Mutual Fund Window, 3940-3943 [2022-01312]

Agencies

• Federal Retirement Thrift Investment Board

[Federal Register Volume 87, Number 17 (Wednesday, January 26, 2022)]
[Proposed Rules]
[Pages 3940-3943]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01312]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 87, No. 17 / Wednesday, January 26, 2022 / 
Proposed Rules

[[Page 3940]]


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FEDERAL RETIREMENT THRIFT INVESTMENT BOARD

5 CFR Part 1601


Mutual Fund Window

AGENCY: Federal Retirement Thrift Investment Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Retirement Thrift Investment Board (FRTIB) will 
make a mutual fund window available to participants in the Thrift 
Savings Plan (TSP), beginning in the summer of 2022. The FRTIB is 
proposing a fee designed to guarantee that the availability of the 
mutual fund window will not indirectly increase the share of TSP 
administrative expenses borne by participants who choose not to use the 
mutual fund window. The FRTIB is also proposing rules and procedures to 
govern fund transfers to and from the mutual fund window.

DATES: Comments must be received on or before March 28, 2022.

ADDRESSES: You may submit comments using one of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Office of General Counsel, Attn: Dharmesh Vashee, 
Federal Retirement Thrift Investment Board, 77 K Street NE, Suite 1000, 
Washington, DC 20002.
    Comments will be made available to the public online at https://www.regulations.gov. Do not include any personally identifiable or 
confidential information that you do not want publicly disclosed. 
Anonymous comments are acceptable.

FOR FURTHER INFORMATION CONTACT: For press inquiries, contact Kim 
Weaver at (202) 465-5220. For information about how to comment on this 
proposed rule, contact Laurissa Stokes at (202) 308-7707.

SUPPLEMENTARY INFORMATION: The FRTIB administers the TSP, which was 
established by the Federal Employees' Retirement System Act of 1986 
(FERSA), Public Law 99 335, 100 Stat. 514. The TSP is a tax-deferred 
retirement savings plan for Federal civilian employees and members of 
the uniformed services. The TSP is similar to cash or deferred 
arrangements established for private-sector employees under section 
401(k) of the Internal Revenue Code (26 U.S.C. 401(k)). The provisions 
of FERSA that govern the TSP are codified, as amended, largely at 5 
U.S.C. 8351 and 8401-79.
    FERSA requires the TSP to offer the following individual investment 
funds to TSP participants: (1) A Government Securities Investment Fund 
(G Fund); (2) a Fixed Income Investment Fund (F Fund); (3) a Common 
Stock Index Investment Fund (C Fund); (4) a Small Cap Stock Index 
Investment Fund (S Fund); and (5) an International Stock Index 
Investment Fund (I Fund). 5 U.S.C. 8438(b)(1)(A)-(E). In addition to 
these five individual funds, the TSP is statutorily required to offer 
Lifecycle (L) Funds which are target retirement date portfolios 
comprised of varying proportions of the five individual funds. 5 U.S.C. 
8438(c)(2). These statutorily mandated investment options are referred 
to as the TSP core funds. The FRTIB does not have discretionary 
authority to add or remove funds from its menu of core funds.

I. Background

What is a mutual fund?

    A mutual fund is a company that pools money from many investors and 
invests the pooled money in other investments such as stocks, bonds, 
and short-term debt instruments. Investors buy shares in mutual funds. 
Each share represents an investor's part ownership in the fund and the 
income it generates. Investors buy mutual fund shares from the mutual 
fund itself rather than from other investors. Mutual funds are governed 
primarily by the Securities Act of 1933, the Securities and Exchange 
Act of 1934, the Investment Company Act of 1940, and the Investment 
Advisors Act of 1940.

What is a mutual fund window?

    A mutual fund window is a type of self-directed brokerage account 
that gives individuals the ability to buy shares of mutual funds 
through a broker-dealer that has been selected by their retirement plan 
or by one of their retirement plan's service providers. Unlike a plan's 
core funds, the investments available through a brokerage account are 
not ordinarily vetted by a plan fiduciary to determine whether they are 
prudent investments.

