[Senate Hearing 108-554]
[From the U.S. Government Publishing Office]



 
                                                        S. Hrg. 108-554

                 OVERSIGHT OF THE THRIFT SAVINGS PLAN:
                   ENSURING THE INTEGRITY OF FEDERAL
                      EMPLOYEE RETIREMENT SAVINGS

=======================================================================

                                HEARING

                               before the

     FINANCIAL MANAGEMENT, THE BUDGET, AND INTERNATIONAL SECURITY 
                              SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 1, 2004

                               __________

      Printed for the use of the Committee on Governmental Affairs





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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

           Michael D. Bopp, Staff Director and Chief Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                      Amy B. Newhouse, Chief Clerk

                                 ------                                

     FINANCIAL MANAGEMENT, THE BUDGET, AND INTERNATIONAL SECURITY 
                              SUBCOMMITTEE

                PETER G. FITZGERALD, Illinois, Chairman
TED STEVENS, Alaska                  DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
ARLEN SPECTER, Pennsylvania          THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

                   Michael J. Russell, Staff Director
              Richard J. Kessler, Minority Staff Director
            Nanci E. Langley, Minority Deputy Staff Director
                       Tara E. Baird, Chief Clerk




                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Fitzgerald...........................................     1
    Senator Pryor................................................     4

                               WITNESSES
                         Monday, March 1, 2004

Andrew M. Saul, Chairman, Federal Retirement Thrift Investment 
  Board..........................................................     6
Gary A. Amelio, Executive Director, Federal Retirement Thrift 
  Investment Board...............................................     9
Alan D. Lebowitz, Deputy Assistant Secretary for Program 
  Operations, Employee Benefits Security Administration, U.S. 
  Department of Labor............................................    11
James M. Sauber, Chairman, Thrift Advisory Council...............    13
Blake R. Grossman, Global Co-Chair Executive Officer and Managing 
  Director, Barclays Global Investors............................    15

                     Alphabetical List of Witnesses

Amelio, Gary A.:
    Testimony....................................................     9
    Prepared statement...........................................    37
Grossman, Blake R.:
    Testimony....................................................    15
    Prepared statement...........................................    51
Lebowitz, Alan D.:
    Testimony....................................................    11
    Prepared statement...........................................    40
Sauber, James M.:
    Testimony....................................................    13
    Prepared statement...........................................    46
Saul, Andrew M.:
    Testimony....................................................     6
    Prepared statement...........................................    33

                                Appendix

Questions and responses for the Record from:
    Mr. Saul.....................................................    59
    Mr. Amelio with attachments..................................    63
    Mr. Lebowitz.................................................   120
    Mr. Sauber...................................................   121
    Mr. Grossman.................................................   123
Chart entitled ``Expense Ratio Comparison As of 12/31/03'' I60124
Chart entitled ``Annual Cost Per Participant (NFC Cost Only)''...   125


OVERSIGHT OF THE THRIFT SAVINGS PLAN: ENSURING THE INTEGRITY OF FEDERAL 
                      EMPLOYEE RETIREMENT SAVINGS

                              ----------                              


                         MONDAY, MARCH 1, 2004

                                     U.S. Senate,  
                  Subcommittee on Financial Management,    
                    the Budget, and International Security,
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 11:06 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Peter G. 
Fitzgerald, Chairman of the Subcommittee, presiding.
    Present: Senators Fitzgerald and Pryor.

            OPENING STATEMENT OF SENATOR FITZGERALD

    Senator Fitzgerald. Good morning. This meeting will come to 
order.
    Today, we are conducting an oversight hearing of the 
Federal Government's Thrift Savings Plan, the $131 billion 
government equivalent of a private sector 401(k) plan. This 
Subcommittee has jurisdiction over Federal retirement benefits, 
of which the Thrift Savings Plan, or TSP for short, plays an 
integral role.
    The TSP was established by the Federal Employees Retirement 
System Act of 1986. The TSP currently provides virtually all 
Federal employees, including members of the military, the 
uniformed services, and Members of Congress and their staffs, 
with a tax-deferred defined contribution plan. TSP participants 
can invest their retirement savings in any or all of five TSP 
funds, each of which is either an equity or debt security index 
fund.
    I would like to first welcome the witnesses we have with us 
today and thank them for taking time out of their busy 
schedules to discuss their involvement with the TSP and its 
operations.
    It is important that Congress ensure the financial 
integrity of the TSP, in which 3.2 million participants have 
invested their retirement savings. Congressional oversight is 
especially important now in light of a growing list of trading 
abuses in the private sector mutual fund industry. I look 
forward to hearing from our witnesses regarding the TSP's 
oversight mechanisms, its audits, and its daily investment and 
management activities, as well as its management expenses and 
costs.
    The TSP is the largest defined contribution plan in the 
world. Since its first full year of operation in 1988, the TSP 
has grown from $2.7 billion in investments held by 1.3 million 
participants to its current $131 billion in investments held by 
3.2 million participants. Despite its size, the TSP has been 
successful in providing plan participants with high quality 
service while keeping administrative fees and transaction costs 
to a minimum.
    This Subcommittee recently held hearings to examine abuses 
in the mutual fund industry, including market timing, late 
trading, and hidden fees charged to investors. Last fall, 
Senator Akaka and I looked into the management of TSP 
investments, and based on the information provided to us and to 
the best of our knowledge, the TSP does not suffer from, nor is 
it vulnerable to, these types of abuses that contribute to high 
management fees and transaction costs in private index funds.
    During our last hearing on January 27, I referenced the 
expense ratios of the TSP--which measure administrative 
expenses, management and advisory fees, and transaction costs 
as a percentage of total assets--and compared them with 
comparable private sector funds to illustrate the low cost of 
fund management and governance at the TSP. Last year, the 
expense ratio of the average government TSP fund was only 11 
basis points, or 11 cents per $100 invested, and in previous 
years it has been as low as 7 or 8 basis points.
    Now, for those of you who can see these charts,\1\ either 
that chart over there or the chart right here, the expense 
ratio of the TSP C Fund, which is the large cap equity fund for 
the TSP, is shown on the left as of the end of last year. The 
2003 expense ratio was 11 basis points, 11 cents per $100 
invested.
---------------------------------------------------------------------------
    \1\ The chart referred to appears in the Appendix on page 124.
---------------------------------------------------------------------------
    Over on the right is the average expense ratio for the 
average private sector comparable mutual fund. The Lipper S&P 
500 Index average, the average expense ratio for the average 
private sector equity stock index fund, is 63 basis points. 
That is about six times the expense ratio for the Thrift 
Savings Plan.
    In the middle there is the Vanguard 500 Index Fund, which 
is the lowest-cost private sector index fund. Its expense ratio 
last year was 18 basis points. So the expense ratio for the TSP 
fund last year was quite a bit lower than Vanguard's expense 
ratio--the lowest private sector fund--and it was six times 
lower than the average private sector fund's expense ratio.
    I would point out as well that the TSP's expense ratio 
includes transaction costs, while the expense ratio for the 
private sector funds does not include the transaction costs. It 
just includes their management fees and so forth.
    So as I said, this is extremely low when compared to the 
most recent data for private sector index funds, particularly 
since the TSP's expense ratio includes transaction costs 
whereas expense ratios of private sector mutual funds do not. 
According to the Lipper Services, comparable index funds in the 
private sector have an average expense ratio of 63 basis 
points, or 63 cents per $100 invested.
    Contributing to the minimal costs and fees charged to each 
TSP account holder is the competitive bidding of contracts, 
such as the contract with Barclays Global Investors. Since 
1988, Barclays has been selected to manage four of the five 
funds--the F, C, S, and I funds. The competition is conducted 
separately for each fund every 5 years. Each year, Barclays or 
its predecessor has been selected to act as fiduciary and has 
established a record of good governance and strong management.
    I have long been a proponent of competitive bidding and 
encourage the TSP to consider opening its nearly $52 million 
contract with the National Finance Center to competition. The 
National Finance Center is a division of the USDA, the U.S. 
Department of Agriculture, that handles the TSP's processing 
and recordkeeping in Louisiana. As of January 31, 2004, there 
were 433 USDA employees assigned to the TSP, compared to 100 
employees here in Washington. It is my view that the TSP could 
save significant funds if this contract were opened to 
competition, which would directly benefit the plan's 3.2 
million participants. I look forward to hearing from our 
witnesses regarding this proposal.
    Based on the information known to me, TSP participants do 
not need to worry about many of the problems plaguing the 
mutual fund industry, such as excessive fees, directed 
brokerage, revenue sharing arrangements, or soft dollar 
payments. Nor do participants need to worry about an incestuous 
board of directors that is beset with conflicts of interest. 
TSP board members are completely independent and required by 
law to act solely in the interest of plan participants and 
beneficiaries.
    The Federal Employees Retirement System Act of 1986 also 
protects TSP participants from poor management by authorizing 
the Department of Labor to conduct investigations and annual 
audits of TSP activities. The Employee Benefit Security 
Administration, or EBSA for short, within the U.S. Department 
of Labor conducts audits on all aspects of the TSP, including 
its Board and other fiduciaries. EBSA has made over 800 
recommendations under its audit program, 95 percent of which 
the Board has adopted. EBSA programs include an audit on 
fiduciary compliance which tests for compliance with the 1986 
Act. This year, EBSA plans to review customer service at the 
TSP as well as the TSP's loan program to address participants' 
concerns about access to the TSP website.
    In addition to its strong management and oversight 
protections against abuses, the TSP also strives to continually 
improve the services it offers to participants. Last year, the 
TSP switched from a paper-based system with quarterly valuing 
of accounts to a daily automated system that provides 
participants with 24-hour online access to their account 
balances, as well as the opportunity to transfer investments 
between funds and submit loan applications.
    Initially, the system had some web access problems due to a 
computer glitch. Therefore, we would like to hear from our 
witnesses how these problems have been addressed and the extent 
to which participants are now benefitting from the new system's 
capabilities.
    This year, the TSP is considering several changes to 
improve and expand its services to participants. One change to 
the TSP's loan program is scheduled to begin on July 1 which 
will better allocate the costs of loan processing among the 
applicants to the loan program. Another initiative under 
consideration is the addition of one or two new funds, 
lifecycle and lifestyle funds, that participants may select. 
While the addition of these funds is still being reviewed, they 
would provide a more tailored investment option for 
participants based on their preferred investment style--
conservative, moderate, or aggressive--or on their proximity to 
retirement.
    Today, we will hear from witnesses with a variety of 
oversight roles and perspectives on the TSP. They are 
knowledgeable about the day-to-day activities of the TSP and 
they possess a strong understanding of the fiduciary duties and 
the investment policies regarding the TSP.
    I would like to welcome Senator Pryor. I appreciate your 
being here, and before I turn it over to Senator Pryor, I would 
like to note that the Subcommittee's Ranking Member, Senator 
Akaka, very much wanted to be here today. His schedule, 
however, required him to be in Hawaii this weekend. As you 
know, Hawaii is a long way away, so when he goes back to Hawaii 
for the weekend, it is hard for him to be back by Monday 
morning and he was not able to return to Washington in time for 
this hearing.
    In his absence, though, I would like to thank him for the 
record for his valuable contributions that he and his staff 
made in preparing for this hearing. Of course, we will include 
for the record any statements or questions the Senator may wish 
to submit for this hearing. Senator Akaka long has had an 
interest in the TSP and has worked to ensure the TSP operates 
as efficiently as possible on behalf of Federal employees. I 
look forward to continuing to work with Senator Akaka on any 
legislative initiatives that we might pursue regarding the TSP.
    With that, I would like to again welcome Senator Pryor and 
invite you to make some opening remarks. Thank you.

