Participants' Choices of TSP Funds, 22049-22057 [E8-8957]

Agencies

• Federal Retirement Thrift Investment Board

[Federal Register Volume 73, Number 80 (Thursday, April 24, 2008)]
[Rules and Regulations]
[Pages 22049-22057]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-8957]



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Federal Register / Vol. 73, No. 80 / Thursday, April 24, 2008 / Rules 
and Regulations

[[Page 22049]]



FEDERAL RETIREMENT THRIFT INVESTMENT BOARD

5 CFR Part 1601


Participants' Choices of TSP Funds

AGENCY: Federal Retirement Thrift Investment Board.

ACTION: Final rule.

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SUMMARY: The Federal Retirement Thrift Investment Board (Agency) amends 
its interfund transfer (IFT) regulations to limit the number of 
interfund transfer requests to two per calendar month. After a 
participant has made two interfund transfers in a calendar month, the 
participant may make additional interfund transfers only into the 
Government Securities Investment (G) Fund until the first day of the 
next calendar month.

DATES: This rule is effective on May 1, 2008.

FOR FURTHER INFORMATION CONTACT: Megan Graziano, 202-942-1644.

SUPPLEMENTARY INFORMATION: 

Preamble

    Under the Federal Employees' Retirement System Act of 1986, the 
Thrift Savings Plan (TSP) was created to offer passive long-term 
investments designed to improve the retirement security of Federal 
employees. As a result of analysis performed in 2007, it became clear 
that a small number of TSP participants were pursuing ``market timing'' 
active investment strategies in the TSP. These activities were diluting 
the earnings of the long-term investors, and adversely affecting the 
ability of TSP managers to replicate the performance of selected 
indexes as required by law.
    The Chief Investment Officer reported these findings to the 
Executive Director on November 6, 2007. The Executive Director 
presented the information to the Federal Retirement Thrift Investment 
Board members at their public monthly meeting on November 19. Subject 
to the input from the Employee Thrift Advisory Council (ETAC), the 
Board authorized the Executive Director to put in place both interim 
and structural restrictions on frequent interfund transfer activity.
    The 15 members of the ETAC were advised that same day and presented 
with the information developed by Agency staff. Under longstanding 
custom, ETAC members were also provided an advance copy of the Agency's 
interim proposed rule. Two ETAC member organizations voiced some 
concerns, and the Agency decided to withhold publication of the 
proposed interim rule until a public meeting of the ETAC and the 
Executive Director could be conducted on December 19. After extensive 
discussion at the meeting, no ETAC member objected to the Agency's 
implementation of its interim plan. The proposed interim rule was 
forwarded to the Federal Register on December 21, where it was 
published on December 27. The rule took effect on January 7, 2008.
    On January 24, 2008, under the interim rule, the Executive Director 
sent letters to 3,775 TSP participants who had been identified as 
frequently requesting IFTs. The letters explained the need to reduce 
this activity and asked recipients to voluntarily reduce their IFT 
requests. The letters also warned each individual that a failure to 
practice self-restraint could result in the imposition of restrictions. 
Eighty-five percent of those who received a letter voluntarily 
complied. However, 549 individuals continued their frequent IFT 
activity during February. These individuals were subsequently notified 
by certified mail that they would be restricted to requesting IFTs by 
mail, effective April 1, 2008. Their option to request IFTs via the TSP 
Web site or over the Thriftline was suspended until plan-wide 
structural restrictions are implemented. However, some have appealed 
their restrictions, and, in appropriate cases, the Agency has approved 
their appeals.
    On March 10, 2008, the Agency published a proposed rule with 
request for comments in the Federal Register (73 FR 12665, March 10, 
2008). The Agency received comments from three Federal employees' 
unions and from 354 TSP participants. One comment purported to include 
the views of over 4,000 participants. Additionally, the Agency received 
and reviewed 110 comments prior to the Agency's publication of its 
January 7, 2008 interim regulation; these comments were reconsidered as 
a part of this rulemaking process.

Comment Summary

Summary

    Commenters raised a number of issues and a detailed response to 
each one is provided below. By way of summary, those individual 
respondents who have personally made frequent interfund transfers and 
oppose the proposed limits display a fundamental misunderstanding of 
the statutory TSP design. They also present two overarching arguments 
which deserve discussion at the outset, because they obscure the damage 
which their frequent IFTs inflict on other plan participants.

Misunderstanding

    By misappropriating language used in the capital markets (buys, 
sells, trades), some TSP participants give the impression that their 
frequent interfund transfers are trades in and out of the markets which 
affect only their own funds. This is incorrect. All TSP assets are in a 
pooled investment which is designated by statute as the Thrift Savings 
Fund.
    In this regard the TSP funds are like mutual funds regulated by the 
Securities and Exchange Commission (SEC). In 2005 the SEC took steps to 
reduce activity in mutual funds. It did so after finding that: 
``Excessive trading in mutual funds occurs at the expense of long-term 
investors, diluting the value of their shares. It may disrupt the 
management of a fund's portfolio and raise the fund's transaction cost 
because the fund manager must either hold extra cash or sell 
investments at inopportune times to meet redemptions.''
    Congress established the Thrift Savings Fund as a long-term, 
passive investment. The legislative history shows that active 
investments were considered, but rejected. The Federal Retirement 
Thrift Investment Board is required by law to develop policies under 
which four Thrift Savings Fund offerings--commonly known as the C, S, 
I, and F Funds--are invested to ``replicate'' the performance of 
selected

[[Page 22050]]

market indexes at a low cost. Through careful and diligent management, 
these goals have been achieved for more than twenty years.
    Each day the Agency and its contractors tally new contributions, 
loan activities, disbursements, and IFTs to arrive at net amounts 
available for investment in each of the Thrift Savings Fund offerings 
that day. A similar netting process occurs in the TSP asset manager's 
commingled investment funds, which include the assets of many other 
institutional investors. Predictable cash flows and offsets due to 
netting minimize trading costs.
    This carefully designed structure, which optimizes achievement of 
the statutory goals, has been challenged over the past year by a 
noticeable increase of IFTs by a small group of participants. The 
Agency's analysis has demonstrated that fewer than 1 percent of TSP 
participants are engaging in this activity to the detriment of more 
than 99 percent of participants who are long-term investors (those who 
requested 12 or fewer IFTs in calendar year 2007).
    The actions by the small group have become less random, which 
suggests coordination and leads to fewer opportunities for cost savings 
due to offsets. The deleterious consequences of these activities in the 
TSP are the same as those which the SEC found occurring in mutual 
funds. Importantly, the clear intent of this activity--to ``beat'' the 
market indexes--fundamentally conflicts with statutory mandates that 
the Board provide passive investments which replicate the performance 
of market indexes.

