Rule2022-09972
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
May 10, 2022
Effective
June 1, 2022
Issuing agencies
Federal Retirement Thrift Investment Board
Abstract
The Federal Retirement Thrift Investment Board (FRTIB) adopts as final, without changes, a proposed rule concerning the Thrift Savings Plan (TSP)'s mutual fund window--which we will make available to TSP participants beginning in June 2022. This final rule establishes 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. We are also adopting policies to govern fund transfers to and from the mutual fund window, including a restriction on the amount that a participant may invest through the mutual fund window.
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[Federal Register Volume 87, Number 90 (Tuesday, May 10, 2022)]
[Rules and Regulations]
[Pages 27917-27923]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-09972]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 87, No. 90 / Tuesday, May 10, 2022 / Rules
and Regulations
[[Page 27917]]
FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
5 CFR Part 1601
Mutual Fund Window
AGENCY: Federal Retirement Thrift Investment Board.
ACTION: Final rule.
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SUMMARY: The Federal Retirement Thrift Investment Board (FRTIB) adopts
as final, without changes, a proposed rule concerning the Thrift
Savings Plan (TSP)'s mutual fund window--which we will make available
to TSP participants beginning in June 2022. This final rule establishes
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. We are also adopting policies to govern fund transfers to and
from the mutual fund window, including a restriction on the amount that
a participant may invest through the mutual fund window.
DATES: The effective date is June 1, 2022.
FOR FURTHER INFORMATION CONTACT: Kim Weaver, Office of External
Affairs, (202) 465-5220 or Laurissa Stokes, Office of General Counsel,
(202) 308-7707. For more information about when and how TSP
participants can access the mutual fund window, please visit
<a href="http://www.tsp.gov/new-tsp-features/">www.tsp.gov/new-tsp-features/</a>.
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 increase or change the types of core funds
offered to TSP participants.
I. Background
A. What is a Mutual Fund?
A mutual fund is formed when a special type of corporation called a
fund company pools money from many individuals and invests the pooled
money in other things such as stocks and bonds. Mutual funds offer
individuals the ability to invest in hundreds of different holdings
without having to make hundreds of separate purchases themselves. A
mutual fund's holdings are picked by a professional money manager--
called an investment adviser--who is hired by the fund company.
Investors buy shares in mutual funds. Investors (or their brokers)
purchase mutual fund shares from the fund company itself (or its
broker)--as opposed to purchasing them from other investors (or their
brokers) on a secondary market such as the New York Stock Exchange.
Each share represents an investor's part ownership in the mutual fund
and the net aggregate returns of the mutual fund's investment holdings.
B. What is a Mutual Fund Window?
A mutual fund window is a type of brokerage window. A brokerage
window is a retirement plan feature that allows participants to open a
brokerage account to put some of their retirement savings in
investments that are not curated by their retirement plan's
fiduciaries.
Some retirement plans call this feature a ``self-directed brokerage
option''. ``Brokerage window'' and ``self-directed brokerage option''
are just two different names for the same feature. This feature is
often described as ``self-directed'' because it allows participants to
forego some of the protections afforded by fiduciary oversight of
investments in exchange for access to a much broader choice of
investments.
However, investing through a retirement plan feature is never as
``self-directed'' as investing through a brokerage account outside of a
retirement plan. For example, retirement plan participants do not pick
their own brokerage firm. Usually, one of the retirement plan's service
providers (for example, its plan administrator or record keeper)
selects a brokerage firm that will provide brokerage accounts and an
online trading platform to the retirement plan's participants via a
subcontract.
In addition, certain categories of higher-risk trades that can be
made in brokerage accounts outside of a retirement plan are often
excluded from brokerage windows. These categories include trading on
margin and buying put or call options, futures contracts, or
cryptocurrency. Subject only to categorical exclusions such as these,
the specific investments available through a retirement plan's
brokerage window are typically determined by a cluster of agreements
negotiated among the plan's service provider, a brokerage firm, and
fund companies.
