    [House Hearing, 109 Congress]
    [From the U.S. Government Publishing Office]

    H.R. 1578, REAL ESTATE INVESTMENT TRUSTS [REITS]: CAN THEY IMPROVE THE
                              THRIFT SAVINGS PLAN?

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

                                    HEARING

                                   before the

                     SUBCOMMITTEE ON THE FEDERAL WORKFORCE
                            AND AGENCY ORGANIZATION

                                     of the

                                  COMMITTEE ON
                               GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                       ON

                                   H.R. 1578

      TO AMEND TITLE 5, UNITED STATES CODE, TO PROVIDE FOR A REAL ESTATE
          STOCK INDEX INVESTMENT OPTION UNDER THE THRIFT SAVINGS PLAN

                                   __________

                                 APRIL 19, 2005

                                   __________

                               Serial No. 109-79

                                   __________

           Printed for the use of the Committee on Government Reform

      Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                                   index.html
                          http://www.house.gov/reform

                                     ______

                        U.S. GOVERNMENT PRINTING OFFICE
    23-944                      WASHINGTON : 2005
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                         COMMITTEE ON GOVERNMENT REFORM

                         TOM DAVIS, Virginia, Chairman
    CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
    DAN BURTON, Indiana                  TOM LANTOS, California
    ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
    JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
    JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
    GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
    MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
    STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
    TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
    CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
    JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
    CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
    MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
    DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
    GINNY BROWN-WAITE, Florida           C.A. DUTCH RUPPERSBERGER, Maryland
    JON C. PORTER, Nevada                BRIAN HIGGINS, New York
    KENNY MARCHANT, Texas                ELEANOR HOLMES NORTON, District of
    LYNN A. WESTMORELAND, Georgia            Columbia
    PATRICK T. McHENRY, North Carolina               ------
    CHARLES W. DENT, Pennsylvania        BERNARD SANDERS, Vermont
    VIRGINIA FOXX, North Carolina            (Independent)
    ------ ------

                        Melissa Wojciak, Staff Director
           David Marin, Deputy Staff Director/Communications Director
                          Rob Borden, Parliamentarian
                           Teresa Austin, Chief Clerk
              Phil Barnett, Minority Chief of Staff/Chief Counsel

         Subcommittee on the Federal Workforce and Agency Organization

                        JON C. PORTER, Nevada, Chairman
    JOHN L. MICA, Florida                DANNY K. DAVIS, Illinois
    TOM DAVIS, Virginia                  MAJOR R. OWENS, New York
    DARRELL E. ISSA, California          ELEANOR HOLMES NORTON, District of
    KENNY MARCHANT, Texas                    Columbia
    PATRICK T. McHENRY, North Carolina   ELIJAH E. CUMMINGS, Maryland
    ------ ------                        CHRIS VAN HOLLEN, Maryland

                                   Ex Officio
                          HENRY A. WAXMAN, California

                         Ron Martinson, Staff Director
                    Chris Barkley, Professional Staff Member
                                Reid Voss, Clerk
              Mark Stephenson, Minority Professional Staff Member

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on April 19, 2005...................................     1
    Text of H.R. 1578................................................     6
    Statement of:
        Foley, Hon. Mark, a Representative in Congress from the State
          of Florida, Co-Chair of the House Real Estate Caucus; and
          Hon. Richard E. Neal, a Representative in Congress from the
          State of Massachusetts, Co-Chair of the House Real Estate
          Caucus.....................................................    21
            Foley, Hon. Mark.........................................    21
            Neal, Hon. Richard E.....................................    23
        Saul, Andrew M., chairman, Federal Retirement Thrift
          Investment Board; and Gary A. Amelio, executive director,
          Federal Retirement Thrift Investment Board.................    28
            Amelio, Gary A...........................................    36
            Saul, Andrew M...........................................    28
        Wechsler, Steven, president and CEO, National Association of
          Real Estate Investment Trusts; Dr. Roger Ibbotson,
          chairman, Ibbotson Associates, professor of finance, Yale
          University; and Amy Schioldager, managing director, head of
          U.S. indexing products, Barclays Global Investors..........    54
            Schioldager, Amy.........................................    96
            Wechsler, Steven.........................................    54
    Letters, statements, etc., submitted for the record by:
        Amelio, Gary A., executive director, Federal Retirement
          Thrift Investment Board, prepared statement of.............    38
        Cummings, Hon. Elijah E., a Representative in Congress from
          the State of Maryland, prepared statement of...............   113
        Davis, Hon. Danny K., a Representative in Congress from the
          State of Illinois, prepared statement of...................    11
        Ibbotson, Dr. Roger, chairman, Ibbotson Associates, professor
          of finance, Yale University, prepared statement of.........    86
        Neal, Hon. Richard E., a Representative in Congress from the
          State of Massachusetts, Co-Chair of the House Real Estate
          Caucus, prepared statement of..............................    24
        Porter, Hon. Jon C., a Representative in Congress from the
          State of Nevada, prepared statement of.....................     4
        Saul, Andrew M., chairman, Federal Retirement Thrift
          Investment Board, prepared statement of....................    31
        Schioldager, Amy, managing director, head of U.S. indexing
          products, Barclays Global Investors, prepared statement of.    98
        Wechsler, Steven, president and CEO, National Association of
          Real Estate Investment Trusts, prepared statement of.......    56

    H.R. 1578, REAL ESTATE INVESTMENT TRUSTS [REITS]: CAN THEY IMPROVE THE
                              THRIFT SAVINGS PLAN?

                                  ----------

                            TUESDAY, APRIL 19, 2005

                      House of Representatives,
          Subcommittee on Federal Workforce and Agency
                                          Organization,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 2:02 p.m., in
    room 2154, Rayburn House Office Building, Hon. Jon C. Porter
    (chairman of the subcommittee) presiding.
        Present: Representatives Porter, Davis, Cummings, Norton,
    and Van Hollen.
        Staff present: Ron Martinson, staff director; B. Chad
    Bungard, deputy staff director and chief counsel; Chris Barkley
    and Shannon Meade, professional staff members; Reid Voss,
    legislative assistant/clerk; Patrick Jennings, detail from OPM
    serving as senior counsel; Michelle Ash, minority senior
    legislative counsel; Mark Stephenson and Tania Shand, minority
    professional staff members; and Teresa Coufal, minority
    assistant clerk.
        Mr. Porter. Usually, when it is this quiet at my house when
    I get home, it is usually because the kids have done something
    wrong. So let me say welcome, and I know that is not the case.
    I thank you all for being here. I would like to bring the
    meeting to order. This is a hearing today on the Real Estate
    Investment Trusts and whether they can improve the Thrift
    Savings Plan.
        Since we do have a quorum present, we will bring the
    meeting to order. Good afternoon. As you know, last Wednesday
    I, along with Representative Chris Van Hollen and
    Representative Tom Davis, our chairman of the Government Reform
    Committee, introduced the Real Estate Investment Thrift Savings
    [REITs] Act, H.R. 1578. As a Member of Congress who represents
    a good share of major growth area in real estate in Nevada and
    Las Vegas, I think it is very important we look at this issue
    today, and that is why we brought the bill forward, as an
    option as investment for the program.
        As you know, there are many other programs, not unlike the
    401(k) plans. Federal employees are given choices in handling
    their own retirement planning through the Thrift Savings Plan.
    The Thrift Savings Plan, however, is lagging behind the private
    sector in the amount of options it offers its employees in its
    defined contribution plan. The TSP offers 5 options; whereas
    the private sector, in some cases, as an average can have close
    to 16 options.
        What we are talking about today is a simple concept and it
    is called diversification. Basic economic principles dictate
    that investors should not place all of their eggs in one
    basket, but must spread their money and risk among different
    types of assets.
        A few years ago, during the tech bubble collapse, many
    Federal employees experienced setbacks in their investment
    portfolios and did not have the option to invest substantially
    in REITs. Federal employees should not be left out in the cold.
    Adding a Real Estate Investment Trust fund option to the TSP is
    the next logical step. With its resilient earnings and lower
    volatility, real estate provides a sound investment over the
    long haul, such as investment in valuable diversification tools
    providing the possibility of strong returns and risk reduction.
        The demand for Real Estate Investment Trusts among 401(k)
    investors has been robust, as they seek to diversify their
    portfolios. In response, the Real Estate Investment Trust
    stocks are increasingly being added as an investment option by
    the private sector in their 401(k) plans, including employers
    such as IBM and General Motors.
        It is no wonder. As this month's Forbes reports, in the
    past 5 years, Real Estate Investment Trusts have outperformed
    the Standard & Poor's 500, up 19.1 percent annually from the
    Bloomberg Real Estate Investment Trust Index, negative 3.2
    percent for the Standard & Poor's. Moreover, from 2000 to 2003,
    when the highest total rate of return on any stock fund in the
    TSP--the C, the S, or the I Funds--was 1 percent, the rate of
    return on the Real Estate Investment Trusts were near plus 20
    percent.
        I mention the recent success of the Real Estate Investment
    Trusts earnings not to raise expectations that the Fund will
    produce this extraordinary result every year. Rather, it shows
    that if a Federal employee had invested in a Real Estate
    Investment Trust Fund in that period of economic downturn, he
    or she could have avoided what for many was a financial
    disaster right on the edge of their retirement plan.
        I would add that the Thrift Savings Board holds the view
    that the Real Estate Investment Trusts are an industry and
    should be viewed like energy, technology, and the like.
    Interestingly, Barclay's Global Investors, which administers
    four of the five TSP Funds for the TSP Board, will state in
    their testimony before us today that the Real Estate Investment
    Trusts real estate are not an interest, but rather, an entirely
    separate asset class.
        And while I am on that subject, let me also compliment the
    TSP Board for its work. I had a chance to read the backup
    testimony, and appreciate the expense ratios and what you have
    done. Although we may not agree on this issue, let me applaud
    you for the work that you are doing. We appreciate it very
    much.
        I truly believe that adding a Real Estate Investment Trust
    to the TSP is a step forward in bringing the benefits of
    diversification to the TSP and thus enhancing the retirement
    benefits for all of our hardworking Federal employees.
        With that said, I know that there are differences of
    opinion, as I mentioned, on what the TSP should look like. I
    look forward to hearing from all of our witnesses today and
    thank you for agreeing to join us.
        [The prepared statement of Hon. Jon C. Porter and the text
    of H.R. 1578 follow:]

    [GRAPHIC] [TIFF OMITTED] T3944.001

    [GRAPHIC] [TIFF OMITTED] T3944.002

    [GRAPHIC] [TIFF OMITTED] T3944.115

    [GRAPHIC] [TIFF OMITTED] T3944.116

    [GRAPHIC] [TIFF OMITTED] T3944.117

        Mr. Porter. I would like to now recognize the ranking
    minority member of the committee, Mr. Davis. Welcome, Mr.
    Davis.
        Mr. Davis. Thank you very much, Mr. Chairman. I appreciate
    it.
        Chairman Porter, members of the committee, we are here to
    discuss a legislative proposal, H.R. 1578, the Real Estate
    Investment Thrift Savings Act. H.R. 1578 would add a Real
    Estate Investment Trust to the Thrift Savings Plan. The TSP is
    a key component of the Federal Employees' Retirement System
    [FERS]. It is a defined benefit retirement plan similar to the
    401(k) plans provided by many employers in the private sector.
    The income that a retired worker receives from the TSP will
    depend on the balance in his or her account.
        For this reason, I am concerned about the process--how,
    when, and why--any investment funds, including REITs, are added
    to the TSP. The act that established the TSP specifically
    states that the Federal Retirement Thrift Investment Board is
    to set investment policies and administer the plan ``solely in
    the interest of the participants and beneficiaries.''
        Indeed, when the Board last added new funds to the TSP, as
    fiduciaries and managers of the TSP, the Board studied various
    investment options and transmitted a legislative proposal to
    Congress that authorized the addition of the S and I Funds to
    the TSP. Representative Connie Morella introduced the
    legislation, and it was enacted on September 30, 1995. This is
    significant because, at this time, the Board and the Employee
    Thrift Advisory Council do not support adding REITs to the TSP,
    and the Board has not submitted a legislative proposal
    recommending that REITs be included in the TSP.
        The process by which funds are added to the TSP is
    important because it goes to the heart of Congress' intent when
    it created the TSP. In reviewing the legislative history for
    the establishment of the TSP, one will find this statement: ``A
    great deal of concern was raised about the possibility of
    political manipulation of large pools of thrift plan money.
    This legislation was designed to preclude that possibility.''
        It goes on to say, ``The committee considered permitting
    any qualified institution to offer employee specific investment
    vehicles. However, the committee rejected that approach for a
    number of reasons. First, there are literally thousands of
    qualified institutions who would bombard employees with
    promotions for their services. Also, even qualified
    institutions go bankrupt occasionally and a substantial portion
    of an employee's retirement benefit would be wiped out. This is
    in contrast to the diversified fund approach which could
    survive a few bankruptcies.''
        It is clear that Congress intended to isolate the TSP from
    political manipulation by creating the Board and emphasizing a
    diversified, broad-based indexing fund approach for the TSP.
    Congress envisioned exactly what is happening today, and I do
    not think we should stray too far from the principles Congress
    laid out in 1986 when the TSP was created.
        Given the political realities, however, I strongly
    recommend that the Board conduct a comprehensive study of
    various investment funds, including REITs, and submit a
    legislative proposal to Congress recommending what funds, if
    any, should be added to the TSP.
        Again, I thank you for calling this hearing and look
    forward to the witnesses, and I yield back any additional time.
        [The prepared statement of Hon. Danny K. Davis follows:]

