[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
INVESTING IN THE FUTURE: MINORITY OPPORTUNITIES AND THE THRIFT SAVINGS
PLAN
=======================================================================
HEARING
before the
SUBCOMMITTEE ON FEDERAL WORKFORCE,
POSTAL SERVICE, AND THE DISTRICT
OF COLUMBIA
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JULY 10, 2008
__________
Serial No. 110-133
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
----------
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48-064 PDF WASHINGTON : 2009
For sale by the Superintendent of Documents, U.S. Government Printing
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Washington, DC 20402-0001
COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania DAN BURTON, Indiana
CAROLYN B. MALONEY, New York CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri CHRIS CANNON, Utah
DIANE E. WATSON, California JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of PATRICK T. McHENRY, North Carolina
Columbia VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota BRIAN P. BILBRAY, California
JIM COOPER, Tennessee BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
JACKIE SPEIER, California
Phil Barnett, Staff Director
Earley Green, Chief Clerk
Lawrence Halloran, Minority Staff Director
Subcommittee on Federal Workforce, Postal Service, and the District of
Columbia
DANNY K. DAVIS, Illinois
ELEANOR HOLMES NORTON, District of KENNY MARCHANT, Texas
Columbia JOHN M. McHUGH, New York
JOHN P. SARBANES, Maryland JOHN L. MICA, Florida
ELIJAH E. CUMMINGS, Maryland DARRELL E. ISSA, California
DENNIS J. KUCINICH, Ohio, Chairman JIM JORDAN, Ohio
WM. LACY CLAY, Missouri
STEPHEN F. LYNCH, Massachusetts
Tania Shand, Staff Director
C O N T E N T S
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Page
Hearing held on July 10, 2008.................................... 1
Statement of:
Hollingsworth, Jarvis, partner, Bracewell and Giuliani, LLP;
and Edward Swan, Jr., president, Fiduciary Investment
Solutions Group............................................ 32
Hollingsworth, Jarvis.................................... 32
Swan, Edward, Jr......................................... 41
Long, Greg, executive director, Federal Retirement Thrift
Investment Board; and Michael Sobel, managing director and
head of U.S. Equity Trading, Barclays Global Investors..... 8
Long, Greg............................................... 8
Sobel, Michael........................................... 16
White, Thurman, chief executive officer, Progress Investment
Management; Mellody Hobson, president, Ariel Capital
Management, Inc.; and Jesse Brown, president, Krystal
Investments................................................ 57
Brown, Jesse............................................. 87
Hobson, Mellody.......................................... 79
White, Thurman........................................... 57
Letters, statements, etc., submitted for the record by:
Brown, Jesse, president, Krystal Investments, prepared
statement of............................................... 89
Davis, Hon. Danny K., a Representative in Congress from the
State of Illinois, prepared statement of................... 3
Hobson, Mellody, president, Ariel Capital Management, Inc.,
prepared statement of...................................... 81
Hollingsworth, Jarvis, partner, Bracewell and Giuliani, LLP,
prepared statement of...................................... 36
Long, Greg, executive director, Federal Retirement Thrift
Investment Board, prepared statement of.................... 11
Sobel, Michael, managing director and head of U.S. Equity
Trading, Barclays Global Investors, prepared statement of.. 19
Swan, Edward, Jr., president, Fiduciary Investment Solutions
Group, prepared statement of............................... 43
White, Thurman, chief executive officer, Progress Investment
Management, prepared statement of.......................... 61
INVESTING IN THE FUTURE: MINORITY OPPORTUNITIES AND THE THRIFT SAVINGS
PLAN
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THURSDAY, JULY 10, 2008
House of Representatives,
Subcommittee on Federal Workforce, Postal Service,
and the District of Columbia,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2247, Rayburn House Office Building, Hon. Danny K. Davis
(chairman of the subcommittee) presiding.
Present: Representatives Davis, Cummings, Norton, Sarbanes,
and Jordan.
Staff present: Lori Hayman, counsel; William Miles,
professional staff member; and Marcus A. Williams, clerk.
Mr. Davis of Illinois. The subcommittee will now come to
order.
Although the ranking member hasn't arrived yet, I expect
him to come momentarily, and given the fact that I grew up in
an environment where punctuality was the essence of being, or
at least my father thought so, we will go ahead and begin.
Welcome, Ranking Member Marchant, members of the
subcommittee, hearing witnesses, and all those in attendance to
the Subcommittee on the Federal Workforce, Postal Service, and
District of Columbia's hearing entitled, ``Investing in the
Future: Minority Opportunities and the Thrift Savings Plan.''
The Chair, ranking member, and subcommittee members will
each have a 5-minute period to make opening statements, and all
Members will have 3 days in which to submit statements for the
record. Hearing no objection, so is the order.
I will begin with an opening statement.
We welcome Mr. Jordan. Mr. Jordan, how are you doing?
Mr. Jordan. Good morning.
Mr. Davis of Illinois. Today's hearing is intended to
examine ways to increase minority participation in the
management of Thrift Savings Plan [TSP] Funds and to explore
why the Federal Government uses passive management strategies
versus active management of TSP funds.
The TSP is the Federal Government's retirement plan,
similar to private employer's 401(k) plans. The TSP has over
$224 billion under its management. The Plan is unique because,
unlike other Federal Government programs, it does not receive
any appropriations of taxpayer money, nor does it have a public
purpose, and all decisions must be made for the exclusive
benefit of TSP participants who invest in the program. This
gives participants the confidence that the money invested will
only be used in their interest and they will not be charged
astronomical fees. By law, TSP stock and bond funds must be
passively managed index funds. Passive management funds seek to
replicate the broad markets, not beat them, often creating
savings for participants because of their traditionally lower
fees.
The debate over minorities participating in the TSP funds
has been a concern for quite some time; yet, the issue came to
the forefront during last year's Congressional Black Caucus
legislative conference. The executive director of the Federal
Retirement Thrift Investment Board revealed that there are
minority firms with talent in long-term financial management.
However, most of these firms gravitate toward the active fund
management business, which is not an investment strategy of the
TSP. Research by the TSP indicates that there may be only one
minority-owned firm that deals with passive-management of index
funds.
Today's hearing will examine ways to increase minority
access and the possibility of increased profitability to
members of the Plan because of diversification to active
management strategies. Several ideas will be discussed today to
try to achieve this goal, including: one, minority firms using
passive fund strategies so they can participate in the
management of TSP funds; two, minority firms applying to
participate in Barclays minority program; and, three, TSP
beginning to operate using active funds to increase
profitability and minority access.
The debate about active versus passive management of TSP is
not a new concept. Today we will discus some of the viable
options and explain why the TSP operates as it currently does,
and why some firms feel that it is time for the TSP to leap
into the future and change its management style of TSP funds.
I thank all of the witnesses in attendance and we look
forward to your testimony.
[The prepared statement of Hon. Danny K. Davis follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Davis of Illinois. I will now yield to Mr. Jordan for
any comments that he might have.
Mr. Jordan. I thank the chairman.
Today's hearing will take a look at the extent to which
minority-owned firms are involved in management of the Thrift
Savings Plan funds. For most Federal employees, these funds are
a critical component to their retirement plans and, as such,
represent a significant positive asset for recruitment and
retention of talented civil servants.
The Federal Retirement Thrift Savings Investment Board has
managed the funds of these Federal employees in such a manner
as to ensure independence, reasonable cost, and transparency.
Any efforts to modify that system must first seek to maintain
and enhance these characteristics.
It is also important to recognize that the funds controlled
by this fund are first and foremost someone else's money. These
funds belong to the women and men who have earned them through
their service to this country. There may be ways to improve the
operation of this fund, but Congress should always keep in mind
that it isn't our money. That doesn't mean we can't suggest
changes, but the desires and personal goals of the civil
servants should always be our guiding principle in making these
sort of changes.
I look forward to the testimony of the witnesses today and
want to thank the chairman for scheduling the hearing.
Mr. Davis of Illinois. Thank you very much, Mr. Jordan.
Now I would like to ask Representative Norton if she has
some opening remarks.
Ms. Norton. I thank the chairman for this hearing. There
are two ways to look at this hearing; to look at what the TSP
is doing generally and also look at it as a continuation of the
chairman's concern for equal opportunity when Federal dollars
are at stake or Federal employment is involved.
We have a competitive process. We are dealing here, at
least when it comes to firms, with an area that has been
traditionally closed to minority firms; indeed, has
discriminated against them. So there is no wonder that this is
one of those areas in which we would want to make sure that
minority firms understood the competitive process of the
Federal Government and that we reached out to encourage their
participation in an area that is one that did not welcome them,
traditionally, in this government and in this society.
We have to satisfy ourselves that is being done,
particularly when you consider the growing number of employees
who contribute to the fund who are people of color. We want to
make sure that we have done all that we can do to ensure that
every part of our government has welcomed all to participation.
This may be a difficult part; therefore, it requires some
specific action; perhaps action that has not yet been taken,
but we will see.
I thank you again, Mr. Chairman.
Mr. Davis of Illinois. Thank you very much, Representative
Norton.
We will now go directly to our witnesses. Before swearing
them in, let me just introduce our first panel.
Our first panel is Mr. Greg Long, who is the Executive
Director of the Federal Retirement Thrift Investment Board. The
Board is responsible for administering the Thrift Savings Plan,
which is currently the contribution fund for Government
employees.
Thank you very much, Mr. Long, for being here.
Our second witness is Mr. Michael Sobel. Mr. Sobel is the
managing director and head of U.S. Equity Trading for Barclays
Global Investors, which is the management company responsible
for the outside management of TSP funds.
Gentlemen, is it our tradition that witnesses be sworn in.
If you would stand and raise your right hands.
[Witnesses sworn.]
Mr. Davis of Illinois. The record will show that the
witnesses answered in the affirmative.
Again, gentlemen, we are pleased that you are here with us.
We would ask that you summarize your statement in 5 minutes. We
generally are guided by the green light, although we don't
always adhere totally to it. But the green light indicates that
you have 5 minutes. When it gets yellow, you are down to 1
minute; and, of course, the red light means that you should
summarize your statement and then we will go into questions.
Let me thank you again, and we will begin with Mr. Long.
STATEMENTS OF GREG LONG, EXECUTIVE DIRECTOR, FEDERAL RETIREMENT
THRIFT INVESTMENT BOARD; AND MICHAEL SOBEL, MANAGING DIRECTOR
AND HEAD OF U.S. EQUITY TRADING, BARCLAYS GLOBAL INVESTORS
STATEMENT OF GREG LONG
Mr. Long. Chairman Davis and members of the subcommittee,
my name is Greg Long, and I am the Executive Director of the
Federal Retirement Thrift Investment Board. The five members of
the Board and I serve as the fiduciaries of the Thrift Savings
Plan for Federal employees.
The TSP is the largest defined contribution retirement plan
in the world. Individual accounts are maintained for more then
3.9 million Federal employees, members of the uniformed
services, and retirees. As of June 30th, the TSP totaled $226
billion in assets.
Your letter of invitation explained that the purpose of
this hearing is to examine the passive investment strategy used
in the TSP and explore ways to increase minority participation
management of the TSP. I will address both of these matters in
my statement.
The TSP was created by Congress in the Federal Employees
Retirement System Act of 1986, following 3 years of study and
hearings by the House and Senate committees of jurisdiction.
The record of these proceedings shows that the committees
received input from pension experts, academics, employee
representatives, the financial services industry, and the
Reagan administration. Significant assistance was also provided
by the Congressional Research Service and GAO.
Various investment approaches were considered and,
ultimately, the House and Senate decided on a passive
investment policy for the TSP. Passive management in the TSP is
achieved through the use of index funds. All of the stocks in
an index are purchased. There is no ``active'' attempt to out-
perform the index through specific stock selection.
The following passage from the Joint Explanatory Statement
of the Committee of Conference explains how the conferees
themselves described the crucial nature of this decision:
``Most importantly, the three funds authorized in the
legislation are passively managed funds, not subject to
political manipulation. A great deal of concern was raised
about the possibility of political manipulation of large pools
of thrift plan money. This legislation was designed to preclude
that possibility. Concerns over the specter of political
involvement in the thrift plan management seem to focus on two
distinct issues. One, the Board, composed of Presidential
appointees, could be susceptible to pressure from an
administration. Two, the Congress might be tempted to use the
large pool of thrift money for political purposes. Neither case
would be likely to occur given present legal and constitutional
restraints. The Board members and employees are subject to
strict fiduciary rules. They must invest the money and manage
the funds solely for the benefit of participants. A breach of
these responsibilities would make the fiduciaries civilly and
criminally liable.''