Claim That Frequent Interfund Transfers Do Not Significantly Increase 
Costs Is Misleading

    Commenters who oppose restrictions cite the very low TSP 
administrative expenses as evidence that their actions are harmless. 
Some concede additional costs, but argue that those additional costs 
are de minimus and only amount to $4 per year, per participant.
    While we neither accept this number nor the process by which it is 
derived, the view that exceptional costs generated by 1 percent of 
participants should be viewed as inconsequential if they can be charged 
off to 100 percent of plan participants is troubling. The resulting 
small average cost obscures a significant problem, i.e., the cost to 
other individual participants can be very high depending on how funds 
are invested on a particular day. This issue is discussed further 
below.
    Moreover, the Agency rejects the argument that $16 million in 
trading costs is small. The entire budget for the TSP in 2007 was just 
$87 million. In the context of how the TSP fiduciaries run the TSP, 
this additional $16 million is a very large number.
    Costs remain low in the TSP because the Board, exercising due 
diligence, looks behind broad averages. Indeed, diligent examination 
led to the discovery last summer of frequent interfund transfer 
activity by this very small but determined cohort of participants.
    As noted above, individual TSP interfund transfers are not 
``trades'' and transferees are not ``traders.'' However, frequent IFTs 
can and do generate expenses which include trading costs at the Fund 
level. The Agency and its asset manager endeavor to minimize trading 
costs through offsets, netting, and cost free ``cross-trading.'' 
Ultimately, if the asset manager must go to the market to buy or sell 
securities, the associated transaction costs (including commissions 
paid to the brokers, transfer taxes, and market impact) are borne by 
all participants in the Fund. These costs are not reflected in the 
highly publicized and very low TSP expense ratio. Further discussion of 
transaction costs is featured below.

Recommendation That Interfund Transfer Restrictions Apply Only to the I 
Fund Obscures Significant Abuse

    A number of commenters acknowledge that the analysis presented by 
the Agency staff makes a compelling case to restrict interfund 
transfers in the I Fund. However, they argue that the analysis is not 
as compelling for the other TSP funds. The Agency has decided to apply 
the restrictions to all TSP offerings for two reasons:
    First, the Agency's analysis does demonstrate measurable and 
growing adverse effects of frequent IFT activity in the S Fund. 
Moreover, since the analysis was performed, interfund activity in the F 
Fund increased as well.
    Second, the G Fund has been subjected to a frequent transfer/market 
timing practice that is particularly insidious.
    The G Fund is invested in specially-issued Treasury securities 
which provide a fixed rate of return established monthly. It is 
considered the TSP ``stable value'' fund, and is especially important 
to those cautious investors who seek security of principle and 
interest.
    Some of the frequent interfund transferors have determined that by 
making one-day round trips in and out of the G Fund three to five times 
each month, they are able to effectively collect a full month's worth 
of G Fund earnings for just three to five days of actual G Fund 
investment. The windfall they secure comes at the direct expense of 
long-term G Fund investors who never anticipated that their safe 
retirement investment would be subjected to such mercenary treatment by 
their fellow TSP participants.
    Practitioners visit a Web site in order to compare notes and 
calculations to assist each other in the execution of this scheme. They 
congregate at a message board which they have aptly titled ``G Fund 
Payday.'' Indeed, like ghost workers, these individuals only show up in 
the G Fund on the days when their calculations show that G Fund shares 
will increase in value. With a finite amount of earnings to be 
allocated, these individuals unquestionably dilute G Fund value at the 
expense of long-term investors.
    This indefensible practice will be severely curtailed by the limit 
on interfund transfers. Additionally, the Agency will make a structural 
change beyond the purview of this rulemaking which will totally 
eradicate this particularly abusive form of frequent interfund transfer 
activity.

Union Comments

    The Agency received three comments from Federal employees' unions. 
All acknowledged that frequent IFT activity is detrimental to the 
performance of the funds and that some action to restrict it is 
necessary.
    One union supports the regulation as written.
    One union commented that changes that have already been made 
address the frequent transfer problem and no further changes are 
needed. This union is referring to the interim regulation implemented 
by the TSP in January 2008, whereby the Executive Director identified 
3,775 participants who were making excessive IFT requests, thus driving 
up costs for the participants who are using the TSP in the way it was 
intended, as a long-term retirement vehicle. Letters were sent to those 
participants requesting that they voluntarily restrict their IFTs to 
fewer than four in the month of February. The letter noted that, if the 
participant did not voluntarily comply, s(he) could be limited to 
making IFT requests by mail only. This limitation would remain in 
effect until the Agency implemented structural changes that would 
automatically apply to all participants.
    Thus, the Agency's actions so far were only approved as a temporary 
measure, to deal with an immediate problem, until the longer-term 
solution could be put in place. It was an extremely labor-intensive 
process to identify these individuals, notify them by mail,

[[Page 22051]]

identify those who did not voluntarily comply, send them certified 
letters, restrict their online access, and handle their appeals.
    Additionally, in all fairness to those individuals, the Agency 
would have to continue to apply that same labor-intensive process to 
all participants on a monthly basis.
    With this final regulation, the Agency will implement a structural, 
automated process. While the union asserted that the interim measure 
was less ``Draconian'' than the proposed regulation, the Agency sees it 
as the opposite. Under the interim regulation, affected participants 
must submit IFT requests by mail and, as the Agency processes mail 
requests in the order received (not necessarily in the order mailed), 
participants have reduced control over what order their IFTs are 
executed. (One participant commented against the union proposal and 
noted that the interim regulation is ``Draconian.'')
    This union also suggested that if a change is necessary, it should 
be ``to allow two transfers per month and after two transfers (if other 
than the G Fund), attach a fee for servicing the transfer.'' ``While it 
may be `impossible to correctly assign the exact costs,' we can follow 
the leads of other such funds in arriving at a figure.''
    In its research, the TSP found no mutual fund or defined 
contribution plan which allows participants to make a certain number of 
free transfers and then charges a fee for additional transfers. In 
fact, fund managers who use trading limitations and fees, do so as a 
double deterrent, not as a way to accommodate more transfer activity. 
In recommending this approach at an ETAC meeting, the union noted that 
TIAA-CREF pursued a similar policy. The Agency contacted TIAA-CREF, and 
its policy is: A participant who transfers from any fund, transfers 
back, and then sells it within 60 days may not repurchase that fund for 
90 days and, if the transaction involves the international (similar to 
I Fund), high yield, or small-cap (similar to S Fund) funds, a 2 
percent fee is assessed. The TSP regulation is far less restrictive.
    The TSP also looked to Vanguard, the largest mutual fund index 
manager in the country. Holders who redeem shares in any Vanguard 
mutual fund must wait 60 days before repurchase. For some funds, 
including the fund that is similar to the TSP's I Fund, if the 
shareholder redeems a fund that has not been held for 60 days, the 
shareholder cannot repurchase the fund for 60 days, and must pay a 
redemption fee, which would be 2 percent for the international fund. 
Again, the TSP regulation is far less restrictive.
    The third union suggested two proposals. The first was addressed in 
the preceding paragraph. Alternatively, it proposed four instead of two 
unrestricted IFTs per month. TSP studies showed that allowing four IFTs 
per month would not result in any meaningful reduction in the dollar 
amount of the daily trades. Allowing three IFTs per month would result 
in a 31 percent reduction in the dollar value and two per month would 
result in a 53 percent reduction. Thus, the TSP is expecting a 
reduction in dollar value of between 31 percent and 53 percent, after 
factoring in some activity related to unlimited transfers to the safe 
harbor of the G Fund. TSP research has shown that less than 1 percent 
of participants make more than 12 IFTs per year. Therefore, the 
regulation will not affect 99 percent of participants. It will allow 
participants to rebalance their accounts twice per month, which, in the 
view of the Plan's two investment consultants, is more than adequate.

