[House Hearing, 112 Congress] [From the U.S. Government Publishing Office] THE THRIFT SAVINGS PLAN: HELPING FEDERAL EMPLOYEES ACHIEVE RETIREMENT SECURITY ======================================================================= HEARING before the SUBCOMMITTEE ON FEDERAL WORKFORCE, U.S. POSTAL SERVICE AND LABOR POLICY of the COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED TWELFTH CONGRESS FIRST SESSION __________ JULY 27, 2011 __________ Serial No. 112-112 __________ Printed for the use of the Committee on Oversight and Government Reform Available via the World Wide Web: http://www.fdsys.gov http://www.house.gov/reform U.S. GOVERNMENT PRINTING OFFICE 73-450 WASHINGTON : 2012 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM DARRELL E. ISSA, California, Chairman DAN BURTON, Indiana ELIJAH E. CUMMINGS, Maryland, JOHN L. MICA, Florida Ranking Minority Member TODD RUSSELL PLATTS, Pennsylvania EDOLPHUS TOWNS, New York MICHAEL R. TURNER, Ohio CAROLYN B. MALONEY, New York PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of JIM JORDAN, Ohio Columbia JASON CHAFFETZ, Utah DENNIS J. KUCINICH, Ohio CONNIE MACK, Florida JOHN F. TIERNEY, Massachusetts TIM WALBERG, Michigan WM. LACY CLAY, Missouri JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts JUSTIN AMASH, Michigan JIM COOPER, Tennessee ANN MARIE BUERKLE, New York GERALD E. CONNOLLY, Virginia PAUL A. GOSAR, Arizona MIKE QUIGLEY, Illinois RAUL R. LABRADOR, Idaho DANNY K. DAVIS, Illinois PATRICK MEEHAN, Pennsylvania BRUCE L. BRALEY, Iowa SCOTT DesJARLAIS, Tennessee PETER WELCH, Vermont JOE WALSH, Illinois JOHN A. YARMUTH, Kentucky TREY GOWDY, South Carolina CHRISTOPHER S. MURPHY, Connecticut DENNIS A. ROSS, Florida JACKIE SPEIER, California FRANK C. GUINTA, New Hampshire BLAKE FARENTHOLD, Texas MIKE KELLY, Pennsylvania Lawrence J. Brady, Staff Director John D. Cuaderes, Deputy Staff Director Robert Borden, General Counsel Linda A. Good, Chief Clerk David Rapallo, Minority Staff Director Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy DENNIS A. ROSS, Florida, Chairman JUSTIN AMASH, Michigan, Vice STEPHEN F. LYNCH, Massachusetts, Chairman Ranking Minority Member JIM JORDAN, Ohio ELEANOR HOLMES NORTON, District of JASON CHAFFETZ, Utah Columbia CONNIE MACK, Florida GERALD E. CONNOLLY, Virginia TIM WALBERG, Michigan DANNY K. DAVIS, Illinois TREY GOWDY, South Carolina C O N T E N T S ---------- Page Hearing held on July 27, 2011.................................... 1 Statement of: Long, Gregory, executive director, Federal Retirement Thrift Investment Board; Clifford Dailing, chairman, Employee Thrift Advisory Council, Secretary-Treasurer, National Rural Letter Carriers' Association; and Joseph Beaudoin, president, National Active and Retired Federal Employees Association................................................ 7 Beaudoin, Joseph......................................... 29 Dailing, Clifford........................................ 23 Long, Gregory............................................ 7 Letters, statements, etc., submitted for the record by: Beaudoin, Joseph, president, National Active and Retired Federal Employees Association, prepared statement of....... 31 Connolly, Hon. Gerald E., a Representative in Congress from the State of Virginia, prepared statement of............... 50 Cummings, Hon. Elijah E., a Representative in Congress from the State of Maryland, prepared statement of............... 49 Dailing, Clifford, chairman, Employee Thrift Advisory Council, Secretary-Treasurer, National Rural Letter Carriers' Association, prepared statement of............... 25 Langevin, Hon. James R., a Representative in Congress from the State of Rhode Island, prepared statement of........... 51 Long, Gregory, executive director, Federal Retirement Thrift Investment Board, prepared statement of.................... 9 Lynch, Hon. Stephen F., a Representative in Congress from the State of Massachusetts, prepared statement of.............. 5 THE THRIFT SAVINGS PLAN: HELPING FEDERAL EMPLOYEES ACHIEVE RETIREMENT SECURITY ---------- WEDNESDAY, JULY 27, 2011 House of Representatives, Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy, Committee on Oversight and Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 2:16 p.m., in room 2154, Rayburn House Office Building, Hon. Dennis A. Ross (chairman of the subcommittee) presiding. Present: Representatives Ross, Lynch, and Davis. Staff present: Jennifer Hemingway, senior professional staff member; James Robertson, professional staff member; Cheyenne Steel, press assistant; Peter Warren, legislative policy director; Nadia A. Zahran, staff assistant; Kevin Corbin, minority staff assistant; and William Miles, minority professional staff member. Mr. Ross. Good afternoon. Thank you for your patience. I'll now call the Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy to order. I would like to begin this hearing by stating the Oversight Committee mission statement. We exist to secure two fundamental principles. First, Americans have the right to know that the money Washington takes from them is well spent; and, second, Americans deserve an efficient, effective government that works for them. Our duty on the Oversight and Government Reform Committee is to protect these rights. Our solemn responsibility is to hold government accountable to taxpayers because taxpayers have a right to know what they get from their government. We will work tirelessly, in partnership with citizen watchdogs, to deliver the facts to the American people and bring genuine reform to the Federal bureaucracy. This is the mission of the Oversight and Government Reform Committee. I'll now begin with my opening statement. The Thrift Savings Plan, established in 1986, provides a