The Conference Report goes on to describe how the passive
approach is designed to insulate the TSP from political
pressure while allowing Plan participants to benefit from the
long-term growth available in the broad markets.
Since the initial policy was established by the Congress in
1986, the Board, on its own initiative, has conducted two major
investment policy reviews. Between 1993 and 1995, the Board
reaffirmed the passive strategy, while asking the Congress to
authorize additional passively managed index funds for
investment.
Again in 2006, with the assistance of Ennis Knupp, our
Chicago-based investment consultant, the Board undertook a
second major review of TSP investment policy. This review again
reaffirmed the passive management approach, which the Board
continues to endorse and pursue.
Surveys of Federal employees by the Office of Personnel
Management have shown that the TSP is very highly regarded. Our
own surveys internally support the same findings. Investment
legend John Bogle, the founder of Vanguard Mutual Funds, has
characterized the TSP as ``the best single savings vehicle in
America today.'' The Board members and I are privileged to
offer this valuable benefit to the men and women who serve our
Nation, and we endorse continuation of this passive investment
philosophy, which has served Plan participants very well over
the past 21 years.
With regard to the second matter noted in your invitation,
this is the second time in 16 months that I, as Executive
Director, have been asked by a Member of Congress to publicly
discuss why the Board does not specifically seek asset
management services for minority or women-owned vendors. Last
September, Congresswoman Maxine Waters invited me to address
the same topic at the Congressional Black Caucus Foundation's
Financial Services Issue Forum.
I accepted that invitation even though I knew that many
vendors in attendance would not be pleased with my message.
Nevertheless, I think it is important to speak openly to all
members of the financial services industry so there is a clear
understanding of just what the Board is seeking when it goes to
the marketplace for investment services.
First, for the reasons discussed above, the TSP offers only
passive investments to participants. Consequently, we do not
seek services from the very large segment of the financial
services industry that offers various active management
products. Our goal with regard to investments is to replicate
the returns of the broad indices, as our statute requires.
Second, our law requires the Board to develop investment
policies which provide for low administrative costs. I, and all
of my predecessors, determine that the best way to achieve low
administrative costs for the participants is to conduct a full
and open competition for the asset management services we
require. This process of open competition has resulted in the
hallmark of the Plan's success, which is its very low
administrative costs. In my view, this remain the gold standard
for ensuring participants that this Plan is being administered
exclusively for their benefit, as our guiding statute requires.
Some agencies may seek to further social or political goals
when they spend taxpayer dollars to accomplish their missions.
The Board, however, does not spend taxpayer dollars. Our
administrative expenses are paid first from forfeitures and
then from the investment earnings of all TSP participants.
These expenses reduce the retirement savings of our
participants and thus must be expended solely for their
benefit. This highly focused approach governs all of our policy
and business decisions, including the procurement of services.
Additionally, by statutory design, the financial services
we seek are the plainest of plain vanilla. In writing and
amending our statute, the Congress clearly intended that the
TSP's funds are to be invested efficiently, keeping market
impact to an absolute minimum.
I hope this testimony helps the subcommittee in its review,
and I welcome any questions.
[The prepared statement of Mr. Long follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Davis of Illinois. Thank you very much.
We will now hear from Mr. Sobel.
STATEMENT OF MICHAEL SOBEL
Mr. Sobel. Chairman Davis and members of the subcommittee,
my name is Michael Sobel. I am here to testify on behalf of
Barclays Global Investors and its role as the external manager
for the Federal Thrift Savings Plan. As head of U.S. Equity
Trading at BGI, I am responsible for equity and listed
derivatives trading originating from the United States, of
which responsibilities include assuring that the execution
results are in line with BGI's best execution principles in
managing our brokerage relationships.
I will begin by discussing our investment philosophy and
our structure, both of which are focused on delivering highly
reliable, low-cost investment results to institutional
investors like TSP. By ``institutional,'' I refer to defined
benefit and defined contribution pension plans sponsored by
corporations or public agencies, and to endowments,
foundations, and other similar pools of capital. I will then
say a few words about the services we provide to the TSP and
elaborate on how we keep the costs associated with trading and
investing as low as possible. I will conclude by discussing
BGI's Emerging Broker Program, which has been in place since
the early 1990's.
Barclays Global Investors was founded in 1971 as part of
Wells Fargo Bank in San Francisco, CA. Today, we are owned by
Barclays PLC, one of the world's leading financial services
providers. We are headquarters in San Francisco with
approximately 3,400 employees worldwide. Since our founding,
BGI has remained true to a single global investment philosophy
which we call Total Performance Management. BGI manages
performance through the core disciplines of risk, return, and
cost management. The success of our indexing methodology
results from our focus on delivering superior investment
results over time while minimizing trading and other
implementation costs and rigorously controlling investment and
operational risks.
We are honored to have served as an investment manager for
the TSP since 1988, a relationship that we have retained in
regular, highly competitive bidding process. BGI manages four
of the investment options available for participants: the TSPC
Fund, based on large-cap U.S. equities; the S Fund, based on
mid and small-cap U.S. equities; the F Fund, based on Lehman
Agg. Long-Term Bond Index; and the I Fund, based on the MSCI
Europe Australia Far Index of non-U.S. equities. There is also
a G Fund, which is managed by the U.S. Treasury and invests in
U.S. Treasury securities. In August 2005, the TSP added a
series of lifecycle or target horizon options that use the
existing five options as the asset class building blocks with
allocations in each lifecycle across the funds, these options
being determined by a separate vendor selected by the TSP.
BGI provides investment management services to the TSP and
no other services. This is also true of BGI's relationship with
most of our other clients. In general, we provide only
investment management services, which we consider to be our
core expertise. The key to our success in asset management is
our ability to minimize implementation and trading costs. High
costs and expenses of investing detract from performance and
investment returns; lower costs increase the investment pool
and put more money long-term into the pockets of investors.
Let me say a few words about how we do this. Each of our
index funds is structured to match the performance of a
specific index. These indices, such as the S&P 500 or MSCI
EAFE, are designed by third-party index providers. However,
these indexes are really paper portfolios and do not include
any of the trading costs that real-world investors experience.
Thus, to successfully achieve the performance target--that is,
to track the index as closely as possible--BGI strives to
minimize the real-world cost through a variety of highly
efficient trading approaches.
Through the size and diversity of our client base, we are
able to match or offset a significant portion of our clients'
buy and sell orders internally, thereby reducing or eliminating
market transaction costs. The internal matching of buy and sell
orders is commonly referred to as crossing and is conducted and
actively monitored by BGI pursuant to the terms and conditions
of an exemption issued by the Department of Labor. All these
transaction cost savings, which we estimate are in the hundreds
of millions of dollars annually, are passed directly to the
clients.
When we do trade in the external markets, we utilize
carefully developed and managed trading strategies, and we
access all possible sources of liquidity, including electronic
marketplaces. Our trading activities are supported by dedicated
trading research team whose sole job is to develop new trading
strategies and techniques to minimize trading costs. Our prime
objective is to achieve the highest degree of control over
investment outcomes at the lowest possible cost. BGI has
developed state-of-the-art systems which use automation to
improve trading efficiencies and lower transaction costs, which
are often found at major broker-dealers.
We execute our trades through broker-dealers who are pre-
screened for creditworthiness, as we believe all trading
relationships incorporate some level of credit exposure to the
executing broker. We rigorously monitor the prices at which our
trades are executed relative to the number of market-related
benchmarks to ensure that we are receiving best execution. We
also use our scale to negotiate fairly low per share commission
rates. BGI has not and has never used soft dollars in its
trading activities on behalf of our funds. BGI does not accept
direction from investment management clients as to its trading
activities, including its selection of brokers with which it
trades.
Over the course of a long-term investment, lower management
fees and expenses can translate into considerable savings for
investors. Indeed, index investing remains the most cost-
effective and diversified way to gain exposure for most
investors' portfolios.
Now I would like to discuss BGI's Emerging Broker Program.
BGI is committed to promoting and utilizing new ideas in
investment services in order that we may provide our clients
with the best and widest range of execution services and
alternatives that are consistent with our fiduciary
responsibilities. In keeping with our fiduciary
responsibilities, BGI has an explicit policy to select the most
credit-worthy counterparties that provide the best execution at
the lowest possible cost.
At the same time, we recognize the diversity and complexity
of today's business community and that recent trends in
financial services have resulted in an increasing number of
firms offering brokerage services that do not fit the
traditional format of a full-service investment firm. These
emerging brokers include minority business enterprises, women-
owned business enterprises, disabled veterans enterprises, and
other small firms offering alternatives to established and
well-capitalized broker-dealers.
Within the contest of our overall trading requirements, BGI
believes it is important to allow for the positive impact of
innovative ideas and differentiated service from emerging
brokers. The diversity of thinking and potential for creative
problem-solving is often associated with the entrepreneurial
culture of emerging brokers. This is an advantage that we have
long recognized and wish to continue to provide for our
clients. As a result, we have developed a separate program and
approval requirements for emerging brokers.
Firms are selected on the basis of several criteria,
including capital, business and regulatory track record,
operational capabilities, trading talent, competitive costs,
and reputation. For firms that pass the initial screening, BGI
conducts due diligence, which often includes an onsite visit by
BGI trading personnel. Once selected, our trading team works
closely with the dealers to establish real-time connectivity,
review order handling guidelines, and establish the best
execution framework required to do business with BGI. We have
found, in our experience, emerging brokers are most successful
with us when they focus on working to match offsetting client
order flow or in handling agency orders in small or mid-cap
securities that have irregular trading patterns.
The nature of the investment strategies managed by BGI
means the majority of our trading requirements will continue to
be met by those firms that provide the necessary automation and
high volume, low cost execution that is part of the advantage
that we offer to our clients. However, also due to BGI's scale,
we are often within the top 10 clients of an emerging broker in
the program. We don't believe it is in either the broker's
interest or in the interest of BGI and its clients to be the
dominant customer of any brokerage firm, as it creates and
poses dependency risks to both sides.
Because of our commitment to innovation, which we firmly
believe originates in the diversity of ideas, we continue to
refine our counterparty approval policies to ensure that they
recognize the positive potential contribution of emerging
brokers.
I thank you for the opportunity to speak with you today and
I look forward to answering questions that you may have.
[The prepared statement of Mr. Sobel follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Davis of Illinois. Thank you, gentlemen, very much. We
will proceed directly into a line of questioning.
Let me begin with you, Mr. Long. From time to time, we hear
about possible political manipulation of TSP money and that one
of the things that the Board is very conscious about and
against is that kind of manipulation. Could you share with us
some examples of what might be called political manipulation or
attempts at political manipulation?
Mr. Long. Sure. In the past, we have seen different groups
that wanted to receive favorable treatment from the TSP. There
was a group that represented commodities that thought we should
have a commodities fund. There was another group that
represented real estate investment trusts that thought we
should have a real estate investment fund. There are groups
that think they should receive favorable treatment, and there
might be rational reasons behind those goals, but that is not
what we do. We look out just for the best interest of
participants' beneficiaries.
Mr. Davis of Illinois. You also mentioned in your testimony
about surveys that you have done and, of course, surveys that
the Office of Personnel Management [OPM] have done both
indicate a high level of satisfaction on the part of employees,
on the part of investors. What are some of the things that they
indicated that perhaps they liked best about what was
happening?
Mr. Long. I think the most important statistic from the
survey was the level of overall dissatisfaction. We had a level
there of about 3 percent. So some participants are highly
satisfied, some participants are kind of in the middle, but the
number of people who are dissatisfied is in the single digits;
and that says, on an overall basis, we are doing a darn good
job. And when I say we, I mean not just the agency that I help
run, but OPM and the Government as a whole.
The focus on the funds, we asked about specific funds.
There is some desire for more funds, but then when you get down
to the question of are you willing to pay more money for more
funds, the answers change. What we also saw is a clear high
usage and benefit of the Web site. In other words, people go to
the Web site, they use it, and the people who use it often tend
to make wiser investment decisions.
Mr. Davis of Illinois. Have you seen any place or would you
say that there is any place in the law that would allow for
consideration of social goals that could be used as part of the
criteria for investing the funds?