               OPENING STATEMENT OF SENATOR PRYOR

    Senator Pryor. Thank you, Mr. Chairman. If you would 
entertain a motion, I would love for the next time we have this 
meeting, we accommodate Senator Akaka's schedule and just hold 
the meeting in Hawaii. Could we do that? [Laughter.]
    Is that possible? [Laughter.]
    I want to thank you, Senator Fitzgerald, for your great 
leadership on this issue. I know that this is something that 
you are very concerned about and have spent a lot of time on. 
We truly appreciate all the work that you have done.
    Considering the significant abuses in the mutual fund 
industry which have recently come to light and have cost people 
millions of dollars, it is important for us to know that the 
Thrift Savings Plan has a lot of integrity. It is important for 
Federal employees all across the country to understand that 
their savings are secure and that the fund is being managed 
appropriately. I really have no doubt about that, but I look 
forward to hearing from the panel today about the changes in 
the Thrift Savings Plan and positive things that are happening 
to increase the efficiency in the operations, but at the same 
time still maintaining sound investment options and benefit 
selections at very low cost.
    Mr. Chairman, thank you for holding this hearing today and 
thank you for your leadership on this issue.
    Senator Fitzgerald. Senator Pryor, thank you very much for 
that.
    One thing I want to say before I introduce our panel of 
witnesses is that it is my hope that someday we can create 
private sector mutual funds that would give every American 
investor the same kind of low-cost mutual fund opportunities 
that are now available to Federal employees. The fact of the 
matter is that only Federal employees can get such low-cost 
mutual funds. These are not available to ordinary people who 
are non-Federal employees.
    As shown by those charts over there, a non-Federal employee 
is probably going to have to pay six times as much in costs 
over years of investing as Federal employees. And those costs 
may not seem like a lot, but it is estimated that one basis 
point in additional costs over 30 years of investment can cut 
someone's retirement nest egg by 35 to 40 percent.
    So what it means when a Federal employee can have a mutual 
fund that charges them 11 basis points--in fact, that is 
abnormally high this year because of the costs of charging off 
a computer contract, it may go back down to 6 or 7 basis points 
in the next couple of years--a Federal employee who invests the 
same amount for the same number of years as a non-Federal 
employee who is investing in a private sector mutual fund, the 
Federal employee will have much more money at retirement, and I 
don't think that is fair. My hope would be that we could have 
some reforms that would promote greater disclosure and liberate 
free market forces so that there could be greater competition 
amongst private sector mutual funds.
    So I would now like to proceed to introducing our panel of 
witnesses. Our first witness is the Hon. Andrew M. Saul, who 
serves as Chairman of the Federal Retirement Thrift Investment 
Board that administers the TSP. Mr. Saul has been general 
partner in Saul Partners, LLP, in New York City since 1986. He 
has served as Chairman of the Board for Cache, Inc., and is a 
trustee for the Metropolitan Museum of Art and other 
organizations. He is Commissioner for the Metropolitan 
Transportation Authority for New York City and also sits on the 
Board of Overseers for the Wharton School of Finance at the 
University of Pennsylvania.
    Our second witness is Gary A. Amelio, who has served as 
Executive Director of the TSP since June 2003. Mr. Amelio has 
extensive experience in pension plan management and 
investments, having served as Senior Vice President and 
Managing Director of the Retirement and Investment Services 
Department of PCN Bank in Pittsburgh, Pennsylvania. In 
addition, Mr. Amelio has over 20 years of banking experience, 
specifically in the areas of employee benefits, executive 
compensation, tax, and fiduciary duties.
    Third on our panel today is Alan Lebowitz, the Deputy 
Assistant Secretary for Program Operations at the Department of 
Labor's Employee Benefits Security Administration, or EBSA. Mr. 
Lebowitz has served in this capacity since 1984 and has 
overseen the Department's annual audit program of the TSP and 
its fiduciaries since the TSP's first full year of operation in 
1988. Mr. Lebowitz has extensive experience with employee 
benefit plans and fiduciary duties, having previously served as 
Assistant Administrator for Fiduciary Standards at the Office 
of Pension and Welfare Benefit Programs at the Department of 
Labor.
    Our fourth witness is James W. Sauber, who serves as 
Chairman of the Employee Thrift Advisory Council that advises 
the Federal Retirement Thrift Investment Board on matters 
pertaining to the administration and investment of TSP funds. 
Mr. Sauber is Director of Research for the National Association 
of Letter Carriers, which is one of the 15 employee 
organizations identified by statute to participate in the 
Council. He has over 16 years of experience with the Council 
and has served as the Council's Chairman since September 2003.
    Our fifth and final witness is Blake R. Grossman, who is 
Global Chief Executive and Managing Director of Barclays Global 
Investors. Since 1988, Barclays or its predecessor, which was 
Wells Fargo, I believe--Barclays bought Wells Fargo's Global 
Investment subsidiary?
    Mr. Grossman. Exactly.
    Senator Fitzgerald. Since 1988, Barclays or its predecessor 
has won the competitive bid to manage the investments of four 
of the five TSP funds. Mr. Grossman has primary 
responsibilities for Barclays' investment strategies globally, 
as well as the institutional businesses based in the United 
States. In this capacity, he oversees the team managing TSP and 
its assets. And, for full disclosure purposes, I would like to 
state that I know personally the Chairman of Barclays Bank in 
London, Matthew Barrett, from the time that he was Chairman of 
Bank of Montreal, with which my family is affiliated. I have no 
authority over awarding the contract to Barclays, but I did 
want to disclose that. [Laughter.]
    Again, I would like to thank our witnesses for being here 
today to testify. In the interest of time, your full statements 
will be included in the record and we ask that you limit your 
opening remarks to 5 minutes.
    Mr. Saul, you may begin. Thank you.

 TESTIMONY OF ANDREW M. SAUL,\1\ CHAIRMAN, FEDERAL RETIREMENT 
                    THRIFT INVESTMENT BOARD

    Mr. Saul. Good morning, Senator Fitzgerald and Senator 
Pryor. My name is Andrew Saul and I am the Chairman of the 
Federal Retirement Thrift Investment Board. The Board 
administers the Thrift Savings Plan for Federal employees and 
members of the uniformed services. I am accompanied today by 
Gary Amelio, the Board's Executive Director.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Saul appears in the Appendix on 
page 33.
---------------------------------------------------------------------------
    My four fellow Board members and I serve in a part-time 
capacity. I might also say, Senator, that Gordon Whiting, one 
of our other Board members, is here and sitting behind Mr. 
Amelio.
    By statute, the Board members are responsible for policy 
decisions affecting the investment and management of the TSP. 
The Executive Director carries out our decisions and directs 
the plan's day-to-day operations. The five Board members and 
the Executive Director are fiduciaries and, as such, are 
required to act solely in the interest of the Thrift Savings 
Plan's participants and beneficiaries.
    When I and two of my fellow Board members last appeared 
before this Subcommittee in November 2002 at our confirmation 
hearing, then-Chairman Akaka graciously yet firmly made us 
aware of the difficult situation that we faced in assuming our 
new roles as Board members. This warning proved to be an 
understatement as we entered an embattled agency.
    The outgoing Executive Director took a number of actions 
just before his abrupt departure that demoralized the staff, 
many of whom had built the program from the beginning. 
Expensive lawsuits and investigations were sprouting up. 
Rancorous battles were underway with other agencies. The costs 
of the failed recordkeeping system project had not been charged 
to participants. And decisions had to be made immediately on 
whether to go forward with the new recordkeeping system project 
at all.
    I and my fellow Board members entered this environment, and 
working with the seasoned career staff, methodically sorted 
through these matters, keeping the new system and other 
projects on track and moving forward as we restored essential 
relationships.
    Our first order of business was to address the agency 
leadership issue. We conducted an open and orderly nationwide 
search for an Executive Director that resulted in the selection 
of Gary Amelio, a private sector pension and investment expert. 
The Board was confident that Mr. Amelio's 22 years of private 
sector experience would result in the betterment of the Thrift 
Plan for the participants and we have not been disappointed.
    He immediately dealt with the implementation of the new 
recordkeeping system, settled the lawsuits to the benefit of 
the plan participants, and working with the Board members, 
reestablished professional, respectful relationships with other 
agencies without diminishing independent fiduciary leadership.
    Mr. Amelio has proven his leadership of the agency's career 
staff, established productive cooperation with the various 
employing agencies of government, and developed an outstanding 
rapport with the unions and associations that comprise the 
Employee Thrift Advisory Council. As a result of his efforts, 
Mr. Amelio has received favorable recognition for the plan in 
the pension industry and has already received two national 
awards in recognition of his performance. This achievement 
signals the turnabout originally sought by this Subcommittee.
    When the TSP was first conceived in the early 1980s by 
Senator Ted Stevens, it was designed to be an efficient, low-
cost vehicle securing retirements for a large and diverse group 
of Federal employees. Congress established the TSP using a 
diversified, passively managed index fund approach with a 
reasonable limit on the number of investment choices.
    The Board has developed investment policies and adopted 
sound administrative practices in furtherance of these 
Congressional goals. The results have been what we believe 
Senator Stevens and his colleagues intended when they undertook 
the reform of the Federal retirement system 20 years ago.
    Over the years, Congress has carefully considered proposals 
to change the TSP, adopting improvements and extending coverage 
as appropriate to new employee groups. At the same time, it has 
set aside seemingly well-intentioned proposals that would have 
moved the TSP away from its fundamental strategy. This 
restraint has preserved the basic commitment to investment 
choices which are well managed, inexpensive, and appropriate 
for a long-term investment strategy.
    In view of Chairman Fitzgerald's recent efforts to 
emphasize the value to investors of low administrative costs, 
we are pleased that the Thrift Savings Plan offers participants 
a diversified selection of investment options and a competitive 
array of plan benefits at an extremely low cost. In 2002, total 
participant expenses were 10 basis points. An additional one 
basis point of expense was offset with forfeitures. Two-
thousand-and-three charges were unusually high because we had 
to charge 3 basis points to account for the expense associated 
with the earlier failed recordkeeping project. For 2005, we 
project that the cost to participants could be as low as 6 
basis points.
    Legislative improvements to augment benefits, simplify plan 
administration, and provide new investment funds, have been 
beneficial for participants. An example is the extension of 
plan participation to members of the uniformed services 2 years 
ago. In only 2 years, nearly 400,000 members have become 
voluntarily contributing to the plan to supplement their 
retirement benefits. We are proud to have the opportunity to 
make this program available to them.
    I would like to bring one potential legislative improvement 
to the attention of the Subcommittee today and that is the 
elimination of TSP open seasons. The Board supports eliminating 
open seasons because it would expand participant access to the 
TSP and simplify Plan administration. We also believe it would 
increase participation and contribution levels.
    Open seasons were useful when the Plan was conceived 
because they provided a structure for initial implementation. 
They are no longer useful in a daily value plan environment. 
Indeed, they restrict the opportunity for employees to make 
contribution elections, and more damaging, delay eligibility 
for automatic 1 percent in matching contributions to newly-
hired employees.
    The Board has previously supported legislative proposals, 
including one introduced by Senators Akaka and Warner on 
December 13, 2001, that would have overcome the latter barrier 
by providing these benefits as soon as new employees join the 
TSP. We would support similar legislation again.
    We are also reviewing a second potential legislative issue, 
a change in the current fiduciary insurance provision in our 
statute. Currently, the agency must purchase such insurance. 
Self-insurance, however, is not allowed. We are in the process 
of examining whether it makes better economic sense for the 
Plan to cover its own risks rather than to pay premiums to 
private insurers. The staff analysis is expected to be 
completed this summer. Depending on the findings, the Board may 
subsequently seek legislative authority allowing us the option 
to either purchase insurance or self-insure as the fiduciaries 
would determine.
    In this first 9 months as executive director, Mr. Amelio 
has dealt decisively with the major challenges facing the TSP. 
He has initiated necessary changes to the TSP loan program and 
is preparing a proposal to provide new investment allocation 
strategies based upon the existing Plan fund options. Mr. 
Amelio will also be initiating a major revision of our 
communication materials with an emphasis on participant 
education.
    With your permission, I would like to introduce Gary Amelio 
to the Subcommittee for his remarks.
    Senator Fitzgerald. Mr. Amelio.