tax-deferred retirement savings plan to 4\1/2\ million Federal participants. With $289 billion in assets, the TSP is the largest defined contribution plan in the world and is a smart choice for Federal employees planning for a secure retirement. The TSP models private sector practice, with two-thirds of its employers reporting that the 401(k) is the primary retirement savings vehicle for the employees that they cover. The TSP provides participants a choice of investment options to allow participants to determine the appropriate amount of risk for their own circumstances. Participants may currently select from a choice of five funds in addition to life cycle funds tied to a projected retirement date. In 2009 Congress passed the Thrift Savings Plan Enhancement Act, resulting in a number of significant changes to the TSP. Requiring automatic enrollment for new hires has led to an increase in TSP's participation rates. Expanding survivor spouse benefits allows for Federal employee households continued access to low-cost investments. Implementing a Roth TSP contribution program should prove beneficial to employees, particularly those at the early stages of their career. The 2009 legislation also grants TSP discretionary authority to offer a mutual fund window, allowing participants to invest a portion of their savings in mutual funds outside of the TSP. This enhancement could help respond to the continued debate in Congress on the merits of adding additional investment alternatives. Increasing the number of TSP investment options, similar to those being offered by the private sector 401(k) plans, could prove to add more flexibility to participants wishing to further diversify their portfolios. Several legislative proposals have been introduced in the 112th Congress to modify investment options for Federal employees participating in TSP. With TSP contributions--participants contributing more than $2 billion per year, this hearing presents an opportunity for lawmakers to examine the administration of the TSP, including its investment offerings, participation rates, and expenses. As the committee with jurisdiction over the TSP, I hope to learn whether further legislative change is needed to ensure that the plan continues to meet participant needs. I thank the witnesses for appearing today, and I look forward to your testimony. I now recognize the distinguished gentleman, ranking member from Massachusetts, Mr. Lynch, for his opening statement. Mr. Lynch. Thank you very much, Mr. Chairman. I want to thank you for holding this hearing and also want to welcome our witnesses in coming forward to help this committee with its work. Today's hearing, as the chairman mentioned, will examine recent developments regarding the Federal Thrift Savings Plan, the retirement savings plan and investment plan for Federal civilian employees and members of the uniformed services. With over 4.4 million participants and more than $285 billion in assets, as the chairman noted, the Thrift Savings Plan is the largest defined contribution plan in the world, and an integral component of our Federal Employee Retirement System. In addition, through its diverse and sensible investment options and with the average annual fees that are significantly lower than those of our typical private sector plans, the Thrift Savings Plan stands as a model 401(k). In light of its vital role, the Thrift Savings Plan merits continued and careful oversight by our subcommittee so that we can better ensure that our Federal employees and service members are afforded the tools necessary to maximize their savings and enhance their retirement security. Therefore, I welcome this opportunity to discuss the status of the Thrift Savings Plan, given our current economic climate, budgetary challenges faced by the Federal Retirement Thrift Investment Board, and legislative and regulatory changes. In particular, as we all know, Congress is currently considering legislation to raise the Federal debt limit and tackle the Federal deficit. Notably, the past several months have been marked by wide speculation regarding the broad market consequences of a failure to enact a debt limit increase. As a result, I would be interested in hearing our panelists' perspectives on how a Treasury debt default and proposed spending reductions may affect the Thrift Savings Plan balances of participants and their beneficiaries as well. I also look forward to hearing our panelists' thoughts on how the current Federal pay freeze may be impacting the Thrift Savings Plan. Additionally, during the previous Congress, the Thrift Savings Plan underwent a significant modernization with the enactment of provisions collectively known as the Thrift Savings Plan Enhancement Act. Specifically, that legislation contained several key enhancements to the plan, including automatic enrollment and immediate agency contributions for all new Federal civilian employees as well as the addition of Roth 401(k) investment options which allow participants to contribute after-tax dollars to the plan. Given these significant changes to the Thrift Savings Plan, I look forward to examining the progress of implementation of the Thrift Savings Plan Enhancement Act, including the challenges that the Federal Retirement Thrift Investment Board has faced in terms of increasing plan participation among uniformed service members in establishing the mutual fund options. I would also like to revisit the feasibility of permitting Federal employees to invest the cash value of unused annual leave in their Thrift Savings Plan retirement accounts. I introduced legislation to this effect during the last Congress, and I'm very interested in again exploring the possibility of allowing Federal employees