Mr. Long. The Conference Report specifically--and I am
going from memory here, but the Conference Report specifically
considered that and said that was not the intent of the TSP,
that social goals should not be looked at as we determine what
the investment options should be.
Mr. Davis of Illinois. In the 2006 bidding process, were
there any minority companies represented or did any minority
companies bid?
Mr. Long. One moment.
[Pause.]
Mr. Long. The answer is no, there were none. What I was
just talking with Tom about is I can't discuss the names of the
people who actually bid.
Mr. Davis of Illinois. Let me just go to you, Mr. Sobel,
for a minute. Could you tell us a little bit more about the
Emerging Broker Program?
Mr. Sobel. Sure. Happy to. We started the program in the
early 1990's. As our size and complexity grew, we were really
interested in extending out the trading capabilities by looking
to leverage the kind of creative and entrepreneurial
capabilities of smaller firms, so we established this program.
We are certainly also aware that many clients also had a keen
interest in supporting it as well, which certainly didn't hurt
the overall approach that we had already been kind of taking.
And we have found, over the years, that by working with these
brokers, that they learn from us and we learn from them, and we
are able to really leverage their keen and intense focus on
service, particularly for small and difficult names to trade in
the marketplace.
Mr. Davis of Illinois. I am going to actually go now to Mr.
Jordan, and I am going to ask Members if we would try and hold
pretty close to the 5-minute rule, and we will do another round
where we need to.
Mr. Jordan.
Mr. Jordan. I thank the chairman. Whenever we have hearings
on this type of issue, I am always reminded of the Will Rogers
line who, I think, said, I am more concerned about the return
of my money than the return on my money, which I think is
important to keep in mind whenever we are talking about these
kind of issues.
I will just do one question. Elaborate on this whole debate
between active and passive investment strategies, and
specifically tied into the fee structure typically associated
with both, and maybe even look at bear markets versus bull
markets and how that can impact. We can go with Mr. Long first
and then Mr. Sobel.
Mr. Long. We, by law, invest passively, so we do not employ
an active approach. An active approach would be one in which
you pay people, a manager, to make a determination between
different stocks: do you buy Pepsi or Coke, and which one is
the best over the long term. That is not a determination that
we make in a passive style; we buy the whole marketplace.
Because you don't need to pay people to make that decision,
these are typically very bright, well paid people, the expenses
for passive management for index funds are lower, often
substantially lower. It is not uncommon to have active
management funds in excess of 100 basis points, sometimes in
excess of 200 basis points. When you take a look at the TSP,
our total cost, including all services, order costs for Web
sites, statements, recordkeeping, investment management
trading, all those expenses in aggregate net 1.5 basis points
to participants. So it is an enormous difference, and that
difference translates directly to the pocket of our
participants and beneficiaries.
Mr. Jordan. Would some argue that even with that fee
structure in mind, bear market versus bull market, can you
elaborate on that a little bit?
Mr. Long. There are, and I have read them, papers out there
that say active management generally does better in a bull
market than a passive market, and in a bear market passive
management tends to do better. You can find plenty of papers
supporting both arguments. There are a lot of people that have
their own self interests and research is created to support
that self interest. The bottom line is, for the TSP, right now,
we are required to do what we do, which is passive management.
It translates to low fees and, over time, typically better
returns than the average active manager fund is able to
produce.
Mr. Jordan. Mr. Sobel.
Mr. Sobel. I regretfully concur with Mr. Long; the fees are
unusually low for this particular investment style. We do, as a
firm, believe that index investing, or passive investment
strategies, are kind of key and core to any investment plan, so
having a component of this as an option is incredibly
important, just on the basis of the fee differential alone. So
100 or 150 basis points or 1.5 percent compared to 1/100th is a
big hurdle to try to get over. So, from the cost perspective,
the overall kind of approach to passive investing I think is
fairly compelling.
Bull market versus bear market, application of index funds,
the markets are incredibly complex and, depending on who you
talk to, whether they believe in efficient market theory or
not, it is very hard to beat the markets in either scenario,
and market timing is a very difficult thing.
Mr. Jordan. I thank the chairman.
Mr. Davis of Illinois. Thank you very much, Mr. Jordan.
Mr. Sarbanes, no questions?
Ms. Norton I am sure she does, but while she is on her way
back, let me ask you, Mr. Sobel, is the Federal Government your
largest client? Do you have a client larger than that?
Mr. Sobel. I actually don't know the answer to that. I
don't think the answer to that would be yes. So I think the
answer to that is no, I do not believe that they are our single
largest client.
Mr. Davis of Illinois. Oh, OK.
I see that Ms. Norton is back. Ms. Norton.
Ms. Norton. Thank you very much, Mr. Chairman.
Could I ask, Mr. Long, has the TSP outperformed other
publicly managed funds that are involved in active management,
where the funds are invested with active managers?
Mr. Long. We spend our time looking at the performance
relative to the benchmark.
Ms. Norton. Sorry?
Mr. Long. I said we spend our time, in our analysis,
looking at how we perform relative to the benchmark that we are
required to perform to, and that we don't compare ourselves to
other publicly managed funds. However, I can say that I am sure
that other publicly managed funds that employ active
strategies, some have probably outperformed us.
Ms. Norton. Well, how do you perform with respect to the
market, period?
Mr. Long. We replicate the market.
Ms. Norton. Explain.
Mr. Long. Instead of buying some stocks, we buy all of
them, and that is a strategy----
Ms. Norton. So what happens to the market happens to you?
Mr. Long. Whatever the market happens to do. And that is an
incredibly----
Ms. Norton. So risk-averse as you are, whatever happens to
the market happens to you.
Mr. Long. That is correct.
Ms. Norton. So how are you faring now, Mr. Long?
Mr. Long. Well, the market has had a tough month, tough 6
months, and it performs badly. Beating the market is a
challenging thing to do. What you will find is some active
managers are able to beat the market some of the time; an awful
lot of them don't.
Ms. Norton. I want to be clear, Mr. Long. I understand this
is a Federal Government fund. I am asking these questions
because I am trying to make sure this fund that was set up,
with set up guiding principles a long time ago--how long has it
been--investigates, looks at those principles and doesn't
simply accept them, as I must say I hear you saying you don't
even look at its comparison to other funds.
So I don't mind you concentrating on your work, but it
seems to me, if anything, out of market intellectual curiosity,
you want to know something about--I have in mind, Mr. Long, for
example, there are State teachers' funds, there are a plethora
of public funds in the market. They better not lose any more
than we better not lose, because they are generally handling,
sir, funds that are far more critical to those to whom they owe
a fiduciary responsibility. They are handling entire retirement
funds.
So I sense that we are taking care of everybody, and when I
look at the plethora of public funds in the States that are
infected in an active management, at least leads me to ask
questions. Why are we so much more secure than they who have so
much more at stake than we, because we certainly are not here
talking about people's fundamental retirement.
Mr. Long. The plans that you reference, the State plans,
are, not all, but most, defined benefit plans, meaning that the
participant, the end-user has a defined benefit that is
irrespective of the way that the funds perform. The State has
the obligation to pay the employee usually a fixed percentage--
--
Ms. Norton. I am quite aware of that, Mr. Long.
Mr. Long. OK.
Ms. Norton. I don't see how that answers my question. You
are saying to me that the State would have to pay in any case.
Are you saying to me that the State has had to make up for
losses? Is that what you are implying? I can understand a
defined benefit plan and what it is supposed to do and what
would happen if in fact there were losses. That doesn't answer
my question. My question is that much more is at stake, there
is much more to lose, and yet the investment is made. Why do
they make the investment in that way?
Mr. Long. I am not sure I understand why you are saying
there is much more to lose.
Ms. Norton. I am talking about often whole retirement
funds. I am not talking about something like TSP, which does
not involve people's entire retirement.
Mr. Long. Well, the TSP is a core part of anybody who--is
for employees, certainly, but it is not their only retirement
source of income.
Ms. Norton. Yes. So continue.
Mr. Long. I am not sure what the question is, though.
Ms. Norton. My question, Mr. Long, has to do with State
funds that in fact often do involve people's entire retirement.
And I want to know why the States do not feel that they are at
substantial risk in having at least some of those funds in
active management.
Mr. Long. Well, they have experts. They sit down and they
have experts that choose the funds. They have a pension
management. The State of New York, they have a pension expert
that sits down and decides what to invest those moneys in.
Those are not made at the participant level, they are made at
the trustee level.
Ms. Norton. Obviously, Mr. Long.
Mr. Sobel, perhaps you can inform us of how--obviously
these States, these pension funds, these union pension funds
have had to calculate the consequences of a horrifically under-
performing market. There is, I argue, even more of a reason to
be risk-averse and, yet, they have in fact--I think you will
hardly find a State that doesn't have substantial funds in
active management, and I am simply trying to understand, since
they have the same kind of fiduciary relationship to their
employees as we do, except that they are usually holding funds
that are far more important not their employees.
I am trying to find out what is the core difference in the
decisionmakers. We are one here. There would have to be a State
legislature who was there. Why do they take this risk and we
don't take this risk even with a small, let us say, part of our
funds? Do these States, do these funds feel they have a risk?
How would you explain the difference in the approach, both of
which require some very high level of risk-averse in deciding
which approach to use?
Mr. Sobel. Well, I think it is a great question. It is an
extremely complicated area. It all has to do with what type of
aversion to risk do you have. Certainly, as you pointed out,
even passive strategies have a very substantial amount of
market risk associated with them. Active strategies also bear
that market risk; they have an additional layer of risk, which
has to do with the stock selection.
Ms. Norton. Have some of these active funds been able to
beat the market in this market situation, which, as Mr. Long
has had to say, has not been good for those who simply follow
the market, whichever way it goes? Have some of the funds in
active management been able to beat the market in this climate,
in this economy?
Mr. Sobel. Sure, some certainly have. But I think over the
long run we have hundreds of thousands of clients from all over
the world, and there are many examples of very large, sizable
funds that make most, if not all, of their investment into
passive strategies as a matter of policy, and we have seen
others----
Ms. Norton. Give me examples of those funds that make all
their investments in passive.
Mr. Sobel. I am not going to be at liberty to disclose any
names of any funds.
Ms. Norton. That must be a matter of public record, because
they would want everybody to know that, especially those to
whom they are responsible.
The point of this line of questioning is--which still has,
I must say, not been responded to to my satisfaction, and I am
sorry we don't have somebody from one of these State funds or
State legislatures--is to try to get to the bottom of what it
is we are afraid of so I know what it is, whether, in fact, we
could hedge against it in some way or whether the best strategy
is the strategy we have. A strategy, of course, we have, I must
say, has been based on an economy that right under us is
changing in fundamental ways that nobody understands. I have
been having debates with friends about, well, you know, this
mantra, you know, we are a robust economy, this is part of the
cycle.
There is no cycle ever like this that we have seen. This is
a perfect storm and it involves some uncontrollables that will
always be beyond our control that have now become primary in
this economy. And no one can imagine that for decades now they
won't be. New actors in the economy, huge new hungry actors,
and, of course, commodities like oil and food going ways that
are completely adverse to the way in which this country was
built. So someone who says, oh, it is a robust economy, we are
having a downturn, seems to me is not doing the kind of
analysis we need to do to try to understand this.
The analysts I most respect are those who are beginning to
even question whether or not those who say the obvious, that,
you know, the new actors, that is the reason for it. Those who
have looked seriously say we don't even know the reason for it
in a global economy.
So, Mr. Long, when you come and say all I do is look in my
own navel, as much as I can understand that, we may wake up 1
day and find that we have not had fair warning, that there were
other things we should be looking at. I don't know if one of
those is piloting something in active management. I don't know.
I don't know enough to know. My problem is I don't think you
know enough to know. And I believe, in an economy that is
really changing right from under you, that it is your
obligation to know.
We did not know, at the time of the farm bill, for example,
Mr. Chairman, I didn't know, I did not perceive, I hadn't read
deeply enough to know that subsidizing ethanol was going to
make us go completely off the cliff, because we had made that
decision years ago. So here we are now eating gas and
subsidizing it. So I must say I think the only thing to do is
to bring self criticism and skepticism to everything we do, and
especially to handling somebody else's money; and that is what
you are doing now, you are handling somebody else's money, and
I would hope you would be looking at how everybody else is
handling it and what is happening to our economy.
I thank you, Mr. Chairman.
Mr. Davis of Illinois. Thank you very much.