Participant Comments

Support for Proposed Regulation

    Thirty participants supported the regulation.

Opposition to Proposed Regulation

    Some participants suggested there should be a certain number of 
``free'' IFTs per month and then a fee per transaction. This proposal 
was addressed under the union comments discussed above.
    Many participants commented that TSP expenses are already very low 
or that costs are going down. Some noted that TSP Funds are already 
outperforming their underlying indexes.
    TSP expenses are very low. The TSP's enabling legislation requires 
the Board to develop investment policies which provide for low 
administrative costs. 5 U.S.C. 8475. Due to efforts by the Board, the 
net expense ratio for the TSP Funds declined to 1.5 (0.00015%) basis 
points last year.
    However, the Funds also incur transaction costs, which are directly 
related to the dollar amount of IFTs requested by participants. These 
transaction costs are investment expenses that reduce investment income 
before deductions for administrative expenses and are not included in 
the expense ratio.
    TSP net administrative expenses in 2007 were reduced to 
$31,392,286. However, costs from trading activity were an additional 
$13,880,098. Although more than 99 percent of participants made 12 or 
fewer IFTs last year, all participants shared the full cost of 
executing the interfund transfers generated by those who made numerous 
IFTs.
    Numerous IFTs increase the dollar amounts of the orders that are 
given to the investment manager on a daily basis. The investment 
manager must therefore hold more cash to meet potential redemptions, 
leading to a greater chance of differences in performance from the 
indexes tracked by the funds. This difference (tracking error) can be 
positive or negative, but the TSP is charged by statute to keep this 
tracking error as low as possible since the funds must, by law, 
``replicate'' their respective indexes. 5 U.S.C. 8438. It is 
indisputable that reducing the dollar amount of IFTs will lower 
transaction costs and the amount of cash the investment manager must 
hold and will, therefore, reduce tracking error.
    Several participants noted that ``there is no problem;'' that 
trading costs are going down; that trading costs the average 
participant $3, $3.55, $3.56, $4, or $4.60. They asked ``Why does it 
cost $240 to trade a $300,000 account?'' ``Why can't you determine the 
exact cost and charge participants accordingly?''
    The TSP has avoided using averages when averaging can obscure 
important distinctions. For example, over the years, some have 
suggested that the Agency develop an average cost per participant. One 
could devise a simple calculation, i.e., in 2007, net administrative 
expenses at approximately $32 million spread over approximately four 
million participants would yield an average annual cost of $8 per 
participant.
    However, this is misleading because costs are borne pro-rata, and 
increase based on account size. So in order to be precise, the Agency 
expresses costs in terms of basis points. Thus, with last year's net 
expense ratio of 1.5 basis points, a new participant with $1,000 on 
account can easily determine that his cost was 15 cents, while a 
veteran participant with $1 million on account can quickly know that 
her share of these expenses was $1,500.
    With regard to IFTs, because there are several moving parts each 
day, an average would obscure important distinctions. For example, on 
August 16, 2007, participants redeemed 22,219,762 shares of the I Fund. 
The price they received was $22.48 based on a 4 p.m. market pricing. 
When the securities were sold at the opening of the foreign markets 
later that evening and the following morning, they were sold for 
$9,554,497 less than the prices used to determine the $22.48 share 
price. This

[[Page 22052]]

