[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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              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

                              ----------                              
                                                                   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

                              ----------                              


                        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:]

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    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:]

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    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.]

                                 
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