The Executive Director of the Federal Retirement Thrift Investment Board (FRTIB), the agency that oversees TSP operations, is requesting a change to the I Fund Index due to a recent study. TSP requested this study—conducted by Aon Hewitt Investment Consulting. The purpose of this study was to evaluate the appropriate indexes to use for the C, F, S, and I Funds.
After review, Aon Hewitt determined that the C, F, and S Funds should continue to track their current indexes. The C Fund currently tracks the S&P 500 Index, and the S Fund tracks the Dow Jones U.S. Completion Total Stock Market Index. They recommended TSP stay with these because the entire U.S. Stock Market is covered by these 2 indexes, whereas the other combination considered (Russell 1000 and 2000 Indexes), only covers 98% of the market
Aon Hewitt also recommended the F Fund continue tracking the Bloomberg Barclays U.S. Aggregate Index. The study looked at four alternative indexes but determined this one provides the widest coverage of the investment grade bond market and is the most widely recognized fixed income benchmark in the U.S.
Aon Hewitt Recommendations
The study looked at 8 non-U.S. stock indexes as possible alternatives for use by the I Fund. Currently, the I Fund tracks MSCI Europe, Australia, Far East (EAFE) Index. Aon Hewitt recommends changing to the MSCI All Country World ex U.S. Investable Market Index (IMI) based on the study’s results. This would offer TSP participants who invest in the I Fund exposure to markets they don’t have access to currently like Canada, emerging markets, and international small-cap equities.
“The MSCI ACWI ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding U.S.) and 24 Emerging Markets (EM) countries. With 6,149 constituents, the index covers approximately 99% of global equity opportunity set outside the U.S.,” a summary document on the Index described.
The study also concluded transition costs were “reasonable”. They expected the cost to average approximately $57 million. This number is based on the expected trading costs to make the transition and asset value of the I Fund which, as of June 30, 2017, was $42 billion.
FRTIB Executive Director Recommendations
Ravindra Deo, the Executive Director of the FRTIB said in a memo to board directors that he was seeking their approval for the change. He said he felt the most appropriate time to implement the change would be during the next re-compete of the I Fund’s investment management, which is the calendar year 3rd quarter of 2018. The transition, expected to take place over 3-6 months, could be done no later than the end of the first half of the calendar year 2019.
Deo wrote, “Based on the study by AHIC, including costs and other information provided in its written report and presentation regarding transition-related issues, we believe that it is appropriate to change the benchmark index for the I Fund. I am asking for the Board’s approval for the FRTIB to change the I Fund’s benchmark index to MSCI ACWI ex—U.S. Investable Market Index from the current benchmark of MSCI EAFE Index, to be executed by the single investment manager chosen with the next re-compete of investment management.”