        [GRAPHIC] [TIFF OMITTED] T3944.003

        [GRAPHIC] [TIFF OMITTED] T3944.004

        [GRAPHIC] [TIFF OMITTED] T3944.005

        [GRAPHIC] [TIFF OMITTED] T3944.006

        [GRAPHIC] [TIFF OMITTED] T3944.007

        [GRAPHIC] [TIFF OMITTED] T3944.008

        [GRAPHIC] [TIFF OMITTED] T3944.009

        [GRAPHIC] [TIFF OMITTED] T3944.010

        [GRAPHIC] [TIFF OMITTED] T3944.011

        Mr. Porter. Thank you.
        Congresswoman, do you have an opening statement?
        Ms. Norton. Mr. Chairman, I am intrigued by this hearing,
    and thank you for calling this hearing, because I think it
    opens up not only an option, but it opens up the opportunity
    for members to find out, for example, why--I think there are
    good reasons why--this fund is lacking in the kind of
    diversification that we find in the private sector. But I need
    to know why.
        I am a big supporter of the TSP. Mr. Chairman, with such a
    bipartisan bill, I hope you will forgive this partisan note. I
    would like us to have more hearings like this about how to
    encourage employers and employees to promote savings for
    retirement in the way the Thrift Savings Plan does, as opposed
    to yanking it out of Social Security. So I am really for
    enhancing the plan to the extent that is consistent with what
    the Board and the Advisory Board, whose job it is to sit on top
    of all this, find to be prudent.
        Off the top of my head--and we all have to understand that
    in Congress it is literally off of our heads--you say to me
    invest in real estate. I said you have me. I am from the school
    that always believed that investment in real estate and land
    was more solid than the stock market. This shows how much I
    know. I am also from the generation that is still a victim of
    the dot com era--I used to have a shirt back then--but I do
    think we all learn that what looks good in one period may not
    be as good in another, which is why the TSP has a reputation
    for being conservative.
        I have to say, Mr. Chairman, I was intrigued by your own
    opening statement, by what you indicated real estate had done
    during these very down years, 2000-2003, while we were down in
    the dumps. That is, what I want to know is, what happened to
    us? I thought we were supposed to be conservatively invested
    during that period, and look at that. The difference that you
    speak of, 20 percent there, and all of us who were invested in
    TSP were at 0.1 percent. I don't know where the conservatism
    got us in that regard, because that is where I would have
    expected us to have done better precisely because the TSP is,
    as we all know, run in a conservative fashion.
        So this might be the right thing to do, and, Mr. Chairman,
    I think you are doing the right thing, that is to say, having a
    hearing before we jump. This Board consists of fiduciaries,
    including their executive director, and I asked my staff to
    find out something about this Board. I wanted to know if this
    Board was in any way political, and they tell me that the
    members don't have to be divided by party; they are all
    appointed by the current President. The Board is nonpartisan.
    Of the five Board members, three were appointed by President
    Bush, one was recommended by Speaker Hastert, and the other was
    recommended by Senator Stevens. They have staggered terms.
        So when this Board tells me go slow, I think we all ought
    to listen. At the same time, I am concerned if there is less
    diversification since, again, the standard gospel is that the
    more diversification the better, of course. There can be a
    point where diversification, I suppose, counts, but on this
    matter, whereas my instinct would be to say why not, I think,
    Mr. Chairman, that I may be the conservative and you may be the
    liberal here, that I would like first to hear from the Board
    before I tell them to risk my money in anything.
        So I appreciate this hearing, because it allows us to hear
    from them and from other witnesses on a very intriguing
    subject, and I appreciate that you have called this hearing for
    that reason.
        Mr. Porter. Thank you very much for the kind comments. I,
    like you, am anxious to hear the testimony and have an
    opportunity to ask some questions ourselves.
        I would like to ask unanimous consent that all Members have
    5 legislative days to submit written statements and questions
    for the hearing record, and any answers to the written
    questions provided by the witnesses also be included in the
    record. Without objection, so ordered.
        I ask unanimous consent that all exhibits, documents, and
    other materials referred to by Members and the witnesses may be
    included in the hearing record, and that all Members be
    permitted to revise and extend their remarks. Without
    objection, so ordered.
        I ask unanimous consent that written statements from IBM
    and the Employees' Thrift Advisory Council be submitted for the
    record. They were invited to speak today but were unable to do
    so. So, without objection, that is also so ordered.
        And it is the practice of the committee to administer the
    oath to all witnesses, but we will wait a moment and introduce
    our first panel. Good friends, we appreciate your being here.
        First, I would like to introduce Mr. Mark Foley,
    Congressman from Florida. And with him is Congressman Richard
    Neal, Representative from Massachusetts. These men are co-chair
    of the House Real Estate Caucus.
        So I begin with Mr. Foley. You are recognized for 5
    minutes.

      STATEMENTS OF HON. MARK FOLEY, A REPRESENTATIVE IN CONGRESS
     FROM THE STATE OF FLORIDA, CO-CHAIR OF THE HOUSE REAL ESTATE
    CAUCUS; AND HON. RICHARD E. NEAL, A REPRESENTATIVE IN CONGRESS
      FROM THE STATE OF MASSACHUSETTS, CO-CHAIR OF THE HOUSE REAL
                             ESTATE CAUCUS

                      STATEMENT OF HON. MARK FOLEY

        Mr. Foley. Thank you very much, Mr. Chairman. My fellow
    colleagues and members of the subcommittee, thank you for
    inviting me here today to testify in favor of the Real Estate
    Investment Thrift Savings Act ``REITs Act.'' As co-chairman of
    the Congressional Real Estate Caucus, I strongly support this
    effort to bring the explosive growth potential of the real
    estate market to over 3 million Federal workers and military
    personnel that participate in the Thrift Savings Plan.
        Chairman Porter's bill will increase the investment options
    available to Federal employees and enhance the retirement
    security of the Federal work force. In fact, the success of
    this option in the TSP could act as a model for its expansion
    into private sector employer-sponsored retirement plans.
        Real Estate Investment Trusts have a proven record of
    success, operating portfolios of investment-grade, income-
    producing commercial, residential, and industrial real estate.
    REITs derive a large portion of their value and most of their
    reliable income from the rents produced by these tangible
    assets.
        And because REITs pay out virtually all of their income to
    shareholders, as required by law, their yields are much more
    impressive than many of the other investment products. In fact,
    non-industry research has shown conclusively that returns from
    real estate investments are much higher than those from other
    investments.
        More recent research has shown that investment returns from
    REITs and the returns from other stocks and bonds make REITs an
    attractive addition to an individual investor portfolio as well
    as those of institutional investors. As a result, more and more
    financial experts are recomending that retirement savings be
    diversified into stocks, bonds, and real estate.
        Until 2001, when the S Fund and the I Fund were added, the
    TSP contained only three options: the C, the G, and the F
    Funds. All three were considered to be low-risk investment
    options over the long term, but the plan was insufficient for
    proper diversification and so other funds were added. Now is
    the time to further expand the TSP by adding a REIT fund to
    those options already available.
        Again, subject to the discretion of the investor, myself
    included, I have diversified my account to all current five
    funds in thrift savings, and I would welcome the chance,
    personally, to be able to have a sixth option.
        Research by the Federal Retirement Thrift Investment Board,
    which administers the Thrift Savings Plan, shows that the
    number of investment options in private sector 401(k) plans
    continues to increase. The Board reported that the percentage
    of private sector companies offering 11 or more options to
    their employees has risen to nearly 70 percent. On the other
    hand, the percentage of companies offering five or less
    options--the TSP currently has five options--has dropped to
    about 1 percent. This makes the Thrift Savings Plan somewhat
    out of step with the private sector retirement plans.
        REITs provide the benefit of diversification and have a
    proven long-term performance. The old adage of don't place all
    of your eggs in one basket certainly holds true today. I have
    always invested a portion of my mother's own personal
    retirement savings in Real Estate Investment Trusts because I
    believe them to be not only safe, but a prudent way in which to
    diversify her own portfolio. I trust them for my mother. I hope
    I have the trust to be able to invest them myself. I don't, as
    I say, just recommend these to others; I have invested in my
    own personal account as well.
        Again, I reiterate my support for the chairman's
    legislation and look forward to its speedy consideration by the
    full House of Representatives.
        Mr. Porter. Thank you, Congressman. Appreciate your
    comments. And my best to your mother. Take care of your mom.
        Mr. Foley. She is happy, she has a new pope today. She is
    pleased.
        Mr. Porter. Yes, I am sure she is. Give her our best.
        Mr. Foley. Thank you.
        Mr. Porter. Next, Congressman Neal.

                   STATEMENT OF HON. RICHARD E. NEAL

        Mr. Neal. Thanks very much, Mr. Chairman. I want to also
    join with my friend, Mark Foley, another son of Massachusetts.
    Of course, one of the reasons that I have defended Social
    Security so arduously is because of your mom. So I am looking
    out for her as well as the rest of my constituents of
    Massachusetts.
        Mr. Foley. Thank you.
        Mr. Neal. Mark is, I think, the second chairman I have
    served with on the Real Estate Caucus. I do want to thank you
    for taking the time to do it, because it really is worthwhile.
        Adding a Real Estate Investment Trust [REIT], to the TSP
    would give Federal workers the opportunity to achieve greater
    diversification of their investment portfolios, potentially
    making their investments more stable and more secure.
    Retirement savings, as we all know, given the debate that is
    taking place across the country even as we speak, really are a
    sacred trust. The individuals responsible for designing and
    administering these plans uphold a precious responsibility:
    that when people who have worked hard all of their lives reach
    retirement, the funds that they have invested will be there to
    sustain them for the next chapter of their life.
        When we think about adding another fund to TSP, we should
    carefully consider a variety of issues, such as whether the
    dividend income is dependable, long-term performance, whether
    it is workable administratively, costs associated, and so
    forth. But the bottom line question that we need to focus on is
    whether it will help Federal workers achieve retirement
    security. Is it a good investment tool for them? In the case of
    REITs, the answer is clearly yes.
        Recent history has shown us too many heartbreaking examples
    of what can happen when people fail to diversify their
    retirement savings. My clearest memory of Enron and Worldcom
    scandals is of the interviews with former employees who were
    left wondering how they would manage after their companies'
    implosions also took down their retirement savings, and we
    should never forget that here in Congress, what happened in
    those instances. It is an extreme example, but it is an
    important lesson in why workers should be encouraged not to put
    all of their eggs in one basket.
        A REIT investment option would give Federal employees one
    more opportunity to achieve meaningful diversification of their
    retirement portfolios. Researchers have determined that returns
    on real estate investments are appreciably different than the
    yields from other forms of investment. For example, when the
    stock market is falling, it isn't necessarily the case that
    REITs would also be declining. Institutional investors
    recognize this and routinely include real estate in their
    portfolios.
        Mr. Chairman and members of the committee, I believe REITs
    would offer Federal workers an outstanding investment
    opportunity. They combine reliable income with excellent long-
    term performance and they offer outstanding means of
    diversifying workers' retirement portfolios. And as this
    debate, that surely is to captivate us for much of the rest of
    the year over retirement savings, I think that we might help to
    set in position a model for what retirement plans ought to look
    like for the American people.
        [The prepared statement of Mr. Neal follows:]