For the TSP's brokerage window, Congress has excluded all
categories of investments except for mutual funds.\1\ That is why it is
called a mutual fund window. It is a type of brokerage window that is
limited to mutual funds.
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\1\ See 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)).
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C. Mutual Funds Versus TSP Core Funds: What is the Difference?
Like mutual funds, the TSP core funds offer investors the ability
to pool their money with other investors to purchase a share of a
portfolio containing hundreds of investment holdings. The difference is
that the TSP core funds are designed specifically for TSP participants.
Only TSP participants
[[Page 27918]]
can invest in them, and their only goal is to maximize participants'
retirement savings. Mutual funds, on the other hand, are designed for
the general public. As such, many different types of mutual funds exist
to satisfy a wide variety of goals.
II. Historical Context
For many years, TSP participants have voiced a desire to have more
investment options. In 2009, Congress passed legislation that
authorized, but did 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)).
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) \2\ about adding a mutual fund window to the
TSP. 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 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 and plan administration
services, including a mutual fund window. The contract was awarded in
November 2020. The FRTIB is currently undergoing a transition to its
new service provider(s).
III. Proposed Rule
On January 26, 2022, the FRTIB published a proposed rule with
request for public comments in the Federal Register (87 FR 3940,
January 26, 2022). We proposed to collect an administrative fee of $55
annually 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 preamble of the proposed rule
informed the public that TSP mutual fund users will also incur other
costs such as: (1) An annual maintenance fee of $95, (2) a per trade
fee of $28.75, and (3) fees and expenses imposed by the specific mutual
fund(s) in which they invest. We explained that these other costs are
outside the scope of the proposed rule.
We also proposed several terms and conditions that would govern
fund transfers to and from the mutual fund window. For example, the
proposed rule would require a minimum initial transfer of $10,000 and
limit investments through the window to no more than 25% of the
participant's TSP account value. In addition, the proposed rule would
count transfers to and from the mutual fund window against an existing
limitation on the number of interfund transfers participants are
allowed to make per month.
We received feedback from 100 commenters. Their comments fell into
ten broad areas of concern, and our response to each concern is
provided below.
IV. Response to Public Comments
A. Account Maintenance Fee and Trading Fee
We received 44 comments from participants who believe the $95
annual maintenance fee and a $28.75 per trade fee are not competitive
with prices negotiated by other retirement plans. Before addressing
these comments, we want to note that the annual maintenance fee and per
trade fee were negotiated using the procedures of Federal Acquisition
Regulation (FAR) part 15 and were evaluated for reasonableness in
accordance with FAR 15.404-1. We also note that this final rule governs
only the fees determined by the Executive Director in his role of
setting policy to implement specific Congressional directives. Fees
negotiated through acquisition procedures are beyond the scope of this
final rule.
Nevertheless, we think it is important to address the concerns
raised by these commenters. The comments indicate that many TSP
participants are under the impression that other retirement plans
negotiate free brokerage services. We looked into what have been
described as ``free'', ``no-transaction-fee'', and ``zero cost'' mutual
fund trades offered to participants in other retirement plans. We found
that those prices are often caveated with fine print disclaimers, such
as this:
No-Transaction-Fee (NTF) mutual funds are no-load mutual funds for
which [brokerage firm] does not charge a transaction fee. NTFs, as well
as other funds, have other continuing fees and expenses described in
the fund's prospectus. [Brokerage firm] receives remuneration from fund
companies for record keeping, shareholder and other administrative
services. The amount of remuneration is based in part on the amount of
investments in such funds by [brokerage firm] clients.
The remuneration (i.e., fees) that brokerage firms receive from
fund companies are treated by the fund companies as fund expenses,
which are ultimately passed on to the people who have already invested
in the fund. This type of arrangement between a brokerage firm and a
fund company is called revenue sharing.
Revenue sharing is not inherently pernicious. In many industries,
revenue sharing is like a referral fee that a business owner might pay
to compensate a person for bringing a new customer to their business.
For most businesses, revenue sharing is a marketing cost borne by the
business.