Let me just see if I can understand. Are there reasons we
can define which suggest that teacher retirement funds, State
funds are instances where there is a greater reliance for
ultimate retirement than what is on the TSP? Are we more
judicious than those investors or are we more judicious than
the handling of those pension contributions? Is there a defined
rationale for that position?
Mr. Long. Would you like me to respond?
Mr. Davis of Illinois. Yes.
Mr. Long. For a teacher, for anybody who is entirely
dependent on a single pension, then I think it is a fair
statement, then you have somebody who is fully reliant on one
pension plan, as opposed to the current three-tiered structure
that exists under the Federal system. But does that change the
basic fiduciary obligation to look out solely for the best
interest of the beneficiaries? No. It doesn't change what we
do.
Mr. Davis of Illinois. So I guess the most that we would
end up being able to say is that we have a system and a process
that is defined that is different than some others, and, yet,
the outcomes are expected to be the ultimate protection in both
instances. I am sure the people who invest teacher retirement
funds want to make absolutely certain that, when Ms. Jones gets
ready to retire, that everything is in place and everything is
there.
Let me just ask another question. Given the lay of the
land, given what we know, given the law, given what we have
experienced, given what we have seen, do you see any wiggle
room for movement toward accomplishment of the goal that I am
certainly seeking, and that is the goal of finding a way that
the level of diversity changes a bit from what it is in the
direction of where we are trying to take it? Mr. Long.
Mr. Long. Yes, and as the more companies grow--right now,
BGI is our vendor. We will re-compete that again and again and
again, and whoever is the best and whoever wins that
competition will be the manager for at least some of the TSP.
There is no reason to think that it has to be BGI in the
future. And whether that is a woman-owned firm, minority-owned
firm, as long as it is U.S.-based, they can compete.
Mr. Davis of Illinois. Mr. Sobel, let me just ask you does
Barclays have an internal diversity or diversification program
or goal or system? What is your position on diversification?
Mr. Sobel. And this relates to our employee population that
you are referring to?
Mr. Davis of Illinois. Yes. I mean the overall
diversification. When I think of diversification, I really
think of from top to bottom, I think of from side to crossways,
I think of from up to down, and I think of what it is that we
do.
Mr. Sobel. I do know that we have a team focused on this,
but I have to profess it is a bit outside of my core area of
expertise.
Mr. Davis of Illinois. OK. Could you perhaps get an answer
for us for that and get it back to us?
Mr. Sobel. Yes, happy to.
Mr. Davis of Illinois. All right.
Thank you, gentlemen, very well. We appreciate your being
here and we thank you so much for your testimony.
We will go to our second panel. Our second panel is going
to consist of Mr. Edward Swan. Mr. Swan has over 32 years of
institutional investment management and marketing experience
covering major domestic and international investment sectors,
most recently as President of the Fiduciary Investment
Solutions Group. Mr. Swan, we welcome you. Thank you very much.
Mr. Jarvis Hollingsworth is a partner in the public law
section of the Houston, TX office of Bracewell and Giuliani. He
also serves as a trustee of the Teacher Retirement System of
the Texas Pension Fund, after serving as chairman from 2002 to
2007.
Gentlemen, we thank you very much. If you would stand and
be sworn in.
[Witnesses sworn.]
Mr. Davis of Illinois. The record will show that the
witnesses answered in the affirmative.
Gentlemen, we thank you so much for being with us, and we
ask that you summarize your statements in 5 minutes. Your
entire statement, of course, will be included in the record.
Yellow light indicates that you have a minute left, if you
would then sum up, and the red light indicates the time is
over.
We will begin with you, Mr. Swan.
Mr. Swan. Mr. Chair, with your permission, could I ask Mr.
Hollingsworth to go before me? I think some of his comments
will be very pertinent to the discussion that just occurred.
Mr. Davis of Illinois. Well, I have always been taught that
age was before beauty anyway, so----
Mr. Hollingsworth. Does that imply he is older than me?
Because I love that. [Laughter.]
Mr. Davis of Illinois. Mr. Hollingsworth, you may proceed.
Thank you.
STATEMENTS OF JARVIS HOLLINGSWORTH, PARTNER, BRACEWELL AND
GIULIANI, LLP; AND EDWARD SWAN, JR., PRESIDENT, FIDUCIARY
INVESTMENT SOLUTIONS GROUP
STATEMENT OF JARVIS HOLLINGSWORTH
Mr. Hollingsworth. Thank you, Mr. Chairman, members of the
subcommittee. It is an honor to be here today to discuss these
issues with you. My name is Jarvis Hollingsworth. I am a lawyer
and a partner with the law firm of Bracewell and Giuliani in
Houston. I was most recently the chairman of the Board of the
Teacher Retirement System. It was a privilege to serve the
active and retired teachers of Texas for over 6 years as a
fiduciary and steward of their retirement dollars.
The System, typically referred to as Texas Teachers, about
$112 billion as of market today, serves over 1.2 million
retired and active teachers. It is the sixth largest public
pension plan in the country. The plan pays out over $5.5
billion a year in benefits. It is a defined benefit plan and
therefore is the sole retirement of the teachers and the
retirees.
I will address three issues here today. First, recent
changes in the investment allocation at Texas Teachers. I will
then talk about the use of external managers and moving Texas
Teachers from a passively managed strategy to some active
management. Third, I will give the subcommittee some background
on efforts under my leadership at Texas Teachers to increase
minority participation at the fund, as you seek to do here
possibly at TSP.
During fiscal year 2006, our Board of Trustees instituted a
very thorough review of the investment program. One objective
was to increase the return to the fund without an increase in
risk. A second objective was to review the fund's asset
allocation in order to lessen the fund's exposure to dramatic
swings in the stock market and to achieve a more efficient and
more balanced asset allocation. We determined that these
objectives would help the fund, first, meet our future pension
obligations; second, be more cost-effective; and, third, manage
our risk in a very proactive manner.
In recent past, the Texas Teachers portfolio was
concentrated in large domestic equities. Hence, in good and bad
economic times, a majority of our fund's returns had
historically been driven by the performance of these publicly
traded instruments. Prior to the board's reallocation of the
assets in 2006, which I will get to in just a moment, the
proportions of our total investment strategies were 65 percent
equities, 26.8 percent fixed income, 4.3 percent that was
spread across the various alternative assets, private equity,
real estate, and hedge funds, 3 percent in cash instruments. So
over 90 percent of the fund at that time was essentially
invested in an enhanced index or passive management approach.
One of the things that led us to the study was, when I
first came on the board in 2002, I was there to experience the
tech bust in the stock market. Our plan was at $95 billion when
I came on the board, and within 18 months the plan was down to
$65 billion. So there are examples where you do well with the
stock market and, of course, it is both good and bad times.
After our study, we created three new major asset
categories for the fund: one, global equities, which
constituted 60 percent of the portfolio, that includes all
public and private equity; 20 percent in an allocation called
stable value, which included all fixed income credit, U.S.
treasuries, hedge funds and cash; the remaining 20 percent were
in our real return asset category, which included real estate,
real assets, commodities, and global inflation-linked bonds.
This reallocation that we did in 2006 moved the fund away
from the traditional large U.S. public pension model of being
highly weighted in publicly traded stocks and bonds, and
allowed the fund to guard against the downturns in certain
markets and better capitalize on the strong returns of the less
traditional asset classes. In addition to being a better
balanced portfolio, it offered greater diversification, the
opportunity for more robust returns, and took advantage of the
fund's competitive advantages: a long investment time horizon
of 10 years and very limited short-term liquidity requirements.
This asset reallocation also decreased the fund's downside
risk, lowered the volatility in the portfolio, and lowered the
correlation among the portfolio's asset classes.
I will talk a bit about active and passive and external
managers. Texas Teachers has a very long tradition of managing
the assets internally. As of 2006, over 90 percent of our
assets were managed internally by Texas Teachers investment
professionals. We are very proud of that fact and, for the most
part, it generated returns that were at or above those of
external managers.
While this internal management resulted in an effective,
low-cost system that produced consistent returns over time,
staff, in conjunction with our external consultants,
determined, after this study, that a combination of both
internal and external management would allow for a more
effective portfolio design that diversifies risk across
managers and investment strategies.
If I could, I would just like to take a second to talk
about the emerging manager program. I think the case has been
made, and you will hear a lot today, Members, that young talent
of small and emerging managers have outperformed their large
counterparts in both up and down markets. They also diversify a
large portfolio as they give these plans access to sectors,
strategies, and geographies that are not meaningfully available
to large funds.
Texas Teachers launched our first small and emerging
manager program in 2004 primarily to diversify our private
equity portfolio. At that time, our portfolio was predominantly
only large buyout plans.
Diversity of investment professionals was also important to
our board, and we felt it very complimentary to the risk return
goals at Texas Teachers. Due to their recent emergence in the
investment management area, minority and women-owned firms are
more likely to be in the small and emerging manager space and,
therefore, diversifying a portfolio to include such strategies
presents additional opportunities for pension plans to develop
and increase the number of meaningful relationships that it
develops with women and minority-owned funds.
Currently, small and minority manager programs have been
implemented in Texas in our private equity and our hedge fund
portfolio, and we are currently evaluating adding small and
emerging plans to a fund of funds in our global equities and
real estate portfolios. The board's goal is to get that
allocation up to $1.5 billion; it is currently at about $800
million.
And I am summarizing, Mr. Chairman. I apologize.
In further efforts to increase the fund's relationships
with minority and women-owned funds, in 2006, Texas Teachers
launched a minority and women-owned brokerage program. It is a
6-month pilot program in which these firms are allowed to
execute trades, after which their execution is evaluated for a
determination of whether they should be included on the
System's approved list of brokers. Texas Teachers has been very
pleased with the results of this program.
Finally, we felt that minority and women-owned funds are
uniquely positioned to find and take advantage of attractive
demographics and opportunities for targeting high-growth ethnic
and economic sectors consistent with recent demographic
changes, and that these are very complimentary to the risk and
return goals of a plan fiduciary.
As pension plan obligations continue to increase and the
global investment marketplace continues to rapidly change, plan
fiduciaries must search for ways to invest more efficiently and
more effectively, and to boost returns while reducing long-term
risk. We are confident that the investment changes made at
Texas Teachers will serve the interest of the members, the
retirees, and the pension fund, and are consistent with the
board's fiduciary duty.
I hope this review of recent Texas Teachers activities has
been of assistance to this subcommittee as it carries out its
vital oversight of the Federal TSP. Please feel free to contact
me if any members of the subcommittee would like access to any
of the information that was assembled in our board's
reallocation of the fund's assets or the board's decisions to
use external managers or to implement the fund's small and
emerging manager programs. Thank you.
[The prepared statement of Mr. Hollingsworth follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Davis of Illinois. Thank you very much.
We will go to Mr. Swan.
STATEMENT OF EDWARD SWAN, JR.
Mr. Swan. Thank you, Mr. Chair and members of the
committee, for inviting me. I do want to make one correction
for the record. I am the former president of FSI Group. I
happily retired last July, after almost 35 years in the
investment business. I have worked for large firms, small
firms, and across a variety of investment strategies, and that
gives me a fairly distinct perspective. I have also served as a
graduate business school professor.
What I hope today, the committee certainly has a grasp of
active and passive, the definition of those two terms, but I am
going to make a few comments about the implications of active
versus passive management.
The whole goal, obviously, of active management is to out-
perform a series of a given benchmark. The goal of passive is
to provide performance at very low fees in line with a given
benchmark. I would suggest, as the committee thinks about the
TSP, that the real goal, long-term, on behalf of the
participants of the Plan is how do you maximize their
accumulations. How do they wind up, at the point that they
retire, with the maximum amount of money against which to
retire?
I will make four points. The first is that the data shows
the likelihood of picking an active manager that will out-
perform the benchmark, and picking a manager on a random basis,
increases to the extent that the market that you are looking at
is inefficient.
What do I mean by an inefficient market? If you are buying
treasury bonds, everybody knows just about everything there is
to know about each treasury bond, so no one has an information
advantage. That is an efficient market.
An inefficient market might be small cap stocks, where I
might know about a company that my competitor doesn't know
about, or I might be able to do better research about that
company; hence, I have an information advantage. I can choose
to buy that stock or choose not to buy that stock based on
something that will give me an edge.
So to the extent that markets are inefficient, active
management really, probably ought to play a larger role.