equates to a $0.43 per share trading cost. That is, if the Agency could 
have determined this in advance, the share price would have been only 
$22.05. Instead, the $9,554,497 difference was charged to the remaining 
holders of the I Fund. That is in one DAY, not in one year.
    Each day is unique, and the timing of participants' redemptions 
affects how much of the cost is borne by any given participant. A 
participant who would have redeemed the day before would not have been 
impacted at all by this transaction. One who transferred funds into the 
I Fund just before August 16 and transferred out just after would have 
experienced the full effect.
    On August 16, almost half of the dollar amount of the trade was 
from participants who were requesting frequent IFTs. The Agency knows 
from its analysis that a large number of the participants who make 
frequent interfund transfers were moving $250,000 or more. Each 
participant who redeemed $250,000 on that day would have sold 11,121 
shares, and therefore would have made an extra $4,782. (11,121 shares 
sold multiplied by $0.43 per share trading cost.) These ``extra'' funds 
did not come from the market. Rather, they came from the accounts of 
other participants who remained in the I Fund. When examined this way, 
it becomes clear why frequent IFTers would prefer to express this cost 
as an annual average spread over all participants.
    Additionally, because the investment manager's liquidity pool had 
been depleted on August 16, $452 million of that trade settled on 
August 21 instead of August 17. That cost the G Fund $235,000 in 
foregone interest.
    The Agency also cannot measure the cost to participants that 
results from increased tracking error because the investment manager 
has to keep a larger liquidity pool to meet frequent redemptions.
    Every day is different, and different participants are impacted in 
different ways depending on the timing of their interfund transfer 
activity. Stating an average cost per participant would be misleading. 
The goal of this regulation is to reduce IFT activity in order to 
control the costs borne by the other participants, costs which are 
different for every participant depending on what days they may be 
invested in, or not invested in, any particular fund and that are 
impossible to determine in advance.
    Several participants noted that money could be saved by eliminating 
mailed IFT confirmations and that the DVD for the L Funds was very 
expensive. Those costs are reflected in the already low expense ratio, 
which is assigned pro rata to all TSP participants. The trading 
expenses are not borne pro rata. In fact, a participant, who transfers 
out of a fund on a day when the cost to complete that trade is very 
high, bears none of the cost of that trade, while those who remain in 
the fund bear it all. It is the inequity of the allocation of the 
trading expenses which the TSP seeks to address, and which, as 
discussed in the proposed regulation (73 FR 12667, March 10, 2008), the 
SEC has identified as a problem for mutual funds.
    Several participants said (incorrectly) that the L Funds are 
responsible for the transactions costs and that these funds should also 
be limited. The dollar amount of trade activity attributable to the L 
Funds, especially when compared to the dollar amount of trading 
activity attributable to participants making frequent IFT requests, is 
very small. For example, in the I Fund, for September and October 2007, 
the average daily dollar amount attributable to the L Funds' 
rebalancing accounted for just 7 percent of the total daily trade, 
while the average daily dollar amount attributable to those making 
frequent IFTs (defined in this instance as participants who made IFTs 
into or out of the I Fund eight or more times in the prior 60 days) was 
63 percent. The impact of the L Funds' rebalancing is demonstrably 
minimal. The Agency monitors the L Funds, as it does all its funds, 
and, in the unlikely event that the dollar volume of the L Funds' 
rebalancing becomes costly, the Agency can take steps to reduce the 
frequency or amount of the rebalancings.
    Many participants requested that a fee be charged instead of 
limiting the number of IFT requests. Some of these participants 
recommended a ``$10 flat fee.'' Others noted that the Agency charges a 
fee for loans, and therefore, should be able to charge a fee for 
interfund IFTs. This comment was addressed in the proposed regulation 
as explained below:
    Many fund families charge redemption fees for shares which are 
redeemed within 30, 60, or 90 days of purchase. T. Rowe Price, for 
example, levies fees on 27 funds, including a 2 percent redemption fee 
on shares of its International Index Fund (similar to the I Fund) and a 
0.5 percent fee on shares of its Equity Index 500 (similar to the C 
Fund) and Extended Equity Market Index Funds (similar to the S Fund), 
if they are sold within 90 days of purchase. TIAA-CREF (with $400 
billion of assets under management and 3 million participants) charges 
a redemption fee of 2 percent on shares of its International Equity, 
International Equity Index, High Yield II, Small-Cap Equity, Small-Cap 
Growth Index, Small-Cap Value Index or Small-Cap Blend Index Funds 
redeemed within 60 days of purchase. We noted particularly that the fee 
is a percentage of the dollar amount transacted, not a flat processing 
charge.
    When brokerage firms charge $10 to execute a stock trade, they know 
how much it costs them to make that transaction. Mutual fund managers 
(and the TSP) cannot determine the exact amount of costs to the plan 
from IFT activity for the following reasons. First, each day, a price 
for each fund is determined based on closing stock prices for that day. 
However, the fund manager does not execute every stock trade at that 
closing price. Any difference is market impact and is charged or 
credited to the fund, thus impacting the returns of the long-term 
holders. Second, to accommodate the large trades which result from 
frequent IFT activity, managers must keep a larger liquidity pool, 
which causes performance to deviate from that of the index. Lastly, for 
the TSP, when the liquidity pool is depleted as a result of a number of 
large trades in a row, cash due to the TSP is not received for up to 
three days, costing participants foregone interest. None of these three 
costs is calculable in advance, and all three are different every 
single day. Because it is impossible to determine how much to charge 
for each transaction, mutual fund families assess a percentage of the 
dollar amount transacted, which is then credited back to the Fund.
    Many fund families employ trading restrictions similar to 
Vanguard's whereby an investor may not repurchase any fund within 60 
days after a redemption.
    We would also note that both TIAA-CREF and Vanguard, among others, 
use a double-barreled approach by charging a fee on top of the trading 
restrictions for some funds. For example, if an investor sells the 
Vanguard Developed Markets Index Fund (similar to the TSP's I Fund) 
within 60 days of purchasing it, that investor is charged a 2 percent 
fee and cannot repurchase the fund for 60 days.
    In developing its recommendation, the Agency chose not to pursue 
redemption fees because it is impossible to correctly assign the exact 
costs to those who are making IFTs. Additionally, imposing a percentage 
fee would deny our participants the ability to go to the safe harbor of 
the G Fund at any time for no charge. The Agency considers that 
capability to be of paramount importance. A fee-based system would 
especially punish an

[[Page 22053]]