Fund companies are, of course, businesses also. But fund companies
are structurally different from other corporations. They typically have
no employees, no physical assets, and no tangible products. They are
just a collection of contracts relating to pools of money (i.e.,
funds), and they charge their costs of doing business to the people who
have invested in the funds, regardless of how well the funds perform.
Their unique corporate structure has led both Congress and the U.S.
Supreme Court to conclude that ``the forces of arm's-length bargaining
[[Page 27919]]
do not work in the mutual fund industry in the same manner as they do
in other sectors of the American economy.'' Jones v. Harris Assocs.
L.P., 559 U.S. 335, 338 (2010), quoting S. Rep. No. 91-184, at 5
(1969). This does not mean that there is something sinister about the
mutual fund industry. It means only that the nature of the product
makes the usual distinctions between price, cost, revenue, profit, and
quality less clear than they are in other industries.
Fund companies are not required to provide individualized
statements to investors, detailing the exact dollar amount of the
fund's fees that each investor has indirectly paid. Consequently,
revenue sharing between retirement plans, record keepers, brokerage
firms, and fund companies can lead to confusing, opaque fee
disclosures. Revenue sharing converts explicit fees (e.g., account
maintenance fees and transaction fees) into less transparent fees
(e.g., fees embedded in the fund's expense ratio). By including the
fees in the fund's expense ratio, the return on an investment in that
fund is reduced. Most participants in private sector plans have no idea
that revenue sharing exists, much less how much it decreases the return
of their investments.\5\
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\5\ See ``401(k) Plans: Increased Educational Outreach and
Broader Oversight May Help Reduce Plan Fees'', GAO-12-325 (April 24,
2012), available at <a href="https://www.gao.gov/products/gao-12-325">https://www.gao.gov/products/gao-12-325</a>; ``GAO:
How Revenue Sharing Can Work, and Its Potential Impact on
Participants' Account Balances'', YouTube, U.S. Government
Accountability Office, 24 April 2012, <a href="https://www.youtube.com/watch?v=PIRGduLn59A">https://www.youtube.com/watch?v=PIRGduLn59A</a>; ``401(k) Retirement Plans: Many Participants Do
Not Understand Fee Information, but DOL Could Take Additional Steps
to Help Them'', GAO-21-357 (July 27, 2021), available at <a href="https://www.gao.gov/products/gao-21-357">https://www.gao.gov/products/gao-21-357</a>.
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The FRTIB values transparency. We believe TSP participants need,
and deserve, to see the dollar amount of the fees they pay for their
mutual funds. Toward that end, TSP participants will pay account
maintenance fees and certain transaction fees directly rather than
paying them indirectly through revenue sharing. Furthermore, FRTIB has
contractually required the TSP record keeper, their trading platform
provider, their broker-dealer(s), and any of their other affiliates or
subcontractors to rebate all revenue sharing payments, or any other
type of indirect compensation, they receive in connection with
participants' mutual fund window investments. The rebates will be
credited to participants' mutual fund window accounts. This ensures
that the dollar amounts of all fees and expenses borne by TSP
participants for services provided in connection with their mutual fund
window investments are explicitly disclosed.
B. Concern That Participants Might Be Confused by New Fees
One commenter expressed concern that participants might
inadvertently incur fees which can, over time, cause serious damage to
their retirement savings. We share this concern. Even small differences
in fees can translate into large differences in returns over time. That
is why we have chosen to make the fees paid to our service providers
explicit at the risk of appearing less competitive than plans that
compensate their service providers through revenue sharing
arrangements. We intend to provide ongoing communication and education
to TSP participants about the impact of fees on their retirement goals.
We will also ensure that participants have convenient access to mutual
fund prospectuses prior to making investment decisions.\6\ In addition,
participants will have access to a tool that allows them to sort mutual
funds by expense ratio, starting with the lowest expense ratios first.
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\6\ Mutual funds use a document called a prospectus to disclose
information about the fund to investors. The U.S. Securities
Exchange Commission requires mutual funds to include certain
information about the fund's fees and expenses in the prospectus.