The second point is that--and remember, those data are
based on random selections of managers. So the second point is
that a smart staff, employing good consultants, ought to be
able to select managers more effectively than on a random
basis.
The third point that I would make is that purveyors of
passive funds argue that the fees are low, and, indeed, that is
quite true. But the TSP is a huge fund; it has massive buying
power. And having been at firms that have done both passive and
active management, I can tell you that the TSP has the
bargaining power to squeeze active fees down in a way that it
hurts active managers. The fee spread, given TSP's active
management--the fee spread, meaning the difference between
active management fees and passive management fees--would be
narrowed considerably by TSP's bargaining leverage.
The fourth point that I would make is that the availability
of software and technology now enables small firms to compete
much more effectively than they could even 5 years ago, so that
it may be a mistake in the interest of being risk-averse to
overlook small firms just so you could have a behemoth that
somehow may have some advantages, or may not.
I hope my comments have been helpful. I would welcome any
questions that you have. And I would leave you with one other
thought as you deliberate. We talk about risk aversion and we
talk about risk versus a benchmark. Bear in mind that there is
nothing magic about the benchmarks. They are not sacrosanct.
They, in fact, are passively held portfolios designed by a
committee. The S&P 500, I think it is 10 people sit around and
say these are the stocks that are going to be in the S&P 500.
They are not sacrosanct.
So I hope my comments have been helpful. I would welcome
any further questions. Thank you, Mr. Chair and committee
members.
[The prepared statement of Mr. Swan follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Davis of Illinois. Thank you both very much. We will go
into some questions.
Let me also just indicate and acknowledge that we have been
also joined by Representative Elijah Cummings from the State of
Maryland, and we are delighted that you have come,
Representative Cummings.
Let me just ask you, perhaps, beginning, Mr. Swan. When I
asked Mr. Long about market manipulation and possible political
interests that people might have, he mentioned a couple of
areas, and one of them happened to be the Real Estate
Investment Trust. Do you see REITs and some other venture
capital areas as necessarily risky or that much of a great risk
as some people have suggested?
Mr. Swan. Let me respond several ways. The first answer to
your question is no, I don't see them as these terrible things.
In fact, the response was--let me go to commodities, because
that really jumped out at me. There was a suggestion by some
commodities group that perhaps the TSP ought to look at a
commodities fund. I would draw the distinction between looking
at real estate, looking at venture capital, looking at private
equity, looking at commodities, areas that may in fact enhance
the return of the fund, as a good thing, and to take those
suggestions as potential manipulation kind of baffles me a
little bit. Indeed, they may be good suggestions, and I would
ask the committee, maybe the committee might want to see the
analysis upon which these manipulative suggestions were made,
how they looked at it and why they rejected it.
Mr. Davis of Illinois. I have to admit that I have been
somewhat baffled by some of this along the way, especially, as
we look at how fluid things are and how some things remain
fairly static, at least in terms of their being. One of the
things that I thought about in terms of real estate is that you
can't move it to China or someplace if it is in New York.
Mr. Swan. Yes, sir.
Mr. Davis of Illinois. It is pretty difficult to do.
Mr. Swan. And it is not going to be mass produced, either.
Mr. Davis of Illinois. Yes.
Mr. Swan. There is only so much of it.
Mr. Davis of Illinois. The sectors with the highest returns
or that are performing, say, better than some others might be
performing, if one takes a look at those, does that necessarily
mean that they are diminishing the protection of their clients?
Mr. Swan. The answer is no. The higher performing sectors
may indeed, over time, have more volatility, the returns may
bounce up and down a bit more, but they tend to have higher
volatility around a steeper performance trend line, a steeper
positive performance trend line. It may mean that, for example,
you limit, if you have a venture capital option or a pure real
estate options, that you limit the amount that the plan
participants could put into that option. But I am not sure that
one necessarily says these should be non-viable options. These
are areas that you cannot or are very difficult to index.
Generally, they are not areas you would want to index.
Mr. Davis of Illinois. Mr. Hollingsworth, could you share
with us some of the thinking that surrounded the Texas Teacher
Retirement Fund deciding to change a little bit or to venture
into another arena?
Mr. Hollingsworth. Mr. Chairman, this really sort of
started when I first came on the board as a trustee back in
2002, as I indicated in my earlier remarks, and that in the
next year to 18 months we proceeded to lose $35 billion of the
plan's assets when the tech bubble burst. And some of us began
to ask questions about why that was happening and whether we
had the right asset mix in our portfolio, and it took several
years for us to get there because of a couple of reasons. One,
at the time, Texas Teachers, we had the lowest per member cost
of any large U.S. plan in the country, and we wore that like a
badge of honor. As we began to do our asset allocation study,
the study impressed upon us that there was a cost for us to
wear that badge, and the cost was being borne by the annuitants
in the area of decreased returns to our system.
The other thing is we were basically the last bastion of
internal management. We had over 90 percent, at one time, of
our assets were internally managed by internal staff,
essentially in an indexed form. So we realized, one, we weren't
getting any alpha or any increased returns in these inefficient
markets--the alternative assets, private equity, certain high-
yield type strategies. Those were strategies that were
performing well in some markets and we had no opportunity to
participate in those returns.
So the board concluded that the best long-term asset
allocation--again, this is a defined benefit plan, so this is
these folks' only retirement--was to have a balanced portfolio
where we were still a majority equity fund but, for example, we
now have 10 percent of the fund allocated to private equity, 10
percent to real estate, 5 percent to real return,
infrastructure, timber, 5 percent in the absolute return
strategies, the hedge funds. So regardless of what is going on
in the marketplace, we felt like we always had an opportunity
to participate in what was doing well, and we also minimized
our downside risk in those assets classes that were not
performing well.
I mean, our fund right now is probably up 2 percent, which
is not great. Had we not moved so much money out of our global
equities portfolio, we would probably be down 6 percent or 7
percent. So having basically a beta fund, a stock and bond
fund, means that you live and die with the stock market. When
it is doing well, you make a lot of money; when it is not doing
well, you lose a lot of money. So we thought a more balanced
approach was a better one.
Mr. Davis of Illinois. Thank you, gentlemen, very well.
I will now go to Mr. Jordan.
Mr. Jordan. Thank you, Mr. Chairman.
I too want to thank you both for coming here. Very
compelling testimony from both of you.
Mr. Swan, your four points I thought were great,
particularly the one that the passive strategy is not
sacrosanct either; there are people making decisions about what
elements are going to determine the benchmark itself. So I
think that is a point well taken. The one thing, though, that
you didn't talk about, and Mr. Hollingsworth has a little bit
in his opening statement--and this was the focus of Mr. Long's
testimony and, frankly, the Members of Congress when they put
together the act back in 1986, was making sure we do as much as
we can to safeguard against political influence, political
manipulation.
To me, that is what it comes down to, because you have done
some good things in Texas to deal with this market we are in
now. I mean, I looked at my Thrift Savings Plan quarterly
report last time and it wasn't what we would have liked to have
seen, so I understand that. But talk to me about what you would
suggest to have those safeguards in place to deal with the
political aspect of this.
And then, Mr. Hollingsworth, elaborate more on what you did
in Texas when you said you moved to some partial active
investment strategies, what you did to deal with the political
question as well.
Mr. Swan. I guess I am at a little bit of a loss because
you have a defined contribution plan, it is huge, but there are
defined contribution plans in many political settings. This is
not unique. So I hear this concern about political
manipulation, but I am not sure what the manipulation might be.
The only example that was given earlier was that some people
showed up--I don't know what the group was--and said, gee, you
ought to look at commodities. Well, maybe that is a bad idea;
maybe it is a good idea. But I have yet to hear an example of
political manipulation. If someone has one, I would love to
respond to it.
Mr. Jordan. So you just think it is overstated.
Mr. Swan. I think it is overstated and I think that----
Mr. Jordan. And that is valid.
Mr. Swan [continuing]. As long as those that are exercising
their fiduciary responsibility and ultimately selecting the
vehicles that the plan participants can then subsequently make
their selections from, as long as those individuals exercise
their fiduciary responsibility, I am not sure what the
political manipulation is.
Mr. Jordan. I think about the plan I was involved with, the
deferred compensation plan--I have to go back and look at the
particulars, but I believe it was designed as you just
described.
Mr. Hollingsworth.
Mr. Hollingsworth. I agree with that. You know, I think
this is a situation where there are examples. You hear stories
where one or two incidents of situations sort of hit the news.
When I became chairman of this board, some people perceived me
as, I now have $110 billion to give out to people, so the phone
started ringing and everybody wants to meet with you. So that
is there. But I always took the approach with our board that we
can put some things in place so that the information level is
equal among board members. But I have never been one to think
that you can legislate ethical behavior, so you have to hold
each of your board members to their ethical and fiduciary
responsibilities.
Now, having said that, when we did move to more strategies
where the board and senior staff were more involved in meeting
with managers, reviewing portfolios, making decisions, and
obligating assets, we did do some things such as have certain
ethical disclosures in place, such that when a board member met
with a potential manager who wanted to be part of our private
equity portfolio or part of our real estate portfolio, that
information, under the old policy, had to be disclosed. You had
to disclose that information so that when that manager came
before the board, that board member would reveal I have met
with this individual, I am or am not biased, I think I can or
cannot be objective in voting.
So I think there are some disclosure rules and some other
things that you can do if there is concern about inappropriate
influence on the investment process.
Mr. Jordan. OK.
Mr. Swan. None of these, by the way, if I might add, have
anything to do with the efficacy of the plan and its ultimate
goal, which I think should be how to help the participants
maximize the amount of money that they have when they retire.
Mr. Davis of Illinois. Thank you very much, Mr. Jordan.
I thought Mr. Cummings was there, but I see he has left. I,
then, just have one, perhaps, additional question. Given our
purpose, how does each one of you view the possibility--and I
think all of us want to make sure that fiduciary
responsibilities are in place, and obviously that is inherent
in any discussion. How do you see the possibility of some
movement to provide opportunities that currently seemingly are
distanced or, to some degree, does not exist?
Mr. Hollingsworth. I am sorry, the last part of your
sentence dropped off, Mr. Chairman. What was that?
Mr. Davis of Illinois. I really was saying that it is
difficult to break into this with minority companies. What do
you see as a possibility?
Before I do that, though, let me ask Mr. Cummings if he has
any questions. And if so, Elijah, go right ahead.
Mr. Swan. There are two, I think, pretty obvious ways right
up front. The first one is who do the providers of your
investment service, who are their vendors? Who do they execute
trades in, and in what kind of volume? That is one issue.
There is another issue, and that is--and it is a sidebar,
it is only partial response to your question, and you asked it
earlier--what does the staff of your vendors look like? Because
that is also about opportunity.
Finally, over the last 10 years, there has been the
development of something called managers of emerging managers.
These are firms that hire smaller firms, many of which, if not
most of which, are women-owned and minority-owned firms,
package them so that, indeed, large plan sponsors can hire the
firm and give it a lot of money. It is very difficult to give a
lot of money to a firm that only manages $20 million. But if a
minority firm or woman-owned firm comes to the table and they
have $1 billion under management, or $2 billion or $3 billion,
then a very large plan can do business with them, and should be
able to do business with them; and that is the economic
function that managers of managers provide. And I think you
will hear testimony from someone from one of the very excellent
firms, and they have produced terrific returns on an active
basis.
Mr. Hollingsworth. And that is the way we have approached
it at Texas. Manager managers, fund to funds, as they are also
referred to. We instituted a small and emerging manager program
that we are basically going to have in every asset class and
every strategy, and basically you are hiring a manager that
goes out and evaluates these funds. The dollars can be
allocated different ways, but typically the dollars are
allocated to the fund-to-funds manager, and that fund-to-funds
manager then has discretion to distribute those dollars in
smaller increments to small and emerging managers.
It just so happens that because of the recent emergence of
minorities and women in this space, if you are investing in a
small and emerging manager program, be it in private equity, be
it in global equities or real estate, you are inherently going
to be developing and increasing the number of relationships
that your entity has with women and minority-owned firms
completely consistent with your fiduciary duty.
Our small and emerging manager program does a few things.
First, it typically gives us access to strategies sectors where
those managers are more on the ground and have more access to.
But we are also looking for those great investors, those
investors who are going to be the stars of the future. So we
are helping to build, many times, these small and growing firms
into substantial firms that can come back and in which we can
invest directly into them, because they have size, they have
bandwidth, they have the track record, they now have the
experience.