  TESTIMONY OF GARY A. AMELIO,\1\ EXECUTIVE DIRECTOR, FEDERAL 
               RETIREMENT THRIFT INVESTMENT BOARD

    Mr. Amelio. Good morning, Chairman Fitzgerald and Senator 
Pryor. My name is Gary Amelio and I have served as Executive 
Director of the Federal Retirement Thrift Investment Board 
since June 2003. I came to the agency with 22 years of banking, 
pension, and investment experience. I am pleased to appear 
today to discuss the challenges the agency has addressed over 
the past 9 months and to outline our future agenda. The 
challenges that face the TSP today offer opportunities to 
improve service for the plan's participants tomorrow.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Amelio appears in the Appendix on 
page 37.
---------------------------------------------------------------------------
    First, however, I would like to compliment this 
Subcommittee and its predecessors on the design of the TSP. 
Since arriving, I have told everyone who will listen that this 
plan has an excellent combination of investment options, 
benefit selections, and low costs. Any retirement professional 
would reference the TSP as the optimum retirement plan. That 
reflects positively on the vision of its Congressional 
designers as well as the fortitude of those who have kept it 
true to its original principles over the past 18 years.
    With 3.2 million participants and $130 billion in assets, 
the TSP is the largest plan of its kind in the world. The 
participation rate is very high, the contribution levels well 
above average, and support among participants for the program 
is strong. Our roll-out of the state-of-the-art recordkeeping 
system last year ensures that we will be able to continue the 
efficient delivery of investment products and benefits to 
participants well into the future.
    Although a variety of new features were introduced with the 
new system, improvement is still needed. For example, the roll-
out of the new system last year, we experienced difficulty in 
promptly servicing the increased volume of participant calls to 
the service center. A request for proposals for a parallel call 
center to ensure uninterrupted service and improved overflow 
capacity has been issued. A selection is expected soon and the 
new call center will be operating later this year.
    Based upon well-documented industry standards, I am 
concerned about the excessive use of the TSP loan program. At 
the end of 2003, the plan held over 934,000 loans. Almost 40 
percent of these were issued in the last year. During 
implementation of the new system, a loan churning problem was 
uncovered. The administrative burden and cost to the plan and 
the inconvenience to the participants is significant. Three 
reforms that will reinforce to participants the importance of 
borrowing from their TSP accounts only as a last resort were 
recently announced and will be implemented in July. The changes 
make the system fairer for all participants and consistent with 
private sector loan practices.
    An important issue that required immediate attention when I 
arrived was the pending litigation between the agency and a 
contractor in an earlier failed effort to build a recordkeeping 
system. It was my decision to settle the lawsuits and to accept 
$5 million, which was paid back into the accounts of TSP 
participants. A total of $41 million had been spent on the 
unsuccessful project and the ultimate cost to each participant 
was 36 cents per $1,000 of account balance. The settlement 
allowed us to move forward and refocus on providing investments 
and benefits for our participants.
    Mutual fund trading and 401(k) plans has been a high 
profile subject recently and I am sure there are questions 
about the TSP's experience since it has become daily valued. 
The staff has reviewed participant trading practices and 
discovered no issues of concern. Indeed, only 146 participants, 
that is 0.0046 of 1 percent, have traded more frequently than 
twice a week. Interestingly, some of these traders held fewer 
shares at the end of the trading period. In other words, they 
lost money. The agency staff is currently reviewing guidelines 
just released by the Department of Labor which describe 
appropriate fiduciary actions in addressing such practices and 
will develop a recommendation for handling such accounts.
    In regard to product enhancement, the agency staff is 
preparing a recommendation for the Board members that the TSP 
offer lifestyle or lifecycle investment options for TSP 
participants. The lifestyle approach is designed to reflect an 
investor's investment profile, for example, aggressive, 
moderate, or conservative. The lifecycle approach permits an 
investor to select the date upon which he or she would start 
withdrawing assets from the account, such as at retirement. In 
either case, the new life options would be invested solely in 
combinations of the five existing TSP investment funds using 
different allocations depending upon the investment objective.
    Life investment options are professional asset allocation 
and rebalancing tools for participants who may not have the 
time or knowledge to manage account assets on their own. 
Professional research indicates that 80 to 90 percent of 
defined contribution plan participants fall into this category, 
as evidenced by their failure to rebalance their accounts. 
Indeed, the average age of a TSP FERS participant is 43.8 years 
and this group has 47 percent of its assets invested in stable 
value and fixed funds. By definition, this group has at least 
20 years until retirement and will likely need portfolio 
diversification to achieve their retirement goals.
    Agency research to date indicates that a life product is 
very inexpensive to implement. There is no doubt that the 
participants who embrace life professional asset allocation and 
rebalancing models will enhance the retirement values of their 
accounts over time.
    Later this month, I expect to present to the Board and the 
Employee Thrift Advisory Council the result of months of 
research, including interviews with numerous investment 
providers who responded to our request for information on life 
options and our recommendation for this new investment product. 
My goal is to obtain insight from the Council and policy 
decisions from the Board that will allow us to have this option 
ready for implementation next year.
    In the meantime, we are moving forward to substantially 
upgrade our web, print, and video communication materials. This 
is, of course, a long-term project. The Board members and I 
view the enhancement of communication materials as a priority. 
I am also aware that the Members of the Subcommittee have 
expressed concerns in this regard. A participant satisfaction 
and input survey will be part of the communication upgrade 
process, although such initiative is just now in the formative 
stage.
    Other enhancements will be reviewed in the coming year as 
we, in Mr. Saul's words, take what has been an excellent plan 
to the next level. We will be pleased to take your questions. 
Thank you.
    Senator Fitzgerald. Mr. Lebowitz.

 TESTIMONY OF ALAN D. LEBOWITZ,\1\ DEPUTY ASSISTANT SECRETARY 
      FOR PROGRAM OPERATIONS, EMPLOYEE BENEFITS SECURITY 
            ADMINISTRATION, U.S. DEPARTMENT OF LABOR

