Federal Retirement Thrift Investment Board

October 2022

2022 Investment Option Review

Investment advice and consulting services provided by Aon Investments USA Inc.

Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice.
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Executive Summary

▪ The Federal Retirement Thrift Investment Board (FRTIB) retained Aon Investments USA, Inc. (Aon) to 

conduct a comprehensive review of the Thrift Savings Plan (TSP) investment options.

▪ Aon completed the following tasks:

– Summarized our guiding principles with respect to investment structure, and provided an initial 

evaluation of the TSP investment structure based on these factors

– Compared the TSP circumstances to those of peer plans

– Identified key criteria to evaluate asset classes/investment options under consideration

– Applied the key criteria to a broad array of asset classes/investment fund options to identify those 

suitable for further consideration

– Reviewed in detail the appropriateness of certain asset classes/investment fund options and 

provided our recommendations on whether a new asset class/investment option should be 

considered for inclusion within the TSP line-up

▪ Consistent with prior reports, Aon identified one recommendation for the FRTIB to consider:

– Expand the market coverage of the I Fund to include Canada, emerging markets, and non-U.S. 

small cap stocks
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Background Information

▪ As of July 31, 2022, the TSP had approximately 6.6 million participants. This translates to an average 

participant balance of approximately $112,000.

Note: The table shows that assets invested in the core funds are reduced by their representation in the L Funds in order to avoid double counting

Objectives Investment Option Types TSP Options Market Values ($ Billions)

(As of 6/30/2022)

Capital 

Preservation

Cash Equivalent/

Stable Value G Fund $234.5

Income Diversified Fixed Income F Fund $20.8

Asset Allocation Target Date/Lifecycle

L Income, L 2025, 

L 2030, L 2035, L 2040, 

L 2045, L 2050, L 2055, 

L 2060, L 2065

$159.7

Growth Global Equity

C Fund

S Fund

I Fund

$206.1

$62.0

$23.7

N/A Self-Directed Mutual Fund Window $0.1
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Overview of the TSP Investment Structure

▪ Aon believes that the TSP exhibits the following structure, which reflects our best thinking:

– Offers sufficient range of choice: the current options reasonably span the risk and return 

spectrum across major investable markets 

– Allows participants to form well-diversified portfolios

– Is appropriately comparable with peers

– Meets broad participant demand

▪ One of the hallmarks of the TSP is its simplicity and efficiency. The TSP offers low-cost, broadly 

diversified options that provide coverage of the broad asset class segments that form the core building 

blocks of diversified portfolios. We believe the investment structure remains in the best interest of the 

TSP’s participants and beneficiaries.

‒ Additionally, the inclusion of the mutual fund window allows for additional portfolio construction 

flexibility for participants, further supporting the existing simplified investment line-up. 
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Evaluation Criteria of the TSP Investment Structure

▪ While there are numerous criteria to consider when evaluating the types of investment alternatives to 

offer in a participant-directed defined contribution plan, we believe the following criteria (individually 

and collectively) are among the most relevant for the TSP to consider:

– Major diversified asset classes/categories not currently offered as an investment option

– Asset class/category is large enough for the TSP to invest in

– Potential diversification benefit for the TSP participant portfolios

– Asset class/category offers daily liquidity and daily valuation

– Ability to index 

– Ability to engage in securities lending

– Unusual cost and custody issues, administrative and/or operational complexities

– Practices of peers

– Best practices

▪ Given the extraordinary asset size of the TSP, any investment option offered should represent an 

asset class/category of such significance that the likelihood of the TSP becoming a disproportionately 

large investor and trader of the asset class/category is minimized. 
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Evaluated Asset Classes 

▪ The full opportunity set of asset classes/categories we considered for review are listed in the table 

below:

▪ Based on the initial review of the key criteria, we eliminated several categories from further 

consideration due to factors such as small market size, illiquidity, overlapping exposure to existing 

line-up, lack of passive investment strategies, and/or concentrated strategies/purpose. The asset 

classes excluded from further consideration were:

Equities Fixed Income Alternatives/Other

Broad U.S. Equity Non-U.S. Bonds Private Real Estate

Broad Global Equity High Yield Bonds Private Equity

Broad Non-U.S. Equity Emerging Market Debt Hedge Funds

Global REITs TIPS Multi-Asset Inflation Protection

Commodities

Infrastructure

Responsible Investing Funds

Cryptocurrency

‒ Broad Global Equity ‒ Hedge Funds

‒ High Yield Bonds ‒ Infrastructure

‒ TIPS ‒ Responsible Investing Funds

‒ Private Real Estate ‒ Cryptocurrency

‒ Private Equity
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Evaluated Asset Classes Reviewed in Detail

Asset Class Summary of Analysis Recommended 

Change?

Broad U.S. 

Equity

▪ Additional diversification benefits are not material given the TSP’s U.S. 

stock funds provide exposure to the entire U.S. stock market. 

▪ Although there may be structural benefits to combining the C and S 

Funds into a broad U.S. all-cap equity option, the TSP’s line-up is already 

very streamlined, and offering one large-cap and one small/mid-cap 

option is a reasonable approach.

No Change

Continue to offer 

C and S Funds 

for U.S. equity 

exposure

Broad NonU.S. Equity▪ We favor expanding the I Fund exposure to Canada, emerging markets, 

and non-U.S. small-cap stocks, as this expansion would provide broader 

coverage of the international equity markets, more fully capture global 

growth, and provide enhanced diversification of the international equity 

portfolio. 

