Institutional investors include public and private entities that pool funds on behalf of others and invest the funds in securities and other investment assets. Examples of institutional investors include federal, state, and local government, and private retirement plans, endowments, and foundations. In 2015, the eight entities we reviewed held close to $388 billion in externally managed investment assets used to support their investment objectives, including funding retirement benefits for federal employees (see table 1). They administered or oversaw defined benefit retirement plans, defined contribution retirement plans, an endowment, and an insurance program, each with distinct investment objectives. Three of the eight entities we reviewed manage defined benefit plans that provide participants a retirement benefit amount using a formula based on factors such as years of employment, age at retirement, and salary level. Typically, benefits are paid from a fund made up of assets from annual contributions by employers, employees, or a combination of the two and investment earnings from those contributions. Defined benefit plans typically have investment policies and guidance that outline goals for how the funds are to be invested. One of the eight entities we reviewed sponsors a defined contribution plan in which employees and employers contribute to an account directed by the employee into investment options offered by the plan. Policy objectives for defined contribution plans typically focus on offering a range of prudent investments suitable for participants to direct contributions in ways that meet their personal investment objectives. Two of the eight entities we reviewed both manage defined benefit plans and sponsor defined contribution plans. Two of the eight entities we reviewed hold other types of investments. The Smithsonian Institution manages an endowment, which is comprised of trust funds, the majority of which have been permanently restricted by donors for a particular use, such as acquisition of artwork, funding curator positions, or public programs, according to agency officials. The Pension Benefit Guaranty Corporation operates an insurance program designed to partially insure defined benefit pensions sponsored by private employers. While the Pension Benefit Guaranty Corporation insures the pension benefits of nearly 40 million workers and retirees, as a federal guarantor of these plans it takes over the assets of underfunded terminated plans and is responsible for paying benefits to participants who are entitled to receive them. For the defined benefit plans, endowment, and insurance program we reviewed, the entities generally make investment decisions within a framework spelled out in investment policy statements approved by boards of directors, trustees, or regents. Their investment policy statements generally define an asset allocation, or mix of asset classes in proportions designed to meet the entity’s overarching investment objectives. For defined contribution plans, participants make investment decisions by deciding how to allocate the contributions they and their employer make among investment options offered through the plan. Entities that administer these plans may outline these options in plans’ investment policy statements. For three entities in our review, legislative mandates also specify certain investment decisions, such as asset diversification and investment options. The federal entities we reviewed and the National Railroad Retirement Investment Trust are fiduciaries that have responsibilities that are typically similar to those of private sector retirement plans in that they are required to act solely in the interest of participants and beneficiaries in the retirement plans. These responsibilities may include acting with the exclusive purpose of providing benefits to the participants and beneficiaries and defraying reasonable expenses of plan administration; carrying out their duties prudently; following the plan documents; and diversifying plan investments. A number of stakeholders are typically involved in the investment process. Generally, investment boards of directors or trustees, investment committees, investment officials and staff, investment consultants, asset managers, and brokers work together to invest clients’ funds in securities that match clients’ financial objectives (see fig. 1). The defined benefit plans, endowment, and insurance program we reviewed generally retained external asset managers to select individual investments in accordance with the asset allocation frameworks in their investment policy statements. The defined contribution plans generally retained external asset managers to provide plan participants with investment options. Asset management firms typically select investments on behalf of the investors that hired them and regularly report on investment performance. Many earn income by charging service fees based on a percentage of assets they manage. These fees generally include the costs of trading charged by brokerage firms. Asset management firms registered in the United States manage more than $70 trillion. Although thousands are registered to operate in the United States, the 100 largest asset managers account for more than 50 percent of total reported assets under management. Institutional investors we reviewed work with asset managers to typically invest in or offer participants investments in four broad asset classes: equity, fixed income, alternative assets, and cash and cash equivalents. Equity indicates ownership in a business in the form of common stock or preferred stock. The equity asset class includes mutual funds, collective investment trusts, and exchange-traded funds that invest in equity securities. Fixed income refers to any type of investment under which the borrower or issuer is obligated to make payments of a fixed amount on a fixed schedule. The fixed-income asset class includes mutual funds, collective investment trusts, and exchange-traded funds that invest in fixed-income securities. Alternative assets can include hedge funds, private equity, real estate, and commodities. Plans may make such investments in an attempt to diversify their portfolios, achieve higher returns, or for other reasons. In recent years, two of the most common alternative assets that institutional investors held were hedge funds and private equity. Cash and cash equivalents are the company’s assets that are cash or can be converted into cash in a very short period of time. They include bank accounts, marketable securities, commercial paper, Treasury securities, short-term government bonds (with maturities of 3 months or less), short-term certificates of deposit, and money-market funds. Institutional investors generally use (or offer to participants) passive or active portfolio management strategies, or a mix of both. Passive management involves buying or creating an investment portfolio that closely tracks the performance of a broad class of assets usually defined by an index, such as the S&P 500. Passive managers attempt to match the performance of an index, typically with lower fees than active managers. Active managers attempt to exceed the performance of an index using their judgment about which individual investments in that asset class will do better than average. In defined contribution plans, the portfolio management is directed by the participants based on the range of options provided by the plan. The Federal Acquisition Regulation (FAR) establishes uniform policies and procedures for the acquisition of goods and services by executive agencies. Among other things, the FAR includes requirements agencies must meet, such as full and open competition through competitive procedures. With the exception of the Pension Benefit Guaranty Corporation, the FAR does not apply to the asset manager selection processes used by the federal entities or the National Railroad Retirement Investment Trust, according to representatives we interviewed. According to many asset managers and industry associations with which we spoke, MWO asset managers face various challenges when competing for investment management opportunities with institutional investors, including retirement plans and foundations. However, nonfederal plans and foundations with which we spoke used various approaches to help address many of these challenges. These plans and foundations cited several factors that led them to take steps to increase opportunities for MWO firms. For example, some noted organizational interest in diversity as the driving force behind more inclusive selection practices for asset managers. Others cited potential benefits of using MWO firms, such as helping to diversify risk in their portfolios. Investor and consultant brand bias. According to most asset managers and industry associations we interviewed, institutional investors and their consultants often prefer to contract with larger asset managers with brand recognition or with whom they are familiar. Furthermore, according to some asset managers and industry associations, unless clients directly ask for MWO firms to be included in asset manager searches, consultants generally will not include them. For example, one industry association noted that consultants generally exclude MWO asset managers due to an implicit bias that their clients’ investment portfolio performance could potentially suffer if they use a MWO firm despite no information to indicate this would in fact be the case. Having recognized brand bias as a challenge for MWO firms, some nonfederal plans and foundations have asked their investment