        [GRAPHIC] [TIFF OMITTED] T3944.012

        [GRAPHIC] [TIFF OMITTED] T3944.013

        Mr. Porter. Thank you very much, Congressman. Appreciate
    your testimony.
        And to both of you, I know for years you have been
    monitoring and working closely with real estate across the
    country, and we appreciate your expertise today.
        I am not sure if there are any questions from the panel.
        Mr. Davis. Just one.
        Gentlemen, thank you both for your testimony and for your
    articulation of the importance of this legislation and what it
    will, in all likelihood, do for those of us who participate in
    it.
        Obviously, we are always looking to make sure that
    investments are as safe and as secure as they can possibly be.
    An employee could actually put all of their investment into one
    of these plans, and, of course, if something should happen to
    it, they could also lose all of their investment. Would you
    suggest that there might be some restriction on that as a
    safeguard?
        Mr. Foley. Well, I like to caution everyone that you have
    to diversify. I don't like to put percentages on any particular
    investment portfolio, because you may deny that individual who
    has knowledge of the marketplace from gaining substantial
    yields on investment.
        In my particular case, though, I found my way to diversify,
    because there are going to be good years in equities, there are
    going to be some very bad years. I remember 1999, 2000, and
    2001. But with dividend-paying stocks, with Real Estate
    Investment Trusts, with a mixture of bonds and fixed income,
    and also doing some things like mutual funds, the average
    investor can insulate themselves.
        I would always be willing, though, to look at some caps on
    each individual account, because I do think we saw a lot of
    people in 1999, prior to the meltdown, watching CNBC every 5
    minutes, thinking they could outsmart the market and better
    return investments to their portfolio. Sometimes greed needs to
    be reined in with logic.
        So I always like to see a balanced approach. Again, the old
    adage--it may be simple--don't put all of your eggs in one
    basket seems high praise to people who choose a multitude of
    paths in which to invest.
        Mr. Neal. It is a great question, and I think that it is
    the lead-in to part of the Social Security debate. I think that
    is why the certainty of Social Security becomes so important at
    a date that is predictable. But most importantly, I think this
    is a lesson that is lost because we forget sometimes of what
    institutional memory means in this town. I came to Washington
    in the middle of the S&L crisis, and I watched people sit
    across the desk from me in my constituent office back in
    Springfield who didn't know there was a $100,000 on FDIC.
        And since an anecdote is such a powerful part of our public
    lives, I think it always will stand out for me the woman who
    was trying to raise twins that were retarded, and she had saved
    $240,000, and came to my office asking how she could get her
    money back. They were only going to guarantee $100,000.
        This is what I think we have to keep perspective on in this
    debate over retirement savings. If we were sitting here 10
    years ago, the same people that would be saying today that it
    is easy to take this cautious approach to investment, 10 years
    ago they would have been saying to us how can you not get into
    the dot com investment opportunities. They would have been
    assuring us look what has happened; it is guaranteed forever.
    Who listens to them any more?
        And my point is that I think is such a sound part of
    investment strategy, as Mark has done a good job of outlining.
    There is nothing wrong with some risk, but there ought to be
    some certainty too, and that is how we would balance it.
        So I think Mr. Davis asks a very, very appropriate
    question.
        Mr. Foley. I guess I could ask a rhetorical one, then.
    Should the Social Security recipients be all invested in one
    fund, and that is T bills? And that is one of the questions we
    would like to explore. I agree there are some inherent risks.
    My thrift savings account, again, I have the fixed income, the
    Government bond; C Fund equity; S Fund, small cap; I Fund,
    international.
        I have been here 10 years. Taking all of those years,
    including the horrible years we suffered, in the most
    conservative investment I am still at 5.6 percent annualized;
    the most aggressive, in the C Fund, I am at 11.6 percent
    annualized. Spread out among those portfolios, I have earned
    significantly more than we have been able to earn for the
    Treasury for Social Security.
        My last analogy will be my constituents. I represent the
    fifth largest senior population in America, so this is a very
    important debate for me. Those very same constituents will
    drive 3 miles if the CD offered at this bank is one-eighth of a
    point higher. With their own money they shop prudently, they
    look for yield and return, sometimes toasters. But at the end
    of the day they are able to maximize their income by some
    diversification.
        We understand Social Security is a very complexing and
    concerning equation. When my grandmother died, all she had was
    Social Security and Medicare. My job as a member of the Ways
    and Means Committee is to make sure, whatever we do, people
    like my grandmother will rest in peace and those who are still
    alive will have the peace of mind knowing it is a solid
    program.
        Mr. Davis. Well, I thank you both, and it seems to me that
    we are saying that this isn't necessarily for the high-rollers,
    that this is for security, in a sense. And I think that both
    Social Security, as well as the TSP, requires a certain amount
    of looking at, as well as analysis and education, and I think
    some people take the position nothing ventured, nothing gained,
    or they take the position the greater the risk, the greater the
    reward. And I think education becomes the key, and I thank you
    both.
        Mr. Neal. Mr. Davis, could I comment on that? You are
    absolutely right, but I just want to harken back to that point
    that I made about dot coms. The same forces in this town that
    were agitating for expanding the opportunity of the stock
    market and Social Security a decade ago, they would have been
    agitating to put this money in the thrift savings account into
    more aggressive opportunities. They are gone, and I think that
    is what we have to be mindful of.
        I think the anecdote that Mark used is right on target: his
    grandmother. All she had was Social Security and Medicare. And
    I think that, with us, adding on opportunities for people,
    again, emphasizing the term add on, makes a lot of sense, but I
    hope that we don't forget the world of the dot com bust,
    Worldcom, Enron, and the S&Ls.
        Mr. Davis. Thank you.
        Mr. Porter. Well said. Thank you, gentlemen. Appreciate
    your testimony.
        As is customary for the committee, we would now like to
    perform the oath for all witnesses, administer the oath. So if
    all the witnesses would please stand.
        [Witnesses sworn.]
        Mr. Porter. Let the record reflect all the witnesses have
    answered in the affirmative. Please be seated.
        I would like to call on our second panel, Mr. Saul and Mr.
    Amelio.
        For some of you that have not attended any of my
    subcommittee hearings, I have jokingly always said we are going
    to meet in Las Vegas next year. Let me assure you that we have
    a dry heat in Las Vegas, and we appreciate that it is warming
    here, but we kind of like the dry in the west. Welcome.
        Mr. Saul. I accept the invitation.
        Mr. Porter. Well said. Thank you.
        First of all, the Honorable Andrew Saul is chairman of the
    Federal Retirement Thrift Investment Board. Would you like to
    present your testimony?

      STATEMENTS OF ANDREW M. SAUL, CHAIRMAN, FEDERAL RETIREMENT
        THRIFT INVESTMENT BOARD; AND GARY A. AMELIO, EXECUTIVE
          DIRECTOR, FEDERAL RETIREMENT THRIFT INVESTMENT BOARD

                      STATEMENT OF ANDREW M. SAUL

        Mr. Saul. Thank you, Mr. Chairman.
        Good afternoon, Mr. Chairman and members of the
    subcommittee. 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. My four fellow Board members and I serve in
    a part-time capacity. Gary serves as the full-time Chief
    Executive Officer of the agency. The five Board members and the
    Executive Director are established by statute as the plan
    fiduciaries and, as such, are required to act solely in the
    interest of Thrift Savings Plan participants and beneficiaries.
        When Gary and I last appeared in this room to present
    testimony in July 2003, we were newly appointed to our
    positions and in the midst of implementing a new TSP
    recordkeeping system. In response to concerns expressed by
    Committee Chairman Tom Davis and other Members, I provided
    assurances that the new system would dramatically improve
    service to participants. This has been done. Transactions which
    used to take up to 6 weeks are now executed each day. The
    ThriftLine queues have been eliminated. Web-based access has
    been dramatically expanded and operates in less than a third of
    the pre-conversion time, and the transaction capacity has been
    increased exponentially.
        After implementing the new system, the Board approved
    Gary's plan to continue to drive service levels up and costs
    down on all fronts. The TSP data center was upgraded for speed
    and capacity tenfold and a backup facility which can be
    activated within hours to provide seamless service has been
    brought on-line. We instituted a parallel call center to
    improve response times and ensure uninterrupted service during
    emergencies.
        Calls are now routinely answered within the service
    standards of the largest and best private sector providers. For
    the first time we are in the process of soliciting bids for
    recordkeeping services, thus ensuring that participants are
    getting the best quality and price the competition can secure.
    Agency staff has been reduced by 10 percent through attrition
    and our budget has been reduced by $15 million, about 14
    percent. This is especially important since participants pay
    the costs of running the plan and these savings all accrue to
    their bottom line account balances.
        The total cost of the TSP for plan participants was down to
    6 basis points or 60 cents per $1,000 of account balance in
    2004. This includes both the asset management and
    administrative expenses. Gary is promising to bring costs down
    even further, perhaps by another 15 percent, this year. And, by
    the way, the Board will hold him to that. In terms of industry
    comparisons, we are off the charts when it comes to preserving
    participants' funds in their accounts rather than spending them
    on unnecessary administrative expenses or investment fees.
        We have aggressively pursued our statutory obligation to
    develop policies which are suitable for long-term investment.
    We have reviewed the performance of the current TSP investments
    each calendar quarter and have expanded ongoing efforts to
    remain current on industry practices. The other Board members
    and I have conducted due diligence site visits to our major
    vendors. Where appropriate, Gary and the agency staff have met
    with industry and government officials, conducted site visits
    at facilities run by the major national financial service
    providers, and kept the Board members fully appraised.
        At Gary's recommendation, we have established the most
    important new TSP investment policy in at least 10 years by
    approving five new Lifecycle Funds for the TSP. These funds,
    which debut this summer, will provide participants with the
    benefits of professional asset allocation. Consistent with the
    fundamental policy twice approved in statute by the Congress,
    these investments will use the broad-based index and government
    services [sic] funds now offered by the TSP. Once in place, the
    Lifecycle Funds will generate no additional charges to
    participants other than the minimal costs for periodically
    reviewing the asset allocation model design.
        As would occur with the introduction of any new fund, there
    will be costs for systems modifications as well as substantial
    costs associated with the comprehensive design, development,
    and distribution of materials to educate participants. Indeed,
    we have budgeted $10 million for this effort, in recognition of
    both its critical importance and the enhanced focus on
    financial literacy established by the Congress last year in
    Public Law 108-469.
        The education effort will be designed to meet what we
    consider to be the major challenge for TSP investors:
    optimizing investment performance by aligning the individual's
    risk/return profile with his or her investment horizon. In the
    financial world, this is known as investing on the ``efficient
    frontier.'' We are very excited about the prospect of providing
    the Lifecycle Funds to participants and would be pleased to
    discuss this initiative in detail at the appropriate time.
        The purpose of this hearing is to discuss an investment
    that in many ways is quite different from the existing TSP
    investments. The Real Estate Stock Index Investment Fund
    proposed in H.R. 1578 would establish an index fund exclusively
    comprising Real Estate Investment Trust securities. Simply
    stated, for the TSP this would be the wrong fund at the wrong
    time.
        First, investment policy should not be developed one fund
    at a time on a case-by-case basis. Sound investment policies
    can only be developed in a comprehensive fashion.
        Second, investment policy should not be developed absent
    consideration of fundamental plan design issues. We are well
    aware of the arguments for over-weighting in risk-optimized
    portfolios. However, including REITs would represent a
    departure from the very broad asset classes offered by the TSP
    and endorsed by Congress in the past.
        Third, at this time, it is essential that we focus
    participants' attention on the Lifecycle Funds that we are
    introducing this summer.
        Over the past year, the Board has been kept apprised of the
    interest expressed in REITs by both the Congress and the
    industry representatives. Gary and the agency's professional
    staff have met with industry representatives, received the
    industry association's analysis, and performed an independent
    review of that analysis for the Board. They have also met with
    congressional staff and shared with the subcommittee the
    results of their review. The Board strongly endorses the open
    process in which the Executive Director and the agency's
    professional staff engaged the proponents of a REIT fund, as
    well as the findings and conclusions of the review by the
    professional staff.
        For the reasons detailed in that review, as well as what I
    have said and Gary will say today, the Board unanimously
    recommends against the addition of a REIT fund at this time.
        Mr. Chairman, I will conclude my remarks at this point and
    ask that the remainder of my statement appear in the record.
    Thank you.
        [The prepared statement of Mr. Saul follows:]

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        Mr. Porter. Thank you, Mr. Saul.
        Before we move on, Mr. Amelio, co-sponsor of the original
    bill, Chris Van Hollen.
        Sir, would you like to have an opening statement?
        Mr. Van Hollen. No, thank you, Mr. Chairman. I am pleased
    to join with you in introducing this legislation. I look
    forward to the testimony of the witnesses. Thank you.
        Mr. Porter. Very good. Thank you.
        Next I will introduce Mr. Gary Amelio. I know you had a
    warm introduction already, but Executive Director of Federal
    Retirement Thrift Investment Board. Welcome.

                      STATEMENT OF GARY A. AMELIO

        Mr. Amelio. Thank you, Mr. Chairman, members of the
    subcommittee. My name is Gary Amelio. Since June 1, 2003, I
    have served as executive director of the Federal Retirement
    Thrift Investment Board. Before coming to the Board, I had 23
    years of private sector experience in the employee benefits,
    tax, and fiduciary industry. I appear before the subcommittee
    today with extensive professional experience.
        My mission is to apprise the subcommittee of the unanimous
    position of the TSP fiduciaries, being the five Board members
    and myself, to oppose legislation which would add a REIT fund
    to the plan. Our position is neither a commentary on the
    investment worthiness of REITS, nor a permanent edict.
        A fiduciary must exercise the highest degree of skill and
    care when considering changes to the plan's investment options.
    The universe of available investment options should be
    evaluated to determine whether any alternatives might be added
    or taken away. This in total review is a necessary fiduciary
    function.
        Examples of options to be considered in a comprehensive
    review include: (a) whether to split the existing C and S Funds
    to provide for growth and value equity management styles; (b)
    replacing the existing S Fund with separate small-
    capitalization and mid-capitalization funds; or (c) adding
    other asset classes such as international emerging markets,
    hedge funds, high-yield debt, inflation protected bonds, known
    as TIPS, and commodities.
        The analysis must also consider the existing TSP plan
    design. For example, our enabling statute requires the plan to
    be administered at a low cost. After reviewing current industry
    products, I believe that any REIT fund, even if acquired
    through competitive bidding, could cost the TSP participants
    many times more than the existing plan menu. Moreover, there
    could be other significant expenses, such as transaction costs.
        Furthermore, adding a fund to the plan is not a
    ``freebie.'' It could increase the expenses for participants by
    as much as 10 percent, that is $8 to $10 million, to engage
    contractors to modify the TSP's Web site, its recordkeeping and
    participant statement systems, as well as to create new
    brochures and forms while destroying the existing forms.
        The fiduciaries have determined that the cost of the
    Lifecycle Funds rollout which is currently underway is money
    well spent since it educates the participants about the
    importance of asset allocation. Even those participants who
    choose not to utilize Lifecycle Funds will benefit from the
    educational materials. There is no commensurate benefit in
    communicating a narrow, industry specific product.
        The fiduciaries' fund selection process is, of course,
    based upon need and demand. The Thrift Savings participants
    already hold over $1 billion in REITs through the C and S
    Funds, making our plan the 13th or so largest holder of REITs
    in the country, i.e., the need is already met. As for demand,
    there is no use adding a fund that no one wants. I receive many
    letters, e-mails, and calls from the 3.4 million participants
    who are quite willing to share their thoughts about the plan
    with me. In my nearly 2-year tenure, I have received only one
    letter concerning REITs.
        As the subcommittee is aware, the administration has held
    the Thrift Savings Plan up as a model in terms of structuring
    investment options for individual retirement savings. Many
    reputable national financial reporters and virtually all of the
    major news and trade publications have written about the TSP
    and specifically its menu of investment options in laudatory
    terms. Our simple five fund structure, low costs, broad-based
    index investment approach, and long-term performance have
    generated high confidence levels and unequaled participation
    rates.
        In deciding whether to offer Lifecycle Funds for the TSP,
    we first issued a Request for Information, seeking input from
    major investment consultants, banks, and mutual fund managers.
    We asked all of these organizations the same question: whether
    the TSP fund lineup offered our participants adequate
    opportunities for diversification in their accounts and, by
    extension, in the Lifecycle Funds. Every organization affirmed
    that the current TSP fund menu offered such diversification and
    that additional funds were not required. Several of the
    organizations affirmed that the current TSP fund options
    offered not only adequate but ideal diversification.
        Moreover, the agency has already received an expert opinion
    concerning the need for additional funds. Mercer Investment
    Consulting, the expert we selected to develop Lifecycle asset
    allocation models, examined the current TSP fund options to
    determine if they provided adequate diversification for TSP
    participants. They affirmed that the current funds provided
    diversification and that no other funds were needed at this
    time.
        The next paragraph is very important.
        The Board members and I have decided to engage a reputable
    investment consulting firm to assist in analyzing various
    investment-related plan issues. A review of investment options,
    securities lending, risk management controls, and next year's
    competitive bidding of the existing funds' management are all
    considerations in this discussion. I request that any
    consideration of legislation be delayed at least until after
    the appropriate review by the plan's fiduciaries.
        That concludes my remarks, and I ask that the remainder of
    my written statement appear in the record. Thank you.
        [The prepared statement of Mr. Amelio follows:]

