The Department of Labor (DOL) wants to address climate change in Thrift Savings Plan (TSP) Core funds- but relationship between the governmental entities is ambiguous
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An executive order signed by the current president directs agencies to address the financial risks that stem from climate change. Last week, published on the federal register, the DOL requested clarification as to what it “could” or “should” do regarding the financial liability of holding fossil fuel companies in the TSP’s core funds. The Labor Department insinuated it would like to address the issue, and then possibly look to reduce or completely get rid of investments tied to climate change risk. This includes gas and oil companies whose stocks are part of the C, S, and I funds and whose corporate bonds are being held by the F-fund. The TSP, which is overseen by the Federal Retirement Thrift Investment Board (FRTIB), argues that the money in the TSP is owned by TSP investors and not the federal government, suggesting the funds should not be subject to the executive order mentioned above. The TSP has also long opposed “tailored funds” from inclusion in the TSP core, opting to go with index funds that track entire sectors of the market (for example, the C-fund tracks the S&P 500 index).
DOL and TSP’s Tenuous Relationship
The DOL conducts periodic audits of the TSP, but beyond that, the DOL doesn’t have explicit direct authority over the TSP’s investment management. The conduction of the audits implies some authority, but the TSP exists outside of the law that regulates private sector 401(k) plans, ERISA, which is directly enforced by the DOL. Last week’s publication requested clarification regarding the agency’s ambiguous authority over the TSP and the FRTIB.
In 2020, the issue was addressed as the FRTIB tried to implement an index change to the I-fund that would’ve allowed stocks from more countries to be included. However, one of these countries was China and the DOL did not want federal employees’ retirement money invested in a foreign country with which the US has an adversarial relationship. The Labor Department issued a letter to the FRTIB, ordering them to not make the change. The question of whether such direct authority existed, though, remains up in the air. The previous President nominated new board members to the FRTIB, and this effectively suspended the index change in the I-fund, and also left the authority issue unresolved. The current President has nominated new board members, too, but none of these nominees (neither Trump’s nor Biden’s) have been confirmed by the Senate.
There are two bills that have been introduced in Congress that aim to circumnavigate the DOL on the issue of climate change investments. The RISE Act of 2020 (HR 8806) would create a 6th TSP fund that would avoid investments in fossil fuel industries and be known as the “climate choice” or environmental fund (E-fund). The RESPOND Act (S 606) would create an advisory panel at the TSP to determine how, and how much, to divest fossil fuel companies from the TSP’s core funds. Both of these proposed bills have stalled out in Congress, though.
The Mutual Fund Window
Starting this Summer, the upcoming mutual fund window will allow TSP investors to choose from thousands of mutual funds. These options are confirmed to contain ESG (environmental social governance) funds, and this might resolve the contention over TSP’s climate change risk, but whether or not these options will satisfy the DOL is still uncertain.
Until Next Time,
**Written by Benjamin Derge, Financial Planner, ChFEBC℠ The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.