Aligning Your Thrift Savings Plan with Your Values

Many people who work for the Office of the Surgeon General have exposure to tobacco stocks. At the Environmental Protection Agency, scientists make money when polluters do well. And Justice Department lawyers who keep weapons off the streets stake some of their net worth on retailers that sell guns.

All these federal workers share the same 401(k)-like investment vehicle known as the Thrift Savings Plan. And despite years of effort, they still have no mutual funds on the menu that would allow them to put retirement money into stocks without profiting from industries that some find objectionable.

The T.S.P. is a monster, with $632 billion in employee savings from 5,677,989 participants as of Dec. 31. More than 49,620 of them have balances greater than $1 million. The biggest balance is $7,395,476.29. (If that’s you, please get in touch! I’d love to write about how you did it.)

That means the savings plan is ripe with trendsetting potential. According to Morningstar, $20.6 billion moved into funds focused on environmental, social and governance — or E.S.G. — issues last year. If around 3 percent of the plan’s balances could follow a similar path, the rolling river of dollars would equal that figure all by itself.

Some federal employees wish the savings plan had given them the chance to move their money years ago. “We’re in favor of taking the full step of allowing a fossil-free fund to be included,” said Nicole Cantello, a lawyer for the Environmental Protection Agency and president of American Federation of Government Employees Local 704, which represents over 900 E.P.A. employees in Chicago and nearby states. “We feel it’s crucial.”

But they aren’t going to have access to any such option for at least a few more years, and the reasons offer something of a preview for any individuals who want to shake up the plans at their own workplace.

Every retirement plan has at least one decision maker who picks some investments and excludes everything else. To get an E.S.G. fund added to your plan, you have to persuade those decision makers, which isn’t always easy. And in the case of the Thrift Savings Plan, that panel is Congress.

In many ways, the federal government had figured out how to build a good workplace retirement savings plan long before many employers in the private sector. The plan is cheap — we should all have retirement accounts with such low costs — and tracks index funds, which tend to do better than most actively managed funds over time. But Congress hasn’t gotten on board with E.S.G. investing, even though many surveys show that younger investors, in particular, would like more access to those options.

Meanwhile, some of the people who work hardest in service to their fellow Americans are forced to expose their retirement savings to the very things they believe they are protecting us from, at least if they want the money in their plan to track stocks. That’s because the index funds that the T.S.P. mirrors own everything in a particular market sector, say all 500 of the biggest companies in the United States by market capitalization. If you want to make money from that sector in the T.S.P., you have to take the bad companies with the good, however you define each term.

I asked around at the surgeon general’s office and the Centers for Disease Control and Prevention about tobacco stocks. No one in a position of power would comment or return my calls or emails. But I did hear from two spokeswomen, who sent me identical one-sentence statements. They both pointed out the obvious (individuals in the T.S.P. can’t own individual stocks) and dodged my questions about overall employee sentiment about tobacco industry exposure.

There is another solution in the works for government employees: a mutual-fund window. This mechanism doesn’t replace any existing funds; instead, it allows plan participants onto an investment platform where they can choose from most any mutual fund, including hundreds of E.S.G. offerings.

Congress told the savings plan’s board in 2009 that it could offer a window, but progress soon stalled. “The stock market was in free fall, and everyone was scared witless,” said Kim Weaver, a T.S.P. spokeswoman.

The market rebounded in the first half of the 2010s, and federal employees and various advocacy groups started making their feelings known. By 2015, the Federal Retirement Thrift Investment Board’s executive director at the time, Greg Long, was ready to recommend a change. “As the clamor of the voices swell, it will be increasingly difficult to defend the core fund menu,” he wrote in a memo to his overseers.

They agreed with him. The beauty of a fund window is that it doesn’t take anything away from anyone. Moreover, the only thing its availability endorses is the idea of more choice. Federal employees can bet on energy stocks via a mutual fund or shun them as they wish, or just stick with the exposure to the stock indexes that is already part of the plan.

Even so, prying the mutual fund window open is taking quite a while. Congress has pushed several other big T.S.P. initiatives to the front of the line, and it will probably be at least two years before participants will get to climb through that window and see what the world of mutual funds looks like on the other side.

What remains to be seen is how many of them will actually climb through.

Many employers that work with Vanguard offer similar windows, and in 2017, only 1 percent of participants used them. Eight percent of the entities offering this option didn’t get a single employee taking them up on it. Fidelity reports similar figures: Just 2.7 percent of participants use the window.

Why the low adoption rate? Some of it is inertia. Workplace retirement plan participants often set their asset allocation and just forget it, leaving it alone for years or decades. Even for people who are inclined to pick mutual funds more in line with their values, figuring out which ones to select is complicated. Analysis paralysis sets in.

That’s why adding even a single E.S.G. fund to the T.S.P. could make a big difference. Fidelity reports that when there is such a fund on employers’ fund menus, 9.2 percent of participants invest at least something in it.

Even a partial governmental embrace of socially conscious investing would be a boon to other workers who wanted such an option: The T.S.P. is a beacon of sorts, and the retirement plan decision makers at other employers pay careful attention to how it operates and how its participants respond.

Even though the federal government is not out front on E.S.G. offerings, you can still make the case for them to your employer. You could point out, for example, that fossil fuel-free funds haven’t hurt anyone, given that energy stocks have barely budged for a decade, radically underperforming the overall stock market (and pulling down index funds that include them). And just this week, BlackRock announced that it was abandoning coal wherever it could. (And thank your lucky stars that you don’t have to appeal to all of Congress for change on this front.)

What you do with your retirement money says more than a little about who you are and what you stand for. Federal employees should be able to make sure their financial goals align with their professional objectives. That money represents power, and though the opening of the window remains a couple years off, civil servants will eventually have more than they do now.