EXCLUSIVE: White House to block federal pension fund from expanding China investments
WASHINGTON (SBG) -President Trump has instructed top aides to move quickly to rein in a federal pension fund before it expands its investment portfolio, later this year, to include Chinese-held entities that U.S. officials believe to be tied directly to the Chinese military and to the country's global intelligence apparatus, sources said.
A source who discussed the matter directly with President Trump described him as incredulous over the looming prospect of U.S. service members seeing their paychecks deducted for the purpose of funding the Chinese military. "We can't allow this to move forward," the source quoted Mr. Trump as saying. "This needs to stop."
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Senior White House officials told Sinclair the effort is being undertaken with urgency, both because of fresh concerns about Chinese misconduct in its handling of the coronavirus and because of pending action by the pension fund. Known formally as the Thrift Savings Plan (TSP), the fund controls $700 billion in assets, drawn from the 5.5 million employees of the federal government, from Executive Branch officials and members of Congress to the armed forces and members of the National Guard.
A TSP spokeswoman acknowledged this week officials there have already begun filing the paperwork necessary to expand the fund's investments into China's "emerging markets."
"The president has asked our team to look at options," said one senior White House official, "to stop the investment of TSP funds in Chinese equities."
While administration officials would not divulge the exact nature of the actions under review, observers agree the likeliest course of immediate action by the White House is an executive order from President Trump addressing the subject -- even though administration officials concede such an order might not withstand court challenge, as TSP is governed by an independent agency.
Rep. Mike Waltz (R-FL), the first Green Beret elected to Congress and also a National Guardsman, introduced legislation this week that would bar TSP from investing in foreign markets whose firms do not submit to audits by the Public Company Accounting Oversight Board, a private-sector non-profit organization created by Congress to help regulate the accounting practices of publicly held firms. A similar measure has been introduced in the Senate.
"I'm looking for an executive order," Waltz told Sinclair on Wednesday. "I'll leave it to the White House to work through the exact tactics, but they understand the urgency....It needs to happen in the coming weeks."
The move by TSP into additional Chinese investment markets comes under a ruling issued on November 13 by the pension fund's governing body, the Federal Retirement Thrift Investment Board (FRTIB). Under that ruling, the TSP's international investment vehicle, or "I" fund, worth approximately $50 billion, will shift the foreign market index it uses as a benchmark from the MSCI Europe, Australasia and Far East Index to theMSCI All Country World Ex-US Investable Market Index.
"That will literally send tens of billions of dollars onto the Chinese stock exchange," Waltz said, "and help companies that are directly involved in the Chinese defense industry -- and in espionage."
All five of FRTIB's members, the individuals who govern the investing strategy for the Thrift Savings Plan, were appointed by President Obama. The terms for each of the members all lapsed between 2015 and 2018. Under current law, however, board members are permitted to serve past the ends of their terms until the president nominates, and the Senate confirms, their successors. The Trump administration never submitted any nominations for FRTIB's membership -- a staffing failure that sources said the administration will likely move to redress sometime after the issuance of an executive order.
The chairman of FRTIB, Michael Kennedy -- an Atlanta-based executive with Korn/Ferry International, the powerhouse recruiting firm -- declined to be interviewed for Sinclair's reporting. In a statement, Kennedy defended the expansion of TSP's "I" fund investing to include additional Chinese vehicles. "The Board’s primary focus is providing options to allow our participants to save for a secure retirement," Kennedy said. "My fellow Board Members and I serve as fiduciaries who are legally obligated to act 'solely in the interest of the [TSP] participants and beneficiaries.'"
He contended that until FRTIB decided in November to change TSP's foreign investing strategy, the nation's federal employees and service members did not enjoy a "level playing field" alongside civilian retirement funds.
"All ten of the largest publicly traded U.S. companies, all ten of the top federal contractors, the top twenty public (state employee) plans, and all six of the six largest target date fund providers include access to emerging markets," Kennedy's statement said.
If the federal government harbors concerns about the possible misuse of federal employees' pension funds that will be invested in mission-sensitive foreign entities, Kennedy argued, U.S. officials could try to put a halt to such investing through the Treasury Department's Office of Foreign Assets Control (OFAC). "If OFAC bans a country or company, it would be dropped from the index," Kennedy concluded.
"I'm a free market, pro-growth guy all day long -- but not when it comes at the expense of national security," said Waltz. "The last thing we should have is our military members, who are out on the front line, having deductions from their paycheck to go to a 401k plan that then funds their very adversary. I mean, it's just -- it's just mind-boggling."
Kim Weaver, a spokeswoman for FRTIB, indicated on Thursday that the transition to the broader foreign index is already underway and could take months to complete -- but that the agency expects the transition to be completed before year's end.
"We are in the process of opening custodial accounts in the countries that are in the [broader, all-country] MSCI ACWI ex. US [index] but not in the [more limited] MSCI EAFE [index]," Weaver said in an email sent to Sinclair on Thursday. "There are a number of factors that come into play, particularly liquidity to facilitate trading." She added: "The requirements and the time it takes for each country to process the paperwork varies widely, so I do not have a specific date to provide you regarding the start or finish for the transition."
The effort by Congress and the White House to restrict TSP's investment expansion comes as the agency is preparing to enact still another rule change: By October, the automatic payroll contributions to the pension fund from federal employees-- which are often matched by the federal government -- will increase from 3 to 5 percent.