infrequent trader who may wish to redeem within 30, 60, or 90 days 
(depending on the policy) because the market is declining. In this 
situation, the participant could face losing 2 percent of his/her 
investment in addition to the market decline, a worst case scenario.
    The FRTIB is implementing a procedure to reduce costs to 
participants. The SEC recommends that all mutual funds take such 
actions, and according to a 2007 study by Hewitt and Associates, 73 
percent of defined contribution plans have adopted policies designed to 
minimize transaction activities in their funds.
    Several participants expressed wanting more than two (e.g., three, 
four, or more) IFTs per month. Others noted that the Agency should 
gradually implement its policy (e.g., have a ``trial period'') and 
start with a limit greater than two. Further, several participants 
asked ``why two'' trades and stated that the number seemed 
``arbitrary.'' According to data compiled by the Agency, limits of four 
IFTs per month will have very little impact on the dollar volume of 
daily trades, three IFTs would reduce volume by just 31 percent while 
two IFTs would reduce volume by approximately half. The Funds in the 
Plan are index funds. Therefore, the Agency examined the trading 
policies of the largest index fund manager, Vanguard, and of numerous 
other mutual fund managers and defined contribution plans. An investor 
in any Vanguard fund who redeems shares of a Vanguard fund may not 
purchase any shares of that fund for 60 days. Additionally, in 
Vanguard's Developed Markets Index Fund (similar to the TSP's I Fund), 
if the redeemed shares have not been held for 60 days, the investor is 
charged a 2 percent redemption fee. Thus the approach of two IFTs per 
month, with unlimited redemptions to the G Fund, is demonstrably more 
liberal than that provided by the largest provider of index funds.
    Some participants expressed a desire to have 24 (or, as suggested 
by one participant, 12) trades available across the year, as opposed to 
two per month. The purpose of the regulation is to reduce costs to TSP 
participants. Transaction costs are highest when the markets are the 
most volatile. The Agency is seeking to minimize the dollar volume of 
trades, especially during those times. TIAA-CREF, a very large defined 
contribution plan provider, tried allowing a certain number of 
transactions per year and found that it experienced a ``bunching'' of 
trades during volatile times, precisely the opposite of the intention 
of the transfer restrictions. That provider then amended its policy to 
read, ``A participant who transfers from ANY fund, transfers back, and 
then sells it within 60 days may not repurchase that fund for 90 
days,'' and, if the transaction involves the international, high yield, 
or small-cap funds, a 2 percent fee will be assessed.
    Some participants commented that it is their money in the TSP and, 
therefore, the Agency can't limit their activities. Some contend that 
the policy will prevent them from maximizing their retirement income. 
Others stated that the TSP is changing the rules mid-course. Some felt 
it is unfair to younger TSP participants, they assert, who need to be 
more aggressive; some felt it was unfair to TSP participants who are 
close to retirement and, they assert, need to be more aggressive. The 
SEC and 73 percent of defined contribution plans (according to the 2007 
Hewitt Associates study) have acknowledged that market timing (frequent 
IFT) activity is harmful to the performance of funds. The SEC found 
that this activity ``dilutes'' value for all investors, and has 
mandated that mutual funds take action to discourage or eliminate such 
activity. Additionally, 73 percent of defined contribution plans have 
taken actions to reduce this activity. The Agency's research has 
indicated that its proposed limits are more liberal than those of many 
mutual funds and defined contribution plans. For example, the Thrift 
Plan for the Employees of the Federal Reserve System does not allow 
participants to redeem shares of any fund for 14 days after purchase.
    Several participants commented that the proposed change would 
prevent them from engaging in dollar cost averaging. Dollar cost 
averaging is spending a fixed amount at regular intervals (e.g., 
monthly) on a particular investment regardless of share price. Dollar 
cost averaging is, by definition, not driven by the level of the 
market. A participant can most certainly employ a systematic investment 
plan, making IFTs every two weeks regardless of the performance of the 
market, just as dollar cost averaging is intended. In fact, this would 
essentially be the same frequency of dollar cost averaging into the TSP 
via withholding from biweekly paychecks.
    Several participants stated that, if the Agency changes its IFT 
policy, they should be allowed to take their money out of the Plan. 
Congress has established the circumstances under which a participant 
may withdraw money from his/her account. According to a survey by 
Hewitt Associates, 73 percent of defined contribution plans have 
implemented policies to discourage market timing activities because 
such activities are detrimental to the performance of the plans. None 
of the affected participants was permitted a special withdrawal of 
funds from these plans. Further, the Agency is confident that its 
proposal is more liberal than most and furthers the TSP's status as a 
world class retirement vehicle.
    Some participants wrote that the new rule should apply to new 
participants only; current participants should remain under current 
rules. The Agency's objective in promulgating this regulation was to 
reduce the impact of frequent IFT activity. Allowing current 
participants to rebalance using current rules would likely mean that 
IFT requests would remain at high levels. Thus, this would not reduce 
the impact of market trading activities and would also be very 
difficult to program and administer.
    Several participants stated that there is no evidence that frequent 
IFT activity in the C, S, and F Funds has any measurable impact on 
participants as a whole and that the Agency should restrict only the I 
Fund. Further still, a handful of participants stated that frequent IFT 
activity benefits shareholders. While the I Fund transaction costs were 
the highest, at $16.5 million, the F and C Funds incurred measurable 
costs of $1.1 million and $605,000, respectively, in 2007. Moreover, 
the Agency is committed to eradicating the abusive frequent transfer 
activity in and out of the G fund by which some participants extract 
earnings which rightfully belong to long-term G fund investors.
    As noted above, the TSP cannot determine the exact amount of costs 
to the plan from IFT activity for the following reasons. First, each 
day, a price for each fund is determined based on closing stock prices 
for that day. However, the fund manager does not execute every stock 
trade at that closing price. Any difference is market impact and is 
charged or credited to the fund, thus impacting the returns of the 
long-term holders. Second, to accommodate the large trades which result 
from frequent IFT activity, managers must keep a larger liquidity pool, 
which causes performance to deviate from that of the index. Lastly, for 
the TSP, when the liquidity pool is depleted as a result of a number of 
large trades in a row, cash due to the TSP is not received for up to 
three days, costing participants foregone interest. None of those three 
costs is calculable in advance, and all three are different every 
single day.
    Note from above that trading costs may actually be credits. In 
fact, trading costs in the S Fund in 2007 did benefit

[[Page 22054]]