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C. Minimum Core Balance
We received 29 comments opposed to restricting the amount that a
participant may invest through the mutual fund window. Under the
proposed rule, transfers to a mutual fund window account cannot cause a
participant's mutual fund window account balance to exceed 25% of their
total TSP balance. In effect, the proposed rule would require
participants to maintain 75% of their balance in the TSP core funds.
Some commenters described the minimum core balance as ``punitive''
and suggested that it casts doubt on the FRTIB's sincerity in touting
the mutual fund window as a benefit to TSP participants. Others are
concerned that this restriction will impede their ability to achieve
diversification among the funds in their mutual fund window account. We
believe these commenters misunderstand the intended role of the mutual
fund window. The mutual fund window enhances the TSP as a supplement
to, rather than an alternative to, the core fund options.
Other commenters described the minimum core balance as
``paternalistic'' and asked the FRTIB to respect their autonomy when it
comes to making financial decisions. We are sympathetic to these
requests for more freedom of choice and autonomy. But retirement
savings is a context in which autonomy is already constrained.
Retirement plans (whether private or government-sponsored) are tax-
incentivized programs. People who choose to participate in retirement
plans benefit personally from a large tax subsidy. The law mandates
some constraints on autonomy to ensure those tax subsidies are
effective for their intended purpose. Some constraints arise from the
fact that fiduciaries of retirement plans can be sued by participants
for exposing participants' retirement savings to too much risk.
Consequently, we are compelled to balance requests for more freedom of
choice against the risk of damaging the trust placed in us by the vast
majority participants who do not have the time it takes to research
thousands of complex investment choices.
Several commenters believe that a 40% or 50% minimum core balance
would be more reasonable. We understand that many private sector
retirement plans offer brokerage windows with lower minimum core
balance requirements, and that 50% is very common. However, it is not
uncommon among the largest of private sector retirement plans to
require participants to maintain 80% of their total balance in core
funds.\7\ Given the TSP's size, and the extraordinary amount of trust
placed in us by more than 6.5 million participants, we believe it is
appropriate for the FRTIB's minimum core balance to be near the higher
end of the range of minimum core balances that are common in the
private sector.
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\7\ ``Understanding Brokerage Windows in Self-Directed
Retirement Plans'', Report to Honorable Martin Walsh, Secretary of
the Department of Labor, Advisory Council on Employee Welfare and
Pension Benefit Plans (2021), at 24, available at <a href="https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/2021-understanding-brokerage-windows-in-self-directed-retirement-plans.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/2021-understanding-brokerage-windows-in-self-directed-retirement-plans.pdf</a>.
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One commenter suggested tying the minimum core balance amount to
each individual participant's years of service and gradually decreasing
it in increments of 5% per year as the participant's years of service
increase. For example, a participant with two years or less of service
would be required to maintain a minimum core balance of 75%, a
participant with 3 years of service would be required to maintain a
minimum core balance of 70%, a participant with 4 years of service
would be required to maintain a minimum core balance of 65%, and so on.
We believe the enormous
[[Page 27920]]
administrative complexity of this approach would outweigh any
conceivable advantage it could offer.
One commenter suggested the use of messaging and warning banners
instead of a minimum core balance requirement to mitigate the potential
for participants to invest heavily in undiversified funds. In our
experience, messaging campaigns work best when the message is a rule of
thumb--simple, universal, and clear. We are concerned that any message
simple enough to be effective (such as, ``Don't put all your eggs in
one basket'') would be insufficiently nuanced to be accurate in the
context of the mutual fund window. Since almost all mutual funds can
claim to be ``diversified'' in the sense that they have many different
holdings, a simple message about the importance of diversification
could be misleading without a host of additional specifications--such
as the difference between diversifying within an asset class and
diversifying across asset classes.
One commenter asked whether a mutual fund window account balance
that, due to earnings, exceeds the 25% restriction will be adjusted
(i.e., liquidated) to bring the account to 25% of the participant's
total TSP balance. Investment earnings that cause a mutual fund window
account balance to exceed 25% of a participant's total TSP balance will
be permitted to remain in the mutual fund window account. However, a
participant will not be permitted to transfer funds from the core funds
to the mutual fund window if the participant's mutual fund window
account balance (including earnings) already exceeds the 25%
restriction or if the transfer would cause the participant's mutual
fund window account balance (including earnings) to exceed the 25%
restriction.