consultants to maintain an inclusive process for sourcing, evaluating, and recommending investment managers across race, ethnicity, and gender. One of these plans and a local plan in Illinois told us that they asked their investment staff or consultants to ensure that at least one qualified MWO asset manager was invited to present to the institutional investor’s decision-making body. In addition, one foundation ensured that its consultant was held accountable to more inclusive processes by requiring its investment consultant to annually report the number of diverse managers evaluated, recommended, and hired across the consultant’s client base. Perception of weaker performance. According to most MWO asset managers and industry associations with whom we spoke, MWO firms may face challenges because institutional investors generally have a perception that MWO asset managers do not perform as well as non- MWO firms. However, a May 2017 study on diversity in the asset management industry by an academic institution and a research group found no differences in the performance of funds managed by MWO firms and the performance of those managed by non-MWO firms, among the firms they analyzed. Furthermore, all nonfederal plans and foundations we interviewed told us that all firms managing assets in their respective portfolios, including MWO asset managers, were selected based on track record of performance and evaluated against the same performance standards as other asset managers in their portfolios. In addition, some nonfederal plans noted that these asset management firms may provide certain benefits in generating profit for their clients. For example, one plan noted that MWO firms offer more differentiated investment strategies than larger firms. Size and infrastructure. The size and limited infrastructure of smaller, newer MWO firms also may pose challenges. For example, according to most asset managers and industry associations with which we spoke, small MWO asset managers are frequently not able to meet threshold requirements set by institutional investors, such as minimum limits established for assets under management, liability insurance, and length of track record. Moreover, an asset manager and some nonfederal plans and foundations noted that back office functions and operational costs, such as for accounting and compliance, are high and make investments in these areas difficult for smaller, newer firms (including many MWO firms). In light of these minimum threshold challenges for MWO firms and smaller firms in general, many nonfederal plans adjusted requirements to allow these firms to compete, while noting that they maintained the same performance requirements for all asset managers in their selection processes. Specifically, most nonfederal plans and two foundations either lowered their minimum requirements for assets under management, length of track record, or amount of liability insurance to help ensure the requirements were proportional to the size of the firms, or did not set any minimum or maximum assets under management threshold levels. As we will discuss later, the Federal Reserve System and Pension Benefit Guaranty Corporation have made similar adjustments to increase opportunities for MWO asset management firms. Representatives from most nonfederal plans, foundations, the Federal Reserve System, and Pension Benefit Guaranty Corporation stated that they have not sacrificed performance or fallen short of their fiduciary responsibility in increasing opportunities for MWO firms. Industry trends. In May 2016, we reported that defined contribution plans have replaced defined benefit plans and become the dominant form of retirement plan for U.S. workers over the past three decades. According to some asset management firms and industry associations, MWO firms face challenges due to this industry shift from defined benefit plans toward defined contribution plans where business opportunities for MWO firms may be too costly. The marketplace shift from defined benefit to defined contribution plans also will likely drive up costs for asset managers and branding will be more important for defined contribution plans because asset managers will need to interact more directly with participants, according to an industry association we interviewed. The industry shift from active management to passive management may also be a challenge. According to some asset managers, industry associations, and nonfederal plans we interviewed, MWO firms are less able to compete at defined contribution plans with passive management investment strategies because MWO firms lack the size and resources that larger firms have to keep asset management fees low for clients. Furthermore, because asset management fees for passive management strategies are low, an asset management firm must have a volume of business large enough to be profitable. In addition to adjusting minimum size and length of track record requirements, the nonfederal plans and foundations with which we spoke developed other strategies to help increase opportunities for MWO asset management firms. Some nonfederal plans and one foundation allocated a target amount of their investment portfolio to MWO asset managers. For example, to help increase opportunities for MWO asset management firms, a local plan in Texas developed a program that sets aside 10 percent of its total assets across all asset classes to be managed by asset management firms with $50 million or less in assets under management and at least 30 percent ownership by minorities or women. In addition, some nonfederal plans said they have developed emerging manager programs. For example, a state retirement plan in California has an emerging manager program— generally defined as a program geared towards newer, smaller asset managers—wherein each of the plan’s asset classes has emerging manager definitions based on assets under management, length of track record, or both. In the plan’s private equity class, emerging managers do not have to meet a minimum track record requirement and must have $1 billion or less in assets under management. Most of the nonfederal plans with whom we spoke used a fund-of- funds structure, in which a larger fund works as an intermediary for multiple, smaller managers. Three of these nonfederal plans noted that working with one firm to recruit, select, and manage underlying firms was an efficient and effective means of working with smaller, newer managers, including MWO firms. For example, a local government retirement plan in Illinois noted that the fund-of-funds manager they hired was able to hire MWO firms much more quickly than they would have been able to directly. Similarly, a foundation that sought to increase diversity told us that it specifically hired a fund-of- funds manager to help find MWO firms for its foundation. In addition, three nonfederal plans noted that another benefit to hiring a fund-of- funds manager was that the firm could serve as a mentor (providing guidance and coaching to the smaller asset management firms and MWO firms), which can help build institutional relationships over the long-term. Nonfederal plans and foundations also helped increase opportunities for MWO firms by using outreach strategies to identify MWO managers that could meet their investment needs. For example, many nonfederal plans regularly participated in networking events, such as conferences, with MWO asset managers or networked with asset management trade associations that represent MWO firms. Many of these nonfederal plans facilitated one-on-one interactions with MWO firms so prospective asset managers could better understand their selection processes. The federal entities we reviewed and the National Railroad Retirement Investment Trust invested primarily in equity and fixed income, while some also invested in alternative assets or maintained some level of cash and cash equivalents. The 2015 allocations of the defined contribution plans we reviewed, shown in table 2, reflect both the investment options plans offered to participants and participants’ decisions about how to invest among them. Valley Authority Savings and Deferral Retirement Plan also used BlackRock to offer passively managed funds in which participants invested over 60 percent of total 2016 plan assets (see sidebar). Similarly, the Federal Reserve Thrift Plan contracted with six large asset managers to offer the plan’s 12 funds. Eight of these, accounting for nearly three-quarters of participant investments, were passively managed. The defined contribution plans’ use of passively managed funds may limit opportunities for MWO firms. As discussed earlier, the shift toward defined contribution plans and passive management poses a challenge for MWO firms. In particular, some asset managers and industry associations with whom we spoke said MWO firms lack the size and resources to compete with the low fees larger firms can offer through passive management. The federal defined benefit plans we reviewed and the Smithsonian Institution endowment generally invested more extensively in alternative assets in addition to equity and fixed income. As shown in table 3, in 2015 the Smithsonian Institution invested more than half the endowment’s assets in alternative assets. Fiduciaries of four of the five defined benefit plans in our review also invested substantially in alternative assets, ranging from about one-quarter to about one-third of plan assets. The Pension Benefit Guaranty Corporation generally does not invest in alternative assets, but does hold a limited amount of these assets in line with its investment policy. We determined