▪ However, as we consider the appropriate market exposure for the I Fund, 

it is important to take into account the TSP’s unique circumstances such 

as liquidity needs, unusual cost and custody issues, and administrative 

and operational complexities. 

Change 

Recommended

Consider 

expanding 

market coverage 

of the I Fund

Non-U.S. 

Bonds

▪ In addition to low utilization by peers, the benefits of adding a non-U.S. 

bond option are minimal from an expected risk/return and portfolio 

diversification standpoint for the TSP participants.

No Change

Non-U.S. bond 

investment 

option not 

recommended
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Evaluated Asset Classes Reviewed in Detail (cont.)

Asset Class Summary of Analysis Recommended 

Change?

Emerging 

Market Debt

▪ Emerging market debt can experience higher volatility relative to 

traditional U.S. fixed income. 

▪ There are limited passively managed products available, and liquidity is 

generally lower with higher transaction costs.

No Change

EMD investment 

option not 

recommended

Multi-Asset 

Inflation 

Protection

▪ Many of the underlying asset classes that would be included in the 

context of a multi-asset inflation-hedging investment option have 

relatively high correlations with the current investment options, resulting 

in less compelling diversification benefits. 

▪ We do not believe the benefits of adding this type of investment option 

materially outweigh the risk associated with potential misuse within 

participant portfolios, particularly within the context of the simplified 

TSP line-up. 

No Change

Multi-asset 

inflation 

protection 

investment 

option not 

recommended

Global REITs ▪ Global REITs is a specific sector included within the global equity market 

and generally exhibits a higher degree of volatility than the broad equity 

market over longer periods of time.

No Change

Global REITs as 

a standalone 

investment 

option not 

recommended

Commodities ▪ Commodity prices are influenced by demand/supply considerations 

rather than the intrinsic value of a security, and future return 

expectations are uncertain. 

▪ The addition of this asset class adds complexity and is not common 

practice in peer plans.

No Change

Commodities 

investment 

option not 

recommended
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L Funds Structure Review 

▪ The L Funds include an Income Fund and nine target date funds offered in 5-year increments 

commencing with a target retirement/withdrawal date of 2025. 

▪ The L Funds allow participants to select an investment fund that is diversified among and within asset 

classes, as the L Funds are constructed using the five core investment options. 

▪ More than 80% of peer plans offer target date funds to their participants. 

▪ Following the 2017 Investment Option Review, 5-year vintages were added to the suite of L Funds, 

which continues to be in line with best practices and allows participants to have a narrower window of 

time to match their intended retirement date with their asset allocation.

▪ Aon does not recommend any changes to the structure of the L Funds.
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I Fund Overview 

▪ Aon reviewed the merits of expanding the I Fund (e.g., Canada, emerging markets, and non-U.S. small 

cap stocks) to provide more complete coverage of the international equity opportunity set. 

– Large market with total capitalization of over $26.4 trillion (approximately 39% of world equity 

market capitalization)

– The TSP participants do not currently have exposure to Canada, emerging markets, and non-U.S. 

small cap stocks

– Daily valued index products are available

– Securities lending is available in the broad non-U.S. market segment excluding some emerging 

market countries

▪ Modern Portfolio Theory suggests that the “market portfolio” is the most efficient portfolio (in terms of 

risk/return trade-off) that an investor can hold. 

▪ The “market portfolio” is a market-cap weighted sum of all available asset classes/regions/countries. 

Excluding segments of the market limits investors’ opportunities (return and/or diversification 

potential).
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I Fund Forward-Looking Efficient Frontier

▪ Broadening the coverage of the I Fund to Canada, emerging markets, and non-U.S. small cap stocks 

can enhance portfolio diversification and portfolio efficiency. 

Source: Aon Capital Market Assumptions as of 3Q – 2022 10 Years
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Conclusion

▪ TSP Investment Option Review 

– The simplicity and efficiency of the existing line-up make the TSP a very attractive offering to 

participants. 

– Based on our analysis, Aon believes the current line-up remains in the best interest of the Plan’s 

participants and beneficiaries. 

– For that reason, Aon did not find any of the asset classes (and sub-asset classes) evaluated in 

detail particularly compelling as a standalone replacement or additional option to the TSP line-up.

– Aon did find merit in broadening the I Fund market coverage to Canada, emerging markets, and 

non-U.S. small cap stocks, as it would enhance the efficiency of the TSP without compromising 

materially on its simplicity. 

– In addition, broadening the coverage of the I Fund to encompass the full opportunity set will 

provide symmetry to the TSP’s equity investment line-up as it would be providing participants 

access to both U.S. and non-U.S. large- and small-cap stocks.

▪ In summary, Aon recommends that the FRTIB maintain the existing structure of its investment line-up 

while considering expanding the coverage of the I Fund. The expansion of the I Fund is also contingent 

on the TSP’s unique circumstances such as liquidity needs, unusual cost and custody issues, and 

administrative and operational complexities. 
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Legal Disclosures and Disclaimers

Investment advice and consulting services provided by Aon Investments USA Inc. The information contained 

herein is given as of the date hereof and does not purport to give information as of any other date. The delivery 

at any time shall not, under any circumstances, create any implication that there has been a change in the 

information set forth herein since the date hereof or any obligation to update or provide amendments hereto. 

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