the Fund by $4.3 million. However, it is extremely important to 
highlight that that number could just as easily have been a cost. There 
is no way for the Agency to control the size of such costs or whether 
they are costs versus credits. It can only work to minimize the 
exposure of the TSP to the potential costs by reducing the dollar 
amount of the trade. The manager of the S Fund did need to increase the 
liquidity pool for the Fund, and there were several times during the 
year that the TSP and its participants lost interest income because 
cash payment was delayed. Due to these uncertainties, the restrictions 
must be applied to the TSP Funds as a whole.
    Many participants suggested changing the time that the I Fund is 
priced. By statute, the I Fund must be designed to replicate the 
performance of an international index (5 U.S.C. 8438(b)(4)(B)). The 
index is priced at 4 p.m. Eastern Time. Therefore, the I Fund must be 
priced at 4 p.m.
    Some participants commented that fair valuation of the I Fund is 
increasing costs. On the contrary, costs would be even higher without 
fair valuation. All of the TSP stock funds are priced at 4 p.m. Eastern 
Time. For the C and S Funds, the prices used are the 4 p.m. closing 
prices of the stocks. The I Fund comprises international stocks in 
countries such as Japan and England. Although the I Fund is priced at 4 
p.m., the Japanese market actually closed 13 hours earlier, at 3 a.m. 
Eastern Time, and the British market closed four and half hours earlier 
at 11:30 a.m. On most days, those closing prices are used to price the 
I Fund. However, in times of market turbulence, it can become obvious 
that if the securities had still been trading at 4 p.m. Eastern Time, 
the prices would be materially different. Fair value pricing is a 
process (recommended by the SEC) to update those ``stale'' prices to 
make them a more accurate reflection of the current market environment.
    When the investment manager receives the daily trade order from the 
TSP, the foreign markets are closed. The investment manager cannot 
process the order until the markets reopen, and any differences in the 
opening stock prices from the closing stock prices (market impact) are 
charged back to the I Fund, affecting its performance. Since fair 
valuation updates the prices, it brings them closer to where the trades 
are actually executed, thereby lowering the cost to the Fund. Without 
fair valuation, the exposure to market impact costs would be greater. 
Fair valuation is an estimate of prices at 4 p.m. It is not meant to be 
an estimation of where the foreign markets will open.
    Some participants said it was misleading to compare the TSP to a 
mutual fund. Others said TSP funds are more like electronically (the 
Agency assumes the participant meant exchange) traded indexed funds (or 
ETFs) that are traded through brokers. Others noted the TSP should not 
be compared to private sector funds because they have active managers. 
While the TSP Funds are not mutual funds, they are invested in 
collective trust funds (CTFs) which are virtually identical to mutual 
funds in the way they are priced and the way that trades are executed. 
Collective trusts differ from mutual funds in the following ways. In 
general, only eligible, tax-exempt assets such as a 401(k) or defined 
benefit plan can invest in a CTF. CTFs are regulated by the Comptroller 
of the Currency, not the SEC and Financial Industry Regulatory 
Authority (FINRA) (which oversee mutual funds). CTFs do not need to 
provide prospectuses to investors. Management fees tend to be lower 
with CTFs. This is in part because CTFs, as the preferred institutional 
account structure, can offer significant scale advantages to the 
investment manager. CTFs offer absolute fee transparency. There is a 
single management fee, unlike the multiple layers of fees associated 
with mutual funds.
    There is a marked trend towards using CTFs in the 401(k) industry, 
particularly among large plans. Furthermore, low-cost transparent 
vehicles are entirely consistent with the spirit of the Pension 
Protection Act of 2006. Unlike commingled funds and mutual funds, ETFs 
can be bought or sold on an exchange throughout the trading day. They 
can also be shorted. The TSP Funds have an entirely different structure 
from that of ETFs. While it is true that ETFs track indexes, the first 
actively-managed ETF was introduced on March 25, 2008. While it is true 
that there are actively-managed mutual funds, there are also passively-
managed mutual funds which track index performance. Like mutual funds, 
the TSP Funds are priced once per day, and unlike ETFs, they are not 
traded on an exchange throughout the day.
    Hence, the Agency looks to 401(k) plans, the SEC, and the best 
practices of mutual fund managers when developing policy. The Agency 
cited figures from passively-managed index funds whenever possible 
since these most closely resemble the TSP.
    Some participants commented that individual retirement accounts 
(IRAs) do not have trading restrictions. The TSP is not an IRA and is 
not similar in structure to an IRA.
    The Agency received a number of comments about the rulemaking 
process. Some participants stated that the Agency's notice of proposed 
rulemaking was deficient because it stated it would not affect either 
small business entities or members of the uniformed services. This 
comment is unfounded. The Executive Director certified that ``this 
regulation will not have a significant economic impact on a substantial 
number of small entities'' but that it could affect ``members of the 
uniformed services.'' 73 FR 12668, March 10, 2008. He further certified 
the regulation would affect ``an insubstantial number of financial 
advisors who may provide advice in connection with the Fund.'' Id.
    Some participants asked ``aren't individual shareholders considered 
small entities.'' They are not. Small entities are defined at 5 U.S.C. 
601(6) as a ``small business,'' a ``small organization,'' and a ``small 
governmental jurisdiction.''
    Some participants commented that the Agency's notice of proposed 
rulemaking was deficient because the proposed regulation is a major 
rule. A major rule is one that is likely to result in: (A) An annual 
effect on the economy of $100,000,000 or more; (B) a major increase in 
costs or prices for consumers, individual industries, Federal, State, 
or local government agencies, or geographic regions; or (C) significant 
adverse effects on competition, employment, investment, productivity, 
innovation, or on the ability of United States-based enterprises to 
compete with foreign-based enterprises in domestic and export markets. 
5 U.S.C. 804(2). The proposed rule is not a major rule under this 
definition.
    Some participants asked how the Agency could impose IFT 
restrictions on some participants when the regulation was still 
proposed. The interim IFT restrictions are based on a regulation which 
took effect on January 7, 2008. 72 FR 73251, December 27, 2007. Other 
participants asked how the interim regulation could be enforced against 
frequent requestors of IFTs when the comments from the interim 
regulation had not been posted or considered. The Agency's Executive 
Director did consider comments submitted in connection with the interim 
regulation. Additionally, the proposed regulation notes ``[c]omments 
submitted in response to the interim regulation need not be 
resubmitted; they will be considered as part of this rulemaking 
process.'' 73 FR 12665,

[[Page 22055]]

March 10, 2008. The Agency is not required to post comments in 
connection with an interim regulation.
    One participant commented that the proposed regulation should be 
published at ``regulations.gov.'' The proposed regulation was published 
at www.regulations.gov and also published at www.gpoaccess.gov, 
www.tsp.gov, and www.frtib.gov. This participant also noted that the 
Agency should participate in the Federal Docket Management System 
(FDMS) functionality provided at regulations.gov. Because the Agency is 
cost-conscience (Agency research indicates a fee may be associated with 
the FDMS starting in 2010) and also because the Agency publishes 
regulations relatively infrequently, the Agency has not analyzed 
whether this optional functionality would benefit the Agency. However, 
the Agency may inquire into this functionality in the future. 
Regardless of these issues, as each participant was individually 
notified (in the Executive Director's February 2008 letter) regarding 
this regulation change, and as the Agency received hundreds of 
comments, the Agency does not believe participating in this optional 
functionality impacted the rulemaking process.
    Some participants commented that the Agency sent out its regulation 
during a quiet time so that no one would notice. This comment likely 
refers to the Agency's interim regulation, which was published in the 
Federal Register on December 27, 2007. On November 19, 2007, at an open 
Board meeting, the Agency's Board heard a presentation from the 
Agency's Chief Investment Officer. In response, the Board approved a 
policy to limit interfund transfers. The Board's decision was the 
subject of extensive press coverage. Additionally, not long after this 
November 2007 meeting, the Chief Investment Officer's PowerPoint 
presentation and policy memorandum and the minutes of this meeting were 
posted on the Agency's Web site. Further, on November 27, 2007, links 
to additional information about the interfund transfer restrictions 
were prominently displayed on the TSP website. Before adopting the 
Board's policy, the Agency sought the advice of the Employee Thrift 
Advisory Counsel (ETAC) and on December 19, 2007 held an open meeting 
with the representatives to discuss the proposed approach of using an 
initial interim regulation followed by a structural limit. This meeting 
was also subject to extensive press coverage. As soon as practicable 
after the ETAC meeting, the Agency submitted its interim regulation to 
the Federal Register which published the interim rule on December 27, 
2007. The Agency also forwarded a copy of the interim rule to the 
President of the Senate, the Speaker of the House of Representatives, 
the Government Accountability Office, and the U.S. Small Business 
Administration. Continuing with this spirit of openness, the Agency's 
Executive Director notified every participant about the proposed 
regulation in his letter that accompanied the annual participant 
statement mailed in February of 2008.
    Some participants questioned whether this regulation was consistent 
with the Board's fiduciary obligation. The Board's IFT policy decision 
is completely consistent with, and, more accurately, mandated by, its 
fiduciary duty. By law, the Board must adopt investment policies that 
provide for low administrative costs. 5 U.S.C. 8475. The Board's IFT 
decision helps it to keep costs low.
    A few participants stated that the costs explained in the proposed 
regulation were not persuasive and suggested that the Agency hire an 
outside company to do an audit. Some participants also challenged the 
experience and motivations of the Agency's Chief Investment Officer, 
Tracey Ray. Ms. Ray graduated summa cum laude from Washington College. 
She was immediately hired by Merrill Lynch and worked there as an 
account executive for six years, providing investment advice about 
stocks, bonds, options and mutual funds to clients. After her tenure at 
Merrill Lynch, she spent 16 years in the investment department of USF&G 
Corporation, a Baltimore-based Fortune 500 insurance company, which was 
purchased by St. Paul Companies in 1998. While there, she served as a 
Vice President, portfolio manager and trader for stock, bond, option 
and short-term cash portfolios, and was responsible for the derivatives 
program. She also completed the program to earn the designation of 
Chartered Financial Analyst. She left St. Paul Companies in 2001 to 
take the position of Deputy Chief Investment Officer for the State of 
Maryland Pension Fund, where she spent four years evaluating, hiring 
and firing active money managers until she was hired by the Thrift 
Savings Plan in 2005. She also serves on the Advisory Committee for the 
Virginia Retirement System's Defined Contribution Plans.
    While Ms. Ray's credentials are impeccable, and her study of the 
problem facing the TSP was diligent, thoughtful, and thorough, it is 
important to note that the decision to move forward with IFT 
restrictions was made by the Board members, after careful consideration 
and acting in their capacity as fiduciaries for the TSP. The Agency, in 
its notice of proposed rulemaking, explained in great detail the 
adverse effects of frequent IFT activity. The Agency also made 
available, on the TSP Web site, the memorandum and presentation that 
led its Board to adopt such a policy. Since these comments neither 
critique the Agency's methodology nor make substantive challenges to 
the accuracy of its conclusion, the Agency determined it would not be 
prudent to spend TSP money to have an outside auditor verify its 
determinations.
    Several participants wrote that, as of March 31, the Agency will be 
effectively discriminating against a select group of TSP members and 
that all TSP members should be treated equally under the current TSP 
rules. Others wrote that it discriminated against members of the 
military (many of whom are stationed overseas where mail service takes 
longer). This comment is directed at the interim regulation which 
allowed the Executive Director to require those participants who 
engaged in excessive trading to request IFTs by mail only. Pursuant to 
the interim regulation, the Agency analyzed the trading activity of all 
participants in October, November, and December 2007. In January, the 
Agency sent a letter to all participants who made more than three IFTs 
each month. The letter warned that if they made more than three IFTs in 
February, or the following months, the Agency could require them to 
request IFTs by mail only. Thus, it is not accurate to state that the 
Agency is discriminating against a select group. The Agency scanned the 
IFT activity of all participants and warned those who made four or more 
IFTs in three consecutive months that they must stop. Only those 
participants who failed to heed the warning have been restricted. 
Although the Investment Allocation form used for IFTs is not generally 
available on the TSP Web site, restricted participants are able to 
access it via the TSP Web site; the Agency has also mailed a copy of 
the IFT transfer form to participants and they can reproduce it as 
necessary (or call the ThriftLine to obtain more copies).
    Several participants mentioned that the proposed regulation is 
against the Agency's policy of encouraging participants to make their 
own retirement decisions. For example, some characterized the 
regulation as ``paternalistic'' or ``patronizing.'' Further, several 
participants stated that this move takes away employees' control over 
their retirement and cited