So instead of going through a fund-to-funds, where they may
get an allocation between $5 million to $25 million, we can
then invest in that fund directly at amounts up to $500, $600,
$700 million. So we are trying to have a relationship with the
stars of the future, but also help grow and build firms that
have the requisite skill and abilities to help us in our
fiduciary duty.
Mr. Davis of Illinois. Thank you very much.
Mr. Cummings.
Mr. Cummings. This whole issue takes me back to Maryland,
when I was in State legislature trying to make sure that
minority firms had an opportunity to participate. In Maryland,
we had a situation, of course, where a huge percentage of our
employees were minorities and they were concerned, as were
members of the legislature, that when it came to participation
investments, minorities were basically locked out. It was not a
question of whether it was fair; it was unfair and it was
basically an old boys system, and the old boys system basically
said we have done it this way and we are going to continue to
do it this way.
The second thing that they said implicitly was that they
feared that if this money was put under the jurisdiction of
minority firms, that because many of them were new, as compared
to some of the older firms, that they worried about what might
happen to the money. It was deep. So we had a situation where,
if you took particularly the latter argument, the question is
when do those firms get the opportunities to even grow, to not
only grow, but to survive and then thrive.
So that leads me to--I was listening to all you are saying
here--what do you--and maybe you said this--what do you all see
that the legislature--this is the Congress--should be doing to
basically level the playing field? I am just wondering what you
had in mind.
Mr. Hollingsworth. Well, I will address a couple things we
did. In Texas, we did not have authority to do a number of
things.
Mr. Cummings. I am sorry, you didn't have what?
Mr. Hollingsworth. We did not have the authority to do a
number of things at the pension plan. And I haven't really
looked in depth at the TSP to really know exactly what its
legal authorities are, but, for example, we had to go to the
legislature and get authority to use external managers in our
program, and we went to the legislature and basically laid out
that there were these inefficient areas, that we didn't have
the expertise on staff, we needed the ability to go out and
take advantage some external managers who were really good at
what they did.
We also talked about the fact that we were going to use
fund-to-funds, as well, to help us get access to these younger,
smaller funds that are just starting out, because what the
fund-to-funds does is it gives a little bit of cover, because
they have gone through one level of scrutiny already. So the
legislature gave us the approval to put out up to 30 percent of
our plan's assets to external managers, so equivalent to about
$30 billion or so.
So, again, I haven't looked in depth to the TSP to know
where you are constrained right now, but most plans do require
some level of authority to begin to use external managers. From
the presentation I heard earlier, I guess you are mandated
legally to invest passively, so obviously I think you would
have to go and seek some sort of legislative approval for some
active management so that you could take advantage of some of
those other less efficient markets out there and use some other
creative strategies to make sure that you have a balanced
portfolio here at TSP.
Mr. Swan. What many, if not most, small firms, minority
firms, women-owned firms do, the sector that they are involved
in, or the sectors, are precisely the sectors that would allow
the plan participants the opportunity to maximize their total
accumulation. Again, I keep coming back to that point that
index funds aren't the issue. The issue is how do you help plan
participants maximize their accumulation. There are very
powerful arguments that women and minority-owned firms are
operating in those sectors--active equity, to some extent
active fixed income, even now in the international area,
venture capital, private equity. These are sectors that can
drive return well executed.
Mr. Hollingsworth. I would add one more point, if I might,
Representative Cummings. Texas is a defined benefit plan, so
our board makes the decisions for the annuitants. You have a
defined contribution plan, so it is just a matter of what
choices they have as relates to options.
When we created the portfolio that we did that was balanced
and diversified, one option to think about--you were asking us
about ways to do this--would be maybe to have a pooled option,
meaning you have one option for your members that is a
diversified fund where a certain percentage is in equities or
maybe a small segment to private equity, there might be a small
segment to real estate. I know there is always the concern of
protecting your annuitants from themselves. You don't want them
to go out and put all their money in a fund that is all private
equity or all real estate, but maybe an option where it is a
pooled opportunity where they are diversified across several
asset classes, maybe that is an option that could be added to a
defined contribution plan.
Mr. Cummings. One last thing, Mr. Chairman.
I think there are so many of us who get frustrated, and it
is not just in this area, but it is in a lot of areas, and
there are all kinds of excuses that are found not to be
inclusive and not to have a diverse group of folk working on
these kinds of issues. Some kind of way we have to come to a
solution so that we can have some impact. Other than that, our
grandchildren will be talking about these same issues and
opportunities will have passed so many people by and so many
people will have been deprived of the opportunities to grow and
to be a participant.
I will never forget my father--Mr. Chairman, I will be real
brief--my father, who only had a first grade education, he had
one accident in his life, automobile accident, and that
accident came 3 days after I got admitted to the bar, and he
said, I want you to take my case. I said, Daddy, I don't know
nothing about accident cases; I just got admitted to the bar.
And he said something that I will never forget. I said, why do
you want me to do this? He said, if I don't use you, who is
going to use you?
So we prepare our young people to go forward, to be the
best that they can be; we educate them, we give them
opportunity--and it is not just young people, but people--and
they do the right things and then they have this window called
life, their life, and when the window is shut, game over,
opportunity lost. So I just want to work with our chairman to
see what we can do to try to address the rest of these issues.
Mr. Swan. I don't know if there is a legislative remedy
embodied in this, but one of the things that I think is very
helpful is if those that are making the decisions about who is
hired are a diverse group.
Mr. Hollingsworth. I will add just one other point to that,
and I think you will probably hear more of this later with some
of the other panelists. I have always thought that these small
emerging manager programs were important. Not everybody agrees.
Not even all my board members agreed when I first became chair.
But I think what you might hear about later is that I think the
empirical evidence is now there to make the business case that
small and emerging managers, which includes a lot of women and
minority-owned funds, are simply out-performing their
counterpart. So that is a bit more compelling when there may be
those who don't share the same sentiments. So I think you have
to go to a much, much stronger case now.
Mr. Swan. One of the things that certainly could be done is
to ask the GAO to participate in a survey about changing the
law to allow active management. That would open the door
potentially to greater accumulation on the part of the plan
participants and greater opportunity on the part of the
vendors.
Mr. Davis of Illinois. Well, thank you, gentlemen so very
much.
Mr. Swan, at the end of your opening statement you sort of
said I hope that my testimony will be beneficial. Well, I can
tell you that both of your testimony has been very beneficial.
We appreciate the fact that you have come and shared with us,
and we thank you so very much.
Mr. Swan. Thank you, Mr. Chair.
Mr. Hollingsworth. Thank you, Mr. Chair, for having us.
Mr. Davis of Illinois. We will then proceed to our next
panel. Our third panel, while they are being seated, consists
of Mr. Thurman White, who has been chief executive officer of
Progress Investment Management since 2004. Progress is a leader
in creating emerging manager of manager portfolios for a
diverse group of clients. We welcome you, Mr. White.
Ms. Mellody Hobson is the president of Ariel Capital
Management, a Chicago investment firm. And I might also
indicate that they are headquartered in my congressional
district and I consider them to be one of my most prized
constituents and we are delighted that they are there. She is
also the chairman of the Board of Trustees of Ariel Mutual
Funds and a spokesperson for the Annual Area Swap Black
Investor Survey. Ms. Hobson, we welcome you and thank you.
Mr. Jesse Brown is a principal at Krystal Investments. He
has worked extensively with deferred compensation retirement
plans and is an author who has written extensively on
investment and the generation of capital, especially Black
capital, I would assume, although, all of it is green.
Of course, it is our tradition that witnesses be sworn in,
so if you would stand and raise your right hands.
[Witnesses sworn.]
Mr. Davis of Illinois. The record will show that the
witnesses answered in the affirmative.
We would appreciate it if you would summarize your
statement in 5 minutes. Of course, your entire statement is in
the record. The lights indicate timing, and we will simply be
governed by what is going on. Thank you very much.
We will begin with you, Mr. White.
STATEMENTS OF THURMAN WHITE, CHIEF EXECUTIVE OFFICER, PROGRESS
INVESTMENT MANAGEMENT; MELLODY HOBSON, PRESIDENT, ARIEL CAPITAL
MANAGEMENT, INC.; AND JESSE BROWN, PRESIDENT, KRYSTAL
INVESTMENTS
STATEMENT OF THURMAN WHITE
Mr. White. Thank you, Mr. Chairman. Thank you for allowing
me to have the opportunity to appear before you this morning,
and thank you for convening this hearing on a very important
topic for our industry. Again, my name is Thurman White, and I
am president and CEO of Progress Investment Management Co.,
located in San Francisco, CA.
For the past 18 years, our firm has had extensive
experience working exclusively with large institutional
investors who are looking to, one, access new investment talent
and, second, capture the above-market returns that talent can
provide. This pool of under-researched and under-utilized
talent is what we refer to in the industry today as emerging
managers. Typically, this includes smaller entrepreneurial
firms, in many cases less than $2 billion to $3 billion in
assets under management, who are maybe new in their investment
firms but are not new investors. Many of these owners and
portfolio managers and emerging manager firms have gotten
experience at large investment houses and have left to start
their own firms. So that is the niche within which we
specialize.
I would like to make three brief points and then conclude.
The first is that emerging managers do add value; the second
point is that diversification makes a meaningful difference;
and the third is that best practices among large institutional
plans are inclusive, and not exclusive.
With respect to the first point, emerging managers do add
value. Many times there will be some question as to why take
the risk of hiring emerging firms? Aren't they inexperienced?
Aren't they in fact more risky than large firms? The simple
answer is no. Again, as I mentioned, the fact that they are
emerging, the fact that they may be minority and women-owned
firms does not mean that they are inexperienced investors. In
fact, we manage $7 billion in assets for 29 institutional
clients. We work with 60 firms in 20 different multi-management
investment portfolios. Now, when we did a recent survey of the
experience level of the portfolio managers and founders of our
firms, we found that 70 percent of those who had founded and
started those firms had more than 20 years of investment
experience. So these are not new investors.
More importantly, because of their passion, because of
their commitment, because of their access now to technology,
because of their certainly absence of bureaucracy, and, more
importantly, in most cases these are employee-owned firms,
which means there is an alignment between their economic
interest, their professional and financial interest, these are
some qualitative reasons that these firms out-perform.
But as you heard earlier, our own investor performance on
behalf of our clients, the investment performance of others in
the industry, as well as a growing body of academic research
all support the notion that emerging and minority-owned firms
do out-perform market benchmarks; they do out-perform, in many
cases, their larger counterparts, and particularly in the
inefficient asset classes, both in bull and bear markets, and
that is particularly relevant given the kind of market
volatility that we have had most recently. In the small-cap
areas, mid-cap areas, emerging managers do out-perform both
benchmarks, as well as the large firm counterparts.
The second point I would like to kind of focus on is this
idea of diversification and it does make a difference in terms
of institutional portfolios. Diversification is a time-honored
and kind of proven strategy for mitigating all kinds of risk.
Diversification of the kinds of managers that a plan may work
with; diversification in terms of the kinds of strategies that
an institutional investor may employ.
Now, the interesting thing that we have in the situation
with the Thrift Savings Plan is you have both single manager
and specific company risk. Quite unusual to have such a large
pool of assets managed by one firm. As we have seen most
recently with a lot of the large investment firms, there are a
lot of unexpected, unknown, certainly unintended risk that are
resident in those firms. So having that single manager and
specific kind of manager risk is a bit unusual.
The second thing that you have here is a single style risk,
and that is the risk of the market. Again, this is something
that perhaps poses an undue risk for the Federal employees and
retirees that are participants in this plan, and that risk,
again, is a market risk. When a market is doing well, as you
have heard, annuitants do well. When the market is doing
poorly, as we have had in the last few months, annuitants do
not do as well. So having a single style, a passive style risk,
again, is perhaps an undue risk, and certainly one could
question the fiduciary responsibility of the Thrift Investment
Board and its advisory council for exposing annuitants to that
level of undue risk.
Finally, this idea of best practices in the industry being
inclusive, and not exclusive. In Exhibit 2 in my written
testimony, we have identified over 50 defined benefit,
primarily, pension plans, institutional investors of a size and
stature and certainly similar investment objective to the
Federal Thrift Savings Plan. These 50 funds probably represent
a couple of trillion dollars in assets. All of them have
utilized targeted investment strategies to be inclusive of
emerging and minority investment firms.
