Proposed Rule2022-01312
Mutual Fund Window
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 26, 2022
Issuing agencies
Federal Retirement Thrift Investment Board
Abstract
The Federal Retirement Thrift Investment Board (FRTIB) will make a mutual fund window available to participants in the Thrift Savings Plan (TSP), beginning in the summer of 2022. The FRTIB is proposing a fee designed to guarantee that the availability of the mutual fund window will not indirectly increase the share of TSP administrative expenses borne by participants who choose not to use the mutual fund window. The FRTIB is also proposing rules and procedures to govern fund transfers to and from the mutual fund window.
Full Text
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<title>Federal Register, Volume 87 Issue 17 (Wednesday, January 26, 2022)</title>
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[Federal Register Volume 87, Number 17 (Wednesday, January 26, 2022)]
[Proposed Rules]
[Pages 3940-3943]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-01312]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 87, No. 17 / Wednesday, January 26, 2022 /
Proposed Rules
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FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
5 CFR Part 1601
Mutual Fund Window
AGENCY: Federal Retirement Thrift Investment Board.
ACTION: Proposed rule.
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SUMMARY: The Federal Retirement Thrift Investment Board (FRTIB) will
make a mutual fund window available to participants in the Thrift
Savings Plan (TSP), beginning in the summer of 2022. The FRTIB is
proposing a fee designed to guarantee that the availability of the
mutual fund window will not indirectly increase the share of TSP
administrative expenses borne by participants who choose not to use the
mutual fund window. The FRTIB is also proposing rules and procedures to
govern fund transfers to and from the mutual fund window.
DATES: Comments must be received on or before March 28, 2022.
ADDRESSES: You may submit comments using one of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Mail: Office of General Counsel, Attn: Dharmesh Vashee,
Federal Retirement Thrift Investment Board, 77 K Street NE, Suite 1000,
Washington, DC 20002.
Comments will be made available to the public online at <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Do not include any personally identifiable or
confidential information that you do not want publicly disclosed.
Anonymous comments are acceptable.
FOR FURTHER INFORMATION CONTACT: For press inquiries, contact Kim
Weaver at (202) 465-5220. For information about how to comment on this
proposed rule, contact Laurissa Stokes at (202) 308-7707.
SUPPLEMENTARY INFORMATION: The FRTIB administers the TSP, which was
established by the Federal Employees' Retirement System Act of 1986
(FERSA), Public Law 99 335, 100 Stat. 514. The TSP is a tax-deferred
retirement savings plan for Federal civilian employees and members of
the uniformed services. The TSP is similar to cash or deferred
arrangements established for private-sector employees under section
401(k) of the Internal Revenue Code (26 U.S.C. 401(k)). The provisions
of FERSA that govern the TSP are codified, as amended, largely at 5
U.S.C. 8351 and 8401-79.
FERSA requires the TSP to offer the following individual investment
funds to TSP participants: (1) A Government Securities Investment Fund
(G Fund); (2) a Fixed Income Investment Fund (F Fund); (3) a Common
Stock Index Investment Fund (C Fund); (4) a Small Cap Stock Index
Investment Fund (S Fund); and (5) an International Stock Index
Investment Fund (I Fund). 5 U.S.C. 8438(b)(1)(A)-(E). In addition to
these five individual funds, the TSP is statutorily required to offer
Lifecycle (L) Funds which are target retirement date portfolios
comprised of varying proportions of the five individual funds. 5 U.S.C.
8438(c)(2). These statutorily mandated investment options are referred
to as the TSP core funds. The FRTIB does not have discretionary
authority to add or remove funds from its menu of core funds.
I. Background
What is a mutual fund?
A mutual fund is a company that pools money from many investors and
invests the pooled money in other investments such as stocks, bonds,
and short-term debt instruments. Investors buy shares in mutual funds.
Each share represents an investor's part ownership in the fund and the
income it generates. Investors buy mutual fund shares from the mutual
fund itself rather than from other investors. Mutual funds are governed
primarily by the Securities Act of 1933, the Securities and Exchange
Act of 1934, the Investment Company Act of 1940, and the Investment
Advisors Act of 1940.
What is a mutual fund window?