Authority To Offer a Mutual Fund Window

    For many years, TSP participants have voiced a desire to have more 
investment options. A 2008 TSP Participant Survey indicated that 39% of 
participants believed that the addition of a mutual fund window would 
improve the TSP.\1\ In 2009, Congress passed legislation that 
authorizes, but does not require, the FRTIB to offer a mutual fund 
window to TSP participants. Thrift Savings Plan Enhancement Act of 
2009, Public Law 111-31, Division B, Title I, sec. 104 (codified at 5 
U.S.C. 8438(b)(5)(A)). Congress authorized a mutual fund window instead 
of adding more funds to the TSP's statutorily mandated menu of core 
funds.
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    \1\ Subsequent surveys have consistently reaffirmed these survey 
results.
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Decision To Offer a Mutual Fund Window

    In the same year that Congress authorized the FRTIB to offer a 
mutual fund window, the FRTIB's Executive Director initiated 
discussions with the FRTIB Board members and the Employee Thrift 
Advisory Council (ETAC) about adding a mutual fund window to the 
TSP.\2\ In the April 2009 FRTIB Board meeting, the four Board members 
in attendance deadlocked on the decision to adopt a resolution in 
support of the mutual fund window by a vote of two-to-two.\3\
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    \2\ ETAC is comprised of representatives from Federal and Postal 
unions and management associations, as well as a representative from 
the Department of Defense on behalf of uniformed service members. 
ETAC provides advice on matters relating to TSP investment policies 
and plan administration.
    \3\ See April 2009 FRTIB Board Meeting Minutes, available at 
https://www.frtib.gov/MeetingMinutes/2009/2009Apr.pdf. Links to 
attachments accompanying the minutes are embedded in the PDF of the 
minutes.
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    To inform future discussions, the FRTIB assembled a cross-
functional team of subject matter experts from its operations, legal, 
investment, finance, communications, research, and technology offices 
who spent the next several years studying industry

[[Page 3941]]

practices, participant preferences, costs, and operational 
considerations associated with adding a mutual fund window to the TSP. 
Their research was presented to the FRTIB Board members and ETAC during 
public meetings in May 2014, November 2014, and July 2015.\4\
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    \4\ See May 2014 FRTIB Board Meeting Minutes, available at 
https://www.frtib.gov/MeetingMinutes/2014/2014May.pdf; November 2014 
FRTIB Board Meeting Minutes, available at https://www.frtib.gov/MeetingMinutes/2014/2014Nov.pdf; July 2015 FRTIB Board Meeting 
Minutes, available at https://www.frtib.gov/MeetingMinutes/2015/2015Jul.pdf. Links to attachments accompanying the minutes are 
embedded in the PDFs of the minutes.
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    In July 2015, the FRTIB Board members voted unanimously in support 
of adding a mutual fund window to the TSP. The FRTIB Executive Director 
committed to including a mutual fund window in the scope of services 
sought the next time the FRTIB recompeted its major service provider 
contract(s). In August 2019, the FRTIB announced the release of a 
request for proposals for various recordkeeping services, the scope of 
which included a mutual fund window. The contract was awarded in 
November 2020. The FRTIB is currently undergoing an 18-24 month 
transition to its new recordkeeping service provider.

II. Need for Regulation Amendments

Fees and Expenses

    FERSA requires the Executive Director to publish regulations that 
``shall allocate to each account an amount equal to a pro rata share of 
the net earnings and net losses from each investment of sums in the 
Thrift Savings Fund attributable to sums credited to such account, 
reduced by an appropriate share of the administrative expenses paid out 
of net earnings under section 8437(d) of this title, as determined by 
the Executive Director.'' 5 U.S.C. 8439(a)(3). In addition, the Thrift 
Savings Plan Enhancement Act of 2009 added a provision to FERSA that 
requires the FRTIB to ``ensure that any expenses charged for the use of 
the mutual fund window are borne solely by the participants who use 
such window.'' 5 U.S.C. 8438(b)(5)(B). This proposed rule aims to 
fulfill these two Congressional directives.
    Participants who choose to invest through the mutual fund window 
will incur fees and expenses that do not apply to participants who 
invest only in the TSP core funds. These fees and expenses fall into 
four general categories: (1) An annual maintenance fee of $95, (2) a 
per trade fee of $28.75, (3) fees and expenses imposed by the specific 
mutual fund(s) in which the participant chooses to invest, and (4) a 
fee designed to guarantee that the availability of the mutual fund 
window will not indirectly increase the share of TSP administrative 
expenses borne by participants who choose not to use the mutual fund 
window. The scope of this proposed rule includes only the latter 
category of fees and expenses.

