[Senate Report 113-244]
[From the U.S. Government Publishing Office]


113th Congress                                                   Report
                                 SENATE
 2d Session                                                     113-244
_______________________________________________________________________

                                     

                                                       Calendar No. 522


                           SMART SAVINGS ACT

                               __________

                              R E P O R T

                                 of the

                   COMMITTEE ON HOMELAND SECURITY AND

                          GOVERNMENTAL AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                S. 2117

TO AMEND TITLE 5, UNITED STATES CODE, TO CHANGE THE DEFAULT INVESTMENT 
       FUND UNDER THE THRIFT SAVINGS PLAN, AND FOR OTHER PURPOSES




                August 26, 2014.--Ordered to be printed

     Filed, under authority of the order of the Senate of August 5
                   (legislative day, August 1), 2014
        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                  THOMAS R. CARPER, Delaware Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
MARK BEGICH, Alaska                  MICHAEL B. ENZI, Wyoming
TAMMY BALDWIN, Wisconsin             KELLY AYOTTE, New Hampshire
HEIDI HEITKAMP, North Dakota

                  Gabrielle A. Batkin, Staff Director
               John P. Kilvington, Deputy Staff Director
                    Mary Beth Schultz, Chief Counsel
       Lawrence B. Novey, Chief Counsel for Governmental Affairs
               Keith B. Ashdown, Minority Staff Director
         Christopher J. Barkley, Minority Deputy Staff Director
               Andrew C. Dockham, Minority Chief Counsel
                  Sally Anne Braeuer, Minority Counsel
                     Laura W. Kilbride, Chief Clerk


                                                       Calendar No. 522
113th Congress                                                   Report
                                 SENATE
 2d Session                                                     113-244

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



 
                           SMART SAVINGS ACT

                                _______
                                

                August 26, 2014.--Ordered to be printed

     Filed, under authority of the order of the Senate of August 5
                   (legislative day, August 1), 2014

                                _______
                                

 Mr. Carper, from the Committee on Homeland Security and Governmental 
                    Affairs, submitted the following

                              R E P O R T

                         [To accompany S. 2117]

    The Committee on Homeland Security and Governmental 
Affairs, to which was referred the bill (S. 2117) to amend 
title 5, United States Code, to change the default investment 
fund under the Thrift Savings Plan, and for other purposes, 
having considered the same, reports favorably thereon without 
amendment and recommends that the bill do pass.

                                CONTENTS

                                                                   Page
  I. Purpose and Summary..............................................1
 II. Background and Need for the Legislation..........................2
III. Legislative History..............................................6
 IV. Section-by-Section Analysis......................................6
  V. Evaluation of Regulatory Impact..................................7
 VI. Congressional Budget Office Cost Estimate........................7
VII. Changes in Existing Statute Made by the Bill, as Reported........8

                         I. Purpose and Summary

    The Smart Savings Act seeks to enhance the retirement 
security of federal employees. It does so by changing the 
default investment for new contributions to the Thrift Savings 
Plan (TSP)--the government-sponsored retirement savings and 
investment plan for federal employees--from a low-growth fund 
to a fund that should generally yield significantly larger 
account balances over time. Employees would retain the same 
ability to control their investment choices that they have now, 
and those employees wishing to continue investing exclusively 
in the fund with historically lower yields over time, or to 
invest in any other combination of the funds provided by the 
TSP, would remain able to do so.