D. Fiduciary Oversight
One commenter suggested that mutual funds offered through the
window should be ``vetted'' by fiduciaries to ensure that they are
prudent investments. Another commenter suggested that the FRTIB should
offer a large variety of funds to ensure that there is no appearance of
``favoritism'' toward any mutual funds or fund companies.
TSP participants will have access to approximately 300 mutual fund
families. A mutual fund family includes all the separate funds offered
by a single fund company. Since each family consists of multiple funds,
the total number of funds available to TSP participants will be in the
thousands.
We have taken measures toward ensuring that our record keeper and
brokerage firm are not motivated by conflicts of interest or other
misaligned incentives that could influence which funds or fund families
they make available to TSP participants. Many retirement plan record
keepers also own subsidiaries that are fund companies or that provide
investment management services to fund companies. It is common for
these record keepers to design investment menus and exercise influence
on retirement plan participants in a manner that benefits their
subsidiaries. We have mitigated such conflicts of interests by hiring a
record keeper that is not in the business of selling mutual funds.
We intend to monitor for practices that might intentionally or
unintentionally nudge participants to choose more expensive funds (or
share classes) over less expensive funds (or share classes) with
similar risk/return attributes. Toward that end, we have contractually
guaranteed ourselves a say in the choice architecture of the digital
interface through which participants choose mutual funds (e.g., the
order in which choices are displayed and the language used to frame the
choices). We will also ensure that if a mutual fund has a share class
that gives preferential treatment to institutional investors (e.g.,
money managers, insurance companies, investment banks, commercial
trusts, endowment funds, and hedge funds), those institutional share
classes will be made available to TSP participants.
We will not, however, evaluate or monitor any of the mutual funds
to ensure that they are prudent investments. This mirrors the practice
of private sector retirement plans.\8\ Fiduciary oversight of thousands
of funds would place unreasonable cost and resource burdens on the
FRTIB. Those cost increases could disadvantage TSP participants
relative to participants of private sector retirement plans--whose
fiduciaries do not evaluate or monitor investments offered through
brokerage windows except in extraordinary circumstances. We are also
concerned that the potential for appearing to favor some fund companies
over others could raise novel issues under government ethics and
contracting laws; and could run counter to the spirit of a myriad of
provisions in the Federal Employees' Retirement System Act that are
designed to insulate the TSP from political involvement.
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\8\ ``Understanding Brokerage Windows in Self-Directed
Retirement Plans'', Report to Honorable Martin Walsh, Secretary of
the Department of Labor, Advisory Council on Employee Welfare and
Pension Benefit Plans (2021), at 47, available at <a href="https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/2021-understanding-brokerage-windows-in-self-directed-retirement-plans.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/2021-understanding-brokerage-windows-in-self-directed-retirement-plans.pdf</a> (``Investments accessible through a
brokerage window are not routinely monitored by plan fiduciaries,
and most experts conclude that, except perhaps in extraordinary
circumstances, plan fiduciaries are not obligated to monitor
brokerage window investments nor do their fiduciary duties apply
with respect to those investments.'').
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We considered the less costly, less complicated alternative of
implementing a screen whereby the FRTIB would adopt criteria (e.g.,
expense ratio of 1.00% or below) and restrict the window to those
mutual funds that meet the FRTIB's criteria. But we have decided
against any screening criteria because we are concerned it would blur
the distinction between funds that are fully endorsed by fiduciaries
(i.e, the TSP's core funds) and funds that only meet certain minimum
thresholds established by fiduciaries. Participants who only want
simple choices that are fully endorsed by the FRTIB may feel
overwhelmed or misled if we make it hard to distinguish between the
level of fiduciary involvement in TSP core funds and the level of
fiduciary involvement in the funds offered through the mutual fund
window. In view of this concern, we believe that the vast majority of
TSP participants will be better served by a clear, frequent, prominent,
and unequivocal warning that the FRTIB does not provide fiduciary
oversight of the mutual funds offered through the window.
