According to the Federal Retirement Thrift Investment Board (FRTIB), in recent

months, a relatively small number of Thrift Savings Plan (TSP) investors

(less than 3,000 of the 3.8 million participants) are engaging in excessive

frequent trading.  Because this activity is accelerating, and in light

of the detrimental effect on fund performance and transaction costs, at its

November 2007 meeting, the members of the FRTIB authorized the Executive

Director to put in place restrictions on interfund transfers.

After receiving input from the employee unions, organizations,

and others, the TSP plans to place limits on interfund transfers early in

2008.  The process of establishing limits will include normal public

rule-making under the Administrative Procedures Act.  Proposed regulations

will be published in the Federal Register and comments will be welcome.

The TSP states it will contact frequent traders and strongly

urge them to practice self-restraint or face administrative consequences. 

They intend to notify all participants in February 2008 when

mailing the new annual participant statements to everyone who has a TSP

account.

The following questions and

answers briefly describe the planned interfund transfer restrictions and the

reasons why restrictions are necessary, as quoted on the TSP.gov

site.

1.  Why is the TSP placing restrictions on the number of

interfund transfers a participant may make each

month?   

The TSP is a retirement savings and investment plan. Investment choices

should be made with a long-term objective based on a participant's time horizon.

Although the TSP recognized that, once we moved to the new daily valued system,

some participants might engage in market timing activities, the practice was

minimal at first. Now, however, a very small number of TSP participants are

engaging in frequent trading to such an extent that it is having adverse effects

on other participants.

For example, in September and October of 2007, the average I Fund daily trade

amount was $224 million. This compares to average daily I Fund trade amounts of

$49 million in 2006 and $27 million in 2005. In September and October, 63% (or

$142 million) of the $224 million traded was attributable to participants who

had traded the I Fund eight or more times in the prior 60 days. Trade volume is

up significantly, and the majority of this increased volume is attributable to

less than 3,000 TSP participants who are engaged in frequent

trading.
 
2.  What are the new restrictions on

interfund transfers?   

The Thrift Savings Plan will implement restrictions on the number of

interfund transfers a participant can make per month in order to curb frequent

trading and its associated costs to TSP participants.  However, the TSP

does want to provide the opportunity for participants to rebalance their

accounts and to permit unrestricted access to the Government Securities

Investment (G) Fund.  Accordingly, the restrictions would be as follows:

Participants can make two (2) interfund transfers per calendar month. 

After that, they may only move money from the Fixed Income Index Investment (F)

Fund, the Common Stock Index Investment (C) Fund, the Small Capitalization Stock

Index Investment (S) Fund, the International Stock Index Investment (I) Fund,

and the L Funds to the G Fund.  

We will count the interfund transfer based on its process date, not the date

the interfund transfer was requested. 

If your first or second interfund transfer in a month moves money only to the

G Fund, it still counts toward your two (2) interfund transfers per month

limit.
 
3.  How will these restrictions affect

me? 

Based on their current behavior, these restrictions would have no impact on

the investment activity of 99% of our

participants.
 
4.  When will the restrictions be

implemented?

The restrictions will be announced in the annual TSP participant statement

mailing which is scheduled for February 2008.  We anticipate they will take

effect in April 2008.
 
5.  What has been the impact of

frequent interfund transfer activity on the TSP Funds? 

Frequent trading activity has (1) increased fund transaction costs and (2)

increased the likelihood that a fund's performance will deviate from its

benchmark. 

(1)  Transaction costs, which are in addition to the TSP administrative

expense for each fund, can be double or triple the cost of administering the

fund.  Transaction costs are not fees paid to Barclays Global Investors

(BGI, the investment manager for the F, C, S, and I Funds).  They are costs

comprising commissions paid to brokers, transfer taxes, and market impact (the

difference between when the stock is bought or sold versus the stock price used

to value the fund).  Before BGI places an order to buy or sell shares in

the market, it trades shares internally among other public and corporate

tax-exempt employee benefit plans that are invested in the same index funds as

the TSP.  There is no cost to the TSP for this service.  However, the

larger the trade, the lower the percent that can be internally moved between

plans.  Thus, an increase in the size of the daily trade leads to a

disproportionate increase in the transaction costs which are paid by all TSP

participants invested in these funds.