                II. Background and Need for Legislation

    Congress created the Thrift Savings Plan (TSP) in 1986 to 
give federal employees the same kinds of savings and tax 
benefits that many private employers offer their employees 
under section 401(k) plans.\1\ In contrast to a defined benefit 
plan, which provides a set pension after retirement, the TSP is 
a defined contribution plan, through which an employee and the 
employer contribute set amounts that are saved and invested in 
the employee's account until the employee retires. The amount 
available to the employee upon retirement then depends on the 
individual investment choices the employee has made over time, 
as well as the performance of those investments.
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    \1\See generally, Thrift Savings Plan, ``Purpose and History,'' 
available at https://www.tsp.gov/planparticipation/about/
purposeAndHistory.shtml; ``Summary of the Thrift Savings Plan: Your 
Plan, Your Future'' (May 2014), available at https://www.tsp.gov/PDF/
formspubs/tspbk08.pdf (``TSP Summary''); 5 U.S.C. chapter 84, 
subchapter III.
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    Under current statute, new federal employees are 
automatically enrolled in the TSP, and 3% of each employee's 
basic pay each pay period is automatically deducted from the 
employee's pay and deposited into the employee's TSP account, 
unless the employee affirmatively elects otherwise. In 
addition, the employing agency automatically contributes an 
amount equal to 1% of the employee's basic pay, and also makes 
matching contributions in an amount calculated on the basis of 
how much the employee contributes to the account.
    The TSP offers a number of options for investing assets, 
from among which each employee may choose. Five of the options 
are individual funds, each invested in a particular class of 
securities:\2\
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    \2\These descriptions of the fund are based on information in TSP 
Summary, note 1 above.
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     The Government Securities Investment Fund (G 
Fund), invested in short-term U.S. Treasury securities.
     The Fixed Income Index Investment Fund (F Fund), 
invested in domestic government, corporate, and mortgage-backed 
bonds.\3\
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    \3\The F Fund is invested with the objective of matching the 
performance of Barklays Capital U.S. Aggregate Bond Fund. See id.
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     The Common Stock Index Investment Fund (C Fund), 
invested in the stocks of large and medium-sized U.S. 
companies.\4\
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    \4\The C Fund is invested with the objective of matching the 
performance of the Standard & Poor's 500 (S&P 500) Stock Index. See id.
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     The Small Capitalization Stock Index Fund (S 
Fund), invested in the stocks of small to medium-sized U.S. 
companies.\5\
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    \5\The S Fund is invested in stocks that are not included in the C 
Fund, with the objective of matching the performance of the Dow Jones 
U.S. Completion TSM (Total Stock Market) Index. See id.
---------------------------------------------------------------------------
     The International Stock Index Investment Fund (I 
Fund), invested in international stocks of 21 developed 
countries.\6\
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    \6\The I Fund is invested with the objective of matching the 
performance of the Morgan Stanley Capital International EAFE (Europe, 
Australasia, Far East) Stock Index. See id.
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    The G Fund is the least volatile of these funds and has no 
risk of loss of principal, but the earnings are relatively low. 
The earnings of the other funds are generally higher than those 
of the G Fund, but the other funds are also more volatile and 
are subject to the market risks and other kinds of risks 
distinctive of the class of instruments that each of the other 
funds is invested in.\7\
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    \7\See id at page 13.
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    In addition to these individual funds, the TSP offers a 
series of Lifecycle Funds (L Funds), which are invested in 
professionally designed mixes of the five individual funds.\8\ 
Each fund's name includes a future year, indicating that the 
fund is invested in a portfolio considered appropriate for 
employees who plan to retire and begin withdrawing the fund 
within five years before or after that year. Also, the asset 
allocation shifts over time, so that it becomes increasingly 
less volatile as the target year approaches. During 2014, the 
TSP offers five L-Funds, with target retirement dates ranging 
from 2015 to 2045.\9\