Participants who prefer funds that are overseen by FRTIB
fiduciaries should invest in the TSP core funds.
E. Other Investment Options
Several commenters suggested that, instead of mutual funds, the
FRTIB should offer individual stocks, individual bonds, or exchange-
traded funds through the brokerage window. By law, mutual funds are the
only type of investment the FRTIB is permitted to offer through the
brokerage window.\9\ Mutual funds offer certain advantages over
purchasing individual stocks and bonds, such as built-in professional
management; and they are the most common type of investment in private
sector 401(k) retirement plans. Although exchange-traded funds offer
similar advantages, they are not--technically speaking--mutual
funds.\10\
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\9\ See 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)).
\10\ See ``Mutual Funds and Exchange-Traded Funds (ETFs)--A
Guide for Investors, U.S. Securities Exchange Commission'',
available at <a href="https://www.sec.gov/reportspubs/investor-publications/investorpubsinwsmfhtm.html">https://www.sec.gov/reportspubs/investor-publications/investorpubsinwsmfhtm.html</a>.
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[[Page 27921]]
F. Objections to Offering a Mutual Fund Window
Several commenters objected to the fact that the FRTIB is offering
a mutual fund window at all. Others believe that the mutual fund window
should be a lower priority than other possible improvements to the TSP.
The decision to offer a mutual fund window was made by a vote of the
FRTIB Board members in July 2015 and, therefore, is not the subject of
this regulation.
Nevertheless, we wish to assure these commenters that the FRTIB is
also adding a host of other new features which are consistent with many
of the priorities these commenters have articulated. We do not believe
that satisfying the diverse preferences of the TSP's 6.5 million
participants must be a zero-sum game. We are confident we can offer a
mutual fund window for participants who want it at no cost to
participants who don't, while also offering many other new features
that participants with other priorities will appreciate. For
information about other new features, we invite TSP participants to
view <a href="https://www.tsp.gov/new-tsp-features/">https://www.tsp.gov/new-tsp-features/</a>.
Some commenters suggested that, instead of offering a mutual fund
window, the FRTIB should expand the number of its core funds or should
select indexes that allow for more diversification within its
individual core funds. The FRTIB does not have the statutory authority
to expand its core fund options. Only Congress can do that, and
Congress authorized a mutual fund window instead of adding more funds
to the TSP's core fund menu. Congress has historically found that
offering a small core menu of low-cost, passively-managed funds is most
conducive to promoting the integrity of the Thrift Savings Fund.\11\
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\11\ Federal Employees' Retirement System Act of 1986, Public
Law 99-335, H.R. CONF. REP. 99-606, 1986 U.S.C.C.A.N. 1508 (``Most
importantly, the three funds authorized in the legislation are
passively managed funds, not subject to political manipulation. A
great deal of concern was raised about the possibility of political
manipulation of large pools of thrift plan money. This legislation
was designed to preclude that possibility.'').
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The FRTIB periodically hires professional investment consultants to
evaluate the diversification of the TSP's core fund menu compared to
the menus of other retirement plans and to perform benchmark studies of
the TSP's individual core funds. We invite TSP participants to view
these studies at <a href="https://www.frtib.gov/ReadingRoom/">https://www.frtib.gov/ReadingRoom/</a>.
G. Administrative Fee
We received 6 comments relating to the $55 administrative fee. Four
commenters supported the fee and two commenters objected to it.
One commenter suggested that a $25-$30 fee would be more
reasonable. This commenter did not offer a rationale for why $25-$30
would be more reasonable or suggest an alternative means of deriving an
appropriate fee amount. Another commenter suggested that all TSP
participants should share in the cost of the mutual fund window. We
believe this suggestion would conflict with an explicit Congressional
directive to ``ensure that any expenses charged for use of the mutual
fund window are borne solely by participants that use such window.'' 5
U.S.C. 8438 (b)(5)(B). We are, therefore, adopting the proposed rule as
final without substantive change.