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        Mr. Porter. Thank you for your testimony.
        Now I would like to open it up for questions.
        Regarding the cost factor, I know that is in your backup
    and in your testimony, you previously made cost comparisons
    between F Fund and the REIT Fund when drawing conclusions about
    how much a REIT Fund would cost. But Barclays has compared the
    S Fund to the REIT Fund in some ways. Wouldn't it be more
    appropriate, then, to compare the S and the REIT for the cost
    purposes?
        Mr. Amelio. Well, if you look at the cost--first of all, we
    are, I believe, the cheapest legal investment in the world.
    When I got here, back to 1996, we were at about 7 basis points.
        Mr. Porter. Less expensive. How about that?
        Mr. Amelio. I am sorry, sir?
        Mr. Porter. Less expensive.
        Mr. Amelio. Less expensive, yes. It sounds better than
    cheapest. Sorry, Congressman.
        We have since got down. Last year we were down to 5.83
    basis points. This year we are projecting we will be at about
    5. Those costs are 100 percent of the plan's costs,
    administrative as well as investment, and I have to tell you
    the investment piece of that is very small. If we go out and
    were to competitively bid and bring a REIT in--and, by the way,
    those charges are across the board for the five existing
    funds--of course, I don't know exactly what competitive bidding
    would yield, but, just based upon generic discussions, we have
    reason to believe that the management fees alone would be
    somewhere in the 10 to 20 basis point range.
        Now, we may find that we get someone to bid lower than
    that. We may find the bid higher. We just don't know until
    competitive bidding. But if you assume 10 basis points versus
    what we are paying now, that particular fund would be somewhere
    in the 15 to 25 basis point range versus the existing 5 funds,
    and it is just way out of sync with the existing 5 funds.
        Mr. Porter. You also have a comment that may be confusing
    by adding additional funds. From what little I have seen to
    date on the Lifecycle Funds, it seems like that is going to add
    additional complexity also. Is there a reason why it will not
    be confusing as the REIT would be in your argument in your
    white paper?
        Mr. Amelio. When you have 3.4 million participants around
    the globe, anything you do to the plan is complex in terms of
    communicating. But we have an extensive education effort, which
    actually Congress asked us to do last year in conjunction with
    OPM, and what we are going to roll out is asset allocation in
    general, as well as Lifecycle. I wouldn't portend that it is
    not complex, it is simply that it is much broader education,
    because when you talk about Lifecycle, you are talking about
    overall retirement needs.
        Mr. Porter. Yes, Mr. Saul.
        Mr. Saul. Mr. Chairman, I would just like to answer the
    question that you just asked from my own behalf. The thing that
    always has impressed me about the Thrift Savings Plan--and I am
    a professional investor in my private life--when I came here, I
    couldn't understand how we offered so few choices. After
    spending 3\1/2\ years here, I think that is the strength of
    this plan.
        The fact is we have people that are very dedicated to their
    professions, 3\1/2\ million of them, some in the military, some
    sitting around this room, a lot of people sitting around this
    room, that have a lot of things to do, and they are not
    professional investors. And I think that when you have a plan
    that is simple like this but very broad-based, you must
    remember that if you look at all the options, the five options
    that we give, it is pretty inclusive, everything from investing
    in stocks in Great Britain to investing in small Russell 2000
    stocks, small companies, to buying all different kinds of
    bonds, whether they be corporate bonds, or government-issued
    bonds, foreign government bonds.
        We have a money market fund and, of course, we have the S&P
    500. We have a lot of real estate stocks in the S&P 500 and the
    small cap fund. This is a very, very broad-based group of
    indexes and choices that we issue to people that are not that
    sophisticated, for the most part, in investing.
        The Lifecycle Funds do not add any complexity to this
    thing. As a matter of fact, it takes away the complexity
    because what it is doing is doing the asset allocation for
    people that may be intimidated by the chore of investing their
    money. We are not adding any more plans at all. We are not
    adding any more to the menu by adding Lifecycle Funds. All we
    are is actually adding an asset allocator that will make it
    much easier for the average participant, I feel, to invest his
    money.
        So I just want to sum this up, and I know it is a long-
    winded answer, but I think it is very important. I think if you
    look at our plan, the strength of our plan is the fact that it
    has limited choices but a full range of options within those
    choices because of the broad base of financial markets that our
    plan covers.
        Mr. Porter. One of the reasons that I encourage the passage
    of the bill is this allows everyone to have an oportunity to
    invest in real estate. There are a lot of folks in the country
    that are in a financial position to do it on their own. This
    gives everyone an opportunity within the plan. But when we look
    at the returns, take the G Fund from 2000 to 2004, it was 5
    percent; the I Fund was 1.2 percent; F Fund, 7.8 percent; the C
    Fund a 0.8; the S Fund 3.6; and you look at the REIT Funds, we
    are at 22.4 percent. So is there a reason that you haven't
    moved forward with REITs in the past?
        Mr. Saul. First of all, I think the important thing in
    looking at this plan is to look at the results over a longer
    period of time rather than 5 years. I think that you really
    have to go back, take a period from 1988 to now, where we have
    accurate statistics on the plan, and take a look at the returns
    there. Any one of the plans can do well at any shorter period
    in the cycle, there is no question about that.
        But what you really want to do is if you have somebody that
    is a young person that is investing in this plan, he is 25
    years old, hopes to work until normal retirement age, you
    really want to see how he does over the long period of time.
    And I think if you look at these broad-based choices, which, by
    the way, I am not against real estate, I own personally a lot
    of real estate. I want you to know that. It is a bedrock of the
    U.S. economy.
        And I do think that we have that included in the broad-
    based funds that we have now. But I don't think it is accurate,
    and I would caution against picking out any one investment over
    a short cycle and see how it does. I think the real thing is to
    take a look at it over a longer period of time and then see how
    it does.
        Mr. Porter. And I know I am actually using more than I am
    entitled to, but just to followup. In the past 30 years the
    REITs have out-performed the Standard & Poors. If you look from
    1988 to 2004, the Real Estate Investment Trusts have returned
    about 14 percent since 1988. So we are looking at the long-
    term, and these numbers actually came from the Ibbotson
    Associates. So I think we have some disagreement, and we will
    have some more time to get back to that, OK?
        And as far as the information, it came from the Board
    itself. Thank you.
        Mr. Davis.
        Mr. Davis. Thank you, Mr. Chairman.
        Chairman Saul, you indicate that investment policy should
    not be developed one fund at a time on a case-by-case basis,
    that it has to be, or certainly should be, comprehensive. Does
    that mean that once you have established a plan, that in all
    likelihood you would not add, detract, or subtract at some
    point?
        Mr. Saul. I think that as fiduciaries we look at this thing
    on a quarterly basis. I think that you have to--business is
    evolutionary, the U.S. economy is evolutionary. Things are
    changing all the time. I think that the duty of the
    fiduciaries, and why I have been chairman, we look at this
    quarterly, monthly, is to look at all possibilities.
        And I think you are absolutely right, we are talking about
    the possibilities, and I think there are possibilities there,
    things in the future. Any prudent businessman would feel that
    way.
        I think you would also want to look at the offerings that
    you have, and I think that Gary said that in his testimony,
    that we would constantly look at the existing plans and see if
    they should be changed in any way. I think you are absolutely
    correct in that assumption. I think the whole plan has to be
    constantly evaluated on an ongoing basis.
        Mr. Davis. Notwithstanding the fact that real estate has
    been fairly strong. I think of my own city, especially in much
    of my district, which is Downtown Chicago and within the Loop
    area, I mean, things are simply booming. I mean, they are going
    great guns.
        So it would seem like, in a sense, that since there is a
    level of stability--and I just returned, say, from China a
    couple weeks ago, and real estate was pretty hot there as well;
    finding a place to live. And, of course, in Japan it is pretty
    good too. Certainly notwithstanding these market conditions,
    you still wouldn't recommend?
        Mr. Amelio. I believe it is absolutely the wrong reason to
    make an investment decision. It is using the rifle approach
    target, almost stock picking. Virtually all professional asset
    managers, investment managers will tell you that asset
    allocation, rather than stock picking, is the way to go,
    particularly for unsophisticated investors. What we have are
    broad-based funds that cover every food group of investment in
    this country, if not the world, and that offers the best
    protection over the long term.
        I am not saying there isn't a better investment option out
    there, Congressman. There might be, and this one might have had
    a great run. And if you lived in Houston a few years ago, Enron
    had a better run. But eventually all great individual things
    could come to an end. And I am not saying this would. We are
    not being critical of REITs, we are just saying broad-based and
    asset allocation is the way prudent 401(k) providers have to
    look at this.
        Mr. Davis. Do you normally hear from participants a great
    deal? You indicate that you haven't heard much from
    participants suggesting that we move in this direction. Do you
    hear from participants about anything? I am saying at all. Do
    you hear from them? So is this an unusual circumstance or you
    just don't hear from them?
        Mr. Amelio. Actually, I get a great deal of feedback. The
    participants aren't shy, as many of you are aware, especially
    those with districts with a lot of Federal employees. Two years
    ago we got over 25,000 letters when we had the recordkeeping
    problem. I get contact in one of many ways: we get letters, e-
    mails, phone calls, and sometimes it is heavy. I do a lot of
    speaking myself to participants. I go out all over the country
    and I speak to large groups of participants, as many as several
    hundred at a time. Next week I will be seeing about 500.
        And I get a lot of feedback. And most of it really is along
    the lines--they are very fee conscious. I am hearing an awful
    lot about these Lifecycle Funds. They feel they want more
    assistance in terms of getting educated for when they retire.
    But I have only got one letter on this subject in 2 years.
        Mr. Davis. Thank you very much.
        Mr. Amelio. Yes, sir.
        Mr. Porter. Congresswoman.
        Ms. Norton. Thank you, Mr. Chairman.
        Given your testimony from an independent board, all
    appointed by Republicans, I am disinclined to say it would be
    adverse to expanding investment opportunities. So I approach
    this whole hearing, as I do most hearings in Congress, simply
    with a sense of skepticism about both sides so I can make up my
    mind.
        I was on this committee in 1996, when the S and I Funds
    were at it. Now we are into more than 10 years, and no new
    funds. Did we reach nirvana then? Have we reached perfection in
    the last 10 years? One might ask why it took us so long to get
    to the S and I Funds. Perhaps you can--particularly since you
    say--I guess it is in your testimony, Chairman Saul, you
    indicate that there has already been an independent review.
        You talk here about yet another study, but you indicate on
    page 3 of your own testimony that you are offering this
    testimony after doing an independent review and analysis for
    the Board. So I am not sure, first, what the new--I take it
    that you probably looked only at REITs, and maybe you were
    looking at the whole thing when you did your own independent
    review. But I can't tell the difference between what you have
    already done and what you propose to do.
        I can't tell what made you go to S and I Funds, but
    reluctant to go further at this time, particularly when you
    talk about transaction costs, since every time you do it there
    are going to be transaction costs, I suppose. So I suppose I am
    asking how do you operate. How do you decide when, if ever, to
    diversify further, particularly bearing in mind that you can't
    make money without investing some money. So we know it is going
    to cost you something if you add to the funds, as it must have
    cost you something in 1996.
        Go ahead.
        Mr. Amelio. You have a lot of questions in there. I will
    talk fast.
        First of all, I want to say this under oath. I am appointed
    by the Board, not by the President. I am----
        Ms. Norton. No, I know. The Board is appointed by the
    President and by the Speaker.
        Mr. Amelio. The Board, in 2 years, has never brought
    politics into the TSP setting, and I want that on the official
    record under oath. Never once. And I want to make sure I make
    that clear.
        Second thing is with respect to the consultants, the
    consultant that we talk about and the others that we
    interviewed did that in terms of the Lifecycle Funds in looking
    at our existing mix, and they did not look specifically at
    REITs, they gave us their investment opinion, Mercer did, in
    terms of looking at the Lifecycle Funds.
        The last study we talk about on the last page of my
    testimony, that paper is the Board and I have already decided--
    --
        Ms. Norton. Well, just a moment, Mr. Amelio.
        Mr. Amelio. Yes, ma'am.
        Ms. Norton. The testimony of the chairman specifically says
    the Board has been kept apprised of the interest expressed in
    REITs by both Congress and the industry. Gary and the agency
    professionals have met with industry, received the industry,
    and performed an independent review. This testimony clearly, it
    seems to me, refers to REITs, not to Lifecycle or the rest of
    it.
        Mr. Amelio. We also did an--we at the plan did an
    independent analysis of REITs. We have got four different
    studies here that we are talking about. We did do an
    independent analysis of REITs. Mercer had nothing to do with
    this study. Mercer put the asset allocation for us together on
    the Lifecycle Funds. That is independent from the letter I sent
    to the subcommittee staff about REITs, they are completely
    unrelated.
        Ms. Norton. Yes, but I am asking about REITs. And it says
    the agency's professional staff engaged the proponents of a
    REIT fund, as well as the findings and conclusions of the
    review by the professional staff.
        So the study I am interested in is the study that
    apparently has already been done, and that is the independent
    review on page 3 of Mr. Saul's testimony. Does that mean that
    you have already looked at REITs? If you have, what is this new
    look you are going to give and how is it different from what
    you have already done, which apparently has made you conclude
    that we shouldn't do REITs at this time?
        Mr. Amelio. We did an analysis of REITs on a one-on basis,
    in other words, looking specifically at REITs directly in
    response to the subcommittee's request. However, the
    fiduciaries have decided to now go beyond that, engage a
    professional investment consultant to look at the universe of
    investments, which would include REITs. We haven't eliminated
    it, we just want to look at everything in total, as I
    mentioned, rather than simply look at a standalone, up or down
    vote on one fund. We want to look at everything.
        Ms. Norton. I see. Now, you say we are already into REITs,
    and the difference between what we are into is standalone REITs
    versus what we are into. How much REITs are we into?
        Mr. Amelio. $1 billion.
        Ms. Norton. Of REITs alone?
        Mr. Amelio. $1 billion of REITs alone sit in--well, they
    are part of the C and the S Fund; 8 percent of the plan.
        Ms. Norton. Well, let me ask you this. The chairman pointed
    to some initial figures over the short-term that were very
    impressive. Then you challenged him about long-term
    investments. Then he quoted some long-term figures that were
    equally impressive, which makes me want to know why we did so
    poorly between 2000 and 2003 if we are so invested in REITs.
    Where REITs, at least during that period, when everything else
    was in the valley, were going up. REITs didn't look like it
    helped us then, so I don't know what $1 billion means, $1
    billion out of whatever. Perhaps you should tell me $1 billion
    out of what is the total amount.
        Mr. Amelio. $155 billion.
        Ms. Norton. Out of $155. Well, no wonder it didn't help us
    much. Maybe that is why some people want REITs by themselves.
        I was not satisfied with your response, because the
    chairman challenged you again about the long-term returns on
    real estate. It kind of reinforces the stereotype all of us