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    \8\See id.
    \9\Thrift Savings Plan, ``Lifecycle Funds, Key Features,'' 
available at https://www.tsp.gov/investmentfunds/lfundsheet/
fundPerformance_L.shtml.
---------------------------------------------------------------------------
    The earnings of each L Fund is a composite of the earnings 
of the underlying funds. Moreover, as the TSP program explains, 
each L Fund is exposed to all of the types of risks to which 
each of the individual underlying funds is exposed, but the 
total risk is reduced through diversification.\10\
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    \10\See TSP Summary, note 1 above.
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    Employees who participate in the TSP can choose to invest 
their current account balances and their future contributions 
entirely in any one of the funds or in a mix of their own 
choosing. However, for employees who have not elected where to 
direct their TSP investments, the current statute establishes 
that the employees' investments by default go to the G 
Fund.\11\ This situation arises because a TSP account is 
automatically established for new federal employees to receive 
the contributions made to the employee's account by the 
employing agency and, unless the employee elects not to 
contribute, to receive the contributions from the employee and 
additional matching contributions from the agency. If the new 
employee does not choose a different investment choice, the 
contributions are invested by default in the G Fund, and this 
default investment choice continues to apply to all future 
earnings and contributions unless and until the employee elects 
otherwise.\12\
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    \11\5 U.S.C. Sec. 8438(c)(2).
    \12\See Federal Retirement Thrift Investment Board, Memorandum for 
Board Members, From: Greg Long, Executive Director, Subject: ``L Fund 
Default Investment Option'' (December 16, 2013), available at http://
www.frtib.gov/pdf/minutes/MM-2013Dec-Att3.pdf (``FRTIB Executive 
Director memorandum''); Federal Retirement Thrift Investment Board, 
Memorandum for the Executive Director, From: Renee Wilder, Director, 
Office of Enterprise Planning, Subject: ``Default Investment Fund 
Option'' (April 9, 2013), available at http://www.frtib.gov/pdf/
minutes/MM-2013Apr-Att5.pdf (``FRTIB Office of Enterprise Planning 
memorandum'').
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    Putting TSP investments by default into the G Fund avoids 
certain financial risks, because that fund is invested in 
Treasury securities, which--unlike stocks and bonds--fluctuate 
little in value and have no risk of loss of principal. However, 
investing 100% of an employee's account in the G Fund increases 
other significant financial risks for the employee, including 
the risk that growth of the fund will lag behind inflation, and 
the risk that the employee's financial needs during retirement 
will exceed the employee's assets.
    For these reasons, the Federal Retirement Thrift Investment 
Board (FRTIB), which administers the TSP program, and the 
Employee Thrift Advisory Council (ETAC), whose members are 
representatives of unions and other employee and annuitant 
organizations, evaluated whether the current default rules 
should be changed.\13\ Based on that evaluation, both groups 
determined that the default investment option should be changed 
from the G Fund to an L Fund appropriate for the employee's 
age, provided that the employee should retain the ability to 
invest in the G Fund or in any other TSP fund or combination of 
funds if the employee so chooses.\14\ To accomplish this 
change, the FRTIB decided to seek legislation like what was 
subsequently introduced as the Smart Savings Act.\15\
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    \13\See Federal Retirement Thrift Investment Board, Minutes of the 
Joint Meeting of the Board Members and the Employee Thrift Advisory 
Council, April 22, 2013, available at http://www.frtib.gov/pdf/minutes/
2013Apr.pdf; Federal Retirement Thrift Investment Board, Minutes of the 
Meeting of the Board Members, December 16, 2013, available at http://
www.frtib.gov/pdf/minutes/2013Dec.pdf.
    \14\See id.
    \15\Specifically, the FRTIB adopted a motion that provided: ``The 
Executive Director shall pursue legislation to make an age-appropriate 
L Fund the default option for Thrift Savings Plan Contributions by FERS 
participants.'' Id. The Federal Employees Retirement System, or FERS, 
is the retirement system applicable to great majority of new federal 
employees.
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    The reasons for changing the default option to be an age-
appropriate L Fund, as the FRTIB urges Congress to do, are 
compelling. The L Funds offer professionally designed 
portfolios of investments with earnings that are generally 
higher than the earnings of the G Fund. As the Executive 
Director of the FRTIB has explained--