H. Number of Interfund Transfers
We received 22 comments objecting to an existing rule that allows
only two interfund transfers per month. We proposed that the transfer
from a participant's TSP account to their mutual fund window account,
or vice versa, will count toward the existing monthly limit on
interfund transfers. Trading within the mutual fund window will be
restricted only by fees and rules that may be imposed by the mutual
funds in which participants choose to invest.
None of the commenters addressed the application of the FRTIB's
existing rule to transfers to and from the mutual fund window. Instead,
the commenters objected, more generally, to the existing rule as it
currently applies to the TSP's core funds.
We sought public comments on the existing rule long ago. We
published it as a final rule in April 2008.\12\ Every comment about
interfund transfers provided in response to our mutual fund window
proposed rule was thoroughly addressed in the preamble of the 2008
final rule. We are not revisiting the existing rule. We, therefore,
believe these comments are outside the scope of the final rule that we
are publishing today.
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\12\ Participants' Choices of TSP Funds, 73 FR 22049 (April 24,
2008), available at <a href="https://www.federalregister.gov/documents/2008/04/24/E8-8957/participants-choices-of-tsp-funds">https://www.federalregister.gov/documents/2008/04/24/E8-8957/participants-choices-of-tsp-funds</a>.
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The purpose of the existing rule is to prevent a small number of
TSP participants who pursue ``market timing'' active investment
strategies from diluting the earnings of other TSP participants and
adversely affecting the ability of TSP investment managers to replicate
the performance of selected indexes as required by law. The rationales
for the existing rule are equally applicable to transfers to and from
the mutual fund window. We are, therefore, are adopting the proposal as
final without change.
I. Minimum Initial Transfer
We received 3 comments objecting to our proposal to require a
$10,000 minimum initial fund transfer to the mutual fund window. As
explained in our proposed rule, the combination of the $10,000 initial
fund transfer requirement and the 75% minimum core balance requirement
means that an account must have at least $40,000 to be eligible to take
advantage of the mutual fund window. The purpose of this requirement is
to ensure that participants have some investment experience before they
confront additional risks and expenses that may be associated with
using the mutual fund window.
Two commenters expressed concern that the minimum initial transfer
requirement would prohibit new employees from accessing the mutual fund
window. One commenter pointed out that, with today's highly mobile
workforce, many new TSP participants may have gained sufficient
investment experience from retirement assets they have invested
elsewhere. We note that new employees can roll over money into the TSP
from other retirement plans to meet the $10,000 minimum initial fund
transfer requirement. We believe the ability to roll other retirement
investments into the TSP is sufficient to address the concern that
experienced investors who are new Federal employees will not be able to
access the mutual fund window.
Two commenters stated that the minimum initial fund transfer amount
is higher than the industry norm. Brokerage firms often impose minimum
initial fund transfer requirements for the purpose of ensuring that the
cost of servicing a large number of small investments does not exceed
the revenue the brokerage firm requires to offer its services. The
FRTIB's minimum initial fund transfer requirement serves a very
different purpose, which makes a comparison to industry norms
inapposite. We are, therefore, adopting the proposed rule as final
without change.
J. Miscellaneous
One commenter suggested that the proposed rule relies on outdated
survey results concerning the preferences of TSP participants. We
believe this commenter misunderstood the purpose for which we cited
2008 survey results in the proposed rule. We cited 2008 survey results
merely to provide
[[Page 27922]]
chronological historical context for the evolution of the legislation
that authorized the FRTIB to offer a mutual fund window and the FRTIB's
subsequent decision to exercise that authority. For a thorough account
of all the research and deliberation behind the FRTIB's 2015 decision
to offer a mutual fund window, we invite TSP participants to view the
May 2014, November 2014, and July 2015 Board meeting materials at
<a href="https://www.frtib.gov/MeetingMinutes/">https://www.frtib.gov/MeetingMinutes/</a>.
One commenter asked if a participant must set up two mutual fund
window accounts if a participant wants to invest both traditional and
Roth contributions. Nothing in the proposed rule or this final rule
requires a participant set up two mutual fund window accounts for this
purpose. A participant can transfer both traditional and Roth
contributions into the same mutual fund window account.