Why have they done this? Not for social reasons, not for
political reasons, but for performance reasons. They want to
win in the global marketplace. They want to diversify the range
of managers that they work with; they want to get access to new
talent, to the innovation and new ideas that small businesses
bring to management and investment portfolios. They also want
to build on and create opportunities for the next generation of
talent to make the industry itself more competitive.
So these are the reasons that all of these pension plans
have utilized--and increasingly, also, defined contribution
plans are beginning to utilize--emerging and minority
investment firms.
Finally, I would like to conclude with a bit of an analogy.
Since it is the summer, it has to do with baseball and sports.
As we have seen, we have seen this paradigm, whether it is
entertainment, whether it is politics, in a variety of
industries, and that is, simply, this: whenever the playing
field is leveled and new participants are allowed to
participate, the game is enriched. We saw this in baseball
after World War II, when Branch Ricky of the Brooklyn Dodgers
wanted to do one thing, he wanted to win. So like the Thrift
Savings Plan, there was this pool of talent in the Negro
baseball leagues that had been overlooked and not used at all.
So Branch Ricky, of course, identified Jackie Robinson, brought
him in to major league baseball, and the rest is history.
Similarly, even out in San Francisco, with our Giants,
there was a scout there, a man by the name of Alex Pompeii, who
also knew of another under-utilized, overlooked pool of talent,
and that was Latino-based ball players in the Caribbean and
South America. So he began to scout that area, signed people
like Juan Marichal and Orlando Sepeda and the Allou brothers,
and that brought in another underused pool of talent and the
game was enriched.
So as we think about these issues with respect to the
Federal Thrift Plan and the other Federal retirement plans, if
we can make them more inclusive, make them include the talent
potential and performance potential of emerging and minority
managers, and have active investment strategies be a part of
their overall asset allocation, I think the Federal retirees
and employees will be similarly enriched and will have a win-
win situation.
Thank you for the opportunity to be here. I would be happy
to answer any questions you have.
[The prepared statement of Mr. White follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Davis of Illinois. Thank you very much. We thank you
for your testimony.
We will go to Ms. Hobson.
STATEMENT OF MELLODY HOBSON
Ms. Hobson. Thank you very much. Thank you, Chairman Davis
and Ranking Member Marchant, as well as members of the
subcommittee. My name is Mellody Hobson, and I am president of
Ariel Investments, an executive board member of the Investment
Company Institute and a board member of NASP. I greatly
appreciate the opportunity to be here today and provide you
with a brief overview of our firm, our business, and our larger
social mission.
Our chairman and CEO, John Rogers, founded the firm in 1983
when he was just 24 years old. Based in Chicago, Ariel
Investments serves individual investors and 401(k) plans
through our no-load mutual funds. Additionally, we manage
separate accounts for large corporate, public, union, and non-
profit organizations. Throughout our firm's 25-year history,
patience has served as the bedrock of our investment philosophy
and approach to building our firm. By adhering to a consistent
and disciplined approach, we have grown from 2 to 100
employees, with $8.9 billion in assets under management.
Currently, we have more than 1.4 million investors in our
mutual funds.
As the country's first African-American-owned money
management firm, we have a unique viewpoint and perspective on
the retirement challenges facing our County. Even today, we are
still the only minority firm with mutual funds priced daily in
the newspaper.
Just to give you a little insight on our investment
approach, we look for leading brands in established industries
with high quality management teams.
We analyze all financial statements to ensure that we are
buying financially strong businesses.
As value investors, we don't just buy cheap stocks; we buy
quality businesses at very low prices.
The financial industry has recognized our firm's
performance in a number of ways. Through our research process,
our discipline, and our focus, we have established a proven
long-term track record, a record that has been widely, widely
recognized in the media.
On the specific question of active versus passive
management in the Thrift Savings Plan, I would say that over
the long haul many money management firms, including ours, have
out-performed the market. I am a firm believer in active
management, and want to make that clear. The greatest investor
of all time, Warren Buffet, has proved this success over and
over again.
But there is a larger issue at stake. The question of who
is being left behind in defined contribution retirement plans,
like the ones we are moving toward, rather than the defined
benefit system that is rapidly disappearing from many
corporations, and even some sectors of government.
The harsh fact is that minorities, who have less exposure,
experience, and comfort with the stock market, we as a
community are falling behind. That is why, in addition to our
corporate mission to manage money for our clients and to give
them exemplary returns, we also have a social mission to
promote saving and investment and wealth-building in minority
communities. My personal goal is to make the stock market a
subject of dinner table conversation in the Black community.
To that end, for the past 10 years, we have partnered with
Charles Schwab and Co. on an annual survey comparing saving and
investment habits of Black and White Americans. We have
released the results each year to highlight the barriers to
greater wealth-building among African-Americans, including the
lack of knowledge and exposure, the lack of trust in financial
services industry, partly due to the lack of diversity in our
industry; and historical preferences that keep us from the
stock market. Because of these factors, we have learned that
our community typically has half as much money saved for
retirement as our White counterparts at the same income levels.
We were very hopeful that the story will be different in
large corporations that offer company-sponsored retirement
plans, but in the first few companies that we checked, we found
alarming discrepancies between Black and White savings rates,
sometimes by a factor of three or four. Many of us as a
community do not even contribute enough to take advantage of
the company match, the free money that companies give us for
participating in the plan. We also have learned that African-
Americans tend to borrow more against 401(k) plans, we are less
diversified in our investment choices, and less likely to roll
over our retirement money into an IRA when we switch jobs.
Recently, we secured a significant grant from the
Rockefeller Foundation to conduct a study with leading benefits
administrator on minority participation in 401(k) plans at
America's largest corporations. That work is just beginning and
we are very hopeful that we will be able to spark a national
conversation to boost minority participation in company-
sponsored retirement plans.
Finally, and most importantly, we are introducing financial
literacy programs in the Chicago public schools to help educate
future generations of African-American children on the
importance of saving and investing. At Ariel, we have sponsored
a public school called the Ariel Community Academy for over a
decade that teaches inner-city children how to invest in the
stock market using $20,000 per class of real money. When they
graduate, they are allowed to keep their profits and have them
matched with up to an additional $1,000 if they invest in a 529
plan for their college savings.
So you can see, beyond our reputation as a leading
investment firm for our long-term results, Ariel has also
established itself as a national expert on minority saving
investment habits and a leader in promoting financial literacy
in our community. Our research suggests that proactive and
targeted efforts on the part of employers, especially in
seeking out minority managers, can help minorities who work in
government and private sector to invest at a level that secures
and guarantees a comfortable retirement for them.
We welcome any and all opportunities to be involved and
appreciate your giving me the opportunity to speak on this
issue.
[The prepared statement of Ms. Hobson follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Davis of Illinois. Thank you very much.
We will go to Mr. Brown.
STATEMENT OF JESSE BROWN
Mr. Brown. Thank you, Mr. Chairman. It is my honor to be
here to add to the discussion of the importance of improving
minority access in the management of the Federal Thrift Savings
Plan. I am giving my perspective from someone who has little,
if anything, to individually gain from the results of this
discourse, but, more importantly, I have an interest in the
topic from a fairness in the whole financial arena perspective.
Because we only have so much time today to discuss this
topic, I would like to reserve the right to revise and extend
my remarks for the record at a later date, with the permission
of the chairman and the members of the committee.
Mr. Davis of Illinois. So ordered.
Mr. Brown. Let me be clear. The statement ``improving
minority access'' implies there is access. But the access is
wanting, not good enough, inadequate, deficient.
But is that really the case? From where I sit, Mr.
Chairman, that access is not deficient, it is simply not there.
Mr. Chairman, the Federal work force is more than 50
percent historically under-represented ethnic and racially
diverse individuals, as committee Member Norton indicated
earlier. Likewise, that diversity should be reflected in the
enrollment and professional advice given and available to all
the plan participants. We all know that advice is very
important in the financial arena, so who better to give that
advice then people who share the culture and common interests
of those who are actually investing their money?
The dilemma is that the criteria for competing for the
opportunity to manage the Federal Thrift Savings Plan ``is
capability of managing billions of dollars.'' The fact of the
matter is African-American and other minority-owned companies
do not manage billions of dollars or maybe I should say manage
less than the status quo, except for one or two firms which
have been mentioned here today. Therefore, minority managers
cannot bid on these proposals until the criteria for
eligibility has been changed.
What I want to leave with you today is not only a
discussion about what has evolved over time, where there is now
a monopoly, if you will, in place, but I want to make sure that
you understand that there is an opportunity to change the
current practices and create so much more good with just a few
and a little more attention of the course and the willingness
to embrace diversity at its highest and most significant level.
I am talking about inclusion, Mr. Chairman.
This is the 21st century, and I know I don't have to tell
you that much has changed. I must say, as one who traditionally
is very deliberate about change, much of the change we have
experienced with diversity has been for the greater good. Let's
face it, we all know an inclusive environment can enhance the
status of much of what we do in our day-to-day life. We have
all read the studies, heard the presentations by experts in the
field like R. Roosevelt Thomas, who has published several books
on diversity and has a consulting firm, or Bea Smith, founder
of the Kaleidoscope Group years ago who is a leader in the
whole area of diversity, and more than likely we have pretty
much experienced the positive outcomes of diversity ourselves
on a daily basis. So I don't pretend to be telling you anything
that you don't know.
If we can just take what we have learned from other arenas
and apply it here, I believe we would agree that diversity
participation at the management level of the Federal Thrift
Savings program and the investment companies that are
fiduciaries of those accounts can offer opportunities for
inclusion, as well as serve as a catalyst for improved
decisionmaking, increased productivity and make a competitive
advantage. You might ask the proverbial question, if it ain't
broke, why fix it? Let's not get too comfortable with the
familiar, Mr. Chairman. The practice of offering American
businesses the opportunity to participate is inherent in our
existence.
At the very minimum, Mr. Chairman, I think the principles
of affirmative action, or, should I say, diversity should take
force. Even the very large and successful contractors of the
Federal Thrift Savings program have a very poor record of
diversity in their own work force. I would welcome the
committee's aggressive demand upon all of the contractors to
the Federal Thrift Savings Board and the Thrift Savings Plan
itself to set and meet goals of internal minority employment,
hiring and promotion. They should be able to name individuals
of minority groups that head major divisions of their firm.
They should report back to the committee their hiring practices
and recruiting practices. They should show that they are doing
everything they can to meet the goals of the industry as a
whole, and especially as relates to the management of the
Federal Government employees' money.
For that matter, the Federal Thrift Savings Board itself is
not diverse. Has there ever been an African-American or woman
appointed to the Board? Why not? Diversity begins at the top.
Mr. Chairman, the executive director of the Federal Thrift
Savings Board should be challenged and directed to begin the
diversity movement within his own office and staff, and then in
the various departments and divisions. This should be a part of
every vendor's report, the number of minorities that are
employed. And if there are none, why, and what recruiting
efforts are under way.
So reaching these goals should be a criteria for
compensation of the executive director and his staff, beginning
at the Federal Thrift Savings Board itself, and should be
legislated as part of his job description and responsibility.
In closing, the Federal Thrift Savings Board should be
about Federal employees, and not just the administration of the
funds. The employees should be first in the minds of the
Federal Thrift Savings Plan. At this point, the Federal Thrift
Savings Board and the administration primarily worry about
managing the funds. They give off the responsibility of
educating the members of the Federal Thrift Savings Plan to the
Office of Personnel Management. This could be legislated in a
different way as time moves on.
With that, I will conclude my remarks and answer questions,
and leave the rest for the credit document.
[The prepared statement of Mr. Brown follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Davis of Illinois. Thank you very much, Mr. Brown.
Let me thank all three of you for your testimony.
As we pursue change and as we continue to move, it struck
me that change is often a slow and subtle process. It also
struck me that change is often more covert than it is overt;
that it is more evolutionary than revolutionary.
As I was thinking of that, Mr. White, I wanted to ask you
do you think pursuit of a more active strategy on the part of
the Thrift Board would constitute a breach of fiduciary
responsibility?
Mr. White. Well, the short answer to your question, Mr.
Chairman, is absolutely no. It would not be a breach of
fiduciary responsibility. Again, as I mentioned, many, many
U.S.-based plans, both defined benefit as well as defined
contribution, have both active as well as passive management as
part of their overall asset allocation.
It was interesting when Representative Norton asked Mr.
