China

The Thrift Savings Plan/China Controversy – A Fiduciary Governance Perspective

The federal Thrift Savings Plan had planned to change the benchmark for its I Fund. This change would have resulted in federal employee-participants gaining exposure to Chinese equities. This proposal was not without controversy. Last Fall, for example, U.S. Senators Marco Rubio (R-FL) and Jeanne Shaheen (D-NH) complained that the planned move by the Federal Retirement Thrift Investment Board, the government agency that oversees the plan, “will effectively fund companies that engage in human rights abuses and support China’s efforts to undermine America. It exposes nearly $50 billion in assets to severe and undisclosed material risks associated with many Chinese companies listed on the index.”

The multi-year planned implementation of the change in benchmark was set to be complete in early June until the recent and ongoing geopolitical headwinds ultimately led to the White House getting involved, as we noted here, here and here. As reported, the White House penned a May 11 letter to DOL Secretary Eugene Scalia, which stated, in pertinent part, that the change in benchmark “would expose the retirement funds to significant and unnecessary economic risk, and it would channel federal employees’ money to companies that present significant national security and humanitarian concerns because they operate in violation of U.S. sanctions law….” Secretary Scalia, in turn, wrote to the chair of the Federal Retirement Thrift Investment Board, stating, in part: “At the direction of President Trump, the Board is to immediately halt all steps associated with investing the I Fund according to the MSCI ACWI ex USA IMI, and to reverse its decision to invest Plan assets on the basis of that international equities index.”

In response, the Board halted the change in index.

The plan is established under FERSA and the assets of each participant are held in trust. The Board is bound by fiduciary duties in managing the plan. The question becomes, is there fiduciary duty risk for a fiduciary to change course after a decision has been made but before formal implementation? This question is relevant to all fiduciaries, even those who operate under ERISA.

I was recently quoted in the article, Politics pressuring TSP to halt investments that include China, in the May 18 edition of Pensions & Investments.  While political pressure on a plan fiduciary may raise fiduciary duty concerns, I stated, in part, the following: “A fiduciary that re-evaluates a prior decision, in light of significant geopolitical, public health and macroeconomic developments, is likely following a prudent process.”

Live Blogging: New York

I am here at The Harvard Club discussing what plan fiduciaries should consider when evaluating potential exposure to China A-shares. Some of the key issues I am outlining are:

1 – Indicia of ownership issues, particularly for non-US managers (ERISA plans)

2-Prudence considerations in light of foreign investor restrictions (e.g., forced sales) and language barriers when examining public disclosures (ERISA and governmental plans)

3 – Adherence to plan documents, including, but not limited to, the plan’s ESG policies (if any) (ERISA and governmental plans)

4- Fiduciaries should remember that A-shares are traded in renminbi (ERISA and governmental plans)