say open it

up, allow different types of investments to be included in the Plan.

Now, what we have now is a very narrow set of things that is possible to be invested; there are index funds and they are just very

narrow.

Now, the problem with opening it up, of course, is opening it up,

and there would be opportunity for all these various other funds,

be it real estate investment trusts or commodities, or this thing or

that thing or another, and that could become unmanageable, but

it certainly would be open. Once it is then open, then, obviously,

there will be opportunities for different types of managers for different types of things. So, obviously, a particular manager might be

good at fixed income or another particular manager might be good

for one thing or another.

I think there will be great resistance to this because it would be

so open, but there are—and I think Mellody kind of commented on

this—there are various plans, 401(k) plans and others, around the

country that would give you a list of 20, 30, 40, as many different

opportunities as possible. And as I think she indicated, people vote

with their feet, they pick one fund versus another fund. Sometimes

they pick the wrong one; sometimes they pick the right one.

Mr. DAVIS OF ILLINOIS. Well, that is what the TSP people would

say that they are trying to make sure does not happen.

Mr. White.

Mr. WHITE. Yes, Mr. Chairman. A couple of things I might just

point out. One is somehow this idea that active management is

both political and/or social is just flat-out wrong. There is nothing

inherently political or social about active management. It is not

any more politically involved than passive management. So there

is nothing inherently social or political about either.

As was mentioned in an earlier panel, the key ought to be how

do we maximize returns for participants. That ought to be the driving force. Certainly, in addition to considerations about costs being

written into the legislation, the flexibility to include active management, also considerations about risk and return ought to be included within the legislation. Those are ways that traditional, wellrun, fiduciaraly sound plans, whether they be defined benefit or defined contribution, typically include these kinds of considerations

as they make decisions about who manages assets.

I think, finally, this idea of having processes like competitive bid,

RFP, the use of external consultants. The Thrift Plan mentioned

that they had used Ennis Knupp, which is a consultant for many

of the large plans that we work for and others. Again, these are

all mechanisms to help maintain the integrity of the decisionmaking about who gets to manage assets, so these are things that

can be built into legislation to help ensure the integrity of the process.

But there is nothing inherently political or less political about a

passive strategy versus an active strategy. Just if I might add parenthetically, one might view a single provider for a plan that large

as some political sweetheart deal. I don’t necessarily think that because I think Barclays is a good firm. But the fact of the matter

is, again, single manager risk, specific company risk, particularly

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with a firm whose parent is a U.K.-based entity, and not a U.S. entity, I think creates a lot of undue risk for participants. Certainly,

as we have seen with other large plans over the past year or so,

things happen with large investment firms that none of us could

anticipate.

Mr. DAVIS OF ILLINOIS. Well, thank you very much.

Ms. Hobson.

Ms. HOBSON. Yes. My add-on comments to very, very good perspectives are, one, we are not talking about revolution here; we are

talking about some incremental change. I would not sit here and

tell you that it is a bad plan; I am just saying it could be slightly

better if there were more participation and more inclusion. I would

not ever advocate 20 mutual funds. I would not ever advocate a

fund for every flavor and topic, because I think people then become

overwhelmed with the choices that they get. But I do think, on the

margin—again, not anything revolutionary, but more evolutionary—there is an opportunity here to make the fund slightly better,

the Plan slightly better.

The one way to de-emphasize any of the political conversation

that you are alluding to is, at the end of the day, in our business,

the really great thing is we have a score. We know who did well

and who didn’t. You can look at the numbers on the page every single day in our business, every single day you can open up the newspaper and see how your Ariel mutual fund did, and we know if we

won or lost that day versus the indices that are in this plan. So

the good news is that de-emphasizes any kind of political conversation because the numbers speak for themselves. And at the end of

the day, as I said before, people will go where the performance is,

which is also not political at all; it is in their own best interest.

Last but not least, when you look at any of the other plans that

are out there, you typically don’t see this. And if we take it a step

further and look at other Federal plans like the National Railroad

Retirement Trust, as an example, it has active management in it.

So you can’t argue the political active management discussion for

one plan and not have that same argument apply to another. So

I would hold that up as an example that would perhaps put a pin

in that issue very quickly.

Mr. DAVIS OF ILLINOIS. Well, let me just thank all three of you,

as we begin to adjourn.

Did you have another comment?

Mr. BROWN. Yes, just one very brief comment. The difference between the Thrift Savings Plan and other pension plans is that the

individual employee makes the decision for himself as to what is

going to be in his particular account. So one of the failures of the

Federal Thrift Savings Board and the Thrift Savings Plan is the

education or better education of the actual participants itself. Many

times they push this off to the Office of Personnel Management,

who is not here today, and that might be another consideration of

the committee, to talk with them at some point.

Mr. DAVIS OF ILLINOIS. Well, thank you all so much. I want to

thank all of the witnesses. I also want to thank all of you for coming.

I am reminded of two things. One, a fellow named George Collins, who used to be the Congressman representing the district that

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I represent. One of the first political speeches that I ever heard

George make, he said that the politician, Confucius said, that he

who tooteth not his own horn will find that same shall not be

tooteth.

I have sat through many hearings. I can tell you that there are

more Black-Americans in this room than most hearings I have attended since I have been a Member of Congress, when the room

was overflowing. So I am appreciative of the fact that you are here

and that you are expressing the interests and displaying the expertise that you have. Oftentimes, there are no minorities even on

panels testifying. There is nobody, seemingly, that is a minority

that is often asked to testify. So the perspective that we often get

is not one that contains the experiences of minority elements of our

population community.

So I want to thank you all for coming. I want to thank the staff

for the outstanding work that they have done in putting together

this opportunity. And with that, this hearing is adjourned.

[Whereupon, at 12:37 p.m., the subcommittee was adjourned.]

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