to roll over their lump sum annual leave payments into their Thrift Savings Plan accounts as a means of ensuring equity with their private sector counterparts. In fact, I hope the chairman will agree to join me in working to find a legislative solution to this issue as well as other administrative modifications to the Thrift Savings Plan. Last, I look forward to examining the various legislative proposals relating to the Thrift Savings Plan put forward by my colleagues on both sides of the aisle. However, as we continue to seek ways to enhance Federal retirement security that are also mindful of the Federal deficit, I would remind my colleagues that the Thrift Savings Plan is only one element of our three-legged stool--so-called--Federal Employee Retirement System, which also includes the Federal Employee Retirement System defined benefit plan and, of course, Social Security. During the current Congress I've increasingly heard the majority suggest the possibility of eliminating the pension portion of the Federal Employee Retirement System and instead providing the Thrift Savings Plan as the only retirement security option for Federal workers. I believe that this would be a step in the entirely wrong direction. Since its inception, our Federal Employee Retirement System has been praised on a bipartisan basis as a fair and equitable framework that promotes retirement security for our Federal workers and achieves cost savings for the Federal Government. We should keep it that way. Before closing, I would also like to ask unanimous consent that the written statement of Colleen Kelly, national president of the National Treasury Employees Union, highlighting the value of the TSP as well as the Federal Employees Retirement System in general, be included for the record. Thank you, Mr. Chairman. I look forward to discussing these and other issues with our witnesses this afternoon, and I yield back the balance of my time. Mr. Ross. Thank you, Mr. Lynch, and, without objection, the report will be admitted. [The prepared statement of Hon. Stephen F. Lynch follows:] [GRAPHIC] [TIFF OMITTED] 73450.001 [GRAPHIC] [TIFF OMITTED] 73450.002 Mr. Ross. I would now like to also note that Members may have 7 days to submit opening statements for the record. And we will now recognize our panel. We have Mr. Gregory T. Long, who is the executive director of the Federal Retirement Thrift Investment Board; we have Mr. Dailing, who is the chairman of the Employee Thrift Advisory Council; we have Mr. Joseph Beaudoin, who is the president of the National Active and Retired Federal Employees Association. As is custom and policy with the Committee on Oversight, all witnesses will be sworn in before they testify. Please rise and raise your right hands. Thank you. [Witnesses sworn.] Mr. Ross. Thank you. Please be seated. Let the record reflect that all witnesses responded ``yes.'' In order to allow for the discussion, please limit your testimony to 5 minutes. As you know, your entire written statement will be made part of the record. And now I would like to recognize Mr. Long for 5 minutes. STATEMENTS OF GREGORY LONG, EXECUTIVE DIRECTOR, FEDERAL RETIREMENT THRIFT INVESTMENT BOARD; CLIFFORD DAILING, CHAIRMAN, EMPLOYEE THRIFT ADVISORY COUNCIL, SECRETARY-TREASURER, NATIONAL RURAL LETTER CARRIERS' ASSOCIATION; AND JOSEPH BEAUDOIN, PRESIDENT, NATIONAL ACTIVE AND RETIRED FEDERAL EMPLOYEES ASSOCIATION STATEMENT OF GREGORY LONG Mr. Long. Chairman Ross and members of the subcommittee, my name is Greg Long, and I'm 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. I've submitted my statement for the record, and I will summarize here. Your letter of invitation explained that the purpose of this hearing is to review the Thrift Savings Plan, including implementation of the Thrift Savings Plan Enhancement Act of 2009 I am pleased to discuss. I would again like to thank this committee and subcommittee for its initiative on the Enhancement Act. The agency began working with the employing agencies of the government toward implementation even before the ink was dry. We devised a plan for an orderly roll-out of the new provisions, starting with those which could provide the most immediate value for our participants. I will briefly discuss each element. First, immediate employer contributions. This very valuable, long-sought benefit was first on the list for implementation because it would immediately increase the amounts being contributed to the TSP accounts of participants covered by FERS. Hundreds of dedicated payroll and personnel professionals throughout the government stepped up to the plate and performed admirably in implementing this feature. Next, beneficiary participant accounts. This was another provision of the Enhancement Act that fully warranted prompt implementation. Under previous law, surviving spouses were required to withdraw TSP account balances which they inherited as beneficiaries of their deceased spouses. Our review of this matter found that spousal beneficiary accounts were available in many private sector 401(k) plans. However, implementation was complex because it involved obtaining important decisions from a largely aging cohort of widows and widowers who had never worked for the government previously. Our process that included special communications to the spouse beneficiaries, a welcome package, as well as tailored account maintenance and withdrawal forms, that was completed in December 2010. We have now established over 4,800 beneficiary accounts, and that number continues to grow. The next provision was automatic enrollment. I'm pleased to say that since last August, all new Federal civilian employees are being automatically enrolled in the TSP at an initial contribution