    Mr. Lebowitz. Good morning, Mr. Chairman and Senator Pryor. 
I appreciate the opportunity to appear before you today to 
address the Labor Department's activities with respect to the 
Federal Employee Retirement System and its Thrift Savings Plan. 
My name is Alan Lebowitz. I am the Deputy Assistant Secretary 
for Program Operations of the Employee Benefits Security 
Administration. Accompanying me and sitting immediately behind 
me is Ian Dingwall, our Chief Accountant.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Lebowitz appears in the Appendix 
on page 40.
---------------------------------------------------------------------------
    EBSA oversees approximately 730,000 private sector pension 
plans and millions of private sector health and welfare plans 
that are subject to the Employee Retirement Income Security Act 
of 1974, known as ERISA. EBSA-covered pension plans hold over 
$4 trillion in assets and cover more than 45 million workers.
    Title I of ERISA establishes rigorous standards of 
fiduciary conduct for persons who are responsible for the 
administration and management of pension and other benefit 
plans, including the requirement to act solely in the interests 
of participants and beneficiaries, to act prudently, and to 
avoid transactions defined in the statute as prohibited. Under 
ERISA, fiduciaries are personally liable for losses resulting 
from their breach of these standards.
    The Federal Employees Retirement System Act of 1986 charges 
the Department with administering and enforcing substantially 
similar provisions of law governing fiduciary conduct for the 
TSP.
    As with private plans under ERISA, under FERS, the 
Secretary of Labor has broad investigative and auditing 
authority concerning the activities of the FERS Board and its 
Executive Director in the administration of the TSP. However, 
in contrast to ERISA, in 1988, Congress amended FERS to 
specifically exclude lawsuits by the Secretary against Board 
members or the Executive Director. While other fund fiduciaries 
and participants may still sue the Board and the Executive 
Director, the 1988 amendments do not permit any monetary 
recovery against these individuals. The Department and others 
may still bring actions for recovery of losses against other 
TSP fiduciaries, such as investment managers.
    FERS specifically directs the Secretary of Labor to 
establish a program to carry out audits to determine the level 
of compliance with the Act's fiduciary standards and 
prohibitions on certain types of transactions. The statute 
specifies that the Secretary may contract with a qualified non-
government organization. Currently, KPMG LLP conducts the 
audits under the supervision of EBSA's Chief Accountant.
    To guide the auditors, the Department has developed a 
strategic fiduciary oversight program that uses detailed guides 
to test for compliance. Audits must cover all significant 
activities of the fund as well as the controls in place at the 
TSP investment manager, Barclays Global Investors, that ensure 
the accuracy of financial information, compliance with FERS, 
and operational efficiency and management effectiveness. The 
BGI management fee is reviewed for consistency with fees 
charged by other similar institutions in conformance with 
contractual agreements.
    At the conclusion of each audit, the Department issues a 
report for formal response by the Executive Director on behalf 
of the Board. The Department's representative and auditor meet 
with the Board at least once a year to highlight significant 
issues from the audit, to present the Department's future audit 
schedule, and to answer Board members' questions.
    The Department's audit recommendations range from 
compliance with FERS to economy and efficiency issues that may 
provide cost savings opportunities for the TSP. Most 
significantly, the Department communicated many recommendations 
over several years addressing TSP system and software control 
weaknesses which influenced the TSP Board's decision to replace 
the TSP recordkeeping system in June 2003.
    Since the inception of the audit program, the Department 
has made more than 800 recommendations, 95 percent of which 
have been accepted. The remaining recommendations chiefly 
address controls for the TSP new recordkeeping system.
    Certain abusive practices within the mutual fund industry, 
namely market timing and late trading, which have recently come 
to light, have raised concerns and prompted the Department to 
take certain steps. The Department recently performed a limited 
review of BGI's collective trust funds in which the TSP has 
equity investments to determine whether further investigation 
is warranted. Based upon this preliminary review, we do not 
believe that TSP participants are adversely exposed to costs 
and investment risks due to late trading and market timing.
    The Department also recently announced that it is 
conducting reviews of mutual funds, similar pooled investment 
funds, and service providers to such funds to determine whether 
there have been any violations of ERISA. The results of these 
reviews will be used to later determine if any FERS issues 
require further investigation.
    We are working very cooperatively with Chairman Saul and 
Executive Director Amelio and the members of the Board. We 
anticipate continuing a free and candid exchange of views that 
should benefit the TSP participants and beneficiaries and help 
us to fulfill our oversight responsibility.
    This concludes my prepared remarks. Thank you for the 
opportunity to testify before you today regarding this 
important matter. We look forward to working with the Members 
of the Subcommittee and the Thrift Savings Plan fiduciaries in 
this endeavor, and I will be happy to answer any questions you 
may have.
    Senator Fitzgerald. Thank you, Mr. Lebowitz. Mr. Sauber.

  TESTIMONY OF JAMES M. SAUBER,\1\ CHAIRMAN, THRIFT ADVISORY 
                            COUNCIL

    Mr. Sauber. Good morning, Chairman Fitzgerald and good 
morning, Senator Pryor. My name is James Sauber. Thank you for 
the invitation to participate in this hearing.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Sauber appears in the Appendix on 
page 46.
---------------------------------------------------------------------------
    The Employee Thrift Advisory Council is a 15-member body 
established by the Federal Employees Retirement System Act of 
1986 to advise the Thrift Investment Board on matters related 
to the TSP. The 15 members are nominated by organizations 
identified in the FERSA statute. These organizations represent 
Federal and postal employees, both active and retired, at all 
levels of the U.S. Government, from wage earners to senior 
executives. I was nominated to serve on the Council by my 
employer, the National Association of Letter Carriers, and was 
elected to serve as Chairman of the Council last fall.
    As you know, the TSP is a very important and popular part 
of the Federal pension system. It has remained popular despite 
the poor performance of the stock market in recent years. The 
TSP's continued popularity reflects the wisdom of its designers 
from this Committee and on the good judgment of the Federal 
workforce, who have continued to invest and save for the long 
run in order to enjoy a more secure retirement.
    The TSP is also popular because of the solid performance of 
the Thrift Investment Board over the years and because Congress 
has continued to give it strong backing. In practical terms, 
that means the Thrift Board has provided TSP participants good 
service while keeping expense ratios very low, and Congress has 
protected the TSP by insulating it from budgetary and political 
pressures. We are confident that these positive aspects of the 
Plan will be maintained.
    ETAC has a constructive relationship with the Board. Lines 
of communication are wide open and the trust built up over many 
years has allowed us to work well together. That trust and 
communication has also helped us overcome difficulties that 
have occasionally arisen.
    A recent example of such difficulties was the delayed 
launch of the new recordkeeping system last year. I can assure 
you that none of the organizations that make up ETAC were happy 
about the ill-fated contract with AMS to upgrade the 
recordkeeping system or the cost it imposed on TSP 
participants. At our first meeting last fall, we were given a 
comprehensive briefing on the Board's decision to reach a 
settlement to end the litigation with AMS and Executive 
Director Amelio answered all our questions.
    In the context of the Board's long record of success, most 
ETAC members agree that the episode with the recordkeeping 
system should be seen as an aberration. We are pleased that the 
Board has finally successfully implemented the new system. 
Chairman Saul and Executive Director Amelio deserve great 
credit for managing the agency through a difficult period.
    At the most recent ETAC meeting, we also covered two other 
important issues, possible changes to the TSP loan program and 
the Board's investigation of so-called lifecycle and lifestyle 
investment options. In general, there is a consensus among ETAC 
members that many TSP participants are making excessive use of 
the TSP loan program. Instead of using it as a last resort, 
some employees are using it as a short-term money management 
tool at the expense of their long-term financial interests.
    Most of us agree that charging a nominal fee for the loans 
makes sense as a way to discourage excessive use of the loans 
and to more fairly allocate their administrative costs. 
However, not all organizations that make up ETAC favor the 
restrictions on second TSP loans. We look forward to discussing 
the proposed changes at our next ETAC meeting later this month.
    There is also broad interest in the lifecycle investment 
options that the Board is investigating. Too many Federal 
employees fail to rebalance their investments as they age. A 
lifecycle fund that allowed the gradual reallocation of 
investments among the five TSP funds could be very useful. 
Although ETAC members are concerned about the added cost of 
offering a lifecycle fund, we look forward to reviewing the 
Board's research on the issue at our next meeting.
    Finally, I would like to comment on two TSP-related 
legislative matters. First, ETAC fully supports the Board 
proposal to eliminate TSP open seasons, a concept that draws 
heavily on a bill sponsored by, or proposed by Senator Akaka in 
the 107th Congress. Open seasons made sense when the Thrift 
Board was a new agency with limited administrative 
capabilities. Today, with the new recordkeeping system and its 
capacity to value accounts daily and to implement investment 
allocations instantaneously, open seasons are no longer 
necessary. Eliminating them will save money and make 
participation in the TSP more flexible and attractive to all 
employees.
    Second, the six ETAC members from Postal employee 
organizations wish to alert the Subcommittee to a proposal made 
by the President's Commission on the U.S. Postal Service that 
could adversely affect the TSP. The Commission recommended that 
Congress consider removing Postal employees from various 
pension, health insurance, and other benefit programs that 
currently cover all Federal employees. Among such programs are 
FERS and the TSP. All six organizations representing letter 
carriers, Postal workers, postmasters, and supervisors, 
strongly oppose this idea.
    In the case of the TSP, removing 800,000 employees from the 
plan would raise the cost of retirement investing for Postal 
employees and Federal employees alike and unfairly deny Postal 
employees access to this excellent program. We urge the 
Subcommittee to oppose any proposal to exclude Postal employees 
from the TSP.
    That concludes my oral testimony. I have submitted my full 
statement for the record. Thanks again for the opportunity to 
testify and I will be happy to answer your questions.
    Senator Fitzgerald. Mr. Sauber, thank you very much. Mr. 
Grossman.

 TESTIMONY OF BLAKE R. GROSSMAN,\1\ GLOBAL CO-CHIEF EXECUTIVE 
    OFFICER AND MANAGING DIRECTOR, BARCLAYS GLOBAL INVESTORS