A mutual fund window is a type of self-directed brokerage account
that gives individuals the ability to buy shares of mutual funds
through a broker-dealer that has been selected by their retirement plan
or by one of their retirement plan's service providers. Unlike a plan's
core funds, the investments available through a brokerage account are
not ordinarily vetted by a plan fiduciary to determine whether they are
prudent investments.
Authority To Offer a Mutual Fund Window
For many years, TSP participants have voiced a desire to have more
investment options. A 2008 TSP Participant Survey indicated that 39% of
participants believed that the addition of a mutual fund window would
improve the TSP.\1\ In 2009, Congress passed legislation that
authorizes, but does not require, the FRTIB to offer a mutual fund
window to TSP participants. Thrift Savings Plan Enhancement Act of
2009, Public Law 111-31, Division B, Title I, sec. 104 (codified at 5
U.S.C. 8438(b)(5)(A)). Congress authorized a mutual fund window instead
of adding more funds to the TSP's statutorily mandated menu of core
funds.
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\1\ Subsequent surveys have consistently reaffirmed these survey
results.
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Decision To Offer a Mutual Fund Window
In the same year that Congress authorized the FRTIB to offer a
mutual fund window, the FRTIB's Executive Director initiated
discussions with the FRTIB Board members and the Employee Thrift
Advisory Council (ETAC) about adding a mutual fund window to the
TSP.\2\ In the April 2009 FRTIB Board meeting, the four Board members
in attendance deadlocked on the decision to adopt a resolution in
support of the mutual fund window by a vote of two-to-two.\3\
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\2\ ETAC is comprised of representatives from Federal and Postal
unions and management associations, as well as a representative from
the Department of Defense on behalf of uniformed service members.
ETAC provides advice on matters relating to TSP investment policies
and plan administration.
\3\ See April 2009 FRTIB Board Meeting Minutes, available at
<a href="https://www.frtib.gov/MeetingMinutes/2009/2009Apr.pdf">https://www.frtib.gov/MeetingMinutes/2009/2009Apr.pdf</a>. Links to
attachments accompanying the minutes are embedded in the PDF of the
minutes.
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To inform future discussions, the FRTIB assembled a cross-
functional team of subject matter experts from its operations, legal,
investment, finance, communications, research, and technology offices
who spent the next several years studying industry
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practices, participant preferences, costs, and operational
considerations associated with adding a mutual fund window to the TSP.
Their research was presented to the FRTIB Board members and ETAC during
public meetings in May 2014, November 2014, and July 2015.\4\
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\4\ See May 2014 FRTIB Board Meeting Minutes, available at
<a href="https://www.frtib.gov/MeetingMinutes/2014/2014May.pdf">https://www.frtib.gov/MeetingMinutes/2014/2014May.pdf</a>; November 2014
FRTIB Board Meeting Minutes, available at <a href="https://www.frtib.gov/MeetingMinutes/2014/2014Nov.pdf">https://www.frtib.gov/MeetingMinutes/2014/2014Nov.pdf</a>; July 2015 FRTIB Board Meeting
Minutes, available at <a href="https://www.frtib.gov/MeetingMinutes/2015/2015Jul.pdf">https://www.frtib.gov/MeetingMinutes/2015/2015Jul.pdf</a>. Links to attachments accompanying the minutes are
embedded in the PDFs of the minutes.
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In July 2015, the FRTIB Board members voted unanimously in support
of adding a mutual fund window to the TSP. The FRTIB Executive Director
committed to including a mutual fund window in the scope of services
sought the next time the FRTIB recompeted its major service provider
contract(s). In August 2019, the FRTIB announced the release of a
request for proposals for various recordkeeping services, the scope of
which included a mutual fund window. The contract was awarded in
November 2020. The FRTIB is currently undergoing an 18-24 month
transition to its new recordkeeping service provider.
II. Need for Regulation Amendments
Fees and Expenses
FERSA requires the Executive Director to publish regulations that
``shall allocate to each account an amount equal to a pro rata share of
the net earnings and net losses from each investment of sums in the
Thrift Savings Fund attributable to sums credited to such account,
reduced by an appropriate share of the administrative expenses paid out
of net earnings under section 8437(d) of this title, as determined by
the Executive Director.'' 5 U.S.C. 8439(a)(3). In addition, the Thrift
Savings Plan Enhancement Act of 2009 added a provision to FERSA that
requires the FRTIB to ``ensure that any expenses charged for the use of
the mutual fund window are borne solely by the participants who use
such window.'' 5 U.S.C. 8438(b)(5)(B). This proposed rule aims to
fulfill these two Congressional directives.