rate of 3 percent of basic pay unless they elect otherwise. Automatic enrollment is a game changer for the TSP. Over 97 percent of those hired since automatic enrollment began in August are now contributing their own funds to the TSP. Our overall participation rate is now slowly but steadily climbing as a result. The next item is Roth, and 2012 will be a year of significant change to the TSP and the agency I help run, most notably because of the implementation of Roth TSP. With Roth comes sweeping changes, as this new offering touches virtually every element of the plan. The Roth--this will require us to change 27 of our 28 recordkeeping and accounting systems. All of our phone reps, our PSRs, need to be educated in how to answer a wide variety of new types of questions. This is a pretax versus a post-tax decision, and that's going to be highly complex, and we need to provide assistance to the employees as well as the agency reps that in turn need to provide advice and guidance to their employees. Additionally, our legal team is currently drafting regulations covering all aspects of the Roth project, and our timetable is to obtain three publication comments from ETAC this fall, followed by publication in the Federal Register. We expect to roll this out in the second quarter of 2012. Attached to my statement is a document entitled ``Thrift Savings Plan Statistics.'' The data displayed on this page provides an excellent overview of the status of the TSP. It is updated and publicly distributed each month at board meetings. Plan activities should be and are conducted in full public view in order to maintain the confidence of participants. We work hard to ensure that neither the participant nor the Congress or any other observers are surprised by what we do. We function just like a 401(k) plan, and we strive to excel. Our responsibility is to act solely in the interest of participants and their beneficiaries. Our goal is dignity in retirement for those participants who in their day jobs secure our Nation, deliver the mail, and perform countless other necessary functions. In today's world, saving and investing for retirement is essential. Congress has given us the program with which we can accomplish that goal, and we work hard every day to achieve it. That concludes my statement. Mr. Ross. Thank you very much. [The prepared statement of Mr. Long follows:] [GRAPHIC] [TIFF OMITTED] 73450.003 [GRAPHIC] [TIFF OMITTED] 73450.004 [GRAPHIC] [TIFF OMITTED] 73450.005 [GRAPHIC] [TIFF OMITTED] 73450.006 [GRAPHIC] [TIFF OMITTED] 73450.007 [GRAPHIC] [TIFF OMITTED] 73450.008 [GRAPHIC] [TIFF OMITTED] 73450.009 [GRAPHIC] [TIFF OMITTED] 73450.010 [GRAPHIC] [TIFF OMITTED] 73450.011 [GRAPHIC] [TIFF OMITTED] 73450.012 [GRAPHIC] [TIFF OMITTED] 73450.013 [GRAPHIC] [TIFF OMITTED] 73450.014 [GRAPHIC] [TIFF OMITTED] 73450.015 [GRAPHIC] [TIFF OMITTED] 73450.016 Mr. Ross. Mr. Dailing, you are recognized for 5 minutes. STATEMENT OF CLIFFORD DAILING Mr. Dailing. Chairman Ross, members of the subcommittee, thank you for the opportunity to testify today. As you mentioned, my name is Clifford Dailing, and I am the secretary- treasurer of the National Rural Letter Carriers Association. Today I come before you as chairman of the Employee Thrift Advisory Council, ETAC. I was elected chairman by my peers at our last meeting in April. Prior to becoming chairman, I was NRLCA's representative on the Council for the previous 15 years. ETAC is a Federal advisory committee established by the Federal Employees Retirement System Act of 1986 to give a voice to the participants in the operations of the Thrift Savings Plan, TSP. We provide advice on matters relating to investment policies and the administration of the TSP. The Thrift Savings Plan is an extremely important part of the Federal retirement system and is very popular among its participants. Currently 15 unions, employee organizations, and uniformed services comprise ETAC. Our organizations represent the vast majority of the TSP's 4.5 million participants. TSP continues to be one of the best-run and largest defined contribution plans in the world. In fact, TSP administrative costs are mere cents on the dollar, making TSP perhaps the least expensive defined contribution plan in the Nation. At the end of June 2011, the TSP had roughly $289 billion in assets. Protecting these assets is our highest priority. Contributing to the plan's current success is the TSP Enhancement Act of 2009. Two of the key components of this law include immediate agency contributions and automatic enrollment. Both of these features, in my opinion, are part of the reason we have seen a significant increase in participation levels, particularly among younger employees and new hires. Currently 97.4 percent of all new hires are participating in the TSP, with only a minimal of 2.6 percent opt-out rate. Overall, roughly 85 percent of all Federal and postal employees are participating in TSP. Compared with the private sector, where roughly 75 percent of employees are participating in available 401(k) plans, Federal and postal employees are doing extremely well planning for their retirement. As the law stands, every new hire that is automatically enrolled into the TSP plan is preset to contribute 3 percent into the G fund. This amount does change if participants elect to increase or decrease their contribution levels or to opt out altogether. Educating new hires about the Thrift Savings Plan continues to be a priority, but I would think everyone can agree that 97.4 percent participation rate is very encouraging. In addition to automatic enrollment, the Federal Retirement Thrift Investment Board has had the arduous task of implementing the Roth TSP option. Originally scheduled