    Mr. Grossman. Thank you. Good morning, Chairman Fitzgerald 
and Senator Pryor. My name is Blake Grossman. I am the Co-Chief 
Executive Officer at Barclays Global Investors. Thank you for 
inviting me to discuss Barclays Global Investors in its role as 
the external asset manager for the Federal Thrift Savings Plan.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Grossman appears in the Appendix 
on page 51.
---------------------------------------------------------------------------
    We appreciate the concerns of this Subcommittee in 
safeguarding the interests of all investors, including Federal 
employees, particularly in light of certain practices in the 
mutual fund industry that have recently come under close 
scrutiny. We are honored to have served as the investment 
manager for the TSP since 1988 and we take our responsibilities 
for the management of the retirement assets of the Federal 
workforce very seriously. We take great pride throughout BGI in 
maintaining the highest ethical and fiduciary standards and you 
have our commitment that no compromises to these standards are 
acceptable.
    To understand why Federal employees should feel confident 
that BGI is managing their retirement assets responsibly, it is 
important to say a word about who we are, the service we 
provide for the TSP, and how we keep the costs associated with 
trading and investing as low as possible.
    BGI was founded in 1971 as part of Wells Fargo Bank in 
California. Today, we are owned by Barclays PLC, one of the 
world's leading financial services providers. We remain 
headquartered in San Francisco with approximately 1,100 
employees in California and elsewhere in the United States, and 
1,000 more employees worldwide serving the needs of our global 
clients.
    With more than $1 trillion in assets under management, BGI 
is the world's largest index manager and, in fact, created the 
first index strategy in 1971, just one of many financial 
innovations that we have pioneered. Since our founding, BGI has 
been focused on a single global investment philosophy which we 
call total performance management. In brief, our objective is 
to deliver superior investment results by efficiently capturing 
the returns of market indexes while rigorously controlling all 
risks and minimizing trading and other implementation costs. 
This simple yet profound approach is rather unique in the 
industry. It helps us avoid investment fads or dependence on 
star managers or stock pickers. It has been the foundation of 
the way that we manage money for over 30 years and we believe 
it has served our clients very well.
    As I noted, since 1988, one of those clients has been the 
TSP. BGI manages four of the five investment options, each an 
index fund that tracks a widely followed stock or fixed income 
benchmark available to TSP participants. It is important to 
note that we have successfully retained this relationship in 
regular highly competitive bidding processes. Also worthy of 
note is the fact that BGI's services to the TSP are completely 
focused on investment management. We don't provide any other 
services.
    Mr. Chairman, as you know, the costs and expenses of 
investing to track from investment performance, and therefore 
from ultimate retirement benefits. There are three primary 
sources of cost and expense: The administrative cost, 
transaction costs, and investment management fees.
    The majority of BGI's clients are large institutional 
investors, such as the TSP, and the average account size for 
our clients in the United States, in fact, is $880 million. 
Because of our size and the ability to commingle the assets of 
our clients, we offer considerable economies of scale for our 
investors and, therefore, we are able to charge lower 
investment and administrative fees to these clients. 
Sophisticated trading strategies and large trading volume also 
enable us to minimize transaction costs in all of our 
investment activities, a key to both our long-term success in 
index management and the ability to keep the costs for the TSP 
at the very low expense levels that have been previously cited.
    I also want to emphasize that our focus on transaction is 
completely on obtaining best execution. We don't use soft 
dollars or directed brokerage or anything else in connection 
with the TSP assets that would conflict with getting best 
execution.
    Before concluding, allow me to comment on certain practices 
in the mutual fund industry that have recently come under 
scrutiny. We recently conducted a thorough review at BGI of 
these issues, including late trading, market timing, and 
personal trading by BGI personnel. I am pleased to report that 
we have found no issues at BGI of significant concern or any 
practices that compromise our fiduciary responsibilities to the 
TSP or any of our other clients.
    Mr. Chairman, as a citizen, I appreciate the service that 
Federal employees provide for this country and every Federal 
employee should feel confident that we at BGI are managing his 
or her TSP retirement assets in a responsible fashion. We 
appreciate the trust that has been placed in BGI in this 
regard. We look forward to maintaining an open dialogue with 
the TSP and Members of this Subcommittee on these key issues in 
the future.
    Thank you very much for the opportunity here today to share 
our views.
    Senator Fitzgerald. Mr. Grossman, thank you very much and 
thank you for being here.
    I would like to start with Mr. Amelio, and ask about the 11 
basis points in expenses that the TSP C Fund had last year. 
Several of your other funds also seem to come in around 11 
basis points in gross expenses, and the expense ratio tended to 
go down to 10 basis points after you netted out some 
forfeitures of people who start as Federal employees, start 
paying in, and then leave. Their money is forfeited and that 
goes back into the fund.
    I know your management fee is confidential. It was the 
subject of competitive bidding, but Barclays has filed to keep 
that confidential under the FOIA so we won't go beyond where we 
can go, but I would like you to describe in general terms what 
is the breakdown of that 11 basis points in total expenses? How 
much, for instance, is administrative cost?
    Mr. Amelio. I would say roughly--and this is very much of a 
ballpark based upon the overall expenses--the budget that goes 
in is about $110 million and virtually all of that, probably up 
over 90 percent, I would say, is administrative cost, which is 
far the reverse that you would find in the private sector where 
management fees are a lot higher than administrative costs.
    Senator Fitzgerald. OK. So talking about the 11 basis 
points in expenses in dollars and cents terms, over the five 
funds, the costs in dollars and cents terms are about $110 
million, is that right?
    Mr. Amelio. That is the total cost charged to the plan, 
yes, sir.
    Senator Fitzgerald. OK, and that works out to around 11 
basis points of the total fund assets?
    Mr. Amelio. I am giving you a general number. The 11 basis 
points is an anomaly number. The 11 basis points includes that 
settlement, which is a one-time charge. Normally, we are 
talking about a little over 7 basis points is truly the cost to 
the participants.
    Senator Fitzgerald. OK, so about 3 basis points last year, 
roughly, was for that anomalous charge for charging off that 
ill-fated computer contract, and this Subcommittee, by the way, 
is going to have a full Committee hearing on that issue 
probably sometime later this year, so we are not going to go 
deeply into that ill-fated computer contract at this hearing. 
But roughly last year, how much in dollars and cents was 
charged for the computer contract last year?
    Mr. Amelio. Forty-one million was the lawsuit. You have to 
net that against the $5 million we recovered back, so about $36 
million.
    Senator Fitzgerald. About $36 million?
    Mr. Amelio. Yes, Senator.
    Senator Fitzgerald. So you had $110 million in total 
expenses. If we take out $36 million for the computer contract, 
then let us describe your remaining expenses. I want to say 
that your administrative expenses approximate about $54 million 
a year?
    Mr. Amelio. That is at the NFC, yes. There are other 
administrative costs. I have the fact sheet in front of me. 
About 3 percent of the entire number are administrative 
expenses. Everything else is a variety. The National Finance 
Center in New Orleans represents roughly 44 percent of overall 
expenses. The AMS write-off was 30 percent. Other various IT 
contracts and what not were about 9 percent. The Board here in 
Washington is about 8 percent of expenses. Investments are 3 
percent. Printing for employee participant communications is 3 
percent. Rent is 2 percent, and everything else is 3 percent.
    Senator Fitzgerald. Printing is how much?
    Mr. Amelio. About three percent.
    Senator Fitzgerald. OK. Now 44 percent is the National 
Finance Center. That is the backroom operation in Louisiana, I 
believe?
    Mr. Amelio. Yes.
    Senator Fitzgerald. It has 433 Agriculture Department 
employees----
    Mr. Amelio. Yes.
    Senator Fitzgerald [continuing]. That are providing the 
backroom services to run the day-to-day operations of the TSP. 
Has the Board ever competitively bid out the administrative 
services? How did we come to have the Agriculture Department 
doing this?
    Mr. Amelio. The National Finance Center, which is, I guess 
for the lack of a better term, a subsidiary of the Department 
of Agriculture, actually stepped in at the plan's creation back 
in the mid- to late-1980s, around 1986. It was always intended, 
and I am basically reading from the historical transcripts, 
that these services would be competitively bid out over time. 
There have been certain times when the services have been 
looked at up until very recently when we put out a request for 
proposal last year on the parallel call center. But there is 
certainly a history that it was understood that these services 
would be looked at to be competitively bid.
    Senator Fitzgerald. But they have never been competitively 
bid.
    Mr. Amelio. That is correct.
    Senator Fitzgerald. Does the statute not require you to 
competitively bid out your services?
    Mr. Amelio. The statute requires that we operate the plan 
at the lowest possible cost that we are able to.
    Senator Fitzgerald. How do we know we are operating at the 
lowest possible cost with respect to administrative services if 
we haven't competitively bid those out?
    Mr. Amelio. That is a very good question, Senator. That is 
one reason why we have taken the first step in looking at the 
parallel call center. We will be able to judge the existing 
cost versus what the parallel call center costs.
    Senator Fitzgerald. You are new. You just came in last 
year----
    Mr. Amelio. Yes.
    Senator Fitzgerald [continuing]. And that is one of the 
things you identified that you wanted to work on.
    Mr. Saul. If I might just add something, I have been here 
actually over a year now and one of the things you have to 
realize, we could not really competitively bid out the work 
done by the National Finance Center prior to now because the 
old system wasn't properly documented. With the new system that 
we have installed in July that you have heard about, the 
automatic daily recordkeeping system, it is much more 
transportable. It is transportable. The old system was a 
hodgepodge put together, as you can understand, from its 
inception and really was not--there was no ability to even have 
another vendor operate the system. So it wasn't even a question 
of whether you should have, could have, would have. It was not 
a system that could have been done.
    And what we have done since we have come there, we have 
slowly--we have, as you heard in both of our testimonies, we 
had an awful lot of priorities that in the opinion of the Board 
were much more painstaking and had to be accomplished right 
away. We took things in order of priority.
    As you see now, we have gone forward with taking some of 
the functions at the NFC and putting them out. We now have a 
parallel call center, as Gary Amelio has described. We are now 
in the process of bidding out a mainframe operation, which is 
the actual mainframe computer operation, to a third party, and 
we are also now having our software of our new system done by a 
third party vendor.
    So the beginning phases are there of starting to 
competitively bid out the work that was done by the National 
Finance Center. But I think this is a very complex thing. We 
have just gone through a new system introduction and we have to 
be very careful that we don't do anything at all to destabilize 
the system, as you can well appreciate, Senator. While costs 