that MWO asset managers operate in the asset classes in which federal entities and the National Railroad Retirement Investment Trust invest. To do so, we identified more than 180 asset management firms designated through publicly available sources as having some level of minority- or women-owned ownership. These MWO asset managers operate in all four asset classes in which the entities in our review invested or offered investment options to participants. MWO asset managers we identified reported managing assets totaling more than $529 billion. As shown in table 4, most operate in the equity, fixed income, or alternative asset classes. The market presence of these firms equaled less than 1 percent of all regulatory assets under management. Two of the firms, with combined regulatory assets under management of about $42 billion, identified themselves as specializing in passive management investment strategies. Although we identified MWO asset managers operating in each of the four major asset classes, use of MWO asset managers in 2015 and 2016 by the federal entities we reviewed and the National Railroad Retirement Investment Trust varied (see table 5). For example, in 2015, none of the three defined contribution plans we reviewed used MWO asset managers. Four of the five defined benefit plans we reviewed reported using at least some MWO asset managers, but one of these plans did not track this information and was unable to provide us with specific data on its use. Finally, the Pension Benefit Guaranty Corporation did not use MWO asset managers in 2015, but did retain four MWO asset managers in 2016. The Federal Reserve System’s, National Railroad Retirement Investment Trust’s, and Smithsonian Institution’s use of MWO asset managers for their defined benefit plans and endowment was proportionately higher than the market presence of such firms. In 2015, 5 of the Federal Reserve System Retirement Plan’s 32 asset management firms (16 percent) were MWO firms. These firms managed 2 percent of the plan’s total assets, totaling $253 million. Four of these asset managers were private equity firms. The fifth handled a portion of the plan’s fixed income portfolio with two other asset managers handling much larger portions of plan assets under a similar investment strategy. The MWO asset manager achieved investment performance for the plan in 2015 comparable to that achieved by the two larger asset managers. In 2016, 10 of the National Railroad Retirement Investment Trust’s approximately 140 asset management firms (about 7 percent) were majority owned by women and minorities. Collectively, these 10 firms managed about 5 percent of total plan assets. Additionally, another 46 of the plan’s asset management firms had some level of ownership by minorities and women. Representatives of the Smithsonian Institution estimated 14 percent of their asset management firms—equal to about 13 of the more than 90 firms the endowment retained as of the end of 2016—were owned by women or minorities. In comparison, we identified a number of nonfederal entities that use MWO asset managers. These include retirement plans in five states, one of which set a goal of having 20 percent of its plan’s assets managed by MWO asset managers. We also identified three foundations that increased opportunities for MWO asset managers, for example by amending their investment policy or establishing a program to hire MWO asset managers. Finally, we interviewed officials from two corporations, one of which retains MWO firms for both its defined contribution and defined benefit plans. Representatives of the other corporation told us they retain almost 30 MWO firms to manage nearly $600 million, or about 4 percent, of the corporation’s defined benefit plans and foundation. Despite not having an explicit program in place to hire these firms, the corporation cited two key actions that create opportunities for MWO firms to compete. The first is conducting outreach so MWO asset managers understand how to do business with the corporation. The second is communicating to the plan consultant that the corporation expects to see a diverse array of firms when selecting asset managers. Asset manager selection processes varied by federal entity, but generally included conducting research to identify potential asset managers and conducting an evaluation of potential asset managers before making final selections. We identified four key practices that institutional investors can use to increase opportunities for MWO asset managers: establishing and maintaining top leadership commitment, removing potential barriers, conducting outreach to MWO firms, and communicating priorities and expectations about inclusive practices to investment staff and consultants. Some of the federal entities we reviewed implemented all these key practices, but others made partial, limited, or no use of the practices. All the federal entities we reviewed had internal policies related to their selection processes for asset managers. The processes generally included conducting research to identify potential asset managers and evaluating candidates before making final selections, but varied in some respects as the examples below show. We did not evaluate the National Railroad Retirement Investment Trust’s asset manager selection processes because it is not a department, agency, or instrumentality of the federal government, and it is not subject to the federal law that governs the financial operations of the federal government and establishes the powers and duties of the GAO. Selection criteria. All the entities had performance requirements and most had minimum requirements related to size (assets under management) and length of track record, but the thresholds asset managers had to meet for these requirements varied. For example, the minimum size requirements were $1 billion in assets under management for two of the defined benefit plans we reviewed, and ranged from $1 billion to $60 billion in assets under management for the defined contributions plans. The minimum size requirement for the Pension Benefit Guaranty Corporation was $250 million in assets under management for applicants in the smaller asset managers pilot program (discussed later in the report), and ranged from $10 billion to $50 billion for managers outside of the program. Minimum length of track record requirements ranged from 3–5 years for two of the defined benefit plans we reviewed, and ranged from 3–15 years for the defined contribution plans. The minimum length of track record requirement for all managers used by the Pension Benefit Guaranty Corporation was 5 years. In addition to performance, size, and length of track record, the entities we reviewed used other criteria when selecting asset managers, such as investment strategies, diversification of portfolio, organization and resources, and best value. Use of public solicitation process. The Pension Benefit Guaranty Corporation and the Federal Retirement Thrift Investment Board use full and open competition when selecting asset managers. Full and open competition allows all prospective asset managers who meet certain requirements to submit bids or competitive proposals. The Pension Benefit Guaranty Corporation and Federal Retirement Thrift Investment Board seek competitive proposals from prospective asset managers by issuing requests for proposals, which are published publicly on the Federal Business Opportunities website. Asset management opportunities for the other entities are not published publicly. Instead, the entities use other avenues such as internal investment staff or consultants to identify potential asset managers, as discussed later in this report. Frequency of asset manager searches. The Federal Retirement Thrift Investment Board solicits asset management services for its four externally managed funds every 5 years. The Federal Reserve System reviews its public markets asset manager arrangements at least every 5 years and, based on the results of the review, may search for new asset managers. Pension Benefit Guaranty Corporation officials told us that their asset manager searches are ongoing, with generally from one to three searches occurring each year for varying asset classes. The rest of the entities we reviewed do not have a set schedule for conducting asset manager searches. Asset manager searches for these entities typically occur when an asset manager underperforms and needs to be replaced, there is a change in asset allocation that warrants a new asset manager, or when a new investment opportunity arises. Almost all of the entities used consultants to some extent in their selection processes, but some entities relied on consultants more than others. Three entities (Army and Air Force Exchange Service, Navy Exchange Service Command, and Tennessee Valley Authority Retirement System) work closely with consultants. While these entities approve final asset manager selections, the consultants primarily drive the search and evaluation process. Specifically, the consultants identify potential asset managers from their proprietary databases based on the entities’ selection criteria. The consultants then produce evaluation reports on candidates for the entities to review and provide recommendations about which asset managers to select. Three entities (Federal Retirement Thrift Investment Board, Pension Benefit Guaranty Corporation, and Smithsonian Institution) told us they use consultants to help identify potential asset managers or provide expertise on other areas, such as specific asset classes or asset manager fees. However, evaluations to select asset managers