Investment Elections and Fund Transfers

    FERSA requires the FRTIB Executive Director to publish regulations 
governing investment elections and fund transfers. 5 U.S.C. 8438(d). 
Accordingly, the FRTIB is proposing to amend its regulations to include 
rules and procedures for transferring funds to and from the mutual fund 
window.

III. Proposed Regulation Amendments

Administrative Expenses

    Currently, all TSP participants bear a pro rata share of the TSP's 
administrative expenses. The TSP's administrative expenses are 
reflected as a reduction in the unit prices of the TSP core funds. When 
participants begin moving assets from the TSP core funds to mutual 
funds, this method of allocating TSP administrative expenses will no 
longer be sufficient to ensure that all participants bear a pro rata 
share of the TSP's administrative expenses. The TSP has no control over 
the share prices of the mutual funds. Thus, this method cannot be used 
to allocate the appropriate share of TSP administrative expenses to 
assets invested through the mutual fund window. Failure to collect the 
appropriate share of TSP administrative expenses from assets invested 
through the mutual fund window would increase the share of TSP 
administrative expenses borne by participants who choose not to use the 
mutual fund window.
    Therefore, the FRTIB is proposing to collect an annual fee of $55 
from mutual fund window users to guarantee that the availability of the 
mutual fund window does not indirectly increase the share of TSP 
administrative expenses borne by participants who choose not to use the 
mutual fund window. The amount of the proposed fee was derived by 
multiplying an assumed average mutual fund window account balance of 
approximately $120,000 by an assumed TSP administrative expense ratio 
of 4.59 basis points. The FRTIB proposes to redetermine the annual fee 
every three years using the actual average mutual fund window account 
balance and expense ratio, as of the date of redetermination.

Minimum and Maximum Fund Transfers

    The mutual fund window will allow access to funds that are not as 
diversified as the TSP core funds and therefore may expose participants 
to greater market risk. The mutual fund window is intended for TSP 
participants who are experienced investors. It is not suitable for all 
TSP participants. While there may be legitimate reasons for a 
participant to invest in undiversified funds, such needs can be met 
through limited portfolio allocations. Because of the increased risk 
associated with the breadth of options offered through the mutual fund 
window, the FRTIB is proposing several restrictions on transfers and 
allocations between the TSP core funds and the mutual fund window.
    First, the TSP is proposing to require an initial fund transfer of 
at least $10,000 to the mutual fund window. Second, this initial 
investment may not cause the portion of the participant's TSP balance 
that is invested through the mutual fund window to exceed 25 percent of 
the participant's total TSP balance. These two restrictions, taken 
together, would require a participant to have a minimum TSP balance of 
$40,000 before becoming eligible to invest through the mutual fund 
window. Third, subsequent transfers to the mutual fund window would be 
limited to amounts that do not cause the portion of the participant's 
TSP balance that is invested through the mutual fund window to exceed 
25 percent of their total TSP balance.

Operational Details

    To invest in mutual funds, a TSP participant must first establish a 
mutual fund window account that is separate from the portion of their 
TSP balance that is invested in TSP core funds. The FRTIB proposes the 
following rules and procedures:
    1. Elected Transfers. A participant may elect to transfer money (in 
whole dollar increments only) from TSP core funds to a mutual fund 
window account. Amounts transferred to a participant's mutual fund 
window account will initially be invested in a sweep money market fund. 
The participant may then choose from among the mutual funds offered. A 
participant cannot make contributions directly to a mutual fund 
account. All contributions must first be invested in the TSP core 
funds. Similarly, a participant cannot receive a withdrawal directly 
from a mutual fund window account. A participant who wishes to