Participants who choose to invest through the mutual fund window
will incur fees and expenses that do not apply to participants who
invest only in the TSP core funds. These fees and expenses fall into
four general categories: (1) An annual maintenance fee of $95, (2) a
per trade fee of $28.75, (3) fees and expenses imposed by the specific
mutual fund(s) in which the participant chooses to invest, and (4) a
fee designed to guarantee that the availability of the mutual fund
window will not indirectly increase the share of TSP administrative
expenses borne by participants who choose not to use the mutual fund
window. The scope of this proposed rule includes only the latter
category of fees and expenses.
Investment Elections and Fund Transfers
FERSA requires the FRTIB Executive Director to publish regulations
governing investment elections and fund transfers. 5 U.S.C. 8438(d).
Accordingly, the FRTIB is proposing to amend its regulations to include
rules and procedures for transferring funds to and from the mutual fund
window.
III. Proposed Regulation Amendments
Administrative Expenses
Currently, all TSP participants bear a pro rata share of the TSP's
administrative expenses. The TSP's administrative expenses are
reflected as a reduction in the unit prices of the TSP core funds. When
participants begin moving assets from the TSP core funds to mutual
funds, this method of allocating TSP administrative expenses will no
longer be sufficient to ensure that all participants bear a pro rata
share of the TSP's administrative expenses. The TSP has no control over
the share prices of the mutual funds. Thus, this method cannot be used
to allocate the appropriate share of TSP administrative expenses to
assets invested through the mutual fund window. Failure to collect the
appropriate share of TSP administrative expenses from assets invested
through the mutual fund window would increase the share of TSP
administrative expenses borne by participants who choose not to use the
mutual fund window.
Therefore, the FRTIB is proposing to collect an annual fee of $55
from mutual fund window users to guarantee that the availability of the
mutual fund window does not indirectly increase the share of TSP
administrative expenses borne by participants who choose not to use the
mutual fund window. The amount of the proposed fee was derived by
multiplying an assumed average mutual fund window account balance of
approximately $120,000 by an assumed TSP administrative expense ratio
of 4.59 basis points. The FRTIB proposes to redetermine the annual fee
every three years using the actual average mutual fund window account
balance and expense ratio, as of the date of redetermination.
Minimum and Maximum Fund Transfers
The mutual fund window will allow access to funds that are not as
diversified as the TSP core funds and therefore may expose participants
to greater market risk. The mutual fund window is intended for TSP
participants who are experienced investors. It is not suitable for all
TSP participants. While there may be legitimate reasons for a
participant to invest in undiversified funds, such needs can be met
through limited portfolio allocations. Because of the increased risk
associated with the breadth of options offered through the mutual fund
window, the FRTIB is proposing several restrictions on transfers and
allocations between the TSP core funds and the mutual fund window.
First, the TSP is proposing to require an initial fund transfer of
at least $10,000 to the mutual fund window. Second, this initial
investment may not cause the portion of the participant's TSP balance
that is invested through the mutual fund window to exceed 25 percent of
the participant's total TSP balance. These two restrictions, taken
together, would require a participant to have a minimum TSP balance of
$40,000 before becoming eligible to invest through the mutual fund
window. Third, subsequent transfers to the mutual fund window would be
limited to amounts that do not cause the portion of the participant's
TSP balance that is invested through the mutual fund window to exceed
25 percent of their total TSP balance.
Operational Details
To invest in mutual funds, a TSP participant must first establish a
mutual fund window account that is separate from the portion of their
TSP balance that is invested in TSP core funds. The FRTIB proposes the
following rules and procedures:
1. Elected Transfers. A participant may elect to transfer money (in
whole dollar increments only) from TSP core funds to a mutual fund
window account. Amounts transferred to a participant's mutual fund
window account will initially be invested in a sweep money market fund.
The participant may then choose from among the mutual funds offered. A
participant cannot make contributions directly to a mutual fund
account. All contributions must first be invested in the TSP core
funds. Similarly, a participant cannot receive a withdrawal directly
from a mutual fund window account. A participant who wishes to
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make a withdrawal election that exceeds the amount of their balance
that is invested in TSP core funds must first transfer money (in whole
dollar increments only) from their mutual fund window account back to
the TSP core funds.