are conducted internally by the entities. As stated earlier, the Federal Retirement Thrift Investment Board and the Pension Benefit Guaranty Corporation issue requests for proposals, which allow prospective asset managers to submit proposals to be considered for asset management opportunities. The entities evaluate the submissions and then make final selections. The Smithsonian Institution’s investment staff prepare a memorandum after reviewing and vetting asset managers. The memorandum is provided to the endowment’s Investment Committee, which makes final selections. Federal Reserve System representatives told us they primarily rely on internal market searches to identify potential asset managers for both of its retirement plans, but use consultants in limited instances. Specifically, the Federal Reserve System uses a consultant for asset classes in which it may be difficult to find asset managers, such as real estate. After identifying potential asset managers, the Federal Reserve System issues a request for proposal to potential candidates. Candidate submissions are graded using a scoring matrix and the results are used to identify from three to five firms, which then are invited to interview. Final selections are made following the interviews. We identified four key practices that can be used as part of investors’ asset manager selection processes to help broaden the processes and ensure that qualified MWO firms are considered (see table 6). We identified the key practices based on a review of industry reports and interviews with a sample of state, local, and private retirement plans and foundations. We then validated the practices by obtaining feedback from experts and industry stakeholders. The key practices are closely related, and improvements or shortfalls in one practice may contribute to improvements or shortfalls in another practice. The practices do not require investors to develop targets or allocations for MWO asset management firms or to change performance standards. In addition, we identified examples of how some institutional investors have implemented the key practices, which may provide insights to other investors as they undertake or attempt to strengthen or improve their own initiatives related to MWO firms. The examples are not exhaustive and each institutional investor may implement the identified practices in its own way. As stated earlier, many nonfederal plans and foundations we interviewed have implemented these practices to increase opportunities for MWO firms and told us that using the practices does not conflict with their fiduciary responsibilities. According to these plans and foundations, MWO firms they used were selected based on track record of performance and may provide certain benefits in generating profit for their clients. Furthermore, according to plan representatives and other industry stakeholders with whom we spoke, diversifying plan investments to manage risk can be accomplished through the diversification of asset managers. Industry reports and industry stakeholders, including plan representatives with whom we spoke, also noted that implementing a more inclusive selection process for asset managers can widen the pool of candidates, which can help ensure that retirement plans and foundations are identifying the best asset managers. Additionally, as stated earlier, the federal government has an interest in helping increase opportunities for minority- and women-owned businesses and addressing barriers they face. The key practices we identified, which can broaden an investor’s pool of asset manager candidates to help ensure qualified MWO firms are considered for asset management opportunities and increase opportunities for these firms, are consistent with this interest. We found that three of the federal entities we reviewed used all the practices, but the other four entities made partial, limited, or no use of them (see table 7). Specifically, the Federal Reserve System and Smithsonian Institution have developed inclusive policies and taken other steps to increase opportunities for MWO asset managers, and the Pension Benefit Guaranty Corporation has developed a program to help increase opportunities for smaller asset management firms, including smaller MWO firms. Federal Reserve System. The Federal Reserve System’s Office of Employee Benefits (OEB) has documented top leadership commitment by developing policies that support the inclusion of MWO firms in its asset manager searches. For example, OEB’s procurement guidelines, which describe the process that staff should follow when procuring goods and services, state that the office fully supports equal opportunity in procurement. The guidelines also state that prospective lists of vendors (including asset managers) to receive requests for proposals should take into account OEB’s policy that qualified firms interested in doing business with the office, including minority- and women-owned businesses, should be included in the candidate pool as appropriate. Additionally, in 2014 the Federal Reserve System’s Committee on Investment Performance established a policy requiring that each investment mandate for its two retirement plans be reviewed at least every 5 years on a rolling basis, which has provided additional opportunities to qualified MWO firms to compete for all of OEB’s investment mandates on a regular basis. The Federal Reserve System removed a potential barrier to MWO firm participation by lowering its minimum requirement for assets under management. According to Federal Reserve System representatives, about 5 years ago OEB lowered the requirement from $5 billion in assets under management to $1 billion in assets under management for its defined benefit and defined contribution plans. To conduct outreach, the Federal Reserve System has participated in meetings and conferences organized by industry associations that represent MWO firms and met with MWO firms individually, according to Federal Reserve System representatives. Federal Reserve System representatives have communicated their priorities and expectations to investment staff by implementing policies that have opened opportunities for MWO firms, as discussed earlier. The entity has also tracked its use of MWO asset management firms and the proposals it received from prospective MWO asset managers. Federal Reserve System officials told us that their efforts to increase opportunities for MWO asset managers were primarily driven by two factors. First, the decision was driven by a desire to find the best managers in the industry. Second, officials stated that they were aware of the issues surrounding the lack of inclusion in the asset management industry and made changes to help address these issues. Federal Reserve System officials noted that actively including MWO asset management firms in their searches was consistent with prudent investor requirements and fiduciary obligations. Officials also noted that some potential benefits could be gained by a more inclusive selection process, such as helping manage risk by diversifying the portfolio and mitigating manager concentration risk through new MWO managers. Guaranty Corporation demonstrated top leadership commitment by launching a Smaller Asset Managers pilot program in 2016. According to the entity’s 2016 annual report, the program was created to reduce barriers that smaller investment firms face when competing for the agency’s business. As part of this program, the Pension Benefit Guaranty Corporation removed a potential barrier to entry faced by smaller firms by lowering its minimum requirement for assets under management. Specifically, its minimum, which representatives told us typically ranges from $10 billion to $50 billion, was lowered to $250 million for program applicants. All other asset manager selection requirements, including performance, remained the same. The Pension Benefit Guaranty Corporation conducted outreach to smaller asset managers to promote its pilot program. For example, the Pension Benefit Guaranty Corporation held a pre-bidding conference designed to help applicants understand the selection process. The entity also listed the request for proposal for its program on the Federal Business Opportunities website and advertised the program in industry publications. In addition, the Pension Benefit Guaranty Corporation communicated its priorities and expectations regarding its program to its consultant by requesting the consultant help identify prospective MWO firms for the pilot program, according to officials. After completing the selection process for its pilot program, the Pension Benefit Guaranty Corporation selected five firms to participate. Of the five firms, four were minority- or women-owned firms or both. Pension Benefit Guaranty Corporation officials stated that, moving forward, they will evaluate the firms on their performance against the portfolio benchmark over a full market cycle. Smithsonian Institution. The Smithsonian Institution has demonstrated top leadership commitment by revising its investment guidelines and asset manager questionnaire to reflect its commitment to diversity. Specifically, in March 2017 the Smithsonian Institution revised its investment guidelines by adding “environmental, social, and corporate governance considerations in the investment process” as one of its selection criteria. According to Smithsonian Institution representatives, this change allows the Smithsonian Institution to incorporate diversity as additional criteria for asset manager selection. The Smithsonian Institution also included a statement in its annual asset manager