    have about real estate, where real estate did better than the
    traditional stock. And yet you seem reluctant on REITs, and you
    are so little invested in REITs, that when you were going down
    the drain and, by the way, taking all of the rest of us with
    you in 2000 to 2003, we were dependent upon you all to do much
    better since all of us didn't have the sense that we thought
    you had, and we were all into dot coms. You must have been into
    them too.
        I am wondering why, given the track record with REITs and
    the track record in which you are already in, the long-term
    track record and the track record for REITs, when everything
    else was going down, I am trying to understand your reluctance
    on REITs in particular.
        Mr. Saul. I think you ask some good questions, but I think
    that I would like to try and focus us back, if I might, to part
    of my testimony. If you look at the investing we do at the TSP,
    one could always point out there are many sectors, very narrow
    sectors of investment vehicles that could always return, at
    different periods of time, higher results than broad-based
    indexes. There is no question about that. You could pick it
    out. I think a perfect example which we all hear about all the
    time is hedge funds. If you look at the good hedge fund
    operators, they have certainly done better than the broad-based
    indexes. You could point to----
        Ms. Norton. It is not fair to choose the worst examples.
        Mr. Saul. Well, I think they are very good examples. There
    is over $1 trillion invested in hedge funds----
        Ms. Norton. Are you invested at all in hedge funds? Are we
    invested?
        Mr. Saul. Personally, I have a lot of investment in hedge
    funds.
        Ms. Norton. No, you and me, sir.
        Mr. Saul. But I wouldn't recommend it for this plan. That
    is my point. I think that what you have to look at here is this
    is a broad-based plan of indexes that I think gives a highly
    diversified portfolio of availability to the participants,
    everything from money markets to international stocks. Yes,
    there are segments--and, by the way, all these different things
    are covered, for the most part, in these different index funds,
    all different kinds of investments. Energy stocks, you could
    pick out energy stocks in the last have been the greatest
    investment since Swiss cheese.
        But I guarantee you, and I don't have the numbers right
    here, but if you look at the TSP, it is very heavily weighted
    as the U.S. economy is weighted in energy stocks. The indexes
    are weighted to REITs as the U.S. economy as the indexes are
    weighted. And I think the important thing is to focus on what
    the TSP--and this is as a fiduciary I am talking about now--is
    to be able to offer a diversified portfolio that is easy to
    understand, relatively simple to operate to the investing
    participants.
        Ms. Norton. Mr. Chairman, I have finished my questions. I
    just want to leave you with what I hope your study shows me.
    Your off-the-chart examples--hedge funds, energy--do not
    respond to the chairman's example of the long-term returns on
    REITs. That is No. 1. No. 2, you told me something that
    impressed me. You said you were already diversified within the
    funds we had. That impressed me.
        Then I thought about REITs, the short-term and the long-
    term return on REITs, and all I could think of, well, if they
    were diversified in REITs, really diversified within their
    present funds, sufficiently in REITs-type investments, then
    their fund, TSP, would have done better between 2000 and 2003.
        Look, I am with you. I am with you only because you do this
    every day, you have a unanimous Board. I am not about to
    second-guess; you know, I did my second-guessing during dot
    com. I am not about to second-guess your judgment. I do want to
    say you have not--I have a presumption in favor of what you
    have said, but that presumption fell. That presumption has
    fallen. If you could have shown me that you had done pretty
    well during a good period that I think testified what happens
    to funds that were adequately diversified, then it seems to me
    I would have another view.
        I have not yet come to the conclusion that we should invest
    in REITs, but I do need to know why, particularly since you
    were willing to take the transaction costs in 1996 and have two
    more funds, I do want to know, in the long-run, after your
    review of all the possibilities--and, as I understand, you will
    be looking not only at REITs, but whether or not you should be
    in some other things as well. That is very fair. That is very
    fair.
        But given what the long-term returns shown on REITs, given
    your meager investment in REITs, then it seems to me you have
    an obligation either to show us that we ought to be in REITs or
    you ought to be more in REITs in terms of your own
    diversification.
        Thank you, Mr. Chairman.
        Mr. Porter. Thank you.
        Mr. Van Hollen.
        Mr. Van Hollen. Thank you, Mr. Chairman.
        And thank both of you gentlemen for your testimony. I
    understand your caution on adding a REIT option, and I
    appreciate your caution. In my view, you have an institutional
    responsibility to exercise an overabundance of caution and take
    a very careful look at any additional options that are added to
    the plan.
        But I also think we all have the same goal in mind: we want
    to make sure that Federal employees have a source for stable
    and reliable retirement income and that they have the
    opportunity to take advantage of all the options that are out
    there, including options that are increasingly available in the
    private sector.
        Now, your testimony was that you have about $1 billion
    invested in REITs, which is a lot of money in an absolute
    sense, but as a percentage of your overall portfolio, as
    Congresswoman Norton's questions pointed out, it really is
    small. As a percentage, what is it, about 0.7 percent?
        Mr. Amelio. Eight percent, 8.3, I think.
        Mr. Van Hollen. I am sorry?
        Mr. Amelio. It is a little over 8 percent.
        Mr. Van Hollen. Eight percent of your portfolio is invested
    in REITs?
        Mr. Amelio. Yes.
        Mr. Van Hollen. All right.
        Mr. Amelio. And that is a significant number by all
    industry weightings.
        Mr. Van Hollen. All right. That information is somewhat at
    odds with other information we have gotten, so that is
    something we can flush out. One of the purposes----
        Mr. Porter. Would the gentleman yield?
        Mr. Van Hollen. I would be happy to yield.
        Mr. Porter. You have $155 billion, correct, in assets? It
    appears to me that $1 billion of $155 is less than 1 percent.
        Mr. Amelio. Oh, I am sorry, it is 8 percent of the S Fund.
        Mr. Van Hollen. Oh, OK. Well, that is a very different
    answer.
        Mr. Porter. One percent.
        Mr. Saul. But you have to take out the Money Market Fund,
    you have to take out the debt funds, because that really has no
    bearing on any equity at all. Don't forget, 47 or 46 percent of
    the Fund is invested either in the Money Market Fund or the
    Lehman Brothers Bond Index Fund. So you have to really take the
    debt out. So really what you have left is the equity portion
    and the debt portion; you can't talk about it together.
        Mr. Van Hollen. OK.
        Mr. Saul. People have made that choice.
        Mr. Van Hollen. OK. But in terms of the overall Fund, it is
    a little less than 1 percent. But I understand the points that
    you are raising.
        Let me ask you. In the State of Maryland we have an
    Employee Retirement Fund where I think that we have a
    considerable greater amount invested in real estate options,
    including the REIT option, and you raised the question about
    the demand from people who are participating in the system for
    this option. I haven't heard a huge demand, but I have heard
    constituents of mine who say they wish they had an opportunity
    to invest in a REIT option and that it would provide an
    additional investment opportunity.
        And, of course, in the final analysis it would be their
    choice. In other words, if people are not interested, I think
    that would be reflected in the demand for investment in this
    fund. So I think that issue cuts both ways, and ultimately it
    will be the decision for people who are making this investment.
        So, Mr. Chairman, I don't have a lot of questions on this.
    I would like to get more testimony on the cost issues you
    raised with respect to the transaction costs. And one of the
    reasons I think it is very important that we are going forward
    on this hearing and pushing on this is to get out in the open,
    as part of a public dialog, some of these issues.
        But I guess in closing I would ask you this, because it is
    my understanding that within the private sector there are a
    growing number of 401(k) plans offered in the private sector
    that offer a REIT-specific investment option, that it is an
    upward trend in the private sector. Is that your understanding?
        Mr. Amelio. Yes. I wouldn't argue with that.
        Mr. Van Hollen. And I also understand that four of the six
    largest 401(k) plans in the private sector now offer their
    participants a REIT option. Do you know whether or not that is
    the case?
        Mr. Amelio. Actually, I believe that might be erroneous,
    but I could be wrong. The last thing I saw did not show that,
    but I could be wrong about that.
        Mr. Van Hollen. But I guess the point here is that my
    constituents who are working the private sector and working for
    different companies increasingly have an opportunity within
    their savings options to invest in REIT funds, specific REIT
    funds, and the question is why shouldn't we offer Federal
    employees the same option that is increasingly being offered to
    individuals in the private sector? I guess I would ask you that
    question.
        Mr. Amelio. I want to make a point. If you look at
    percentages, we are off the charts. We have 87 percent
    participation amongst people eligible to participate in the
    TSP. If you look at the private sector, it is about 70 percent.
    So we have a higher confidence level in our participants. And
    from the participants that we have talked to and from all of
    the experts that have written about it, it is because of the
    simplicity; there are five funds only.
        And that really has a lot to do with it, it is simplicity.
    Major studies by major vendors in the industry have shown that
    for every 10 investment options that you offer, you lose 2
    percent of the participants; they throw their hands up and walk
    away. They get overwhelmed, they get confused; they don't want
    to deal with it. So it is just innate, very protective, and I
    would argue not conservative. I don't think we manage the plan
    conservatively; we try to be protective of it. But you don't
    want to drive participants away by adding a lot of funds. You
    are talking about one here.
        My biggest concern, and I think one of the Congress people
    mentioned before, is process. This is a very bad way to add a
    fund, to do a onesy, to look at one fund and say we have to add
    this one fund. If you go out and talk to the fiduciary of every
    major private sector plan in America, they will tell you they
    get a consultant and they look at the universe; what is in the
    plan, what is out of the plan, and let us figure how to fill in
    the gaps, get out of funds that aren't being used, and what to
    add. Nobody that I am aware of, no major fiduciary just simply
    says one off, let us just throw one fund into this.
        And even looking at the long-term numbers, I don't see
    where they differ between the REITs and the C and S from 1988
    back to technically when the plan was brought in; they are
    virtually the same.
        The REIT Fund here, the numbers that Congresswoman Norton
    was talking about, the REIT, 14 percent. The S Fund is 13.8 and
    the C Fund is 13.7. I mean, it is de minimis. We had the same
    yields in two of the funds. Certainly the G Fund is lower, but
    at 6.6, that is bigger than any money market or savings fund.
    We are very competitive.
        Remember with the indexes. When Congress established this
    plan in 1986, they wanted to take politics out of it. They
    don't want us to try and hire money managers to beat the
    markets. Only 15 percent beat the markets every year; 85
    percent do worse than the markets. What Congress wanted
    originally, and it was ingenious, was take politics out of this
    and just have it stay with the markets, rather than trying to
    beat them, because most people don't on a regular basis.
        Mr. Saul. Mr. Chairman, may I just add something, because I
    think it is important, if I might? If you look at these
    records, we have here in front of us 1988 to 2004, which is 16
    years of history here. And Gary has given you the statistics of
    13.7 for the C Fund, 13.8 for the S Fund, 14 percent for the
    REIT Fund. That is what I was trying to refer to when I made my
    statement. I think I was answering a question that you asked,
    Mr. Chairman, about a long period of time.
        Mr. Porter. Excuse me, Mr. Saul. The point is that the
    REITs did very well, did better than any of your funds in that
    period of time. And you were commenting that over a long period
    of time the REITs were not a good investment, or not as good of
    an investment. In fact, they were better than the other funds.
        Mr. Saul. I am sorry, that is not what I meant. Anyway,
    what I tried to say is over a long period of time, 16 years,
    the C, S, and the REIT Fund were very close in performance. It
    is true, over a 4-year period, there is no question, because
    there was a downturn in the stock market, the C and S did not
    nearly perform as well as the REIT. There is no question.
        But what I said was you have to look at this whole thing as
    a person's investment from when they basically begin investing,
    as a young person, until the time they get out of the plan, how
    they have done with these different investments.
        Mr. Porter. If I may interrupt, the bottom line is they
    would have been better off in a REIT than the G, the I, or the
    F in that period of time.
        Mr. Saul. Well, the G Fund is a Money Market Fund,
    basically all it is is treasuries, U.S. treasuries, so you have
    to take them out.
        Mr. Porter. Well, said, but if you are going to compare--so
    remove that. You were still better off in the REIT than the I
    and the F.
        Mr. Saul. Well, the F Fund you can't compare it because--
    let us look at these funds. The F Fund is a bond fund, it is a
    debt fund. Usually a bond fund has more stability, a debt fund,
    than an equity fund. You are getting a lower return, but you
    are taking less risk. So I think the F Fund you have to take
    out over a long period of time, it is a bond fund. It is very
    heavy-weighted to U.S. Government bonds, which we hope are the
    safest thing. So that is 8 percent.
        The G Fund is strictly a short-term Treasury operation
    where the participants get a 3 point spread over 90 day rate
    because of a long history that we have and so forth, so that--
    --
        Mr. Porter. I don't think we disagree on that. But what I
    do disagree with is the fact that the REIT would not have been
    a good investment in this period of time. It would have been.
        Mr. Saul. Nobody is saying it wouldn't have been. But that
    was--we are not arguing against REITs. That is my point. I
    tried to say that when Congresswoman Norton asked her very
    important question, I thought, before. We are not arguing
    against REITs. What we are arguing for is the simplicity of the
    plan for unsophisticated investors. We have----
        Mr. Porter. Mr. Saul, I am sorry to interrupt again. That
    is probably the fourth time I have heard about unsophisticated
    investors, and I do take exception to that. I do believe that
    there are folks that, as you said, have high confidence in what
    you are providing for them as options. But, please, that is
    probably the fourth time I have heard unsophisticated. I give
    them higher regard than that. I think there are many that want
    as easy a system as possible, but there are also those that
    would like to choose other options.
        Mr. Saul. When I said unsophisticated, I thought I
    explained that in my testimony before. When I meant
    unsophisticated, I didn't mean unsophisticated individuals, I
    meant unsophisticated in financial investing. One could be a
    very sophisticated person, for example, a man that is a captain
    of a U.S. submarine could be a very sophisticated person, but
    may not be a sophisticated financial investor. That is what I
    meant.
        Mr. Porter. Which is why we want to diversify in as many
    options as possible, correct?
        Mr. Saul. That is what I thought we have done.
        Mr. Porter. Thank you. Appreciate your testimony.
        I would like to now move on to the third panel.
        We appreciate the gentlemen being here. Thank you again,
    Mr. Saul and Mr. Amelio.
        Welcome. We appreciate your being here today. This being
    our third panel, I would like to introduce Mr. Steven Wechsler,
    president and CEO of the National Association of Real Estate
    Investment Trusts. We will then hear--and I guess Dr. Ibbotson?
        Mr. Ibbotson. Ibbotson, yes.
        Mr. Porter. You are not here to testify, but to answer
    questions, is that correct, or do you have a prepared
    statement?
        Mr. Ibbotson. I did submit a white paper, but I am not
    going to read that to you.
        Mr. Porter. Fine. No problem. Thank you very much.
        Mr. Ibbotson. I will maybe refer to it.
        Mr. Porter. And then we will have Ms. Amy Schioldager, head
    of the U.S. indexing products at Barclays Global Investors.
        I would like to begin. Mr. Wechsler, you have 5 minutes.