2. Forced Transfers. The FRTIB is sometimes required by law to make
payments from a TSP account even when a participant has not made a
withdrawal election. For example, the Internal Revenue Code requires
the TSP to make minimum payments of a certain amount to participants
who are age 72 years or older. For another example, the FRTIB is
sometimes required to make payments under court orders that award
benefits to a participant's spouse or child. Paragraph (c)(1) of the
proposed regulatory text contains a non-exhaustive list of the types of
payments that the FRTIB might be required by law to make from a
participant's TSP account.
If the amount a participant has invested in TSP core funds is
insufficient to cover a payment that the FRTIB is required by law to
make, then the FRTIB will force a transfer from the participant's
mutual fund window account to the TSP core funds. If the participant's
mutual fund window account balance is at least $25,000, the forced
transfer amount will equal the amount needed to cover the insufficiency
plus $1,000. The forced transfer amount will be liquidated first from
amounts held in the sweep money market fund and then from amounts
invested in mutual funds, beginning with the position with the highest
balance. If the participant's mutual fund account balance is less than
$25,000, his or her entire mutual fund account balance will be
transferred back to the TSP core funds. All forced transfers will be
invested in the TSP core funds in accordance with the participant's
existing contribution allocation. The participant will be responsible
for any fees incurred as a result of the forced transfer.
3. Monthly Transfer Limit. Currently, participants are allowed two
interfund transfers in a calendar month. After that, they can only
transfer money into the G Fund. Any transfer from the TSP core funds to
a participant's mutual fund window account, or vice versa, including a
forced transfer, will count toward the existing monthly limit on
interfund transfers. Consistent with current rules, a participant may
always elect a fund transfer from his or her mutual fund window account
to the G Fund.
4. Acknowledgment of Risk. FERSA requires any participant who
elects to invest in ``any investment fund or option other than the
Government Securities Investment Fund'', to sign an acknowledgment
which states that the investment is made at the participant's own risk,
that the participant is not protected by the Government against any
loss on such investment, and that a return on such investment is not
guaranteed by the Government. 5 U.S.C. 8439(d). The FRTIB is proposing
to treat the mutual fund window as an ``investment option'' for
purposes of this requirement.
Regulatory Flexibility Act
I certify that this regulation will not have a significant economic
impact on a substantial number of small entities. This regulation will
affect Federal employees, members of the uniformed services who
participate in the TSP, and beneficiary participants.
Paperwork Reduction Act
I certify that these regulations do not require additional
reporting under the criteria of the Paperwork Reduction Act.
Unfunded Mandates Reform Act of 1995
Pursuant to the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 602,
632, 653, and 1501-1571, the effects of this regulation on state,
local, and tribal governments and the private sector have been
assessed. This regulation will not compel the expenditure in any one
year of $100 million or more by state, local, and tribal governments,
in the aggregate, or by the private sector. Therefore, a statement
under 2 U.S.C. 1532 is not required.
List of Subjects in 5 CFR Part 1601
Government employees, Pensions, Retirement.
Ravindra Deo,
Executive Director, Federal Retirement Thrift Investment Board.
For the reasons stated in the preamble, the FRTIB proposes to amend
5 CFR chapter VI as follows:
PART 1601--PARTICIPANTS' CHOICE OF TSP FUNDS
0
1. The authority citation for part 1601 continues to read as follows:
Authority: 5 U.S.C. 8351, 8432d, 8438, 8474(b)(5) and (c)(1).
0
2. Add subpart F to read as follows:
Subpart F--Mutual Fund Window
Sec.
1601.51 Applicability.
1601.52 Fund transfers.
1601.53 Fees.
Sec. 1601.51 Applicability.
This subpart applies only to the transfer of amounts between the
TSP core funds and the mutual fund window; it does not apply to the
investment of future deposits, which is covered in subpart B of this
part, or fund reallocations or fund transfers among the TSP core funds,
which is covered in subpart C of this part.
Sec. 1601.52 Fund transfers.