are very important, and I don't mean to minimize costs at all, 
I think it is a question of priorities and I think we have 
taken the first steps, which were well thought out, and we will 
see how these steps work and then we will go from there.
    Senator Fitzgerald. Just for the record, you all agree that 
this is the big expense. We had $110 million in expenses last 
year. About 30 percent of that was for charging off that one-
time hit for the computer contract, but we are talking 
something like $54 million in administrative expenses, or 44 
percent of the expenses of the funds are for administrative 
functions.
    By comparison, you said only 3 percent of the expenses are 
the actual investment that Mr. Grossman's company is doing, and 
that is competitively bid out. The investment operations have 
been competitively bid out, but we haven't bid out the 
administrative backroom operations. Instead, we have the USDA 
National Finance Center in Louisiana doing it and that is the 
lion's share of the expenses for the fund.
    Have you gotten any requests for proposals back yet? You 
said you put out an RFP?
    Mr. Amelio. Actually, we have completed the RFP process, 
received them, reviewed, them, and the recommendation is in the 
final stages. We will be prepared very shortly to sign a 
contract with one of the vendors and have the parallel call 
center up and running hopefully within a few months.
    In addition to the parallel call center, Senator----
    Senator Fitzgerald. This is just for the call center, 
though?
    Mr. Amelio. Yes, the parallel call center.
    Senator Fitzgerald. OK.
    Mr. Amelio. There are two other pieces that were recently 
discussed and voted on at the last Board meeting, as well, and 
one is we will be moving the mainframe computer, and a separate 
function is the software support of that mainframe and we will 
also be moving those.
    Senator Fitzgerald. How much will be left in the National 
Finance Center then?
    Mr. Amelio. A significant amount. Well, all of the jobs, 
but a significant portion----
    Senator Fitzgerald. What will they be doing?
    Mr. Amelio. Still a significant portion of the call center 
as well as what we call data input. When the forms come in, 
they get processed into the system. All of the mailing of the 
statements, check processing, things of that nature.
    Senator Fitzgerald. OK.
    Mr. Amelio. And the accounting.
    Senator Fitzgerald. So you are a long way from--couldn't 
you bundle everything that the National Finance Center is doing 
and bid out that, or are there not firms out there that would 
do the full range of services?
    Mr. Amelio. We are not there yet. I don't know if there is 
any vendor out there that would be big enough that would be 
able to absorb everything. We haven't got that far down the 
pike yet.
    Senator Fitzgerald. OK. Mr. Lebowitz, has the Department of 
Labor ever looked at the various services of the TSP and 
questioned whether the TSP Board was getting the lowest cost 
services?
    Mr. Lebowitz. Many of the questions you asked were 
questions that we have asked over the years in the course of 
our audit program. My understanding is that the Board in the 
past had done a couple of feasibility studies as to the 
appropriateness, or in statutory terms, prudence of continuing 
the relationship with the National Finance Center.
    But as Chairman Saul and Mr. Amelio have both said, it was 
not terribly feasible to consider moving outside of the 
National Finance Center when the underlying software was not 
portable. It was, as described, a hodgepodge of systems tied 
together. Documentation for that system was lacking in a number 
of respects, as our auditors pointed out many times over the 
years.
    Now that the new system is completed and up and running, a 
whole range of options present themselves to the Board that, as 
a practical matter, were not available before.
    Senator Fitzgerald. Now, here in Washington, we have 100 
employees who are doing the management of the Government Bond 
Fund, in which we have the non-marketable government securities 
that are not traded publicly, but which the TSP Government Bond 
Fund--what fund is that, Mr. Amelio?
    Mr. Amelio. You are referring to the G Fund, which we refer 
to as the Stable Value Fund.
    Senator Fitzgerald. The Stable Value Fund.
    Mr. Amelio. Yes.
    Senator Fitzgerald. That is invested in government bonds--
--
    Mr. Amelio. Yes.
    Senator Fitzgerald [continuing]. But non-marketable 
government bonds, is that not correct?
    Mr. Amelio. That is correct.
    Senator Fitzgerald. And for those assets, the 
administrative work and the investment work, or just the 
investment work for that, is done here in Washington?
    Mr. Amelio. The Board's staff in Washington does handle 
the--I don't want to call it an investment piece because we are 
not actively managing, but they handle all of the work with 
respect to the G Fund, which is administrative processing, the 
movement of money back and forth, the accounting of it. In 
addition, we have a legal staff, a benefits policy staff, 
product development----
    Senator Fitzgerald. Do you need 100 people to do that?
    Mr. Amelio. Well, no. I was just going through each of the 
offices. We do a lot of things other than just the G Fund, as 
well.
    Senator Fitzgerald. How many people are dedicated to just 
the G Fund?
    Mr. Amelio. It would probably--I don't know, maybe a dozen.
    Senator Fitzgerald. OK. So that is only a small portion of 
the 100 people that you mentioned.
    Mr. Amelio. Yes.
    Senator Fitzgerald. OK. Now, Mr. Saul, in your written 
testimony you discussed, and in your oral testimony you 
discussed, two possible legislative changes regarding the TSP. 
One was that you would like the legislative authority for the 
TSP to self-insure, and it is your impression that the current 
statute does not grant the TSP the authority to self-insure, is 
that correct?
    Mr. Saul. That is correct, Senator. The general counsel of 
our agency has issued a legal opinion that we do not have the 
ability to self-insure under the existing statutes as she reads 
them. We are not even 100 percent sure at this point, as I said 
in my testimony. We need to do some more research on this.
    What has happened is because of the costs, as you are 
aware, of D&O insurance skyrocketing because of all the abuse 
that has been out there in the corporate sector, our rates for 
our insurance have skyrocketed and we are paying----
    Senator Fitzgerald. Do you know how much you are paying?
    Mr. Saul. Yes. I was just going to say, we are paying--last 
year, I think it was approximately $400,000 for $5 million 
worth of liability insurance, and this insurance, by the way, 
does not cover the Board or the Executive Director because that 
is, as I think you said in your opening statement, it is 
statutory. We cannot be sued under the Federal statutes. What 
this policy does is provide insurance for the other employees 
of the agency.
    The Board was very upset that we were paying $400,000 or 
$500,000. As a matter of fact, the year before, we were paying 
$500,000 for this kind of coverage and, therefore, it became an 
issue as to whether we could use this $5 million pool that we 
have that is actually paid--filled in by the other----
    Senator Fitzgerald. Did your insurer suggest any steps that 
you could take to lower your----
    Mr. Saul. There is none. As a matter of fact, it was very 
difficult even to get some carrier to bid on this thing. We had 
quite a bit of problems when the RFP went out. There were very 
few insurance firms that even wanted to participate in this 
endeavor, so----
    Senator Fitzgerald. You suggest it sounds very high risk--
--
    Mr. Saul. Well, it is----
    Senator Fitzgerald [continuing]. And I wouldn't think it 
would be.
    Mr. Saul. Frankly, I don't think it is so high risk, but 
the industry assumes that it is high risk because of what has 
happened in the corporate sector. But at any rate, we are 
paying a lot of money for very little coverage at this point, 
Senator.
    Senator Fitzgerald. Mr. Sauber, has your council looked 
into this issue?
    Mr. Sauber. No. This is a subject that has arisen only 
recently--the first time we discussed it was at our last 
meeting and I am sure we will continue to discuss it.
    I would like to, if I could, just comment on an earlier 
subject, when you mentioned the National Finance Center. I 
think it, and this is just coming from my life representing 
workers, that it deserves to be said that the National Finance 
Center has served the Thrift Savings Plan quite well. One of 
the reasons the TSP's expense ratios are so low is that the 
Finance Center has done a very good job.
    So I think it is worth stating that and I think a number of 
the organizations in the Thrift Savings Plan that represent 
public employees would be very concerned about decisions to 
contract out NFC work if it led to the creation of jobs that 
didn't have health insurance, pensions and that sort of thing. 
So I think as a body, our ETAC Council would be concerned about 
any decision to look at outside vendors and would want these 
issues to be given a fair hearing.
    Senator Fitzgerald. Even if it is lower cost and it would 
benefit the postal workers that you represent by lowering the 
cost?
    Mr. Sauber. We certainly are interested in having the 
lowest cost plan possible, but we also care that decent jobs be 
available to our members, as well. So I think there is an issue 
of balance for us. We are, of course, interested in the lowest 
possible cost and I think we have gotten a really good deal 
from the National Finance Center over the years.
    Senator Fitzgerald. What about the printing costs? That 
was, did you say, 2 or 3 percent of the overall cost too, Mr. 
Amelio?
    Mr. Amelio. I did, Senator. That is right.
    Senator Fitzgerald. And who does the printing for the TSP?
    Mr. Amelio. We have an outside service. UNICOR, the Federal 
Prison Industries does the printing.
    Senator Fitzgerald. The Federal Prison Industries, OK. Is 
that competitively bid?
    Mr. Amelio. Not in the past.
    Senator Fitzgerald. It hasn't been in the past?
    Mr. Amelio. I am advised that we were not able to in the 
past. Apparently, there was a rule that Federal agencies had to 
utilize this particular agency for their printing services in 
the past.
    Senator Fitzgerald. So that could be contradictory to the 
statutory requirement that you use the lowest cost.
    Mr. Amelio. I would--I believe so.
    Senator Fitzgerald. You might want to look at all these 
things in preparing legislative recommendations, such as with 
respect to self-insurance. You might want to catalog some of 
these discrepancies because I would like to help you keep this 
as low cost as possible.
    Mr. Grossman, with respect to Barclays, you apparently 
commingle the TSP funds with the funds of hundreds, presumably, 
of other plan managers that you bring together. You have over 
$1 trillion invested, or you manage and you have presumably 
hundreds of 401(k) plans and other types of plans with an 
average size of $800 million, correct?
    Mr. Grossman. That is correct, yes. The TSP assets are 
commingled with other qualified investors in our collective 
funds, and qualified investors being primarily defined benefit 
and defined contribution plans, also foundations and 
endowments. However, it is important to note that the funds in 
which the TSP has invested are not open to hedge funds or 
individual investors. Individual investors can only invest, let 
us say, in a defined contribution plan in these funds.
    Senator Fitzgerald. OK. So you have both defined 
contribution and defined benefit plans participating in your 
index funds, and you commingle all of those monies together.
    Mr. Grossman. That is correct.
    Senator Fitzgerald. OK. And that allows you to achieve a 
lot of these economies that you are talking about?
    Mr. Grossman. Yes. And we have a series of different funds 
depending on the particular characteristics. So in the funds 
that we are managing for TSP, I could tell you that in terms of 
the assets, they are predominately defined benefit plans as 
opposed to defined contribution, but there are some defined 
contribution plans in there, as well.
    Senator Fitzgerald. OK. And this all began as Wells Fargo 
years ago, you said 1971. Was it Wells Fargo that came up with 
what is now Barclays Global Investors?
    Mr. Grossman. That is right. It was operating at that time 
as a division of Wells Fargo Bank called Wells Fargo Investment 
Advisors that was the pioneer in developing index strategies, 
particularly for institutional clients in the United States.