      STATEMENTS OF STEVEN WECHSLER, PRESIDENT AND CEO, NATIONAL
        ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS; DR. ROGER
    IBBOTSON, CHAIRMAN, IBBOTSON ASSOCIATES, PROFESSOR OF FINANCE,
     YALE UNIVERSITY; AND AMY SCHIOLDAGER, MANAGING DIRECTOR, HEAD
          OF U.S. INDEXING PRODUCTS, BARCLAYS GLOBAL INVESTORS

                      STATEMENT OF STEVEN WECHSLER

        Mr. Wechsler. Good afternoon, Mr. Chairman, Mr. Davis,
    members of the subcommittee. I am Steve Wechsler, president and
    CEO of the National Association of Real Estate Investment
    Trusts. NAREIT represents U.S. Real Estate Investment Trusts
    [REITs], and publicly traded real estate companies worldwide.
        I want to preface my remarks by complimenting Congress and
    the Federal Retirement Thrift Investment Board for providing
    through the Thrift Savings Plan a well conceived base model for
    defined contribution plans. The plan offers a set of core
    investment choices utilizing low-cost index funds that maximize
    return to participants.
        I would also like to compliment Chairman Saul, the other
    Board members, and TSP staff for keeping pace with the private
    sector by soon providing plan participants with a set of
    Lifecycle Funds.
        Today's hearing is styled ``Real Estate Investment Trusts:
    Can They Improve the Thrift Savings Plan?'' Based on detailed
    analysis, rigorous research, and historical experience, we
    believe the answer is an unqualified yes.
        Investment research demonstrates that the plan can be
    further improved and the retirement benefits enhanced by adding
    low-cost additional asset choices with long-term investment
    performance and diversification benefits. One such core asset
    or distinct investment choice is commercial real estate. For
    decades, traditional pension plans, also known as defined
    benefit plans, as well as endowments in foundations have
    included a distinct allocation to commercial real estate in
    their investment portfolios.
        For example, the Nation's largest corporate defined benefit
    plan, that of General Motors, reported a real estate allocation
    of 8 percent; the Nation's largest public defined benefit plan,
    California's CalPERS, reported a real estate allocation of 7.5
    percent; and Harvard University, the Nation's largest
    endowment, had a real estate allocation of 10 percent.
        The concept of including real estate as a distinct
    investment choice in a retirement plan is neither new, nor
    untested. Congress understood the importance of commercial real
    estate investment for investors large and small when it created
    REITs. Today, the time has come to extend that vision to 3.4
    million small investors who participate in the TSP by including
    a distinct REIT-based real estate option.
        Our Nation's publicly traded equity REITs are companies
    that generally own, rent, and manage portfolios of investment-
    grade, income-producing commercial real estate, including
    office buildings, distribution facilities, shopping centers,
    and apartments. Because REITs must distribute their taxable
    income to shareholders, their dividend yields are significantly
    higher than those of other equities, three times higher than
    those in the S&P 500, and produce a steady stream of growing
    income.
        REIT stock returns combine the growth characteristics of
    other stocks and the income characteristics of bonds. When the
    dividend income and price appreciation are combined, the 14
    percent average annual total return to REIT stocks from 1988,
    the year the TSP began full operation, through 2004 was
    appreciably higher than comparable returns to bonds and above
    the returns to other large and small-cap stocks. Returns to
    REIT stocks during that period have come with a level of
    volatility, a common measure of risk, which has been below that
    of other large and small-cap stocks.
        Strong returns, low volatility, and a low correlation with
    the returns to other assets are key ingredients to meaningful
    investment portfolio diversification, an accepted strategy for
    reducing investment risk. Research has demonstrated that
    investment returns from commercial real estate are different
    than returns from other investments. Studies also have
    concluded that the competitive returns, low volatility, and low
    correlation of investment returns from REITs make them a
    powerful diversification tool.
        So it is not surprising that the proportion of 401(k) plans
    nationwide offering a real estate fund is on the rise. In fact,
    four of the six largest 401(k) plans in the private sector now
    offer a real estate fund option.
        In a study requested by NAREIT, Ibbotson Associates, an
    authority on asset allocation, found that a distinct REIT index
    fund increases returns and reduces risk when added to efficient
    portfolios of the existing five TSP funds. Given that the TSP
    to date only offers five choices, versus an average of 16 for
    the Nation's typical 401(k) plan, it is clear that Federal
    workers are far too limited in their choices. Consequently,
    NAREIT believes that the TSP can be improved materially by
    adding more investment choices, starting with a REIT-based real
    estate option.
        For the foregoing reasons, NAREIT strongly supports H.R.
    1578, the Real Estate Investment Thrift Savings Act, and
    commends its sponsors, especially Chairman Porter, Mr. Van
    Hollen, and Chairman Davis for introducing this significant
    legislation. It would give Federal workers the choice in their
    retirement savings program, which is supplemental to a Federal
    pension and Social Security, to specifically seize for
    themselves the real estate investment opportunity Congress
    created for small investors years ago.
        As I close, Mr. Chairman, I want to underline that NAREIT
    does not maintain that a REIT-based real estate option is the
    only additional option which should be considered over time for
    inclusion in the plan, but it is sure a good place to start.
        I would be pleased to answer any questions, but I leave you
    with a question for Congress and the Board to ponder further.
    Why shouldn't the men and women who work for our Nation have
    access to the range of retirement savings choices currently
    available to employees of many leading private sector firms and
    to large institutions saving and investing on behalf of their
    workers?
        Thank you.
        [The prepared statement of Mr. Wechsler follows:]

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        Mr. Porter. Thank you for your testimony, we appreciate it.
        Mr. Chairman will wait for questions.
        [The prepared statement of Mr. Ibbotson follows:]

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        Mr. Porter. And the managing director, Amy Schioldager.

                      STATEMENT OF AMY SCHIOLDAGER

        Ms. Schioldager. Good afternoon, Mr. Chairman and members
    of the committee. My name is Amy Schioldager, and I am the head
    of U.S. equity indexing products at Barclays Global Investors.
    In that role, I am responsible for the management of our REIT
    index funds. I appreciate the opportunity to discuss with you
    the issues relating to adding a REIT index fund option to the
    Thrift Savings Plan.
        As members of this committee know, since 1988, BGI has
    provided investment management services to the Thrift Savings
    Plan. We take great pride in the mandates that we have been
    awarded by the TSP under which we manage four of the plan's
    five investment options: large and small capitalization U.S.
    equities, U.S. fixed income, and international equity. The
    fifth option is managed by the U.S. Treasury and invests in
    U.S. Treasury securities.
        As the members of this committee are well aware,
    diversification of asset classes is an important element in
    effective investment management. By ensuring that a portfolio
    is not dependent on any one asset class for performance,
    diversification improves the potential for better returns over
    the long-term. Specifically, Mr. Chairman, REITs offer to the
    investor the ability to gain exposure to real estate through an
    investment which has, on average, sufficient liquidity to gain
    access to that asset class cost-effectively.
        Furthermore, REITs have a low correlation to other asset
    classes. For example, the performance of REITs versus the S&P
    500 Index, since 1963, shows annual return differences greater
    than 20 percent, both positive and negative. It is also worth
    noting, with regard to the TSP, that REITs represent 0.55
    percent of the S&P 500 Index, the benchmark tracked by the C
    Fund, and 8.1 percent of the Dow Jones/Wilshire 4500 Index, the
    benchmark tracked by the S Fund. As a result, TSP participants
    investing in these two funds are already getting an exposure to
    REITs.
        Mr. Chairman, BGI is the largest manager of tax-exempt REIT
    index funds in the world, with approximately $10 billion of
    assets under management in U.S. REITs. We have a long and deep
    experience managing investments in this asset class. In that
    light, there are a number of issues we would encourage the
    committee to consider as it contemplates the inclusion of REITs
    in the TSP. Let me focus on two critical ones, costs and
    liquidity, two subjects we initially discussed in a letter
    dated January 25, 2005, to Chairman Davis in response to his
    January 5th letter to us.
        First, consider costs. A key question is can a REIT option
    be offered to TSP participants at or near the same cost as the
    current investment options. There are two costs that need to be
    considered: investment management fees and transaction costs.
    With respect to management fees, there are many factors that
    potential providers would consider in developing a fee quote
    for such a product, including the complexity of managing the
    investment strategy and their assessment of the competitive
    landscape.
        Obviously, we cannot comment on what other providers might
    bid for this business. What we can say is that management fees
    for institutional REIT index funds tend to be in the range of
    10 to 15 basis points, while fees for REIT index mutual funds
    are in the 25 basis point range. Given the potential size of
    investment by TSP participants, we expect that management fees
    would likely be lower than these levels. But they would also
    likely be modestly higher than the fees currently charged for
    some of the existing TSP investment options.
        Transaction costs are also an important consideration given
    the size of potential cash-flows and the frequency with which
    many TSP participants trade. Depending on the size of the trade
    and given current levels of market liquidity, we would estimate
    that total transaction costs, including commissions, bid/ask
    spread, and market impact, could range from 26 basis points for
    a $10 million trade to 59 basis points for a $100 million
    trade.
        Given recent index methodology changes, the expected T cost
    for $100 million we expect would be 40 basis points. To show
    the comparative illiquidity of REITs, estimated transaction
    costs for a $10 million trade in the C Fund benchmarked to S&P
    500 is approximately 7 basis points, while a $100 million trade
    is approximately 9 basis points.
        A second important issue is whether the REIT marketplace
    offers sufficient liquidity to absorb the potentially large
    daily market flows, in or out, generated by TSP participants.
    Our analysis of the REIT marketplace shows that most of the
    REIT indices have liquidity characteristics similar to the U.S.
    small capitalization equity market in which the TSP's current
    Dow Jones/Wilshire 4500 Index option, the S Fund, invests.
        We have worked with TSP staff to establish procedures that
    have cost-effectively managed cash-flows in this market since
    this option was added to the plan in 2001. Assuming that one of
    the more liquid REIT indices were selected as the benchmark for
    a potential new option, we believe that these same procedures
    would likely work as effectively for a REIT index fund option.
        Before concluding, I would like to make a further point.
    When considering additional options to the Thrift Savings Plan,
    there are many asset categories worthy of evaluation. We would
    suggest, as the leadership of the TSP has in their testimony,
    that a broad view of candidate asset classes be taken when
    determining if REITs are the most appropriate potential
    addition. There are indeed others worthy of consideration, such
    as emerging market equities and commodities. Before selecting a
    new investment option, it would be appropriate to analyze the
    full spectrum of asset class options available to evaluate
    their diversification potential and return opportunities, and
    then select the most suitable additional options.
        Mr. Chairman, I thank you for the opportunity to speak with
    you today, and I look forward to answering any questions you
    may have.
        [The prepared statement of Ms. Schioldager follows:]