questionnaire stating that its Office of Investments strives to promote diversity and inclusion among its manager hires. Furthermore, representatives stated that the Board of Regents and Investment Committee encourage them to look broadly at portfolio diversification not only in terms of asset classes and investment strategies, but also of the racial and gender diversity of asset managers. In addition, the Smithsonian Institution does not have minimum size or length of track record requirements, which has allowed smaller asset managers, including small MWO firms, to compete for asset management opportunities with the endowment. The Smithsonian Institution has also conducted outreach to MWO firms. According to Smithsonian Institution representatives, investment staff meet with MWO asset managers on an ongoing basis. Staff have also participated in conferences focused on women- owned and emerging managers. Finally, the Smithsonian Institution has communicated its priorities and expectations about inclusive selection processes by asking its consultants for a list of diverse managers, according to Smithsonian Institution representatives. Representatives also told us that investment staff have been directed to proactively identify MWO asset managers to add to this list based on their capability and expertise. Smithsonian Institution representatives told us they have often found investing with smaller asset managers (including smaller MWO firms) to be attractive to them. According to the Smithsonian Institution, small firms tend to be entrepreneurial and entrepreneurial firms are more successful when dealing with changing market dynamics, which can increase the chances of delivering superior investment returns. Representatives also noted that even though the endowment has a small staff and limited resources, they have not found it difficult to identify MWO asset managers for the endowment. Three entities have used one or more of the practices, but have not fully implemented all of them. Army and Air Force Exchange Service. The Army and Air Force Exchange Service has used two of the key practices we identified (outreach and communicating priorities and expectations) and partially used (has started but has not completed actions related to) the other two practices (top leadership commitment and removing potential barriers). Specifically, the Army and Air Force Exchange Service has taken several steps to conduct outreach to MWO asset managers. For example, representatives told us that they have held face-to-face interviews with many MWO firms and gathered information on these firms for potential future investments. Army and Air Force Exchange Service representatives have also attended conferences and networking events with MWO asset managers, directed these firms to their consultant to learn more about the Army and Air Force Exchange Service’s selection process, and accepted visitation requests from MWO asset managers, according to representatives. The Army and Air Force Exchange Service also has communicated its priorities and expectations for a more inclusive asset manager selection process. For example, the Army and Air Force Exchange Service has instructed its investment staff to meet with representatives from MWO trade groups. Additionally, the entity has requested that its consultant include MWO asset managers who meet its portfolio needs in asset manager searches. However, the Army and Air Force Exchange Service has not completed actions related to top leadership commitment and removing potential barriers. According to representatives, plan trustees have had initial discussions about taking additional steps to increase opportunities for MWO firms at trustee meetings, but have not taken actions related to these initial discussions. In addition, representatives told us they use some fund-of-funds investments, which have allowed smaller firms, including some MWO firms, to compete for opportunities with the Army and Air Force Exchange Service and have started to review their policies and practices to include more participation of MWO firms in asset manager searches, but have not completed this review as of June 2017. Army and Air Force Exchange Service representatives told us they consider the Army and Air Force Exchange Service to have used all of the key practices we identified because they have taken at least some action related to each of the practices. However, they did not have an expected completion date for two of these actions. Navy Exchange Service Command. The Navy Exchange Service Command has used one key practice (removing potential barriers), but has not used the other three practices (top leadership commitment, outreach, and communicating priorities and expectations). Specifically, the Navy Exchange Service Command does not have minimum size or length of track record requirements for its asset managers. According to officials, the Navy Exchange Service Command does not use these two criteria to select asset managers in part to help ensure asset manager searches are conducted as widely as possible and include smaller asset managers, including smaller MWO firms. However, the Navy Exchange Service Command has not directly made efforts to reach out to MWO firms. Moreover, the entity has not taken any actions to demonstrate top leadership commitment and has not communicated its priorities and expectations to its consultant because it has not specifically requested that its consultant include qualified MWO asset managers in its searches for the Navy Exchange Service Command. According to Navy Exchange Service Command representatives, they have not taken steps to implement all of the key practices because they rely on their consultant to take these actions. Navy Exchange Service Command representatives told us that their consultant is committed to conducting inclusive asset manager searches for all of its clients, performs outreach to MWO asset managers, and regularly reports to the Navy Exchange Service Command on its outreach efforts. Navy Exchange Service Command representatives also noted that it may not be practical for the Navy Exchange Service Command to directly conduct outreach to MWO firms because the entity is small and its consultant has the resources and practices in place for performing outreach to MWO firms. However, Navy Exchange Service Command representatives have not specifically directed their consultant to be more inclusive in their asset manager searches or to conduct outreach. Tennessee Valley Authority Retirement System. The Tennessee Valley Authority Retirement System has used one key practice (removing potential barriers). The entity does not have minimum size or length of track record requirements, which can help widen the pool of asset managers that the Tennessee Valley Authority Retirement System considers for selection. However, the Tennessee Valley Authority Retirement System has not used the other three practices (top leadership commitment, outreach, and communicating priorities and expectations). According to Tennessee Valley Authority Retirement System representatives, it is their understanding that their consultants research and evaluate MWO asset managers and that to the extent such firms meet selection criteria and rank high in the evaluation of a particular investment mandate or strategy that the Tennessee Valley Authority Retirement System is pursuing, the firms would be considered for selection. Tennessee Valley Authority Retirement System representatives also told us that limited staff and resources make it difficult for them to conduct outreach to MWO firms. However, the entity has not communicated its priorities or expectations to its consultants because it has not directly requested or ensured that its consultants include qualified MWO asset managers in searches specifically conducted for the Tennessee Valley Authority Retirement System, nor has the entity directed its consultants to conduct outreach to MWO firms. Furthermore, the Tennessee Valley Authority Retirement System has not taken any actions to demonstrate top leadership commitment. The Federal Retirement Thrift Investment Board has not used any of the key practices. The board described a variety of reasons that have prevented it from taking steps to increase opportunities for MWO asset managers. Federal Retirement Thrift Investment Board. According to Federal Retirement Thrift Investment Board representatives, the Federal Retirement Thrift Investment Board and Executive Director serve as fiduciaries to Thrift Savings Plan participants and as such administer the Thrift Savings Plan in the sole interest of participants and beneficiaries. According to Federal Retirement Thrift Investment Board representatives, the criteria used to select asset managers for the Thrift Savings Plan funds include providing a passive index strategy (as mandated by statute) and best value, which is a combination of technical ability and low price. Representatives stated that while qualified MWO firms are not restricted from responding to their requests for proposals, given the size of Thrift Savings Plan funds and the operational scale needed to manage a significant amount of assets at a low cost, only a relatively small number of firms respond. Further, Federal Retirement Thrift Investment Board representatives told us they plan to implement a mutual fund window platform for the Thrift Savings Plan in 2020, and acknowledged that the platform could provide an opportunity for MWO asset management firms. According to plan representatives, they are seeking a platform that will provide participants with a “broad array” of options, which