Federal Government on the Mark with Plan Investment Indices

Govexec.com reports that the initial focus of the plan’s first-ever external audit was the indices the TSP uses to track its C (common stock), S (small- and mid- size companies stock), F (fixed income securities), and I (international stocks) funds.   The passively-managed funds mirror certain indices, which the consulting firm said were the best choices currently.

The C Fund follows the S&P 500 Index and the S Fund tracks the Dow Jones Wilshire 4500 Index.   Ennis Knupp advisers Russell Ivinjack and Neeraj Baxi told the board this combination is optimal for investors because the indexes are widely-followed and provide access to all US markets, according to govexec.com.   Switching to the next-best option, the Russell 1000 and Russell 2000 for the C and S funds, respectively, would cost about $225 million, the consultants said.

Ennis Knupp consultants also recommended sticking with the Lehman Brothers Aggregate Bond Index for the F Fund.   They said it is the most widely accepted index and provided the most diversification.   Switching to another index would cost about $15 million, they said.

Currently the Morgan Stanley Capital International Europe, Australasia, Far East Index is used for the I Fund.   It does not include Canada or emerging markets like Latin America, so it does not provide the optimal diversification.   However, it is valued daily like all the other TSP funds.   Indices which include Canada and the emerging markets are valued monthly, which would require plan changes.   TSP Board Chairman Andrew Saul said that, once indexes with emerging markets and Canada become daily-valued and grow larger, the board will reconsider the I Fund’s index.

The consultants will next focus on potential changes in asset management, currently handled by Barclays Global Investors, and the possibility of adding funds such as a real estate investment trust.