to begin in January 2012, the plan has been delayed several months for more testing and planning. I encourage the Thrift Board to quickly act toward completion of the implementation of the Roth TSP and give Federal and postal employees and retirees an additional option to invest for their retirement needs. Mr. Chairman, I also need to address the national administration's decision to suspend all Federal employees' investments into the G fund until the debt ceiling has been resolved. I and probably other members of the ETAC have received numerous calls from concerned members who have had retirement investments into the G fund, wanting to know what will become of their retirement. However, despite the fact our members who have invested in the G fund are protected, it is imperative that this information is distributed to all participants to maintain confidence in the TSP. We need to ensure that a strong line of communication is maintained between Federal agencies and their employees so that TSP participants have a high level of confidence during the ongoing debt issuance suspension period. If this information is not dispersed, its impact becomes minimal, as many participants will reduce their contribution from fear of loss of their investment. This can only be done if the administration, Congress, and ETAC maintain a line of communication among each other and remain in contact as the debt ceiling is resolved. Finally, Mr. Chairman, I urge you to proceed with caution as deficit reduction measures are debated. I fear we may see a decrease in employees' TSP contributions as Federal and postal employees will plan for the present rather than invest for the future. We cannot afford to have our members reduce their TSP contributions because cost-of-living adjustments are deferred or Federal employees are required to pay a higher share of their health care costs. This could have a negative effect on our members' financial security in retirement. Once again, thank you for giving me the opportunity to testify before you today. As I mentioned earlier, TSP is very popular among its participants, and part of the reason for that is the strong backing Congress has traditionally shown. I urge you to continue protecting TSP by insulating it from political and budgetary pressures. I would be happy to answer any questions you may have. Thank you. Mr. Ross. Thank you, Mr. Dailing. [The prepared statement of Mr. Dailing follows:] [GRAPHIC] [TIFF OMITTED] 73450.017 [GRAPHIC] [TIFF OMITTED] 73450.018 [GRAPHIC] [TIFF OMITTED] 73450.019 [GRAPHIC] [TIFF OMITTED] 73450.020 Mr. Ross. Mr. Beaudoin. Is that correct? You are recognized for 5 minutes. STATEMENT OF JOSEPH BEAUDOIN Mr. Beaudoin. Chairman Ross, Ranking Member Lynch, and members of the subcommittee, I am Joseph A. Beaudoin, president of NARFE, and I want to thank you for the opportunity to testify. We continue to be pleased with the performance of the Thrift Savings Plan. We believe that the Thrift Board has acted as dutiful fiduciaries on behalf of Federal civilian workers and annuitants and uniformed military personnel and retirees. For example, NARFE supports the Thrift Board's ongoing commitment to offering diversified index funds, which has minimized risk and created retirement security for participants and beneficiaries. We urge Congress and the Thrift Board to work together and to base fund decisions on carefully crafted objective financial analysis. Most of all, Congress and the Thrift Board must act in the best interests of Federal civilian workers and military personnel who put their hard-earned dollars in the TSP. The test of any organization is its performance during a crisis. We believe that the Thrift Board has continued to perform admirably during the most volatile financial market periods of the recession. Unfortunately, because of events beyond our control, nearly all Americans who participate in a defined contribution retirement plan, including TSP participants, lost a significant amount of their saving value during the economic downturn. Federal workers who are years away from retirement should have plenty of time to make back what they lost and hopefully gain ground along the way. The same is not true for workers who are at or near retirement. Those employees are caught between a rock and a hard place: Either retire with a smaller nest egg than they had hoped for or defer retirement until some point in the distant future, after the market sufficiently rebounds. Fortunately, the retirement security of FERS workers is diversified with a three-legged stool, consisting of the TSP, a modest defined benefit annuity, and Social Security benefits. In fact, we believe the FERS defined benefit annuity has become an increasingly important safety net for FERS workers, particularly given the recent market slump of the country's economic recession. Indeed, the construct of FERS is a delicate balance. We strongly hold that the integrity of FERS must be preserved to ensure that the Federal Government is able to attract and retain the best employees. This is no small point, because Americans increasingly appreciate that Federal employees protect us and drive America's progress. For several years we have worked with Congress and the Thrift Board on legislation to add new features to the TSP that have succeeded when offered in private 401(k) plans. We are particularly pleased with the implementation of three provisions in the Thrift Savings Plan Enhancement Act of 2009. First, newly hired Federal employees are now automatically enrolled in TSP and are immediately eligible for an automatic contribution. As a result, 97 percent of newly hired Federal employees are voluntarily putting their own wages in their TSP account. Second, by