One commenter asked, with respect to the mutual fund window, how
the FRTIB would address future legislation that might restrict
investing in certain foreign countries and how the FRTIB would
implement such legislation. The FRTIB will comply with legislation
enacted by Congress that applies to the TSP. The manner in which we
would implement such legislation depends on the specific legislation.
One commenter considered the process of investing through the
mutual fund window too cumbersome and suggested we make a money market
sweep fund available within the TSP so participants would not have to
invest in a core fund prior to transferring money to the mutual fund
window. To make the TSP's recordkeeping more efficient and keep costs
low for all participants, the record keeper, through a brokerage firm,
will handle all operations of the mutual fund window, including the
sweep fund that will receive transfers from the core funds. Having the
TSP operate the sweep fund would negate the efficiency gains that come
from outsourcing the operation of the mutual fund window to the record
keeper and brokerage firm.
One commenter asked why participants cannot invest their employee
contributions directly into the mutual fund window. Allowing direct
contributions to the mutual fund window would require creating linkages
between hundreds of government payroll offices and the mutual fund
window, which again, would undermine the efficiency gains that come
from outsourcing the operation of the mutual fund window.
Many commenters objected to the 12 p.m. eastern time cutoff for
transferring amounts to and from the mutual fund window. The 12 p.m.
eastern time cutoff for all TSP transactions is set forth in 5 CFR
1601.32 and was not a subject of the proposed mutual fund window
regulation. Therefore, the comments are beyond the scope of this
regulation. Nevertheless, we will address the concerns.
Since the TSP went to a daily valuation in 2003, we have required
that transactions must be requested before 12 p.m. eastern time to post
on the same day. For transactions requested at or after 12 p.m. eastern
time, the transaction will post the next business day. The 12 p.m.
eastern cutoff is necessary to allow the TSP to begin the investment
transaction cycle which, given the size of the TSP and number of
transactions it processes each day, is a multipart and complex process.
Because the transfer into and out of the mutual fund window will
involve the sale or purchase of TSP funds, such transfers are also
subject to the 12 p.m. eastern time cutoff. Transactions within the
mutual fund window (i.e., purchase and sale of mutual funds) are
generally subject to a 4 p.m. eastern time cutoff. Some mutual funds
may have earlier purchase cutoff times prior to the 4 p.m. eastern time
cutoff, which would be disclosed by fund.
V. Final Rule
For reasons explained above, the FRTIB is adopting the proposed
rule as final, without any substantive changes. Although the comments
received did not cause us to make changes to the proposed rule, we did
carefully consider all comments received. We have appreciated the
opportunity to review and respond to comments from participants who
take an active interest in the TSP and wish to offer suggestions. The
comment process allowed us to address any misunderstandings about the
mutual fund window, to learn if there are unanticipated legal or policy
impediments to the proposal, and to hear suggestions about how better
to implement the mutual fund window.
Regulatory Flexibility Act
This regulation will not have a significant economic impact on a
substantial number of small entities. This regulation will primarily
affect Federal employees, members of the uniformed services who
participate in the TSP, and beneficiary participants.
Paperwork Reduction Act
This regulation does 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.
Submission to Congress and the General Accounting Office
Pursuant to 5 U.S.C. 810(a)(1)(A), the FRTIB submitted a report
containing this rule and other required information to the U.S. Senate,
the U.S. House of Representatives, and the Comptroller General of the
United States before publication of this rule in the Federal Register.
This rule is not a major rule as defined at 5 U.S.C. 804(2).
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 amends 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 into mutual fund window. A participant may elect
to make one or more fund transfers to the mutual fund window from the
portion
[[Page 27923]]
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 his or her TSP account. 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
subpart 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 for the fund transfer to 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
(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) An automatic cash out distribution; 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 administrative fee of
$55.00 annually. 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. 2022-09972 Filed 5-9-22; 8:45 am]
BILLING CODE 6760-01-P
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</html>Indexed from Federal Register on May 10, 2022.
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