they define as a platform that includes a large number of mutual funds covering a wide range of investment options. However, plan representatives told us they do not plan to incorporate key practices into their selection process when selecting a mutual fund platform. According to Federal Retirement Thrift Investment Board representatives, they are fiduciaries required to act solely in the best interest of plan participants and beneficiaries and therefore cannot make a decision based on criteria that favor any vendor or potential vendor and cannot require that MWO firms be included in the platform. As stated earlier, the key practices we identified can help broaden the pool of qualified asset managers that investors can select from, and do not mandate the hiring of MWO firms or sacrificing performance standards. Moreover, other entities that have implemented the key practices, including two that administer defined contribution plans, have found that using inclusive selection practices do not conflict with fiduciary obligations. By fully implementing the key practices, the four entities could widen the pool of potential candidates in their asset manager searches and help ensure that they are finding the most qualified firms that meet their investment needs. In keeping with federal interests, the practices could also help address barriers MWO firms face and increase opportunities for these firms. Some of the federal entities we reviewed have taken steps to implement more inclusive selection processes for asset managers, including developing a pilot program for smaller asset managers and establishing policies that support the inclusion of MWO firms in asset manager searches. However, opportunities exist for other entities we reviewed to take additional actions by implementing key practices. Specifically, the Army and Air Force Exchange Service, Navy Exchange Service Command, and Tennessee Valley Authority Retirement System have used one or more of the key practices to increase opportunities for MWO firms, but have not fully implemented all of them. The Federal Retirement Thrift Investment Board has not used any of the key practices. Implementing (or fully implementing) the key practices could widen the pool of potential candidates in their asset manager searches and help ensure that they are finding the most qualified firms that meet their or their plan participants’ investment needs. Additionally, in keeping with federal interests, if implemented, the practices could eliminate or mitigate some of the barriers that MWO firms face and increase opportunities for MWO firms. We are making a total of four recommendations to four agencies: The Chief Investment Officer of the Army and Air Force Exchange Service should fully implement key practices to increase opportunities for MWO asset managers as part of its selection processes. Specifically, the Chief Investment Officer should complete actions related to top leadership commitment and removing potential barriers. (Recommendation 1) The Chief Investment Officer of the Federal Retirement Thrift Investment Board should use key practices as appropriate to increase opportunities for MWO asset managers if and when implementing its mutual fund window platform. Specifically, the Chief Investment Officer should take actions to demonstrate top leadership commitment, remove potential barriers, conduct outreach to MWO firms, and communicate its priorities and expectations for an inclusive selection process to its staff and consultants if and when it begins to search for a mutual fund window platform. (Recommendation 2) The Chief Investment Officer of the Navy Exchange Service Command should fully implement key practices to increase opportunities for MWO asset managers as part of its selection processes. Specifically, the Chief Investment Officer should take actions to demonstrate top leadership commitment, and to the extent that staff and resources are a constraint, should direct its consultant to conduct outreach to MWO firms and communicate its priorities and expectations for an inclusive selection process by requesting its consultant conduct more inclusive asset manager searches specifically for the Navy Exchange Service Command. (Recommendation 3) The Chief Investment Officer of the Tennessee Valley Authority Retirement System should fully implement key practices to increase opportunities for MWO asset managers as part of its selection processes. Specifically, the Chief Investment Officer should take actions to demonstrate top leadership commitment, and to the extent that staff and resources are a constraint, should direct its consultant to conduct outreach to MWO firms and communicate its priorities and expectations for an inclusive selection process by requesting its consultant conduct more inclusive asset manager searches specifically for the Tennessee Valley Authority Retirement System. (Recommendation 4) We provided a draft of this report to the Army and Air Force Exchange Service, Federal Reserve System, Federal Retirement Thrift Investment Board, Railroad Retirement Board, Smithsonian Institution, Pension Benefit Guaranty Corporation, Navy Exchange Service Command, National Railroad Retirement Investment Trust, and Tennessee Valley Authority Retirement System for review and comment. We received written comments from the Army and Air Force Exchange Service, Federal Retirement Thrift Investment Board, Navy Exchange Service Command, and Tennessee Valley Authority Retirement System. In their comments, reprinted in appendix IV, the Army and Air Force Exchange Service and Navy Exchange Service Command agreed with our recommendations. The Army and Air Force Exchange Service stated that it would continue to press forward in implementing the key practices to increase opportunities for MWO asset managers in a manner consistent with its investment goals and guidelines. The Navy Exchange Service Command stated that it will demonstrate top leadership commitment by formally directing its consultant in writing to conduct outreach to MWO firms on the entity’s behalf and communicate expectations for an inclusive selection process for asset managers. The Navy Exchange Service Command also provided technical comments, which we incorporated as appropriate. In its comments, reprinted in appendix V, the Federal Retirement Thrift Investment Board disagreed with our recommendation. The Federal Retirement Thrift Investment Board said that when developed, the request for proposal for the mutual fund window will cover topics such as information security and compatibility with the Thrift Savings Plan recordkeeping software, and breadth of fund choices offered. The Federal Retirement Thrift Investment Board stated that this will allow the Thrift Savings Plan to offer participants that wish to use the mutual fund window the greatest amount of choice in a secure, seamless, and efficient manner. The Board also noted that fiduciary rules make it difficult to make guarantees about any fund that might be offered in a future mutual fund window. However, as we discuss in our report, implementing a more inclusive selection process could bring in a broad array of asset managers with different investment strategies and products that can help the Federal Retirement Thrift Investment Board provide participants with more investment options. Further, our recommendation would not require the use of MWO asset managers in the mutual fund window, but instead would help broaden the Federal Retirement Thrift Investment Board’s selection processes and help ensure that qualified MWO firms are considered. The Federal Retirement Thrift Investment Board also provided technical comments, which we incorporated as appropriate. In its comments, reprinted in appendix VI, the Tennessee Valley Authority Retirement System agreed with our recommendation. The entity stated that it was committed to a process with its consultants and asset managers that provides equal opportunities for asset managers of all types of ownership, including MWO firms. The entity also outlined actions it would take to implement the key practices, such as documenting its commitment to equal opportunity for all asset managers, including MWO firms, in its investment policy statement and working with its consultant to set up a process for providing the Tennessee Valley Authority Retirement System information on potential MWO asset managers researched and evaluated by its consultant. The Federal Reserve System, Pension Benefit Guaranty Corporation, and the Smithsonian Institution provided technical comments, which we incorporated as appropriate. The National Railroad Retirement Investment Trust and the Railroad Retirement Board informed us that they had no comments. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the agencies and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact (202) 512-8678 or clementsm@gao.gov, or (202) 512-7215 or jeszeckc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VII. In this report we examined (1) the challenges minority- and women- owned (MWO) asset managers may face when competing for investment opportunities, and practices used by selected state, local, and private entities that administer or oversee retirement plans and foundations to increase opportunities for MWO firms; (2) the major asset classes in which selected federal entities invested, their use of MWO firms, and the market presence of MWO firms in these asset classes; and (3) the policies and processes selected federal entities use to identify and select asset management firms, and their use of key practices to increase opportunities for MWO firms. We reviewed federal retirement plans, an endowment, and an insurance program administered or overseen by eight entities (collectively referred to as federal entities): Army and Air Force Exchange Service, Federal Reserve System, Federal Retirement Thrift Investment Board, Railroad Retirement Board, Smithsonian Institution, Pension Benefit Guaranty Corporation, Navy Exchange Service Command, and Tennessee Valley Authority. We selected the federal entities and the National Railroad Retirement Investment Trust based on size (assets of more than $1 billion in 2015) and investment strategies (passive or active management or both). We excluded federal entities that solely invested in Treasury securities that are not traded (and thus do not use external asset managers), such as the Civil Service Retirement System and the Federal Employees Retirement System. These two retirement systems fund the primary defined benefit pension benefits for the vast majority of federal employees. To identify challenges that MWO asset management firms face, we analyzed reports by industry stakeholders, such as asset management trade associations, institutional investors, and investment managers. We also conducted interviews with asset management trade associations (National Association of Investment Companies, National Association of Securities Professionals, Association of Black Foundation Executives, Association of Asian American Investment Managers, New America Alliance, Private Equity Women’s Initiative, and Diverse Asset Managers Initiative), 10 MWO asset managers, and 4 MWO brokerage firms. These firms were selected based on size of the firms (assets under management for asset managers and revenue for brokers), literature reviews, and recommendations from industry stakeholders. Information gathered from these interviews cannot be generalized to all MWO asset managers or MWO brokerage firms. To identify how entities that administer or oversee state, local, and private retirement plans and foundations (nonfederal plans and foundations) increase opportunities for MWO asset management firms, we interviewed 14 entities: California Public Employees’ Retirement System, California State Teachers’ Retirement System, Employees’ Retirement Fund of the City of Dallas, Exelon, Illinois Municipal Retirement Fund, Kellogg Foundation, Knight Foundation, Maryland State Retirement and Pension System, New York State Common Retirement Fund, Prudential’s Strategic Investment Research Group, Silicon Valley Community Foundation, Teachers’ Retirement System of Illinois, Teacher Retirement System of Texas, and Verizon Investment Management Corp. Seven of these entities administered defined benefit plans; three administered defined benefit and defined contribution plans; three were foundations; and one was an investment group. These entities were selected based on size (assets), use of an MWO program or other initiative designed to increase opportunities for MWO asset management, a literature review, and recommendations by industry stakeholders. Information gathered from these interviews cannot be generalized to all nonfederal plans and foundations. We also analyzed reports by industry stakeholders on key practices for MWO programs or similar initiatives. When relevant, we also gathered information from these sources on the challenges faced by MWO brokerage firms and practices used to increase their business opportunities. To determine the major asset classes invested in by selected federal entities and the National Railroad Retirement Investment Trust, we obtained data from the entities and reviewed their annual reports and audited financial statements for information on annual allocations made to each asset class. Allocation data from annual reports and audited financial statements reflect in some instances the investment objectives of funds managed by external asset management firms, which may not align precisely with the holdings of each fund. However, we concluded these data were sufficiently reliable to document the asset classes in which the federal entities we reviewed and the National Railroad Retirement Investment Trust, invest. To determine the presence of MWO firms in the same asset classes in which the federal entities in our review and the National Railroad Retirement Investment Trust invested, we reviewed publicly available directories and databases of MWO asset managers compiled by industry stakeholders and state retirement plans. We then reviewed the firms’ Form ADV filings in the Investment Adviser Public Disclosure database of the Securities and Exchange Commission to identify the asset classes in which they operate and the assets they reported managing. Finally, we compared the total assets reported by MWO firms we identified to total regulatory assets under management reported by all registered investment advisers in the database as of May 2017. To assess the reliability of data in the Securities and Exchange Commission database, we identified and removed duplicate entries. We also checked data in the database against the Form ADV filings of a random selection of firms to ensure the database accurately reflects firms’ filings. Finally, we compared total regulatory assets under management for all investment advisers in the database to a July 2016 industry estimate of the global asset management industry and found them to be similar. We also compared the proportion of assets reported by the MWO firms we identified to one calculated by researchers in May 2017 and also found them to be similar. Although we did not independently verify the accuracy of Form ADV filings, we concluded the data we obtained from them were sufficiently reliable to estimate the proportion of regulatory assets under management held by MWO asset managers. To the extent available, we reviewed data on the percentage of each federal entity’s and the National Railroad Retirement Investment Trust’s asset managers that are minority- or women-owned, the percentage of assets managed by these MWO firms, and the asset classes in which the firms invested. To assess the reliability of these data, we interviewed representatives of three federal entities and the National Railroad Retirement Investment Trust with knowledge of the systems and methods used to produce these data. We determined that the data we used were sufficiently reliable for purposes of estimating federal entities’ and the National Railroad Retirement Investment Trust’s use of MWO asset managers in 2015 and 2016. To determine the policies and processes that selected federal entities and the National Railroad Retirement Investment Trust used to identify and select asset managers and efforts to include MWO firms, we analyzed investment policies; documentation on the processes and criteria used to select asset managers, including internal guidelines and examples of requests for proposals for investment management services; and available documentation on programs, policies, or initiatives related to MWO firms. In addition, we interviewed representatives from the entities we reviewed to learn more about their selection processes and efforts related to MWO asset managers. We assessed the extent to which federal entities used key practices to increase opportunities for MWO firms. Specifically, we identified key practices by examining the practices used by nonfederal plans and foundations and by reviewing industry reports. We then validated the practices by obtaining input from 10 industry stakeholders and experts selected based on factors such as depth of experience working with MWO firms and published research. The stakeholders and experts generally agreed with the practices we identified, but one expressed a concern about implementing two of the practices. We then assessed the extent to which the federal entities we reviewed used each key practice using three categories. “Uses” indicates that the entity completed an action or actions to implement the practice; “partially uses” indicates that the entity has started an action or actions to implement the practice, but has not completed the action(s); and “does not use,” which indicates that the entity has not started or completed any action(s) to implement the practice. One analyst reviewed the entities’ policies and practices and made the initial assessment. A second analyst then verified these steps to ensure consistent results. We conducted this performance audit from April 2016 to September 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Representatives from the National Railroad Retirement Investment Trust (Trust) stated that trustees and investment staff have a fiduciary obligation to invest the Trust’s assets solely in the best interest of the Trust and its beneficiaries. Representatives told us they do not believe their asset manager selection process, described below, has precluded the Trust from hiring smaller or minority- and women-owned (MWO) firms. Selection criteria and process. According to Trust representatives, the Trust does not have minimum size or length of track record requirements for its asset managers, but considers an asset manager’s size, as well as the appropriate size of a possible allocation to the manager, when determining whether to hire the manger. They also stated that it was important to hire managers that have a demonstrable history of successfully investing and that generally, track records that cover longer time periods are more statistically significant than shorter-term track records because there are more data points to analyze. Trust representatives emphasized that considering these factors has not prevented the Trust