    Senator Fitzgerald. It sounds like you invented indexing 
before Vanguard, which claims to have invented indexing.
    Mr. Grossman. Technically, yes, we did. [Laughter.]
    They get more publicity than we do, but they advertise 
more.
    Senator Fitzgerald. OK. Now, you actually have some 
interesting strategies to keep the costs as low as possible. As 
I understand it, if--let us say that I buy, today, some of your 
C Fund, but Senator Pryor sells an equivalent amount of his C 
Fund shares. You will, in fact, try to net out our transaction 
before you go into the market and adjust your holdings of the 
S&P 500 Index, for example, is that correct? Could you explain 
how that works?
    Mr. Grossman. Yes, that is correct. What we do on the 
trading side is, first, look for any opportunities to cross or 
offset activity such as that, and it can happen at a couple 
different levels. The first level is at the fund level. So 
within a particular pool fund looking to offset contributions 
and redemptions to the full extent possible and therefore 
eliminating the need to trade completely at that level.
    Senator Fitzgerald. And you want to eliminate the need to 
trade because trading drives up transaction costs, is that 
correct?
    Mr. Grossman. Exactly.
    Senator Fitzgerald. And who do you use to execute your 
trades? Who does Barclays use? Do you have your own in-house 
trading firm?
    Mr. Grossman. For executing trades for the TSP plan, we use 
strictly outside broker dealers that we choose based on best 
execution.
    Senator Fitzgerald. And you are not allowing--you said you 
don't use soft dollar arrangements, so in other words, you are 
not giving anybody permission to charge you an exorbitant 
brokerage commission in return for them providing you with 
research.
    Mr. Grossman. That is exactly right. We don't use soft 
dollars anywhere in the business. We don't believe in them. We 
think they present a conflict of interest.
    Senator Fitzgerald. Do you do any directed brokerage?
    Mr. Grossman. We don't do any directed brokerage for the 
TSP assets or the funds in which they are invested. We do some 
directed brokerage in other parts of our business, where a 
client is hiring us to do something on a custom transition or 
restructuring basis, and there, we do have an affiliated broker 
that we use for that activity, but it is on a fully disclosed 
basis where the client is hiring us to do that, or in the case 
of a mutual fund, where it is approved by the fund board.
    Senator Fitzgerald. Do you do any revenue sharing?
    Mr. Grossman. Any revenue sharing? Certainly not in 
connection with the TSP assets in any way, no, we do not.
    Senator Fitzgerald. When you say not in connection with the 
TSP assets, could you be more specific? You may do revenue 
sharing with another client's funds that may be commingled with 
the TSP funds, is that not correct?
    Mr. Grossman. I am not sure, Senator, exactly what the 
definition of revenue sharing is, because I don't know that 
there is a standard definition out there. In our mutual funds, 
for example, we do provide revenue, we do provide funds to 
intermediaries in exchange for shareholder servicing, services 
that they are providing on those funds and it is something that 
is part of the ongoing regular business relationship.
    Senator Fitzgerald. Do you share part of your investment 
fee with brokerage firms in return for the brokerage firms 
distributing your funds?
    Mr. Grossman. We do not engage in any revenue sharing like 
that in exchange for shelf space. It is strictly where they are 
providing shareholder servicing for us. For example, they are 
providing aggregating account orders, they are putting together 
buy and sell activity which we get on an aggregate basis from 
those entities. They are providing recordkeeping. They are 
providing account servicing, covering telephone call centers 
and so on for the clients that they are servicing. There are 
costs associated with that, they get compensated by us for 
providing those services. But that is something that is quite 
different, as we look at it, than paying for shelf space, which 
we do not believe in.
    Senator Fitzgerald. Does Barclays only have index funds or 
do you have actively managed funds that you offer?
    Mr. Grossman. We have actively managed funds, as well.
    Senator Fitzgerald. That are open to retail investors? Can 
retail investors invest in your index funds?
    Mr. Grossman. In our index funds, they can. The primary 
avenue for retail investors to invest in our index funds is 
through our I shares, strategies which are exchange traded 
funds. So those trade on the exchanges. They are open and 
available to any investor. That is the primary avenue for 
retail investors or other mutual funds, that they can be 
obtained by retail investors, but generally, they are really 
targeted at defined contribution plans as opposed to the direct 
retail marketplace.
    Senator Fitzgerald. Now, it is my understanding that you 
have some pretty sophisticated software that enables you to 
match the S&P 500 index. As one company in the index gets 
larger, you will make purchases to reflect the changes in 
composition of the S&P 500 index fund and the other indexes 
that you track. Can you describe your sophisticated software, 
or what I hear is sophisticated software?
    Mr. Grossman. Yes, certainly. I would be happy to. We do 
have a variety of analytics and software that we use for 
tracking not only the S&P 500 index but all of the indexes that 
we are tracking, including all of those that we are using on 
behalf of the Thrift Savings Plan. And the way the software 
works is it allows us to monitor with a very high degree of 
precision what is the composition of each of the indexes we are 
looking to track and to understand any changes in that index.
    So, for example, if Standard and Poors makes a change in 
the index, if they remove a company and add a company, as they 
periodically do in rebalancing the S&P 500 index, we will then 
make the appropriate changes in the underlying portfolios, 
selling, if necessary, the company that is being removed from 
the index, buying the company being added, doing that in a way 
that looks to control the tracking error very precisely while 
also minimizing any trading cost, any frictional cost 
associated with that.
    One other point to make with respect to index funds is that 
if you look at something like the S&P 500, it really does 
provide a good mirror of a buy and hold strategy, because if 
there are no constituent changes to the S&P 500, then one could 
track it quite well by an old approach, because if, for 
example, the weighting of a company goes up because its stock 
price has increased, that doesn't directly trigger any need for 
a trade to take place because the weight in the index and the 
weight in the fund will go up or down pretty much in lockstep 
with each other.
    So the trading activity and the sophisticated software we 
use is primarily around facilitating client contributions and 
redemptions and dealing with changes to the index itself as 
opposed to the need to track it just because of market 
fluctuations.
    Senator Fitzgerald. Mr. Saul.
    Mr. Saul. I am sorry, Senator. I would like to go back, if 
I might have permission, to this whole questioning of the 
National Finance Center, because I think it is important from 
the Board's perspective and my perspective as chairman of the 
agency to be very clear where we stand with this issue.
    We have had a very successful historical relationship with 
the National Finance Center. The agency and the National 
Finance Center grew together from really ground zero. As you 
know, there was $1 billion in here to $131 billion, very few 
participants, there are now over 3.2 million participants that 
are availing themselves of the TSP.
    So I think the Board has to be very careful, and the 
executive director, how we proceed with the National Finance 
Center because cost is very important and you know from our 
record where we have run one of the most competitive, as you 
stated, funds in the country, cost is certainly on our radar 
scope. I don't mean to minimalize this and I respect your 
concern with cost, but we have to be very careful about the 
reliability and the service, also, because the last thing we 
need is any kind of a breakdown or any kind of questioning of 
the reliability and the accuracy of the numbers that our 
participants are getting.
    So while in 1986 it was very clear that the NFC did not 
have a lockhold on this agency and that it was to be bid out, 
as I stated, the system that developed was an antiquated 
system. There was no way it could have been bid out until this 
summer when we put this new documented, automated system in.
    Senator Fitzgerald. I want to ask you about that. I was in 
banking in the private sector and was general counsel for a 
bank holding company that managed a number of small community 
banks. It was common for smaller banks to enter into a contract 
with the large money center bank to manage their backroom 
operations, and the computer operations of the small bank would 
not be compatible initially with the large money center bank's 
computer systems. As part of the contract to manage the 
computer records, the large money center bank would come in and 
do a conversion of the small bank's computer systems over to 
the new system.
    Certainly, I appreciate the efforts of the people in the 
national call center, and I am very conscious about their jobs 
as well. But at the same time, you have a statutory obligation 
to provide this at the lowest cost and I am concerned that we 
have no evidence that we are getting the lowest possible cost 
here or even anything close to the lowest possible cost.
    Mr. Saul. But if you follow the histories, when this 
present Board and this executive director took over 
approximately 14 months ago, we had priorities here and the 
first thing we were faced with was a failed system. We were in 
the midst of developing a new system. So the most important 
thing to the Board was to be sure that we got our new computer 
system up and running, that it was running successfully. It was 
never a question of ignoring the cost. Now once the new system 
is up, if you take a look at what Gary Amelio and the Board----
    Senator Fitzgerald. Now, is the new system compatible with 
that in which other backroom operations, such as that provided 
by, say, Hewitt and Associates----
    Mr. Amelio. Yes.
    Senator Fitzgerald [continuing]. Could adapt and run?
    Mr. Amelio. Yes, sir.
    Senator Fitzgerald. It is?
    Mr. Amelio. Yes. We have a state-of-the-art system now.
    Senator Fitzgerald. OK, and it is used by other 401(k) 
managers, employers around the country, I presume?
    Mr. Amelio. It is very widely utilized. The vendors that 
have put our system in have put many systems in around the 
country.
    Senator Fitzgerald. Who was the vendor who ultimately did 
it after they replaced AMS?
    Mr. Amelio. MATCOM was the primary vendor, but under them 
doing a lot of the specific work vis-a-vis the concept of daily 
defined contribution is SunGard, and you will find their name 
throughout the banking industry.
    Senator Fitzgerald. It is very common.
    Mr. Saul. So if I just might go on, what happened was as 
the new system came up, it became evident to us that we would 
look into some of these other concerns, and in the last 6 
months we have now established or are in the process of 
establishing a back-up call center. We have now taken the 
software maintenance of the new software away from the National 
Finance Center and given that to the vendor that has----
    Senator Fitzgerald. Are you getting lower fees now from the 
National Finance Center as a result of taking----
    Mr. Saul. We are getting lower fees, yes.
    Senator Fitzgerald. They charged you about $54 million last 
year. What would they have been charging historically the year 
before and 10 years ago? Would you know those fees? What 
direction have those fees at the National Finance Center been 
going in dollars and cents terms?
    Mr. Amelio. The overall numbers have been going up, but 
obviously as the size of the plan goes up, the overall cost 
goes up every year. What has concerned me is the cost per 
participant has risen significantly.
    Senator Fitzgerald. So instead of getting an economy of 
scale, we are getting the reverse with the National Finance 
Center?
    Mr. Amelio. That is correct. I have a chart in front of me 
that was provided \1\ and the cost per participant started in 
1991 at a little over $6 per participant and it has now worked 
its way up to over $18 per participant.
---------------------------------------------------------------------------