the second quarter of 2012 a Roth option will be added to the TSP. This feature will allow participants to make after-tax contributions to the plan and withdraw their earnings tax free upon retirement. Third, the retirement security of the surviving spouses of workers and retirees has been enhanced by granting them the same rights over their inherited accounts as any other TSP participant. Although NARFE is delighted with most of the provisions in the TSP Enhancement Act, we continue to be interested in advancing the program further. For instance, since September 2009, 401(k) plans could be amended to allow employees to contribute unused annual leave to their 401(k) account. As a matter of equity, NARFE supported legislation introduced during the 111th Congress by Representative Lynch and Chaffetz that would have allowed Federal workers to do the same. We support reintroduction of this bill in the current 112th Congress, and we encourage this subcommittee to approve it. NARFE also supports a proposal to allow Federal workers to contribute bonuses into their tax-deferred account. Chairman Ross, Ranking Member Lynch, we commend you for your interest in ensuring that the Thrift Savings Plan continues to thrive. Thank you, and I'll answer any questions you have. Mr. Ross. Thank you very much. [The prepared statement of Mr. Beaudoin follows:] [GRAPHIC] [TIFF OMITTED] 73450.021 [GRAPHIC] [TIFF OMITTED] 73450.022 [GRAPHIC] [TIFF OMITTED] 73450.023 [GRAPHIC] [TIFF OMITTED] 73450.024 [GRAPHIC] [TIFF OMITTED] 73450.025 [GRAPHIC] [TIFF OMITTED] 73450.026 [GRAPHIC] [TIFF OMITTED] 73450.027 [GRAPHIC] [TIFF OMITTED] 73450.028 [GRAPHIC] [TIFF OMITTED] 73450.029 [GRAPHIC] [TIFF OMITTED] 73450.030 [GRAPHIC] [TIFF OMITTED] 73450.031 [GRAPHIC] [TIFF OMITTED] 73450.032 Mr. Ross. I'll now recognize myself for 5 minutes, and I will say for someone who has just come from the private sector in a 401(k) and now under the TSP, I think it's a phenomenal program, and I think that you are doing a very good job with it. Mr. Dailing, you talked about communication to the members and what not. What recommendations would you give in terms of flexibility or more products to entice more people to join them? Eighty-five percent is pretty good, but any suggestions? Mr. Dailing. The core, I think, is to--the core I think in this, to answer your question, is just to ensure from all directions that information, no matter what type the material, is given either by the employer, in verbal, in written form, that the individuals know the aspects, all the directions, the parameters of the TSP, and the importance of that for planning initially from the get-go as they begin their career. Mr. Ross. Mr. Long, in 2009 with the changes, did we see an increase in participation? I mean, we did, but we're at 85 percent now. What was it prior to the act? Mr. Long. It was down to 82 percent, and so it's a little bit confusing, but when the immediate contributions were put into place directly after the act was signed, our participation rate actually dropped, and it slowly, since automatic enrollment was implemented in August, has slowly been creeping up by one- or two-tenths of a percent each month. We're in a long, slow march toward 90 percent. Mr. Ross. Let me ask you this. If a person does not participate in it, they're still enrolled in it; is that correct? Mr. Long. Today, under automatic enrollment, if a participant takes no action, they are automatically enrolled at 3 percent. They can choose zero or any other amount, but we needed to take inertia off the table. Instead of a default rate of zero, the default rate is now 3 percent. Mr. Ross. And just help me with this, because I just coincidentally talked to a colleague of mine a little while ago who doesn't want to participate in the TSP for philosophical reasons or whatever reasons. I didn't question that. But he said that he can't get out of it. He cannot opt out of it, and that there is going to be a contribution made I think of 1 percent of his salary annually in the TSP. Mr. Long. The 1 percent is automatic, that is absolutely correct. Mr. Ross. Would you recommend an opt-out provision, if someone, for whatever reason, chose to do so? Mr. Long. Administratively, that 1 percent automatic is very beneficial in running the plan. One of the things that other plans struggle with is they don't know who doesn't participate. Now we know everybody. Everybody gets 1 percent. So I can track all participants. And now I need to know--now I know who you need to target as far as automatic enrollment. So it's--administratively it's very beneficial. Mr. Ross. But that 85 percent enrollees does not take into account somebody who would not want to enroll and still getting a 1 percent; is that correct? Mr. Long. The colleague that you referenced would actually fall under the about 2.4 percent of people that joined after automatic enrollment and the very small percentage that actually chose to do zero. Mr. Ross. Okay. In terms of your budget, your budget's at, what, $143 million or thereabouts? It was frozen, I think, this last year? Mr. Long. Yes; $131 million for fiscal year 2011. Mr. Ross. Okay, and you're requesting a 12 percent increase---- Mr. Long. That is---- Mr. Ross [continuing]. For next year? Mr. Long. Well, I have put forth an estimate. I will actually put forth a formal request in September, but I have put forth an initial estimate to the board of 147, and now I scaled that back to about 145. Mr. Ross. Okay. And then what would you say the budget was in about 2006? Do you have any of those numbers? Mr. Long. Yep. About $90 million. Mr. Ross. Okay. And so in 5 years it's increased about $45 million? Mr. Long. Yes. It is substantial. Mr. Ross. And