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        Mr. Porter. Thank you. We appreciate your testimony.
        I would like to begin. Regarding the costs, if you could
    explain how costs are incurred with REITs and what we can do to
    be more conservative in those expenses, if in fact we do
    include these?
        Ms. Schioldager. Is that management fees or transaction
    costs for trading?
        Mr. Porter. Both, please.
        Ms. Schioldager. OK. And what exactly--I am sorry. Did you
    just want----
        Mr. Porter. Could you explain how the costs are incurred
    for investments in the REIT?
        Ms. Schioldager. OK.
        Mr. Porter. You mentioned up to 25 percent. Could you
    explain those costs to us, please?
        Ms. Schioldager. Sure. Well, the two costs that I spoke to,
    one are investment management fees, and those are the costs
    that an investment manager would charge the Thrift Savings Plan
    for managing those assets. What we see out there currently is
    for institutional REIT index funds, fees are somewhere in the
    range of 10 to 15 basis points. If you look at REIT mutual
    funds--and, again, these are REIT index mutual funds--those
    fees are more in the neighborhood of 25 basis points.
        Now, what I would say is given the size of the TSP Fund,
    that it is likely, it is possible, I should say, that those
    fees would be less than that. It is also likely, given the
    complexity of the management of REITs compared to the current
    lineup that TSP has, that the fee would also be greater than
    what they are currently paying for their other options. So that
    would be the first piece, the management fee.
        The second fee is the transaction costs associated with
    buying and selling REITs in the marketplace. Right now all
    participants, when they trade the various options, whether they
    are going in or out, are paying transaction costs associated
    with those trades. So the fees that I spoke to are transaction
    costs associated with going to the market and completing those
    trades. For an S&P 500 fund, we would expect those fees to be 7
    basis points for a $10 million trade and roughly 9 basis points
    for a $100 million trade.
        So that gives you an idea of what the current costs are for
    the S&P 500 fund. The extended market fund, which is the
    Wilshire 4500 Fund, the transaction costs there, just to give
    you another data point, would be 18 basis points for $10
    million and 23 basis points for $100 million.
        On the same magnitude, what I was looking at was a broad-
    based REIT index where the costs would be approximately 40
    basis points for a $100 million trade and approximately 16\1/2\
    basis points for a $10 million trade. So that gives you an idea
    of the difference in costs associated with REITs versus the
    current fund options.
        Mr. Porter. Is there a way that we can minimize those
    costs?
        Ms. Schioldager. Well----
        Mr. Porter. I know we are not negotiating today.
        Ms. Schioldager. Right. Thank you. The investment
    management fees would go out for competitive bid, so depending
    on what the competitive landscape is and the competitors that
    are involved, that would determine the final bid on that.
        Mr. Porter. Thank you. I appreciate that.
        Mr. Davis.
        Mr. Davis. Thank you, Mr. Chairman.
        Mr. Wechsler, Ms. Schioldager manages REITs index funds for
    Barclays Global Investors, and she raised the issue as to
    whether or not REITs offer sufficient liquidity to absorb the
    potentially large daily market flows, in or out, generated by
    TSP participants. How would you respond to that concern, and do
    REITs offer the liquidity to absorb the large flows in and out
    of the participants?
        Mr. Wechsler. Mr. Davis, it is my understanding that as far
    as liquidity is concerned, there is more than sufficient
    liquidity to operate an index fund. Barclays does that through
    their exchange traded fund on a regular basis, and it has been
    represented, I believe, in the past that liquidity, at least by
    the TSP staff, is not a significant issue in their mind at this
    point. And I think the larger issue is tied, in my
    understanding, to some of these transaction costs and how they
    can be driven down.
        Mr. Davis. Ms. Schioldager, do you agree that is not----
        Ms. Schioldager. Well, we looked at how--there is
    approximately $1 billion worth of REITs that change hands every
    day, so that gives you an idea of the marketplace for REITs. In
    contrast to that, it is many billion in S&P 500 space. So they
    are less liquid than you would see in the other plan options.
    If we were to assume, as a starting point, that the TSP could
    be approximately 10 percent of average daily volume, that would
    mean that we could handle up to $100 million a day from the
    plan participants within the fund. I would consider that to be
    on the high side in terms of what we would be able to trade on
    a daily basis.
        Mr. Davis. Dr. Ibbotson, I understand that your firm was
    commissioned by the National Association of Real Estate
    Investment Trusts to study a REITs fund to the TSP. However, as
    an investment research firm, what asset classes other than
    REITs could you recommend that the Board and Congress consider
    for the TSP, if any?
        Mr. Ibbotson. Well, there are many asset classes that you
    could consider. You could consider--I mean, things were brought
    up such as alternative investments, hedge funds, commodities,
    energy. These are all possibilities.
        I will say that real estate is sort of the natural place to
    look for the next addition because real estate is such a huge
    part of the economy and, actually, not all of real estate is
    represented by the stock market. REITs are, and it is
    understandable that you are looking at real estate investment
    through REITs, because you don't have all these agency
    problems; you don't have to worry about the direct real estate
    and you don't have to worry about who is pocketing what. It is
    a much more straightforward investment to invest in REITs.
        So real estate is a natural place to go as a next category,
    but there is a myriad of categories, and many of them were
    brought up. I think it would be reasonable to look at the whole
    set of categories.
        Mr. Davis. Do you have specific knowledge of TSP
    participants' investment behavior?
        Mr. Ibbotson. I am not an investor in TSP, and I have not
    managed any TSP funds, so I have no direct knowledge of the
    participants other than general knowledge of who they are.
        Mr. Davis. Ms. Schioldager, are there other asset classes
    aside from REITs that you would consider worth reviewing by the
    Board.
        Ms. Schioldager. Yes, I think there are. A couple of them I
    mentioned in my statement. I think emerging markets would be
    worthwhile looking at; I would also add commodities and TIPS as
    possible other investment options when looking at what else the
    TSP could add in terms of their lineup.
        Mr. Davis. Thank you very much, Mr. Chairman.
        Mr. Porter. Thank you.
        Congresswoman.
        Ms. Norton. Thank you, Mr. Chairman.
        Mr. Wechsler, you don't have any objection, do you, to
    their looking at the whole universe of funds in order to decide
    whether any funds should be added, REIT among them?
        Mr. Wechsler. I have no objection whatsoever. In fact, I
    would concur with Ms. Schioldager's expression of some of the
    other areas worth looking at.
        Ms. Norton. That, it seems to me, was the best point the
    prior panel made, that if you are going to do it, look at all
    your options before jumping, even though this option looks
    particularly attractive now.
        Mr. Wechsler, during questioning we brought out the rather
    minute investment in REITs now. I wasn't able to determine why
    that was the case, given the returns, long-term and short-term.
    I wonder whether you have any hypothesis about that, No. 1?
    And, No. 2, whether TSP might accomplish something close to
    what you advocate simply by increasing the percentage of
    investment in REITs among the funds they already have?
        Mr. Wechsler. I will answer the two parts you presented. I
    see there is one reason why the Thrift Savings Plan
    participants today have, on a relative basis, such a small
    exposure to real estate, given its size in the economy, and
    that is because commercial real estate investment is
    significantly under-represented through the stock market.
        So you are not capturing that part of our economy, that
    part of our productivity, that part of our services when you
    invest solely in the stock market. But for a plan like the TSP,
    a low-cost index plan, the way you will capture real estate,
    and the only way you can capture real estate consistent with
    the other five options, is through an index fund based on
    publicly traded equity REITs today.
        That is why we are here. That is why we are talking about
    it, because, as you heard in my testimony, large institutional
    investors routinely allocate 10 percent, 8 percent, 7 percent
    to real estate. There is no earthly way possible you can do
    that through the TSP today unless you vastly over-allocate to
    the S Fund. And even if you did you wouldn't get there. As you
    see in exhibit 13 of my written statement, you would have to
    have taken 80 percent allocation to the S Fund to have a 5
    percent allocation to real estate. No one would recommend that.
        Ms. Norton. Ms. Schioldager, it seems to me that is a very
    important point that Mr. Wechsler has just made. What do you
    say to the point he has just made about what looks to be the
    inability of the TSP to capture the growth in real estate,
    given the way it is now structured, except by going into REITs?
        Ms. Schioldager. I believe that is a true statement. What
    Mr. Wechsler is saying is that the real estate market as a
    whole is roughly a $4 to $10 trillion market, depending on what
    you include in that calculation. So if you include governmental
    land, for instance, it is a much larger number. What is
    available to invest in the public market through REITs is about
    $250 billion. So you can't capture, in the current TSP lineup,
    a 10 percent allocation to REITs or to real estate through
    purchasing REITs. That is an accurate statement.
        The question of what is the appropriate allocation to REITs
    I think is a completely different question. My experience has
    been that defined benefit plans typically hold somewhere in the
    neighborhood of 4 to 5 percent in a real estate allocation, not
    the 7 to 10 percent that Mr. Wechsler has spoken to.
        Ms. Norton. He is saying you couldn't even hold that.
        Aren't you saying you couldn't even hold that in TSP?
        Mr. Wechsler. What I am saying is the only way you could
    hold it, no one would advise you to do under the current plan
    lineup. And I would agree with Ms. Schioldager's comment that,
    on average, traditional pension plans generally have an
    allocation of plus or minus 5 percent.
        But some of the larger plans I have cited, such as CalPERS
    in California, such as General Motors and others, some of the
    larger have had traditionally and have larger allocations to
    real estate for all the reasons I talked about in my statement,
    which is the significant income overtime, the price
    appreciation overtime that more than keeps pace with inflation,
    and the low correlation of real estate with other stocks and
    bonds. And those are very significant investment attributes
    that few other asset classes provide, and it is provided to the
    public markets by REITs representing real estate, which is
    what----
        Ms. Norton. Well, one of the things I hope this study
    brings out is, in addition to whether or not REITs is the best
    among several possible expansions, whether or not there is any
    increase beyond the less than 1 percent in REITs that would be
    consistent with even the present structure of TSP. That is very
    bothersome, that we are unable to take hold of real estate in
    any appreciable way.
        I have to ask you, though, Mr. Wechsler, is this the right
    time to be talking about--would a prudent TSP be looking--let
    us assume the following scenario, that for the first time you
    could go into real estate and you look at what has happened to
    real estate, because everything else is you know where. Real
    estate is one of the few growth opportunities that has not
    seemed to dissolve under us, and that leads many to believe
    that real estate is, if anything, overpriced.
        And watch out, I live in Washington, DC. That being the
    case, even if this is done or even if this proves prudent to do
    at some point, would this not be perhaps the time to pass and
    do it a little later?
        Mr. Wechsler. There is no time like the present generally
    in life to do things, and it seems to me, as was indicated
    earlier, it has been many, many years since the Thrift Savings
    Plan added new options. There are only five options today, one
    of which is----
        Ms. Norton. Mr. Wechsler, I am talking about the price of
    adding options on top of the transaction costs. Very
    specifically, my question is isn't real estate overpriced
    everywhere you look, in large part because everything else has
    gone--I am trying to think of a polite word for what has
    happened to everything else, but surely you know what I mean.
    And I am simply saying one of the things that surely a prudent
    fund would have to watch out for is when is the best time to do
    this, and I don't think that you mean it when you say there is
    no time like the present, because you don't mean that for each
    and every investment you would make. There are some you
    wouldn't make and there are some you would make now.
        Mr. Wechsler. And what we advocate and I believe, and I
    think you have heard it not only from this panel, from Chairman
    Saul and Mr. Amelio as well, is that diversification is the
    object here, to provide Federal workers with the ability to
    diversify their investment portfolios for retirement savings.
    And we are talking about a program that is supplemental to a
    pension and Social Security, and can withstand and should
    benefit from additional choices and asset classes such as real
    estate.
        And I think it is important to distinguish between the
    single-family housing market and the commercial real estate
    market. Both have done well over recent years, but we are not
    resting our case on the performance of the last 1 year, 3
    years, 5 years. As I think the chairman pointed out earlier,
    the track record is strong for a decade, for 20 years, for 30
    years.
        Ms. Norton. Mr. Wechsler, that is a fair point. That is a
    fair point, and I take your point.
        Let me ask you one more question, and that is, goodness,
    Ms. Schioldager's testimony about this huge difference in basis
    points between the transaction costs. These are not just little
    differences, 59 basis points, 9 basis points. They are huge.
    There was testimony without this kind of particularity in the
    last panel that would make anyone stop, that, hey, this is a
    different kind of investment. There is something different
    here. I would like you to speak to the difference and how you
    respond to such huge transaction costs, very much larger than
    anything TSP has ever contemplated before.
        Mr. Wechsler. I think it is a very good question, and I
    would respond in two parts. The first part is I believe--and I
    am not the expert and Ms. Schioldager is the expert on this--
    but the reason the transaction costs, until further determined,
    looks somewhat higher than the other funds is because we are
    talking about a narrower basket.
        We have been talking about five baskets, now possibly
    having a sixth. The plan testified earlier they may want to
    look at multiple additions or slicing and dicing the current
    options into more by slimming some of them down. It seems to me
    that part of the issue here is the number of securities in the
    basket that are being traded, so it is a narrower base in terms
    of the transaction costs and the way the market operates to
    withstand that. And I am sure Ms. Schioldager will----
        Ms. Norton. Mr. Wechsler, I am not getting it. It sounds to