    \1\ The chart referred to appears in the Appendix on page 125.
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    Senator Fitzgerald. So it has tripled?
    Mr. Amelio. Yes.
    Senator Fitzgerald. Now, you weren't in a mutual fund 
before you came to the TSP, you were in pension management?
    Mr. Amelio. Yes. I was with a large bank----
    Senator Fitzgerald. PNC Bank.
    Mr. Amelio [continuing]. The PNC, and we provided the 
services like the National Finance Center would do for private 
sector companies and State and local government----
    Senator Fitzgerald. Well, in your experience, as a fund 
grew larger, weren't you trying to get an economy of scale so 
that the cost would go down per participant?
    Mr. Amelio. There is no question that costs needed to go 
down. The larger the plan, the larger the scale, the lower the 
cost per participant. That is undisputed.
    Senator Fitzgerald. But that normal economy of scale is 
being turned on its head in this case with the fees from the 
National Finance Center tripling over the last 10 or 12 years.
    Let me shift to just a few more issues I want to get into, 
and this does relate to costs, as well. A lot of people are 
taking loans from their TSP plans. It was mentioned by several 
of the panelists that loans are a bad idea unless you 
absolutely have to have them as a last resort. Do you think 
there may be evidence that some TSP participants are taking 
them not as a last resort, but just as available credit, and 
you want to take some steps to deter people from taking loans 
except as a last resort? One of your ideas is to charge a $50 
administrative fee.
    Let us talk about the loans. How many people took loans 
last year? There are 3.2 million participants----
    Mr. Amelio. We have 934,000 loans. Forty percent of that 
number was issued last year.
    Senator Fitzgerald. So a lot of the loans came last year?
    Mr. Amelio. They were reissued, yes.
    Senator Fitzgerald. Reissued?
    Mr. Amelio. Some of them were new. We don't have the 
breakdown between what is new and what was a loan that existed 
and paid off----
    Senator Fitzgerald. It sounds like about 25 percent of TSP 
participants have a loan outstanding?
    Mr. Amelio. That is correct, because many of the people 
that have a loan actually have two outstanding. So about a 
quarter of the plan's participants have outstanding loans. 
Three-quarters have no loans.
    Senator Fitzgerald. Now, do the TSP fund make money or lose 
money on the loans they make?
    Mr. Amelio. I am sorry, Senator?
    Senator Fitzgerald. Do we make money on the loans, are they 
done at cost, or do we lose money on the loans?
    Mr. Amelio. At this point, prior to the implementation of 
the new procedures, it does cost the plan's participants money 
because there is a cost involved with processing the loans. So 
we are----
    Senator Fitzgerald. But we are charging an interest rate, 
right?
    Mr. Amelio. Yes, but that is paid back into the 
participant's account.
    Senator Fitzgerald. So there is a cost that the other 
participants bear when somebody--and what was the cost? Can you 
quantify the cost for last year?
    Mr. Amelio. We can. It was about $47 a loan, which is why 
we came up with the $50 number, which actually is in line with 
industry standards.
    Senator Fitzgerald. So we have at least a cost of $47 per 
900,000 employees that has been charged back to the rest of the 
fund. That is costing a lot of money.
    Mr. Amelio. Yes.
    Senator Fitzgerald. Do you know system-wide how much it is 
costing per year, on average?
    Mr. Amelio. Without multiplying it out, and I don't want to 
make an inaccurate number----
    Senator Fitzgerald. OK.
    Mr. Amelio [continuing]. But it is big. That was one of the 
reasons that we imposed the loan cost as a user fee so that 
participants who----
    Senator Fitzgerald. Is the TSP providing sufficient 
education to participants that they shouldn't do this unless 
they are really in dire financial straits? Does anyone want to 
comment on that? Maybe Mr. Sauber?
    Mr. Sauber. I believe that the kinds of education programs 
available for TSP participants really varies across Federal 
agencies. Many agencies do a very good job of holding seminars 
on how to learn about the TSP, to learn about the TSP loan 
program, but I am not aware of a systemwide effort to educate 
TSP participants. I know that is an issue that Senator Akaka is 
very concerned about and something that the ETAC would like to 
talk about in the context of introducing new lifecycle or 
lifestyle funds.
    Senator Fitzgerald. What is the reason for allowing the 
loans?
    Mr. Amelio. Loans are not a retirement plan feature. The 
reason that they are so popular in the industry is they are an 
inducement to get participants to participate in the plan. 
Participants are----
    Senator Fitzgerald. Don't you have enough inducements here 
in that you have the lowest cost mutual fund in the world? 
Isn't that a sufficient inducement?
    Mr. Amelio. It was pointed out to me, the loan program is 
statutory, certainly, so it is mandated by statute. But to go 
on, it is just well known----
    Senator Fitzgerald. Is it in the original statute?
    Mr. Amelio. Yes.
    Senator Fitzgerald. It was?
    Mr. Amelio. Yes.
    Senator Fitzgerald. OK. So that is one thing we could look 
at at the statutory level.
    Mr. Amelio. You could. I do think if you eliminated loans--
I am an opponent of loans personally, professionally, but I 
would tell you that if you eliminated loans, your participation 
rates would decrease significantly, and that is not just true 
with the Federal workforce. That is true across the entire 
American workforce. I think every study bears that out.
    Senator Fitzgerald. Do you think a $50 fee will defray the 
cost to the other members of the TSP?
    Mr. Amelio. I definitely do. I believe it will cover costs, 
yes.
    Senator Fitzgerald. OK. Mr. Sauber, did you want to 
comment?
    Mr. Sauber. I was just going to say, that it struck us as a 
very nice option that employees like to have because there is 
resistance when you first sign up: Employees ask themselves, 
``Well, what if I really need the money? What if I really get 
in a jam? '' This loan program answers that issue. So I do 
think it is important, at least, for some participants, to 
overcome that first barrier to actually join the plan.
    But I think our primary concern is to ensure that these 
costs be allocated fairly and I think applying a nominal fee 
like that would cover the cost would be fair to the rest of the 
participants. As Gary Amelio mentioned, three-quarters don't 
have loans.
    Senator Fitzgerald. I would think the cost per loan has got 
to be higher than $50. There is loan documentation that goes 
along with this. You have a lot of involvement of your people 
at the Finance Center.
    Mr. Amelio. It is difficult to quantify these costs because 
many of the people and the systems that are doing the work of 
processing loans at other times do other things. But we believe 
that we are fairly close. And at $47--somebody back here did 
the math without a calculator--the cost to the plan is about 
$43 million. Now, that is over a period of time. That is not 1 
year, because some of these loans extend out over 5 years, some 
15 for residential. But for the existing loan base, it costs 
the participants $43 million, all participants.
    Senator Fitzgerald. When you say a residential loan, are 
you referring to something like a mortgage?
    Mr. Amelio. It would not be secured, but yes, the purpose 
of the loan would be to purchase a principal residence.
    Senator Fitzgerald. Or provide the down payment before they 
get a mortgage from a commercial----
    Mr. Amelio. Yes.
    Senator Fitzgerald [continuing.] So they are borrowing the 
down payment?
    Mr. Amelio. Yes. That is probably what is going on.
    Senator Fitzgerald. Mr. Lebowitz.
    Mr. Lebowitz. Mr. Sauber actually, I think, made most of 
the points I was going to make. We have certainly heard over 
the years in the private sector context of regulating plans 
under ERISA that the availability of loans is generally 
regarded as critical to inducing employees to participate and 
to participate at the higher levels permitted under the plan. 
Generally speaking, the surveys seem to show that employees are 
concerned about not having access to the money in circumstances 
when they might need it.
    Senator Fitzgerald. What about the cost of the lifestyle 
fund that you may create? Mr. Amelio, would you care to comment 
on that? What do you think the likely cost of that would be? It 
sounds like a good idea, but if it winds up costing a lot of 
money, that may alter the calculation.
    Mr. Amelio. Obviously, I need to temper my remarks by the 
fact that we have completed the RFI process but have not yet 
gotten approval to go through the RFP process, so I want to be 
careful not to violate any Federal procurement laws.
    I would tell you based upon the extensive research we have 
done with over 20 vendors already, we believe the cost will be 
extremely minimal. I just think it is--to use lay terms, dirt 
cheap, and I believe that this feature is the greatest thing to 
hit plans since sliced bread. I mean, it is just badly needed 
and it is very inexpensive. I don't think it will alter those 
numbers you have behind you on the chart in the least.
    Senator Fitzgerald. What effort do you undertake to monitor 
customer satisfaction with the services of the TSP? Is there a 
survey that you ask people to fill out, or----
    Mr. Amelio. At this point, I don't believe historically any 
customer survey has ever been done by the TSP, but we do have 
one in the works now. It is just in the initial stages and will 
be rolled out with our new communications plan.
    Senator Fitzgerald. Will you do that online as opposed to 
printing at great expense?
    Mr. Amelio. I believe we will limit it to online because 
that is the most cost effective way to do it.
    Senator Fitzgerald. Are more TSP members declining to take 
their TSP prospectus in the mail annually and instead getting 
them to just look it up online?
    Mr. Amelio. I don't have those numbers, because actually, 
participants don't make requests of us. They make their 
requests through individual agencies, so it depends on what 
each agency is looking at. The figures I can give you are this. 
We recently went to what we will call the paperless statement 
route, since we have gone from two statements a year to 
quarterly, and what we have indicated to the participants are 
you can get your statements through the website online or you 
can call and get your balances over the thrift line. If you 
want a paper statement, you have got to request one.
    Now, at this point, over 300,000 participants, or about 10 
percent, have requested paper statements. That is very low. 
What I think is interesting is about a third of those made 
their requests online, so---- [Laughter.]
    The complaints that the folks who need paper statements 
because they don't have access to the Internet just doesn't 
hold water.
    Senator Fitzgerald. So you are going to continue your 
efforts to try and go in a more paperless direction?
    Mr. Amelio. Absolutely. It saves us $10 million a year. We 
will continue to make them available if somebody wants it, but 
we are going to continue to strive----
    Senator Fitzgerald. Note to the Federal Prison Industies, 
right?
    Mr. Amelio. Yes.
    Senator Fitzgerald. OK. That pretty much does it. I think 
this has been a good hearing. I want to compliment all those 
who are involved in the TSP, from the auditors at the 
Department of Labor to the Board members, to the outside 
vendors. I want to compliment you because I think despite a few 
bumps in the road, such as that computer contract in the last 
couple of years, I think it is a very well managed fund, and I 
think those numbers speak for themselves. It is much more low 
cost than any of the private sector funds that are out there, 
and, in fact, as I said at the beginning, I hope some day that 
we can give members of the general public the same kind of low 
cost investing options that we have given Members of Congress 
and other Federal employees.
    So I want to thank you for coming here. I compliment you on 
the job you are doing, and we will look forward to staying in 
touch with you as new issues arise. Please give Senator Akaka 
and me a recommendation of legislative changes that you would 
like to see because we will try and help you with that.
    Thank you very much. This hearing is adjourned.
    [Whereupon, at 12:49 p.m., the Subcommittee was adjourned.]



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