[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.
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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.
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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.
* * * * * * *