    me to be something structurally different between the kinds of
    investments, very traditional investments that TSP makes and
    real estate. Perhaps Ms. Schioldager would add to what you have
    said to clarify.
        Mr. Wechsler. I would just want to complete, and then I am
    very eager to hear what she has to say. But they are not
    structurally different. These are publicly traded companies;
    they were equity securities, the same as in the S and C Fund.
    And what is important to note when we consider cost is also
    benefit.
        So you cannot only look at the transaction costs. If it is
    somewhat higher, what benefit is added by having this option?
    And I think what our testimony shows is that over long periods
    of time the added return in combination with the lower
    volatility and the low correlation with the other categories
    brings a benefit to the portfolio that is well worth any
    marginal additional costs.
        Ms. Norton. Now, Ms. Schioldager, just based on what the
    figures show, which is real estate has done better over the
    long-term, I am sure, taking into account--please correct me if
    I am wrong--what are the transaction costs? I mean, when one
    looks at those figures that the panel had and that the chairman
    had, and those figures are at least comparable and, in fact,
    better, does that take into account transaction costs?
        Mr. Saul. Can I comment on that? Because I think you are
    talking about my figures here.
        The NAREIT figures are a cap-weighted index, there are no
    transaction costs in there. However, the transaction costs,
    although they are higher on the REITs than they are on, say,
    the S Fund or the C Fund, these are index funds, and you have
    to buy them on the way in and you have to buy and sell some to
    take care of some cash inflows and outflows.
        But, for the most part, the transaction costs are a one-
    time occurrence; they occur when you go in. And since you are
    not trading a very high percentage of the portfolio--and
    perhaps Ms. Schioldager can address that--but since the
    portfolio is not heavily traded, the transaction costs are
    actually the smaller part of the fee, compared to, say, the
    management fee that she was also talking about.
        Ms. Norton. Ms. Schioldager.
        Ms. Schioldager. The transaction costs that I spoke to were
    based on the MSREIT Index, which is an index that holds about
    120 securities. Remember that the REITs that are available in
    the public market are just over 200 to 250 REITs available in
    the market, comparing that to the broader U.S. equity market,
    where you have 5,000 securities that are available. So it is a
    very small subset of the U.S. equity market.
        The transaction costs are more expensive simply because of
    the liquidity associated with REITs. Most REITs are small-cap
    and mid-cap stocks, so, given that, the liquidity associated
    with small-cap stocks mean that you pay more when you are
    buying them. It is the case that the transaction costs are only
    occurred [sic] at the time that you purchase a fund, so this
    isn't--you know, if you were to purchase once and you are a
    long-term holder, that is one transaction cost that is
    incurred, and there are no additional transaction costs. But if
    you are buying and selling the fund, that is what you would
    expect to pay each time there is a purchase or a sale.
        Ms. Norton. Thank you very much, Mr. Chairman.
        Mr. Porter. Mr. Van Hollen.
        Mr. Van Hollen. Thank you, Mr. Chairman.
        I just want to pursue the issue of what the trend is in the
    private sector, especially with respect to large employers,
    because my understanding is that the trend is toward allowing
    employees to have a REIT specific option within the portfolio
    and that is especially true among some of the largest
    employers. Could you just all respond to that so we can get the
    facts on the table?
        Mr. Wechsler. I would say that as far as the defined
    benefit world, the traditional pension plans out there, they
    have long invested in real estate, and increasingly the trend
    is that part of their real estate investment is taking place in
    REITs, in some cases all, in some cases part.
        As far as 401(k) plans, which have been a newer addition,
    relatively speaking, on the retirement savings playing field,
    we have begun to see a substantial up-tick in the number of
    plans that have a distinct real estate option for their
    employees, utilizing REITs generally, and that has, in the
    last, I would say, 4 or 5 or 6 years, tripled or quadrupled
    percentage-wise. It is a significant upward trend.
        Mr. Van Hollen. Any other comments on that?
        Ms. Schioldager. The only thing, I would agree that most
    defined benefit plans do have a real estate allocation. Many of
    them gain their real estate allocation through direct access to
    real estate, so they are buying individual properties. Smaller
    defined benefit plans are utilizing REITs for their access to
    real estate. In terms of defined contribution, the statistics
    that I have show on that one in eight defined contribution
    plans have a real estate or a REIT option in their lineup of
    funds.
        Mr. Van Hollen. Do you know what the trend is, though? Has
    it been increasing?
        Ms. Schioldager. It is increasing.
        Mr. Van Hollen. And is that true especially among some of
    the larger employers?
        Ms. Schioldager. Absolutely.
        Mr. Van Hollen. The other question I had is on the issue of
    taking a time to look at various new investment options among
    the TSP, and whether or not the REIT option can be
    distinguished from others because it is under-represented in
    the stock market and the other options, the plans that we are
    talking about. Is that something that distinguishes the REIT
    option from some of the other investment proposals that we
    might be looking at, or would they also be things that are
    under-represented?
        Ms. Schioldager. The other investment proposals that I
    spoke to in terms of emerging markets, commodities, and TIPS,
    are not represented in the current lineup of funds; so, whereas
    you are getting some real estate exposure through both the S&P
    500 Fund and the Wilshire 4500 Fund, you are not getting
    exposure to commodities or emerging markets in any of the plan
    options.
        Mr. Van Hollen. In any of the options.
        Ms. Schioldager. That is correct.
        Mr. Wechsler. But, Mr. Van Hollen, I think part of the
    thrust of your question was the broader economy, and whether
    the stock market and the bond market adequately reflects other
    aspects of the economy. And I think it is fair to say that the
    commercial real estate sector of the economy is probably the
    last major sector that has been moving into the public capital
    markets, both in terms of debt and equity. And that has
    happened over the last few decades in a very significant
    manner, but there is still much more to be done.
        So I think you would be hard-pressed to find in the public
    capital markets another sector of the economy that is under-
    represented in the public markets the way commercial real
    estate is.
        Mr. Van Hollen. Well, that is why I asked to the extent
    that the real estate portion.
        Mr. Wechsler. Which, by the way, is why, for many years, as
    Ms. Schioldager pointed out, defined benefit plans have
    directly purchased real estate. However, that is not a solution
    for the Thrift Savings Plan. I don't think Congress will be
    having it directly by office buildings and shopping malls
    around the country, only indirectly, hopefully, through REITs.
        Mr. Van Hollen. Thank you.
        Thank you, Mr. Chairman.
        Mr. Porter. Thank you very much. That will conclude the
    testimony today. We sure appreciate your being here, all those
    folks----
        Ms. Norton. Mr. Chairman, could I ask one more question?
        Mr. Porter. Yes, you can.
        Ms. Norton. There is a concern among employees and there
    was a concern with the Board that people fall away given
    increased complexity, and that is one of reasons they want to
    just keep it simple, keep it simple. Particularly given the
    testimony we have just heard about the difference in basis
    points between the two kinds of funds on the down side, and on
    the upside, if I may simply refer to Mr. Wechsler's testimony
    that REIT stock returns combine the growth characteristics of
    other stocks and the income characteristics of bonds, there is
    something to that, I think. He also talks about the low
    volatility.
        There is every reason to want to capture some of that,
    frankly, conservatism for Federal employees. I wonder if a fund
    like this or similar funds, given the huge difference in
    transaction costs, which would give me some pause in simply
    saying to employees which do you want to invest in, here is
    REITs and then here are all the rest of them. Would you think
    it appropriate to red flag transaction costs? I am sure people
    are told about transaction costs.
        But when you have this kind of difference in transaction
    costs, and somebody looks and sees the return on real estate or
    lives in a city like Mr. Davis and I live in, where they just
    think real estate is going to go through the roof and be this
    way forever, don't you think it would be important to alert
    people that the transaction costs for this stock is
    considerably greater than for another stock, and maybe we could
    get some of the problem on simplicity and people wondering what
    this is all about dealt with?
        Mr. Wechsler. The short answer is yes, I think more
    education in general about the costs and benefits of all
    investing is incredibly important, and I think that Federal
    workers of the Thrift Savings Plan should have full disclosure
    of any costs as well as the potential benefits.
        Ms. Norton. They already have that. They already have that.
    I am asking a very specific question. If you are going to do
    something where the transaction costs are many times what
    people are used to, and it is down in a footnote, I am
    wondering if we are being fair to ordinary workers like me who
    don't know this kind of stuff and don't read footnotes.
        Mr. Wechsler. What I took from Ms. Schioldager's
    explanation is that the transaction costs for REIT stocks were
    comparable to small and mid-cap stocks, and that certainly
    should be disclosed.
        Ms. Norton. Ms. Schioldager.
        Ms. Schioldager. I would agree with that, and I would say
    that full disclosure is the appropriate way to educate plan
    participants from the standpoint of buying a fund like this.
    And I would expect that if this was added to any lineup, that
    there would be some type of an educational process to inform
    participants about the investment in REITs and what that means,
    and part of that education would include the costs associated
    with it.
        These stocks, as I said, are small-cap and mid-cap stocks,
    as are the funds in the Wilshire 4500 Fund. With that, the
    liquidity, because of the number of stocks that are available,
    is still quite a bit greater than what we see in the Wilshire
    4500. So, by comparison, in the Wilshire 4500, a $100 million
    trade is 23 basis points. The number that I had quoted in my
    testimony was 59 basis points, although there are some
    structural changes in the index that we were using that changes
    that to 40 basis points. So it still is quite a bit more
    expensive than what we see in the 4500 Fund.
        Ms. Norton. Does the average person think about the basis
    points when exercising her option to go from one fund to
    another, as far as you know?
        Ms. Schioldager. I wouldn't be able to comment on what plan
    participants are looking at. I certainly do.
        Ms. Norton. I hope you do.
        Mr. Wechsler.
        Mr. Wechsler. I just want to clarify one thing that would
    be helpful, not tied to the transaction costs, but to the other
    fees which have been discussed today. If my understanding is
    correct--and Mr. Ibbotson can correct me if not--but the work
    that we have done in this and that Ibbotson Associates has done
    has assumed higher fees because they were modeled on what is
    available out there publicly, although the testimony today has
    been that the management fees would be possibly only slightly
    higher than the other options.
        But the numbers that we have presented to you today already
    factor in somewhat higher costs. So notwithstanding the higher
    costs, we think the benefits are still there, which is why I
    responded earlier to you, Ms. Norton, on not only the costs,
    but you have to look at the benefit.
        And we think even at a little higher cost, the benefits are
    documentable and are the type of choice that Federal workers,
    as well as workers in 401(k) plans generally, should have in
    terms of permitting them to include a meaningful allocation to
    commercial real estate in a diversified investment portfolio
    over a long period of time.
        Ms. Norton. There are very substantial benefits here,
    including the lack of volatility after the stock market
    volatility I have seen, and it is certainly true you cannot get
    something for nothing. If you want return on your investment,
    you better understand how this operates; and within TSP I would
    expect it to operate conservatively and to give back a
    considerable sum.
        I think we should be interested in capturing what the real
    estate market has to offer. I am concerned about this notion of
    simplicity. I know, frankly, that I don't ask my investment
    advisor about transaction costs. I trust her; I know her. I go
    buy the stock.
        So I just want to say that the characteristics that Mr.
    Wechsler points out in his testimony are very attractive. In a
    market economy, you simply have to look at those kinds of
    characteristics: strong returns, low volatility, low
    correlation with returns to other assets. That is something one
    would want to look at in a conservative fund.
        At the same time, we in the Government would have to be
    very concerned. I would think it a tragedy if people began to
    fall away from TSP because they say, OK, now you have me, I
    don't quite know what to do.
        And one of the things it seems to me we would have to do is
    to pay attention. The Advisory Committee also indicated that
    they had compunctions about moving forward now. I am sure they
    haven't heard all we have heard, but they do talk about
    simplicity. The Board talks about people falling away. Terrible
    thing to fall away from, since the Government puts its own
    money in as well.
        I think perhaps there is a way to do this. If you are
    making a change that is very different, at least I think
    different from what you have done before in basis points, I
    think you would have to find some way to more than ``educate''
    people. I think you would have to do something to warn people.
        In any case, I will look forward to the work that is being
    done, work that you say, Mr. Wechsler, you have no opposition
    to, that would look at the entire range of options and then
    look at whether, given the range, this should be the one or if
    any ones should come forward consistent with the kind of fund
    we are trying to have here in the Government.
        Thank you very much, Mr. Chairman.
        Mr. Porter. Again, I thank you all very much for being here
    and for your testimony. Very lively debate and discussion. I
    think it has elevated an additional option for Federal
    employees, and I would not say that this discussion will end
    only on this particular option.
        I think that we should, as we move forward, look at some of
    the other plans that were mentioned today. And if there is one
    thing that has been consistent throughout the testimony is that
    the REITs have had a very strong return, and it is something we
    should give very strong consideration to. I appreciate everyone
    being here. Thank you all very much.
        Mr. Wechsler. Thank you.
        Mr. Ibbotson. Thank you.
        [Whereupon, at 4:19 p.m., the subcommittee was adjourned.]
        [The prepared statement of Hon. Elijah E. Cummings and
    additional information submitted for the hearing record
    follows:]

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