        The L Funds, offer professionally managed allocations 
        across asset classes and are designed to maximize 
        expected performance for the amount of risk taken. The 
        design of the L Funds automatically addresses changing 
        asset allocation needs as participants near their draw-
        down dates. While investing in an L fund exposes a 
        participant to the risk inherent in the capital 
        markets, the L Funds appropriately address those risks 
        in their design. Further, those participants who 
        conclude they do not want to assume market risk will 
        always have the ability to change their allocations or 
        move their account balances to the G Fund.\16\
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    \16\See FRTIB Executive Director memorandum, note 12 above.

    Actual investment results have been consistent with making 
the L Fund the default option. Between August 2005, when the L 
Funds were established, through September 2013, which was a 
period that included the market downturn of 2008-2009, the 
cumulative returns for the G Fund were 29.75%. By comparison, 
the cumulative returns for the L 2040 Fund, which was designed 
for younger employees, were 65.78%.\17\ Between August 2010 and 
September 2013, the cumulative returns for the G Fund were 
6.33%, compared to 47.39% for the L 2040 Fund.\18\
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    \17\See id.
    \18\See id.
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    Of course, the L Funds, being more volatile than the G 
Fund, performs less well than the G Fund at certain times and 
under certain circumstances. As a recent unusually severe 
example, in 2008, at the depths of the market downturn, while 
the G Fund had a positive return of about 4% annually, the L 
Funds all dropped in value: the least volatile L Fund, designed 
for employees near or beyond retirement age, dropped about 4.5% 
in value, while the most volatile L Fund, designed for 
employees for whom retirement was still about 30 years away, 
dropped about 32% in value.\19\
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    \19\See Thrift Savings Plan, ``Investment Funds, Fund Performance, 
Annual Returns'' 
https://www.tsp.gov/investmentfunds/annual/annualReturns.shtml.
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    However, the TSP is intended for employees investing for 
the long term, for whom a temporary loss in value is generally 
outweighed by the opportunity for greater long-term growth of 
the account. Especially for younger employees, their long 
investment horizon typically enables them to comfortably 
weather market cycles.\20\ And the example from 2008, described 
above, illustrates how the L Funds designed for employees at or 
near retirement age, who will need to withdraw their TSP assets 
relatively soon, are much less susceptible to a large downward 
swing in value than the L Funds for younger employees. As the 
Director of the FRTIB's strategic planning office concluded, 
``for long-term investors, which includes the vast majority of 
newly-hired Federal employees and certainly younger 
participants, the L Fund is a more appropriate default 
option.''\21\
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    \20\See FRTIB Office of Enterprise Planning memorandum, note 12 
above.
    \21\Id.
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    To further test these assumptions, the FRTIB's investment 
consultant conducted a simulation of potential returns during a 
wide variety of hypothetical economic scenarios, comparing the 
strategy of investing a TSP account in the L Fund with a target 
retirement date of 2030, versus the strategy of investing 100% 
in the G Fund. The TSP Executive Director described the results 
of the simulation this way:

        When modeling a `typical' TSP participant, currently 
        aged 44 and retiring at age 61, the analysis projected 
        that a portfolio 100% invested in the G Fund yielded a 
        less favorable distribution of outcomes (i.e., account 
        balance, replacement ratio [which is the ratio of gross 
        income after retirement divided by gross income before 
        retirement]) than the outcomes of a portfolio invested 
        in the L Fund.\22\
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    \22\FRTIB Executive Director memorandum, note 12 above.

This simulation further illustrates that an age-appropriate L 
Fund is a more prudent investment option than a strategy of 
investing 100% in the G Fund for long-term investors.
    Actual investment patterns indicate that the assets of too 
many younger federal employees may not be prudently invested. 
Comparing age cohorts, the percentages of assets allocated to 
the G Fund are higher for older participants, consistent with 
their needing less-volatile and income-producing assets as they 
approach or exceed retirement age. But the exception to this 
pattern is that participants younger than 30--who should 
generally be investing for long-term growth, not short-term 
stability--have a disproportionately large percentage of their 
TSP assets in the G Fund: 48%.\23\ Because many younger 
participants tend to have difficulty envisioning their need for 
retirement planning and saving, it is likely that an important 
reason why so much of their retirement assets remain in the 
default-option G Fund is inertia.\24\
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    \23\See id.
    \24\See id.
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    In changing the default to an age-appropriate L Fund, this 
bill would bring the federal government into line with a 
substantial and growing trend among private-sector companies. A 
survey of nearly 550 employers over a variety of sizes and 
industries--and including 30% of Fortune 500 companies--found a 
substantial majority of these plans use target-date retirement 
funds for their default options:

        Currently, 78% of plans default participants' funds 
        into a target-date fund, up from 69% in 2009 and 50% in 
        2007. . . . [S]table value or money market [funds are 
        used as the default] by 6% of employers.\25\
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    \25\See AonHewitt, ``2011 Trends and Experience in Defined 
Contribution Plans: Paving the Road to Retirement,'' available at 
http://www.aon.com/attachments/thought-leadership/
2011_Trends_Experience_Executive_Summary_v5.pdf; see also FRTIB Office 
of Enterprise Planning memorandum, note 12 above.

Other surveys of private-sector plans show similar trends.\26\
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    \26\See id.
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    The federal government, too, ought to help its employees 
invest appropriately. By changing the default to the long-term 
investment option of an age-appropriate L Fund, the Smart 
Savings Act would help new federal employees invest most 
appropriately for a secure financial future.\27\
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    \27\A FRTIB representative has advised Committee staff that, 
because L Funds are somewhat more volatile than the G Fund, after 
enactment of the Smart Saving Act the FRTIB would send risk-
acknowledgement information to each new employee whose TSP assets are 
automatically placed in an L Fund, to help ensure that each employee is 
aware of the investment, understands the risks, and has information on 
how the employee can elect to change the investment if the employee so 
chooses.
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                        III. Legislative History

    S. 2117 was introduced by Senator Warren and Senator 
Portman on March 12, 2014, and was referred to the Committee on 
Homeland Security and Governmental Affairs. Senators Begich, 
Enzi, and Tester have been added as cosponsors. On June 25, 
2014, the Committee considered S. 2117 and ordered the bill 
favorably reported without amendment, by voice vote. Members 
present for the vote were: Carper, Levin, McCaskill, Tester, 
Heitkamp, Coburn, McCain, Johnson, and Portman.

                    IV. Section-by-Section Analysis


Section 1. Short title

    This section states that the short title of the bill is the 
``Smart Savings Act.''

Section 2. Thrift Savings Plan default investment fund

    This section would amend 5 U.S.C. chapter 84 to change the 
default investment fund for civilian TSP participants from the 
G Fund to an age-appropriate target-date asset allocation 
portfolio of funds. Under this section, if an employee has not 
elected which fund or funds the assets in the employee's TSP 
account should be invested in, the Executive Director of the 
Federal Retirement Thrift Investment Board would select the L 
Fund with a target date that is appropriate considering the age 
of the employee. In addition, this section provides that, 
before an employee's assets are invested in an L Fund by 
default, the employee shall be sent information to acknowledge 
that the investment is made at the employee's risk.
    This section would also require the Executive Director to 
issue guidance implementing the legislation no later than nine 
months after the date of enactment, and the bill would go into 
effect on the date on which the guidance is issued.

                   V. Evaluation of Regulatory Impact

    Pursuant to the requirement of paragraph 11(b)(1) of rule 
XXVI of the Standing Rules of the Senate the Committee has 
considered the regulatory impact of this bill. The enactment of 
this legislation will not have significant regulatory impact.

             VI. Congressional Budget Office Cost Estimate

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, July 3, 2014.
Hon. Tom Carper,
Chairman, Committee on Homeland Security and Governmental Affairs, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 2117, the Smart 
Savings Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Santiago 
Vallinas and Dan Ready.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