Long the question earlier about benchmarking, and benchmarking
the TSP versus other similarly sized pension plans, and why
that doesn't occur. Certainly, if one were to do that survey, I
think you would find that plans of that size, with exclusively
passive investment as well as a single manager are probably in
the minority among any similarly sized plans within this
country, and perhaps even worldwide.
Mr. Davis of Illinois. Ms. Hobson, let me ask you, given
the experiences of Ariel, given its success, given the approach
that it takes, and as you look at the scenario of TSP, its
statutory requirements, its investment approaches, do you see
any minority firms that you think could handle at least a
substantial piece of investment for the TSP?
Ms. Hobson. The way I would answer the question is this: I
think that no minority firm could handle the entire Plan; it
would not be possible. But I do think that a number of minority
firms can participate in helping to manage the assets for the
existing Plan participants. Moreover, I think the participants
would welcome more choices. And at the end of the day, that is
all you are doing, is giving people another choice; and at the
end of the day they vote with their feet based upon the actual
performance results of the funds.
Mr. Davis of Illinois. Not that you necessarily delved into
every aspect of the TSP, but just given what you know about it
and about its statutory requirements and all, do you think that
they would have the authority to let such a piece of action,
where they kind of broke things up some.
Ms. Hobson. I absolutely think they would have the
authority to expand and include more firms in the current
process than what currently exists with the sole provider,
being Barclays. I also think that, again, when you look at
benchmarking of other plans, I am not sure that there are many
plans around the world that are of this size.
So it is hard to go apples to apples in terms of the pure
scale of this Plan. But when you do look at very large defined
contribution plans around the country, many of whom we work
for, the biggest in the country, the United States, when you
look at those plans, you do see more options, more
opportunities, and you tend not to see a solely indexed option
or set of options for the plan participants. So you can look
at, again, major, major corporations and see that there is a
more diversified lineup of offerings.
The TSP, from what I understand, will use the cost argument
as their major defense--that is what I would assume--and say we
get to do this at the lowest possible price. We would come back
and argue that you may be giving up investment results in
exchange for that 1.5 basis point fee, which I am not sure that
is all-inclusive in terms of the costs, but we would say that
there may be more upside for your participants in terms of more
offerings. And again, at the end of the day--I cannot emphasize
it enough--they get to vote with their feet; they get to go
where they want to be, look at the returns of the funds side-
by-side and decide to invest in that manner.
Mr. Davis of Illinois. Mr. Brown, let me ask you. In your
testimony, you talked a great deal about change, and I know
that you were present as other witnesses testified and as we
talked about different possibilities and different ways of
changing the activities of the TSP. You even mentioned the
board and the whole diversification effort.
What would you view as an option? Obviously, we are
searching for ways to change the way the TSP operates, not
because we are just opposed to the way that they may operate,
but because we believe in fairness, we believe in equity, we
believe in open opportunity. So what would you view as
something that we can do legislatively or that we can do from
the vantage point of this subcommittee?
Mr. Brown. Mr. Chairman, the law is rather specific as to
what can and cannot be done, so obviously the most specific
thing is to actually look at the legislation itself. The way
the law is put together, it gives a tremendous amount of
authority to the Federal Thrift Savings Board, those
individuals who are appointed by the President and, in some
cases, with the advice and consent of the Speaker and the
Majority Leader or the Senate. So although the committee may
have an interest in doing one thing or another, the original
law has some handcuffs, if you will.
Specifically in terms of diversity and change, the
suggestion that there be other funds allowed in the mix of
funds of the Thrift Savings Plan is something specifically that
this committee could suggest. In the past, there have been
suggestions, as you indicated earlier, that various other types
of investments--commodities, real estate investment trusts,
precious metals; the list goes on--the Federal Thrift Savings
Board has the ultimate responsibility in making this decision,
but certainly the committee and Congress can make those
suggestions. So I think that is one very specific thing that
you might want to look at.
In terms of the management of the funds, the Federal Thrift
Savings Board has responsibility of actually just kind of
managing the funds itself. That is kind of administrative role
more than actually passive-active. They administer it. The
Board makes the decision as to what choices are going to be in
the Plan. Actually, the Board, a year or so ago, moved toward a
lifestyle set of funds in addition to their lettered funds for
bonds and equities and such. So I would think that this
committee has a tremendous responsibility in that regard in
terms of making that suggestion to the Federal Thrift Savings
Board.
So, in summary, it is the Board itself that really requires
some attention, and until that Board is dealt with, then it is
going to be very, very difficult, even at hearings like this,
to make any kind of change because of the cushion that was
given to them in terms of political intervention.
Ms. Hobson. If I could respectfully also add to that, in
terms of how the Board considers the provider for the plan. In
many situations, and Ariel very frequently responds to
proposals, fills out requests for proposals from city and State
pension funds around the country, as well as defined
contribution plans, and in those RFPs there are specific
questions about the diversity of the organization. And while
there is no mandate or requirement around any kind of
diversity, by mere virtue of asking the question, it does
behoove people to want to answer the question in a way that
shows off their firm in the best light. When all things are
considered and firms are set side-by-side, perhaps it will add
one more opportunity for consideration or actually being
selected.
So I would use that as a means of saying while not
legislating it, when the RFP is written again, 3 years from
now, when the contract ends, that there might be a conversation
about adding to that RFP discussions about the diversity of the
provider, as well as their board of directors. As far as we can
tell from our research, there is no diversity on the board of
the current provider, none, and no diversity, as far as we can
find, in terms of the upper management ranks of the provider.
And while we do not say that in a way to pass judgment, we say
it in a way that the question at least should be asked.
Mr. Davis of Illinois. Let me just agree with you, because
I kind of liken this to the merit selection of judges, and we
used to laugh about it in terms of who was determining that
some people had merit and other people didn't. And then we
decided to change the system and found out that a lot of people
have merit, and it is very possible that the chief judge of our
court system may not have become a judge if we had not moved
from the way that this notion of merit selection, where
insulated groups were making determinations about the
credentials and viability and possibility of lots of other
people.
Let me ask this. Legislating is not the easiest thing in
the world. I mean, there are many factors that always
contribute to legislative determinations and decisionmaking,
and people who are defenders of the system, they like the idea
of suggesting that there is some insulation from politics, that
they really don't have to be concerned about external
pressures, I guess, or efforts of external intervention. And
when I hear that, I am always reminded that you can't always
determine what goes on around you, but you ought to be able to
determine how you react and respond to it.
Also, how do you think--and each one of you, if you would,
and perhaps this will even be our last question--how do we
maintain the integrity of systems and at the same time try and
move them toward the inclusiveness that we all talk about and
hope to see and fight for, and still maintain what would be
called the integrity of a process involving investment of these
huge sums of money?
Mr. Brown. Mr. Chairman, one idea is the inclusiveness that
the legislation speaks of in the first place, and that is to
say open it up, allow different types of investments to be
included in the Plan. Now, what we have now is a very narrow
set of things that is possible to be invested; there are index
funds and they are just very narrow.
Now, the problem with opening it up, of course, is opening
it up, and there would be opportunity for all these various
other funds, be it real estate investment trusts or
commodities, or this thing or that thing or another, and that
could become unmanageable, but it certainly would be open. Once
it is then open, then, obviously, there will be opportunities
for different types of managers for different types of things.
So, obviously, a particular manager might be good at fixed
income or another particular manager might be good for one
thing or another.
I think there will be great resistance to this because it
would be so open, but there are--and I think Mellody kind of
commented on this--there are various plans, 401(k) plans and
others, around the country that would give you a list of 20,
30, 40, as many different opportunities as possible. And as I
think she indicated, people vote with their feet, they pick one
fund versus another fund. Sometimes they pick the wrong one;
sometimes they pick the right one.
Mr. Davis of Illinois. Well, that is what the TSP people
would say that they are trying to make sure does not happen.
Mr. White.
Mr. White. Yes, Mr. Chairman. A couple of things I might
just point out. One is somehow this idea that active management
is both political and/or social is just flat-out wrong. There
is nothing inherently political or social about active
management. It is not any more politically involved than
passive management. So there is nothing inherently social or
political about either.
As was mentioned in an earlier panel, the key ought to be
how do we maximize returns for participants. That ought to be
the driving force. Certainly, in addition to considerations
about costs being written into the legislation, the flexibility
to include active management, also considerations about risk
and return ought to be included within the legislation. Those
are ways that traditional, well-run, fiduciaraly sound plans,
whether they be defined benefit or defined contribution,
typically include these kinds of considerations as they make
decisions about who manages assets.
I think, finally, this idea of having processes like
competitive bid, RFP, the use of external consultants. The
Thrift Plan mentioned that they had used Ennis Knupp, which is
a consultant for many of the large plans that we work for and
others. Again, these are all mechanisms to help maintain the
integrity of the decisionmaking about who gets to manage
assets, so these are things that can be built into legislation
to help ensure the integrity of the process.
But there is nothing inherently political or less political
about a passive strategy versus an active strategy. Just if I
might add parenthetically, one might view a single provider for
a plan that large as some political sweetheart deal. I don't
necessarily think that because I think Barclays is a good firm.
But the fact of the matter is, again, single manager risk,
specific company risk, particularly with a firm whose parent is
a U.K.-based entity, and not a U.S. entity, I think creates a
lot of undue risk for participants. Certainly, as we have seen
with other large plans over the past year or so, things happen
with large investment firms that none of us could anticipate.
Mr. Davis of Illinois. Well, thank you very much.
Ms. Hobson.
Ms. Hobson. Yes. My add-on comments to very, very good
perspectives are, one, we are not talking about revolution
here; we are talking about some incremental change. I would not
sit here and tell you that it is a bad plan; I am just saying
it could be slightly better if there were more participation
and more inclusion. I would not ever advocate 20 mutual funds.
I would not ever advocate a fund for every flavor and topic,
because I think people then become overwhelmed with the choices
that they get. But I do think, on the margin--again, not
anything revolutionary, but more evolutionary--there is an
opportunity here to make the fund slightly better, the Plan
slightly better.
The one way to de-emphasize any of the political
conversation that you are alluding to is, at the end of the
day, in our business, the really great thing is we have a
score. We know who did well and who didn't. You can look at the
numbers on the page every single day in our business, every
single day you can open up the newspaper and see how your Ariel
mutual fund did, and we know if we won or lost that day versus
the indices that are in this plan. So the good news is that de-
emphasizes any kind of political conversation because the
numbers speak for themselves. And at the end of the day, as I
said before, people will go where the performance is, which is
also not political at all; it is in their own best interest.
Last but not least, when you look at any of the other plans
that are out there, you typically don't see this. And if we
take it a step further and look at other Federal plans like the
National Railroad Retirement Trust, as an example, it has
active management in it. So you can't argue the political
active management discussion for one plan and not have that
same argument apply to another. So I would hold that up as an
example that would perhaps put a pin in that issue very
quickly.
Mr. Davis of Illinois. Well, let me just thank all three of
you, as we begin to adjourn.
Did you have another comment?
Mr. Brown. Yes, just one very brief comment. The difference
between the Thrift Savings Plan and other pension plans is that
the individual employee makes the decision for himself as to
what is going to be in his particular account. So one of the
failures of the Federal Thrift Savings Board and the Thrift
Savings Plan is the education or better education of the actual
participants itself. Many times they push this off to the
Office of Personnel Management, who is not here today, and that
might be another consideration of the committee, to talk with
them at some point.
Mr. Davis of Illinois. Well, thank you all so much. I want
to thank all of the witnesses. I also want to thank all of you
for coming.
I am reminded of two things. One, a fellow named George
Collins, who used to be the Congressman representing the
district that I represent. One of the first political speeches
that I ever heard George make, he said that the politician,
Confucius said, that he who tooteth not his own horn will find
that same shall not be tooteth.
I have sat through many hearings. I can tell you that there
are more Black-Americans in this room than most hearings I have
attended since I have been a Member of Congress, when the room
was overflowing. So I am appreciative of the fact that you are
here and that you are expressing the interests and displaying
the expertise that you have. Oftentimes, there are no
minorities even on panels testifying. There is nobody,
seemingly, that is a minority that is often asked to testify.
So the perspective that we often get is not one that contains
the experiences of minority elements of our population
community.
So I want to thank you all for coming. I want to thank the
staff for the outstanding work that they have done in putting
together this opportunity. And with that, this hearing is
adjourned.
[Whereupon, at 12:37 p.m., the subcommittee was adjourned.]