[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


                                 ______

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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:]

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    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:]

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    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:]

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    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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