[[Page 3942]]

make a withdrawal election that exceeds the amount of their balance 
that is invested in TSP core funds must first transfer money (in whole 
dollar increments only) from their mutual fund window account back to 
the TSP core funds.
    2. Forced Transfers. The FRTIB is sometimes required by law to make 
payments from a TSP account even when a participant has not made a 
withdrawal election. For example, the Internal Revenue Code requires 
the TSP to make minimum payments of a certain amount to participants 
who are age 72 years or older. For another example, the FRTIB is 
sometimes required to make payments under court orders that award 
benefits to a participant's spouse or child. Paragraph (c)(1) of the 
proposed regulatory text contains a non-exhaustive list of the types of 
payments that the FRTIB might be required by law to make from a 
participant's TSP account.
    If the amount a participant has invested in TSP core funds is 
insufficient to cover a payment that the FRTIB is required by law to 
make, then the FRTIB will force a transfer from the participant's 
mutual fund window account to the TSP core funds. If the participant's 
mutual fund window account balance is at least $25,000, the forced 
transfer amount will equal the amount needed to cover the insufficiency 
plus $1,000. The forced transfer amount will be liquidated first from 
amounts held in the sweep money market fund and then from amounts 
invested in mutual funds, beginning with the position with the highest 
balance. If the participant's mutual fund account balance is less than 
$25,000, his or her entire mutual fund account balance will be 
transferred back to the TSP core funds. All forced transfers will be 
invested in the TSP core funds in accordance with the participant's 
existing contribution allocation. The participant will be responsible 
for any fees incurred as a result of the forced transfer.
    3. Monthly Transfer Limit. Currently, participants are allowed two 
interfund transfers in a calendar month. After that, they can only 
transfer money into the G Fund. Any transfer from the TSP core funds to 
a participant's mutual fund window account, or vice versa, including a 
forced transfer, will count toward the existing monthly limit on 
interfund transfers. Consistent with current rules, a participant may 
always elect a fund transfer from his or her mutual fund window account 
to the G Fund.
    4. Acknowledgment of Risk. FERSA requires any participant who 
elects to invest in ``any investment fund or option other than the 
Government Securities Investment Fund'', to sign an acknowledgment 
which states that the investment is made at the participant's own risk, 
that the participant is not protected by the Government against any 
loss on such investment, and that a return on such investment is not 
guaranteed by the Government. 5 U.S.C. 8439(d). The FRTIB is proposing 
to treat the mutual fund window as an ``investment option'' for 
purposes of this requirement.

Regulatory Flexibility Act

    I certify that this regulation will not have a significant economic 
impact on a substantial number of small entities. This regulation will 
affect Federal employees, members of the uniformed services who 
participate in the TSP, and beneficiary participants.

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, and 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 2 U.S.C. 1532 is not required.

List of Subjects in 5 CFR Part 1601

    Government employees, Pensions, Retirement.

Ravindra Deo,
Executive Director, Federal Retirement Thrift Investment Board.

    For the reasons stated in the preamble, the FRTIB proposes to amend 
5 CFR chapter VI as follows:

PART 1601--PARTICIPANTS' CHOICE OF TSP FUNDS

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

    Authority: 5 U.S.C. 8351, 8432d, 8438, 8474(b)(5) and (c)(1).

0
2. Add subpart F to read as follows:

Subpart F--Mutual Fund Window

Sec.
1601.51 Applicability.
1601.52 Fund transfers.
1601.53 Fees.


Sec.  1601.51  Applicability.

    This subpart applies only to the transfer of amounts between the 
TSP core funds and the mutual fund window; it does not apply to the 
investment of future deposits, which is covered in subpart B of this 
part, or fund reallocations or fund transfers among the TSP core funds, 
which is covered in subpart C of this part.


Sec.  1601.52  Fund transfers.