(a) Fund transfers to mutual fund window. A participant may elect
to make one or more fund transfers to the mutual fund window from the
portion of his or her TSP balance invested in the TSP core funds,
subject to the following rules:
(1) The participant must establish a mutual fund window account
that is separate from the portion of his or her TSP balance invested in
the TSP core funds. A participant with more than one TSP account may
establish a separate mutual fund window account for each TSP account,
and the limitations and fees described in this section will apply
separately to each account;
(2) If the participant does not have an acknowledgment of risk on
file as of the date of his or her initial fund transfer request to the
mutual fund window, the participant must complete an acknowledgment of
risk before the fund transfer can be processed;
(3) Fund transfers must be made in whole dollar increments
(percentages are not permitted);
(4) The following limitations must be satisfied:
(i) A participant's initial fund transfer into his or her mutual
fund window account must be at least $10,000 and may not exceed 25
percent of the participant's TSP account balance, as of the date of
such transfer; and
(ii) Subsequent fund transfers into a participant's mutual fund
window account may not cause the balance in the participant's mutual
fund window account to exceed 25 percent of the participant's total TSP
balance, as of the date of any such transfer;
(5) Each fund transfer into the mutual fund window counts toward
the monthly limit set forth in Sec. 1601.32(b);
(6) Amounts transferred to a participant's mutual fund window
account will initially be invested in a sweep money market fund.
Subsequently, the participant may direct the investment of the
transferred amounts into any mutual fund(s) that are available through
the mutual fund window;
(7) Fund transfers are subject to the fees set forth in Sec.
1601.53; and
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(8) A participant may not withdraw funds directly from his or her
mutual fund window account. To make a withdrawal, the participant must
elect a fund transfer back to the TSP core funds as described in
paragraph (b) of this section. Upon completion of such fund transfer,
the participant may make a withdrawal in accordance with 5 CFR part
1650.
(b) Fund transfers back to TSP core funds. A participant may elect
to make a fund transfer to the TSP core funds from amounts invested in
his or her mutual fund window account, subject to the following rules:
(1) Fund transfers must be made in whole dollar increments
(percentages are not permitted);
(2) Amounts to be transferred from a participant's mutual fund
window account to the TSP core funds must first be transferred to the
sweep money market fund. Subsequently, the participant may direct the
investment of the transferred amounts into the TSP core funds;
(3) Each fund transfer back to the TSP core funds from the mutual
fund window account counts toward the monthly limit set forth in Sec.
1601.32(b); except, however, that a participant may always elect a fund
transfer from the mutual fund window account to the G Fund; and
(4) Fund transfers are subject to the fees set forth in Sec.
1601.53.
(c) Forced transfers. The TSP record keeper will force a transfer
from the participant's mutual fund window account to the TSP core funds
in the following situations, and subject to the following rules:
(1) A forced transfer may occur if the balance invested in the TSP
core funds is insufficient to cover:
(i) Amounts necessary to comply with a court order, legal process,
or levy described in 5 CFR part 1653;
(ii) A beneficiary asset transfer;
(iii) A required minimum distribution;
(iv) A distribution of an account balance less than $200 described
in 5 CFR 1650.23; or
(v) Any other payment or transfer that the Board is required by law
to make from the participant's TSP account balance;
(2) The amount of the forced transfer shall be equal to the amount
of the insufficiency described in paragraph (c)(1) of this section,
plus $1,000; except, however, that if the participant's mutual fund
window account balance is less than $25,000, the entire mutual fund
window account balance shall be transferred to the TSP core funds;
(3) Forced transfers shall be liquidated from the participant's
mutual fund window account first from amounts held in the sweep money
market fund; and then from amounts invested in mutual funds, beginning
with the position with the highest balance;
(4) Forced transfers from a participant's mutual fund window
account to the TSP core funds shall be invested according to the
participant's existing contribution allocation; and
(5) The participant shall be responsible for any fees incurred as a
result of the forced transfer.
Sec. 1601.53 Fees.
(a) The Board will allocate a portion of the TSP's administrative
expenses to mutual fund users by charging an annual fee of $55.00. The
amount of this fee will be redetermined once every three years by
multiplying the average mutual fund window account balance by the TSP
administrative expense ratio, as of the date of redetermination.
(b) The fee described in paragraph (a) of this section is in
addition to any mutual fund window account maintenance fees, trading
fees, and fees and expenses associated with the specific mutual fund(s)
in which the participant chooses to invest.
[FR Doc. 2022-01312 Filed 1-25-22; 8:45 am]
BILLING CODE 6760-01-P
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</html>Indexed from Federal Register on January 26, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.