S. 2117--Smart Savings Act

    S. 2117 would change the default investment fund in the 
Thrift Savings Plan (TSP) for government employees. Currently, 
contributions of employees who are enrolled in the TSP, but 
have not specified where to invest their funds, are 
automatically invested in the Government Securities Investment 
Fund. This bill would shift the default fund to a Lifecycle 
fund with an age-appropriate asset allocation.
    CBO estimates that enacting S. 2117 would not affect direct 
spending. The Joint Committee on Taxation (JCT) estimates there 
could be a small revenue effect because enacting the bill might 
change the number of federal employees who choose to contribute 
to the TSP, thus modifying their total tax liability. 
Therefore, pay-as-you-go procedures apply. However, JCT 
estimates that any revenue effects would be negligible.
    S. 2117 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would impose no costs on state, local, or tribal governments.
    On May 7, 2014, CBO transmitted a cost estimate for H.R. 
4193, the Smart Savings Act, as ordered reported by the House 
Committee on Oversight and Government Reform on March 12, 2014. 
The two bills are substantively identical and the cost 
estimates are the same.
    The CBO staff contacts for this estimate are Santiago 
Vallinas and Dan Ready. This estimate was approved by Theresa 
Gullo, Deputy Assistant Director for Budget Analysis.

     VII. Changes in Existing Statute Made by the Bill, as Reported

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, changes in existing law made by 
S. 2117, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

                           UNITED STATES CODE

TITLE 5--GOVERNMENT ORGANIZATION AND EMPLOYEES

           *       *       *       *       *       *       *


PART III--EMPLOYEES

           *       *       *       *       *       *       *


Subpart G--Insurance and Annuities

           *       *       *       *       *       *       *


CHAPTER 84--FEDERAL EMPLOYEES' RETIREMENT SYSTEM

           *       *       *       *       *       *       *



Subchapter III--Thrift Savings Plan

           *       *       *       *       *       *       *



Sec. 8438. Investment of Thrift Savings Fund

    (a) * * *

           *       *       *       *       *       *       *

    [(2) If an election has not been made with respect to any 
sums in the Thrift Savings Fund available for investment, the 
Executive Director shall invest such sums in the Government 
Securities Investment Fund.]
    (2)(A) Except as provided in subparagraph (B), if an 
election has not been made with respect to any sums available 
for investment in the Thrift Savings Fund, the Executive 
Director shall invest such sums in an age-appropriate target 
date asset allocation portfolio of the funds described in 
subsection (b), as determined by the Executive Director.
    (B) If an election has not been made by a member (as 
defined in section 211 of title 37) contributing to the Thrift 
Savings Fund under section 8440e with respect to any sums 
available for investment in such member's Thrift Savings Fund 
account, the Executive Director shall invest such sums in the 
Government Securities Investment Fund.

           *       *       *       *       *       *       *


Sec. 8439. Accounting and information

    (a) * * *

           *       *       *       *       *       *       *

    (d)(1) Each employee, Member, former employee, or former 
Member who elects to invest in any investment fund or option 
under this chapter, other than the Government Securities 
Investment Fund, shall sign an acknowledgement prescribed by 
the Executive Director which states that the employee, Member, 
former employee, or former Member understands that an 
investment in any such fund or option is made at the 
employee's, Member's, former employee's, or former Member's 
risk, that the employee, Member, former employee, or former 
Member is not protected by the Government against any loss on 
such investment, and that a return on such investment is not 
guaranteed by the Government.
    (2) Before the date on which an individual covered under 
section 8438(c)(2)(A) begins contributing to the Thrift Savings 
Fund, the individual shall sign a risk acknowledgment described 
under paragraph (1).

           *       *       *       *       *       *       *


Subchapter VII--Federal Retirement Thrift Investment Management System

           *       *       *       *       *       *       *



Sec. 8472. Federal Retirement Thrift Investment Board

    (a) * * *

           *       *       *       *       *       *       *

    (g)(1) * * *
    (2) Except in the case of investments [required by section 
8438 of this title to be invested in securities of the 
Government] under section 8438(c)(2)(B), the Board may not 
direct the Executive Director to invest or to cause to be 
invested any sums in the Thrift Savings Fund in a specific 
asset or to dispose of or cause to be disposed of any specific 
asset of such Fund.

           *       *       *       *       *       *       *


                                  
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