    (a) Fund transfers to mutual fund window. A participant may elect 
to make one or more fund transfers to the mutual fund window from the 
portion of his or her TSP balance invested in the TSP core funds, 
subject to the following rules:
    (1) The participant must establish a mutual fund window account 
that is separate from the portion of his or her TSP balance invested in 
the TSP core funds. A participant with more than one TSP account may 
establish a separate mutual fund window account for each TSP account, 
and the limitations and fees described in this section will apply 
separately to each account;
    (2) If the participant does not have an acknowledgment of risk on 
file as of the date of his or her initial fund transfer request to the 
mutual fund window, the participant must complete an acknowledgment of 
risk before the fund transfer can be processed;
    (3) Fund transfers must be made in whole dollar increments 
(percentages are not permitted);
    (4) The following limitations must be satisfied:
    (i) A participant's initial fund transfer into his or her mutual 
fund window account must be at least $10,000 and may not exceed 25 
percent of the participant's TSP account balance, as of the date of 
such transfer; and
    (ii) Subsequent fund transfers into a participant's mutual fund 
window account may not cause the balance in the participant's mutual 
fund window account to exceed 25 percent of the participant's total TSP 
balance, as of the date of any such transfer;
    (5) Each fund transfer into the mutual fund window counts toward 
the monthly limit set forth in Sec.  1601.32(b);
    (6) Amounts transferred to a participant's mutual fund window 
account will initially be invested in a sweep money market fund. 
Subsequently, the participant may direct the investment of the 
transferred amounts into any mutual fund(s) that are available through 
the mutual fund window;
    (7) Fund transfers are subject to the fees set forth in Sec.  
1601.53; and

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    (8) A participant may not withdraw funds directly from his or her 
mutual fund window account. To make a withdrawal, the participant must 
elect a fund transfer back to the TSP core funds as described in 
paragraph (b) of this section. Upon completion of such fund transfer, 
the participant may make a withdrawal in accordance with 5 CFR part 
1650.
    (b) Fund transfers back to TSP core funds. A participant may elect 
to make a fund transfer to the TSP core funds from amounts invested in 
his or her mutual fund window account, subject to the following rules:
    (1) Fund transfers must be made in whole dollar increments 
(percentages are not permitted);
    (2) Amounts to be transferred from a participant's mutual fund 
window account to the TSP core funds must first be transferred to the 
sweep money market fund. Subsequently, the participant may direct the 
investment of the transferred amounts into the TSP core funds;
    (3) Each fund transfer back to the TSP core funds from the mutual 
fund window account counts toward the monthly limit set forth in Sec.  
1601.32(b); except, however, that a participant may always elect a fund 
transfer from the mutual fund window account to the G Fund; and
    (4) Fund transfers are subject to the fees set forth in Sec.  
1601.53.
    (c) Forced transfers. The TSP record keeper will force a transfer 
from the participant's mutual fund window account to the TSP core funds 
in the following situations, and subject to the following rules:
    (1) A forced transfer may occur if the balance invested in the TSP 
core funds is insufficient to cover:
    (i) Amounts necessary to comply with a court order, legal process, 
or levy described in 5 CFR part 1653;
    (ii) A beneficiary asset transfer;
    (iii) A required minimum distribution;
    (iv) A distribution of an account balance less than $200 described 
in 5 CFR 1650.23; or
    (v) Any other payment or transfer that the Board is required by law 
to make from the participant's TSP account balance;
    (2) The amount of the forced transfer shall be equal to the amount 
of the insufficiency described in paragraph (c)(1) of this section, 
plus $1,000; except, however, that if the participant's mutual fund 
window account balance is less than $25,000, the entire mutual fund 
window account balance shall be transferred to the TSP core funds;
    (3) Forced transfers shall be liquidated from the participant's 
mutual fund window account first from amounts held in the sweep money 
market fund; and then from amounts invested in mutual funds, beginning 
with the position with the highest balance;
    (4) Forced transfers from a participant's mutual fund window 
account to the TSP core funds shall be invested according to the 
participant's existing contribution allocation; and
    (5) The participant shall be responsible for any fees incurred as a 
result of the forced transfer.


Sec.  1601.53  Fees.

    (a) The Board will allocate a portion of the TSP's administrative 
expenses to mutual fund users by charging an annual fee of $55.00. The 
amount of this fee will be redetermined once every three years by 
multiplying the average mutual fund window account balance by the TSP 
administrative expense ratio, as of the date of redetermination.
    (b) The fee described in paragraph (a) of this section is in 
addition to any mutual fund window account maintenance fees, trading 
fees, and fees and expenses associated with the specific mutual fund(s) 
in which the participant chooses to invest.

[FR Doc. 2022-01312 Filed 1-25-22; 8:45 am]
BILLING CODE 6760-01-P