(2)  Further, because of the very large dollar amounts being traded,

particularly in the I Fund, BGI has had to increase its cash/futures pool to

ensure that the funds can meet their daily redemption requirements.  As a

result, the possibility that the funds' performance will differ from the

performance of the index each fund tracks has

increased.  

6.  What are the costs to TSP participants invested in

the funds affected by frequent trading activity? 

Frequent trading activity results in additional fund trading expenses that

are borne by all participants in the fund (not just those who are making

interfund transfers), and can negatively impact returns.  For example, in

2006, the trading cost for the I Fund was 8 basis points (or 80 cents per

$1,000).  This means that the impact of frequent trading in the I Fund was

more than double the impact from the cost of administering the TSP funds

(expense ratio) which was 3 basis points (or 30 cents per $1,000).  These

costs affect everyone who is invested in the I Fund, not just the frequent

traders.  The frequent trading is impacting the other funds as well. 

In addition, there is the possibility of foregone interest in those situations

where BGI cannot settle our large trades on a next-day basis.

Thus, the changes are designed to protect the interests of all participants

in response to the frequent interfund transfers in the F, C, S, I, and L Funds

made by a small number of TSP participants.
 
7.  

Why are the transaction costs high? 

As explained in Question 5, transaction costs are not fees charged by the

investment manager, but are comprised of brokerage commissions, transfer taxes,

and market impact.  Brokerage commissions are very low, but in some foreign

countries, transfer taxes are very high.  For example, Ireland charges a 1

percent tax on all purchases of securities.  Market impact is by far the

largest transaction cost, particularly in the I Fund where we give our

investment manager the order to buy or sell when the overseas markets are

closed.  The manager then executes the trades when the markets

reopen.  Any price difference is market impact and there are always price

differences.  In 2006, transaction costs for all of the funds were over $15

million. 
 
8.  The TSP's expense ratio was

only 3 basis points (.03%) in 2006. Why does the TSP need to limit trading when

expenses are already low? 

Transaction costs are investment expenses that reduce investment income

before deductions for administrative expenses and are not included in the

administrative expense ratio.  (See the Thrift Savings Plan Statement of

Changes in Net Assets Available for Plan Benefits portion of the Plan's

financial statement.)  Transaction costs of $13.8 million reduced the I

Fund return by 8 basis points (or .08%) in 2006; net administrative expenses

only reduced participants' returns by 3 basis points (.03%) in 2006.

Frequent trading also increases the cash the investment manager must hold to

meet redemptions, which leads to a greater chance of differences in performance

from the indexes tracked by the funds.  It is the goal of the TSP to keep

this "tracking error" as low as possible since the funds are designed to mimic

their respective indexes.
 
9.   The TSP is a huge

plan with $235 billion in assets. Why are transaction costs of $15 million a

problem?  

As indicated in Question 8, transfer costs affect the returns of the

funds.  For example, the I Fund's transaction costs in 2006 decreased the I

Fund's return by 8 basis points or .08%. The cost of administering the TSP

program was only 3 basis points (.03%) in 2006. The Board is charged with

keeping TSP expenses low for all participants. We have determined that trading

restrictions will result in a significant expense reduction for TSP

participants.
 
10.   Does rebalancing the L

(lifecycle) Funds every day cause the amount traded to increase? 

The dollar amount of trading activity attributable to the L Funds is very

small, especially compared to the dollar amount of trading activity attributable

to frequent traders.  For September and October 2007, the average trade in

the I Fund was $224 million.  The L Fund rebalancing accounts for $16

million, while frequent traders account for $142 million.  (Frequent

traders are participants who have traded in the I Fund eight or more times in

the prior 60 days.)  Therefore, the impact of the L Funds' rebalancing is

minimal.
 
11.  Why hasn't the TSP already placed

restrictions on the number of interfund transfers that a participant can make

each month?  