[[Page 22056]]

the Thrift Savings Plan Open Elections Act of 2004 (Act). This Act 
allowed Federal employees and members of the uniformed services to 
begin or alter their TSP contributions at any time instead of limiting 
such changes to biannual open-season periods. The Act did not alter the 
requirement in 5 U.S.C. 8438(d) that the Executive Director prescribe 
regulations allowing at least two interfund transfers per year. This 
regulation affords participants many more opportunities to make IFTs 
than the minimum Congress determined necessary and, further, does not 
change the Agency's continuing policy of educating its participants so 
that they can control their own retirement.
    Several participants commented that the proposed regulation was 
contrary to an existing Federal regulation. Section 1601.32(b) of title 
5, Code of Federal Regulations does currently provide that there is no 
limit on the number of IFT requests that may be made by a participant. 
In 2003, the Executive Director published this regulation pursuant to 
his authority to prescribe such regulations as may be necessary to 
administer the Thrift Savings Plan. 5 U.S.C. 8474(b)(5). The Executive 
Director has determined that, in order to effectively administer the 
TSP, it is necessary to amend this regulation in order to address the 
impact of frequent transfers on the TSP.
    Several participants stated that the TSP spent millions of dollars 
upgrading its systems to handle daily interfund transfers, and wasting 
that investment is inconsistent with the Board's fiduciary duty. The 
Agency did not move to a daily-valued record-keeping platform in order 
to facilitate frequent IFTs. This upgrade improved efficiency by 
spreading the volume of IFTs over the course of a full month, rather 
than requiring a one-time ``batch-process'' at month's end. This 
upgrade also eliminated the previous 15-day waiting period between IFT 
requests and execution. The daily-valued platform also enabled 
participants to have immediate account information access on the Web 
site and reduced paper statement costs (thus saving the participants 
over $3 million per year). Thus, the enhancement to the record-keeping 
system was not intended to facilitate frequent IFTs. In fact, the 
Agency's Executive Director and Board have expressed concern over the 
potential for misuse of the daily-valued platform both before and since 
its implementation.
    In 2004, Agency staff reviewed the TSP's IFT records to determine 
if the newly enhanced system was being misused. The level of frequent 
IFT activity was de minimus at the time and there was no need to put 
restrictions in place.
    Since fielding the daily-valued platform, the Agency has added 
toll-free telephone service, reduced processing and transaction timing, 
added dual/simultaneous call centers with extended hours, enhanced 
participant education materials, added a back-up state-of-the-art data 
center, and implemented the lifecycle funds. During this four-year 
period, the Agency's budget actually decreased on an annual basis.
    In short, the Board takes its fiduciary duty very seriously. It has 
improved service while decreasing costs. It has adopted this IFT policy 
because the costs associated with frequent transfers have harmed TSP 
participants. By law, the Board must adopt investment policies that 
provide for low administrative costs. 5 U.S.C. 8475. The Board's IFT 
policy decision is completely consistent with this duty.
    One participant wrote that the frequent transferors must be making 
money or else Congress would have stepped in to prevent these people 
from harming their retirement accounts. The Board, not Congress, has 
the statutory authority and duty to act solely in the interest of the 
Plan's participants and beneficiaries. 5 U.S.C. 8477(b)(1). Although 
the Agency advised the Congress of its plan to limit IFTs, Agency 
fiduciaries were solely responsible for this decision.
    A participant asked if rebalancing a portfolio which may include 
adjusting the balances of 10 funds constitutes a single IFT. The answer 
is yes.
    A participant suggested that the TSP ``should buy the EFA index 
which can be bought and sold with a low fee.'' The Agency believes this 
participant meant the exchange-traded fund (ETF) which tracks the 
Europe, Australia and Far East (EAFE) Index and has a stock symbol 
``EFA.'' EFA is actually not a low cost alternative as it has an 
expense ratio of 34 basis points versus the TSP's expense ratio of 1.5 
basis points.
    A participant noted that comparison to other funds is 
``meaningless'' as the TSP had unlimited transfers. Other funds also 
had unlimited transfers prior to 73 percent of them implementing curbs 
to reduce market timing activity.
    A participant noted that Barclay's should make more use of EAFE 
futures to offset I Fund transactions. Barclays does make use of EAFE 
and country futures to offset a portion of I Fund transactions. The 
same participant noted that the Agency should balance out IFT requests 
to a single order to buy or sell. The Agency does that. That same 
participant noted that the Agency needs to evaluate whether total I 
Fund transactions in 2007 produced net positive or net negative trading 
costs, on what days and in what amounts. The Agency has that 
information for each day. The total cost for 2007 was $16,513,454.
    Several participants commented they thought the G Fund should not 
be favored because it is not a good investment and does not keep up 
with inflation. The Agency is allowing unlimited redemptions to the G 
Fund to provide a safe harbor for participants who may wish to exit the 
stock market during times of financial distress. The Agency would also 
like to note that, by virtue of the fact that the G Fund rate adjusts 
every month and is based on longer-term Treasury rates, the G Fund is 
an inflation hedge because interest rates generally rise when inflation 
rises.
    Several participants commented that the TSP should have more 
investment options. In 2006, the TSP hired an investment consultant to 
review the TSP's investment choices. The conclusion of that study was 
that participants were well served by the current fund lineup. The TSP 
will conduct similar reviews periodically in the future.
    Some participants suggested that Agency comparisons to Fidelity, T. 
Rowe Price, and Vanguard (among others) are imperfect because these 
plans offer more diverse investment vehicles and that they are for-
profit organizations. It is true that those fund families do offer more 
choices than the TSP, but defined contribution plans do not offer all 
available Fidelity, Vanguard, or T. Rowe Price funds. In 2006, the 
Board hired an investment consultant, Ennis Knupp and Associates, to 
review the plan. The consultant noted that 70 percent of defined 
contribution plans with more than 5,000 participants offer 15 or fewer 
investment options. Additionally, as cited before, over 73 percent of 
defined contribution plans have some type of trading restrictions. 
Mutual fund families are for-profit organizations, but all redemption 
fees are credited back to the funds, not to the profits of the 
companies. Additionally, why would a profit-oriented company, such as 
Vanguard, prohibit shareholders from repurchasing funds for 60 days 
unless it truly believed that market timing was detrimental to fund 
performance? It does so because the company is attempting to maximize 
performance of the funds by minimizing costs due to market timing 
activity.
    Based on several comments, there seems to be a misconception that 
when a participant requests an IFT that his or