any particular reason? I mean, was there capital improvements or something? Mr. Long. Well, several reasons. When I initially joined, one of the things that we dedicated a significant amount of resources to was a TSP systems modernization. We had an infrastructure which created risk, and we actually had situations in which hardware and network failures put us out of business for short periods of time. That's bad. And so we needed to invest significant dollars in infrastructure modernization. Then we moved to a significant change in our Web. The Congressman from Massachusetts previously referred to that as the equivalent of ``pong.'' If you look at it today, you will notice it is far improved. It's a state-of-the-art Web site. And now after those two things, we moved to the TSP Enhancement Act, automatic enrollment, spousal accounts, immediate contributions. And finally the big one, which is Roth that we're in the middle of now. Mr. Ross. Last, I've got just a couple seconds. Any suggestions as to streamline, to help reduce costs in the operation of the TSP? Mr. Long. Well, we have--we're constantly taking a look at anything that creates expenses. I've put forth in my budget proposal several recommendations to the board as to how we can reduce costs at the agency, but everything is a give and take. If you want to reduce costs, there's something that you're planning on providing that you will no longer provide, and that's a discussion that I'll have with the board. Mr. Ross. Thank you. My time's expired. I'll now recognize the distinguished gentleman from Massachusetts, the ranking member, Mr. Lynch, for 5 minutes. Mr. Lynch. Thank you, Mr. Chairman. Mr. Long, let's stay right on that same thought. I know that the TSP provides to its members and investors a great advantage in that it charges, I think the last time we looked at this, very small fees as a percentage of revenue for its operations, and I believe it can do this because it doesn't seek to make a profit. You are just basically maintaining the service. You are not looking to, as I said, to make money off this. And you also have huge economies of scale in terms of your operation. Have you done any analysis in terms of how your fee structure compares with the private sector? Mr. Long. We are constantly taking a look at data that comes out, and just a couple weeks ago we had a report that came out from one of the large consulting firms which takes a look at the average recordkeeping and total investment charges that are allocated to the typical 401(k) participant. Right now a TSP participant pays 2\1/2\ basis points, 25 cents on every thousand dollars. Compare that to about 65 to 75 basis points for the largest plans. Some 401(k) plans pay 200 basis points or 2 full percentage points in fees. We are tiny relative to the typical 401(k) plan, and it's a result of, yes, economies of scale, but also our efficiencies that we create through our design. Mr. Lynch. Now, also the fees for--well, the salaries that you are paying for your investment people, I imagine those are also drastically lower than what we are seeing hopefully in the private sector. Mr. Long. Yes. Well, my investment staff internally is two people, so---- Mr. Lynch. Okay. Mr. Long. And all of the agency employees fall under the standard pay scale, government pay scale structure. Mr. Lynch. Okay, great. The last time you were up we actually asked about providing a mutual fund window as one of the options. You know, I'm a participant. You know, I think the TSP is great. I think it offers a lot of folks an opportunity to invest in their own retirement. Mr. Long. Uh-huh. Mr. Lynch. And it encourages employees to use their own money. Mr. Long. Uh-huh. Mr. Lynch. That's a great advantage to the taxpayer, that these employees are using their own money to sustain their retirement. It's a good idea, I think. There is some volatility. But let me ask you about the mutual fund option. Right now you can select the G fund, you know, so forth, the I fund, all that. What are we doing about the opportunity to give participants a chance to invest through a so-called mutual fund window? Mr. Long. The mutual fund window was a provision that was in the TSP Enhancement Act of 2009, so it is authorized but it is not required. We've also taken no action to implement it. This is a provision which I know will require significant discussions with members on the Employee Thrift Advisory Council as well as my board before we move forward, and we may never move forward, quite frankly. Mr. Lynch. What is the big drawback here? Is it just simply risk? Mr. Long. Well, I think there is a concern, and some of it is a paternalistic concern; that being that if we provide a window to access mutual funds, those mutual funds will virtually all be more expensive than what our core offerings are. And there is the potential that those offerings have a higher level of volatility than what we have because we rely on---- Mr. Lynch. Let me just go back a little bit. Is there a way for you to say, you know, in order to be eligible within this mutual fund window--we are not talking about opening it up to the entire universe of mutual funds out there, but is there an opportunity for you to use your leverage because this is the largest plan out there to say, okay, we are going to allow this window, we are going to allow our members to have access to the funds within this window. However, you know, use the leverage and say we want your fees to be, you know, comparable to our own or certainly at a much greater discount, so you can use the leverage of your size to encourage those private mutual funds to give a better deal to the, you know, Federal employees as a group. Mr. Long. Yes. Would we