from hiring smaller firms, and that about half of their asset managers are small to mid-size firms. According to Trust representatives, the Federal Acquisition Regulation does not apply to the Trust’s asset manager selection process. The Trust uses internal investment staff to identify potential asset managers. Trust representatives told us that searches for asset managers in the public markets (for example, publicly traded stocks and bonds) typically occur when an asset manager needs to be replaced (due to a variety of reasons, such as personnel changes), whereas searches for asset managers in private markets (for example, alternative assets such as private equity and real estate) occur on an ongoing basis. Use of Consultants. Trust representatives told us that they do not use consultants; rather, in-house investment staff conduct the research and evaluation process. Generally, investment staff identify potential asset managers by researching commercial or internally developed databases and then conduct an internal review, which includes reviewing information on prospective firms’ investment strategies and meeting with the firms. Investment staff subsequently develop a memorandum on the prospective asset managers and conduct a final internal analysis before recommending asset managers to trustees, who approve all final selections and the amount of the planned investment. Key Practices. According to Trust representatives, the Trust has taken steps to increase opportunities for MWO firms. Specifically, the Trust’s board has discussed the Trust’s selection practices as they relate to MWO firms on an ongoing basis during its quarterly meetings and has analyzed its use of MWO firms. In addition, Trust representatives told us they conducted outreach by meeting with trade associations representing MWO firms. Further, according to Trust representatives, the Trust does not have minimum size or length of track record requirements for its asset managers, which has removed potential barriers to smaller firms, including smaller MWO firms. Finally, according to Trust representatives, the Trust has tentatively approved revisions to its investment procedures manual that would incorporate statements about valuing diversity and having an inclusive asset manager selection process. Trust representatives told us that the Trust’s board intends to formally approve the revisions at its upcoming board meeting. The federal entities we reviewed and the National Railroad Retirement Investment Trust do not directly hire brokerage firms. However, in conducting our work on nonfederal plans, we identified challenges minority- and women-owned (MWO) brokerage firms face that may limit them from fully competing for opportunities with institutional investors, including retirement plans and foundations, and the asset managers these entities use. Brand bias. According to two MWO brokerage firms with which we spoke, MWO brokers may have difficulty competing with larger brokerage firms that are well known in the industry and have long- standing relationships with asset managers. Size. One brokerage firm with which we spoke noted that some institutional investors and asset managers may have the misconception that smaller broker dealers cannot execute trades as effectively as large brokerage firms, and that using MWO brokers will cost more. Another brokerage firm told us that net capital thresholds were too high for newer, smaller MWO brokers to meet. As a result, MWO brokers may have greater difficulty competing for opportunities. Track record. Shorter track records are also a hindrance, according to brokerage firms we interviewed. For example, one brokerage firm noted that although most brokers may have worked with large corporations before starting their own companies, they may not get the credit for the experience they have because they are a new firm. As a result, they may be overlooked when investors search for brokerage firms. Some state, local, and private plans have taken actions to address these challenges and increase opportunities for MWO brokerage firms. Communicate expectations. Two nonfederal plans and one foundation we interviewed directed their asset managers to use more inclusive practices for sourcing and hiring qualified MWO brokerage firms. Conduct outreach. A state plan also directly communicated with MWO brokerage firms at networking events, and directed its asset managers to do so as well. Report usage of MWO brokers. Some state and local retirement plans have legislative mandates to promote the use of MWO firms, including brokers, and require that their asset managers report on their use of MWO brokerage firms. For example, a local plan in Illinois sets MWO broker-dealer utilization percentage goals across asset classes for its asset managers, and requires that asset managers report monthly on MWO broker utilization. In addition to the contacts named above, Kay Kuhlman (Assistant Director), Kimberley Granger (Assistant Director), Erika Navarro (Analyst in Charge), Farah Angersola, Bethany Benitez, Raheem Hanifa, John Karikari, Risto Laboski, Jill Lacey, Marc Molino, Tom Moscovitch, Barbara Roesmann, Adam Wendel, and Amber Yancey-Carroll made key contributions to this report.

Summary: Asset management firms registered in the United States manage more than $70 trillion. MWO firms manage less than 1 percent of those assets. The federal government has an interest in increasing opportunities for MWO businesses. Questions have been raised about how often federal entities use MWO asset managers and the transparency of their selection processes. GAO was asked to examine, among other things, (1) competitive challenges MWO firms face and how institutional investors address them, (2) selected federal entities' use of MWO firms, and (3) the entities' asset manager selection processes, including their use of key practices. GAO reviewed investment policies and financial statements of 8 entities that manage or sponsor federal retirement plans, an endowment, and an insurance program. GAO also interviewed 14 state, local, and private retirement plans and foundations and 10 MWO asset managers (selected based on size and other factors). According to asset managers and industry associations with which GAO spoke, minority- and women-owned (MWO) asset managers face challenges when competing for investment management opportunities with institutional investors, such as retirement plans and foundations. For example, institutional investors and their consultants often prefer to contract with large asset managers with brand recognition and with whom they are familiar. Also, small firms, including MWO firms, are often unable to meet minimum requirements set by institutional investors, such as size (assets under management) and past experience (length of track record). State, local, and private retirement plans and foundations GAO interviewed addressed these challenges in a variety of ways, such as asking their consultants to include MWO firms in their searches. Many plans also lowered their minimum threshold requirements so that the requirements were proportional to the size of the firms while maintaining the same performance requirements for all asset managers in their selection processes. Federal retirement plans, the endowment, and the insurance program GAO reviewed invest in asset classes in which MWO asset managers have a market presence, but overall use of MWO firms varied. For example, some retirement plans either did not use any MWO firms or did not track this information. The endowment and insurance program reported using some MWO asset managers. GAO identified four key practices institutional investors can use to increase opportunities for MWO asset managers. These practices are consistent with federal interests in increasing opportunities for MWO businesses. Top leadership commitment . Demonstrate commitment to increasing opportunities for MWO asset managers. Remove potential barriers. Review investment policies and practices to remove barriers that limit the participation of smaller, newer firms. Outreach. Conduct outreach to inform MWO asset managers about investment opportunities and selection processes. Communicate priorities and expectations. Explicitly communicate priorities and expectations about inclusive practices to investment staff and consultants and ensure those expectations are met. Some federal entities we reviewed, such as the Federal Reserve System, have used all the practices, but others made partial, limited, or no use of the practices. The Federal Retirement Thrift Investment Board does not intend to use the practices in its planned mutual fund window platform. The Navy Exchange Service Command and Tennessee Valley Authority Retirement System used one practice, but have not used the others. The Army and Air Force Exchange Service has used two practices, and partially used two practices. By using the key practices, the entities GAO reviewed could widen the pool of candidates in their asset manager searches and help ensure that they find the most qualified firms. In keeping with federal interests, the practices could also help address barriers MWO firms face and increase opportunities for them. GAO makes four recommendations to increase opportunities for MWO firms, in keeping with federal interests. Four federal entities should use key practices, as appropriate. The Army and Air Force Exchange Service, Navy Exchange Service Command, and Tennessee Valley Authority Retirement System agreed. The Federal Retirement Thrift Investment Board disagreed. GAO maintains that key practices should be used, as discussed in the report.