[[Page 22057]]

her entire account is sold and repurchased to reflect the new 
percentages. In fact only the difference between the original 
percentage and the new percentage is traded, and that is netted against 
all other participant activity. The investment manager is then given a 
single dollar amount for each fund each day.
    Some participants commented that there is a problem with the 
contract with Barclays, the investment manager, or that the fund should 
be managed by a firm better able to control the fees. The Barclays 
contract is extremely competitive. All of the costs related to the 
administration of that contract are included in the TSP's 1.5 basis 
point net administrative expense ratio. Every manager, who participated 
in the request for proposal process to manage the Funds of the TSP, 
charges trading costs back to their clients' funds, just as Barclays 
does for the TSP Funds.
    A participant noted that he could not find information on the 
Vanguard Web site that Vanguard funds could not be repurchased within 
60 days of redemption. On the site, in the search function, typing 
``frequent trading policy'' will display that information.
    The Agency appreciated the opportunity to review and respond to 
comments from participants who take an active interest in the TSP and 
wish to offer suggestions. The comment process allowed the Agency to 
address any misunderstandings about the proposed interfund transfer 
change, to learn if there are unanticipated legal or policy impediments 
to the proposed change, and to hear suggestions about how better to 
implement the proposed change. Although the comments received did not 
cause the Executive Director to make any changes to the proposed 
interfund transfer rule, he did carefully consider all comments 
received. Therefore, the Agency is publishing the proposed rule as 
final without change.

Regulatory Flexibility Act

    I certify that this regulation will not have a significant economic 
impact on a substantial number of small entities. It will affect only 
Thrift Savings Plan participants and beneficiaries. To the extent that 
limiting interfund transfers is necessary to curb excessive trading, 
very few, if any, ``small entities,'' as defined in 5 U.S.C. 601(6), 
will be affected by the final rule. This is because the Thrift Savings 
Plan is sponsored by the U.S. Government and because the interfund 
transfer limitations are likely to affect primarily Federal employees, 
members of the uniformed services, and an insubstantial number of 
financial advisors who may provide advice in connection with the TSP.

Paperwork Reduction Act

    I certify that these regulations do not require additional 
reporting under the criteria of the Paperwork Reduction Act.

Unfunded Mandates Reform Act of 1995

    Pursuant to the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 602, 
632, 653, 1501-1571, the effects of this regulation on state, local, 
and tribal governments and the private sector have been assessed. This 
regulation will not compel the expenditure in any one year of $100 
million or more by state, local, and tribal governments, in the 
aggregate, or by the private sector. Therefore, a statement under Sec.  
1532 is not required.

Submission to Congress and the Government Accountability Office

    Pursuant to 5 U.S.C. 810(a)(1)(A), the Agency submitted a report 
containing this rule and other required information to the U.S. Senate, 
the U.S. House of Representatives, and the Comptroller General of the 
United States before publication of this rule in the Federal Register. 
This rule is not a major rule as defined at 5 U.S.C. 804(2).

List of Subjects in 5 CFR Part 1601

    Government employees, Pensions, Retirement.

Gregory T. Long,
Executive Director, Federal Retirement Thrift Investment Board.

    For the reasons set forth in the preamble, the Agency is amending 5 
CFR chapter VI as follows:

PART 1601--PARTICIPANTS' CHOICES OF TSP FUNDS

0
1. The authority citation for part 1601 continues to read as follows:

    Authority: 5 U.S.C. 8351, 8438, 8474(b)(5) and (c)(1).

0
2. Amend Sec.  1601.32, by revising paragraph (b) to read as follows:


Sec.  1601.32  Timing and posting dates.

* * * * *
    (b) Limit. There is no limit on the number of contribution 
allocation requests. A participant may make two unrestricted interfund 
transfers (account rebalancings) per account (e.g., civilian or 
uniformed services), per calendar month. An interfund transfer will 
count toward the monthly total on the date posted by the TSP and not on 
the date requested by a parti