be using our leverage? If we move forward with this, we would compete it in the marketplace. We would, we feel, command best pricing because of our size. The other way to limit the potential risk and concern is to not allow participants to put all of their money through this window. You might say only 25--some other percentage. Mr. Lynch. Yeah, and I know--thank you for your indulgence. The other way to do this is to say, look, we're not going to allow participants to invest any more than 20 percent, and then track it. Mr. Long. Yeah. Mr. Lynch. Track it, and see what the usage is and what the danger might be. But I think it is a good opportunity for--you need some flexibility, you know, for employees. I know you're doing very, very well, but I still think there's a need to diversify our options within that plan. And I yield back the balance of my time. Thank you. Mr. Ross. Thank you. The gentleman from Illinois, Mr. Davis, is recognized for 5 minutes of questions. Mr. Davis. Thank you very much, Mr. Chairman. I want to thank our witnesses for being with us. One area that I am interested in exploring relates to the potential consequences, if any, of raising or not raising the Federal debt ceiling and what impact it might have on TSP fund balances and the participants. All of us have listened over the last several months as there has been a tremendous amount of speculation as to what might happen to global financial markets, particularly the bond market, if the Federal Government fails to increase its debt ceiling by August the 2nd and therefore defaults on some of its legal obligations. I believe it is in your written statement, Mr. Dailing, that you mentioned that the G fund is safe and fully protected during debt issuance suspension periods, and that's a quote. Would you mind elaborating on that point a little bit further for the committee? Mr. Long. Oh, I'm sorry. Mr. Dailing. Me, Mr. Davis? Mr. Davis. Yes. Mr. Dailing. I guess I will ask Director Greg to help me with the technical pieces of this as well, too, in the explanation. But as we have been elaborating to our members and trying to give it in a layman's term of a movement of money on paper and IOUs prepared, if you will, to ensure that our members--the understanding of the action from the Secretary of the Treasury during the suspension period of the G fund. Our members did not understand fully what that meant, and their initial reaction was: Is my retirement money safe? Is it going to be there when I draw from that? And I think that was the biggest issue in the overall explanation of what that did mean, and trying to draw that down to our members. The first reaction that I heard from some individuals that I spoke to from our respective group was that their contribution to the TSP, that they were going to change it, and that they would withdraw or reduce their amount into the G fund. They were concerned of the government, if you will, using their money in the issue of the debt ceiling situation and wanted to withdraw that back to where they knew it was in their hands. With absence of a technical explanation, that's from our members' concern. Mr. Davis. Well, let me ask Mr. Beaudoin and Mr. Long if they agree with that basic assertion or explanation. Mr. Long. I do, yes. And I think this is an area in which the board and Congress could, frankly, appropriately anticipate a disadvantage, and it was largely driven by what was going on in 1987. When the TSP started early that year, 1987, there was a debt crisis then, and to assure G fund investments, the board, my predecessors, formally requested legislation guaranteeing G fund earnings. The Thrift Savings Plan Investment Act of 1987 was then signed by President Reagan at the time. It included the make-whole provision. So what this means is that under FERSA, our governing legislation, when G fund--when securities are issued to the G fund, we have-- investors are protected. In the other scenario in which securities are not issued, we have this Thrift Savings Plan Investment Act that protects them. Whether they're issued or whether they're not issued, G fund investors are protected, and that's the message that we have tried to deliver on our Web site, through our partners in ETAC, through our communications with the newsletters, and all of our mediums. We've tried to get this message out, but grant you there are some--we can't always get through clearly, but we try. Mr. Davis. Thank you very much. Mr. Beaudoin, could you just react to that? Mr. Beaudoin. Yes, sir. Although the NARFE would prefer that the funds be used for the retirement annuities and benefits---- Mr. Ross. Mr. Beaudoin, is your button pushed there? Mr. Beaudoin. Oh, I'm sorry. We do acknowledge that such extraordinary measures ensure that annuities in TSP savings continue to be paid. We just want to ensure that once Congress raises the debt limit and the period of debt suspension ends, the Treasury Secretary fully complies with the Federal law which requires him to make whole the retirement funds with back interest, but we do agree with Mr. Long and Mr. Dailing. Mr. Davis. Well, let me thank each one of you. You sounded pretty positive, so I think I'll just end at that. You did say, ``once Congress does raise the debt limit.'' Thank you, Mr. Chairman. Mr. Ross. Thank you, Mr. Davis. That concludes our questioning and our hearing for today. I thank the witnesses for being here and taking the time out of your busy schedules to testify. With that, our subcommittee stands adjourned. [Whereupon, at 2:58 p.m., the subcommittee was adjourned.] [The prepared statements of Hon. Elijah E. Cummings, Hon. Gerald E. Connolly, and Hon. James R. 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