Before the TSP moved to the daily valued record keeping system, participants

were limited to 12 interfund transfers a year -- one per month.  When we

decided to introduce daily valuation, we understood that some participants might

trade more frequently.  We decided not to limit the interfund transfers

unless a problem developed.  In the past two years -- particularly in the

past 6 months, however, the adverse effects of frequent trading have become more

pronounced.  Because the Federal Retirement Thrift Investment Board has a

fiduciary responsibility to all of its participants to keep costs low, the

decision was made to put restrictions in place.
 
12. 

Do other plans and mutual funds place trading restrictions on their

participants?  

The financial industry has responded in a variety of ways to the challenge of

frequent trading in its mutual funds.  Consequently, most large mutual fund

families have adopted some type of trading restrictions or they have implemented

a fee structure.  The TSP reviewed the restrictions in place for many of

these mutual funds and determined that allowing participants two interfund

transfers per month, with subsequent interfund transfers only to the G Fund was

both reasonable and prudent.  (The TSP restrictions are not as onerous as

those of some institutions.  For example, one institution restricts trades

to once every 60 days; another provides for one round trip -- an investment into

and out of a fund -- per year.)

Although the Securities and Exchange Commission (SEC) does not have direct

oversight authority with respect to the TSP, its views on frequent trading and

its directive to mutual fund boards of directors is instructive.  The SEC

provides that, under rule 22c-2(a)(1), "the board of directors must either (i)

approve a fee of up to 2% of the value of shares redeemed, or (ii) determine

that the imposition of a fee is not necessary or appropriate.  Id.  A

board, on behalf of a fund, may determine that the imposition of a redemption

fee is unnecessary or inappropriate because, for example, the fund is not

vulnerable to frequent trading or the nature of the fund makes it unlikely that

the fund would be harmed by frequent trading.  Indeed, a redemption fee is

not the only method available to a fund to address frequent trading in its

shares.  As we have stated in previous releases, funds have adopted

different methods to address frequent trading, including:  (i) restricting

exchange privileges; (ii) limiting the number of trades with a specified period;

(iii) delaying the payment of proceeds from redemptions for up to seven days

(the maximum delay permitted under section 22(e) of the [Investment Company]

Act); (iv) satisfying redemption requests in-kind; and (v) identifying market

timers and restricting their trading or barring them from the fund."  71

Fed. Reg. 58258 (Oct 3, 2006).

The TSP concludes that its restriction policy is consistent with best

practices in the financial industry and with the guidance provided by the

SEC.
 
13.  Why doesn't the TSP impose redemption

fees instead of trading restrictions?  

In deciding what action to take, the TSP conducted a study of the best

practices of large mutual fund families, which revealed that two methods are

used to control frequent trading: (1) fees and (2) trading restrictions. 

T. Rowe Price imposes fees on redemptions; it manages an international index

fund similar to the TSP's I Fund and charges investors a fee of 2% for any

redemptions made within 90 days of purchase.  Fidelity limits international

fund activity to one round trip (a purchase and sale) within 30 days, with a

maximum of two round trips in any 90-day period.  Vanguard, the largest

manager of index funds, does not allow any of its funds to be repurchased within

60 days after a sale.

The TSP determined that imposing a 2% fee on redemptions within 90 days would

harm the vast majority of participants who are not frequently trading.  We

wanted to give participants the opportunity to rebalance their portfolios more

often than every 90 days.  For example, a participant purchases some shares

of a TSP fund and decides, for whatever reason, to change that allocation a week

later.  That may be the only activity in the account that year, but

according to the policy at T. Rowe Price, the participant would be charged a

fee.  Fidelity's policy essentially allows 4 purchases and sales every 90

days.  The TSP proposal is more liberal in allowing 6 purchases and sales

in a 90-day period.  The TSP also wanted to provide more flexibility than

the Vanguard rule, which requires investors to wait 60 days before repurchasing

a fund.

It is the TSP's intention that restricting participants to two interfund

transfers per month (with unlimited transfers into the G Fund thereafter) will

eliminate the extra costs to the TSP that are generated by the transactions of a

very small number of participants without causing harm to the vast majority of

participants who trade infrequently.  It is a policy that is much more

liberal than the policies of many large, well regarded mutual fund families.

14.  Do these new interfund transfer restrictions also apply to

contribution allocation requests?  

The interfund transfer restrictions do not apply to contribution allocation

requests