Investment Management: Key Practices Could Provide More Options for Federal Entities and Opportunities for Minority- and Women-Owned Asset Managers
Highlights
What GAO Found
According to asset managers and industry associations with which GAO spoke, minority- and women-owned (MWO) asset managers face challenges when competing for investment management opportunities with institutional investors, such as retirement plans and foundations. For example, institutional investors and their consultants often prefer to contract with large asset managers with brand recognition and with whom they are familiar. Also, small firms, including MWO firms, are often unable to meet minimum requirements set by institutional investors, such as size (assets under management) and past experience (length of track record). State, local, and private retirement plans and foundations GAO interviewed addressed these challenges in a variety of ways, such as asking their consultants to include MWO firms in their searches. Many plans also lowered their minimum threshold requirements so that the requirements were proportional to the size of the firms while maintaining the same performance requirements for all asset managers in their selection processes.
Federal retirement plans, the endowment, and the insurance program GAO reviewed invest in asset classes in which MWO asset managers have a market presence, but overall use of MWO firms varied. For example, some retirement plans either did not use any MWO firms or did not track this information. The endowment and insurance program reported using some MWO asset managers.
GAO identified four key practices institutional investors can use to increase opportunities for MWO asset managers. These practices are consistent with federal interests in increasing opportunities for MWO businesses.
- Top leadership commitment . Demonstrate commitment to increasing opportunities for MWO asset managers.
- Remove potential barriers. Review investment policies and practices to remove barriers that limit the participation of smaller, newer firms.
- Outreach. Conduct outreach to inform MWO asset managers about investment opportunities and selection processes.
- Communicate priorities and expectations. Explicitly communicate priorities and expectations about inclusive practices to investment staff and consultants and ensure those expectations are met.
Some federal entities we reviewed, such as the Federal Reserve System, have used all the practices, but others made partial, limited, or no use of the practices.
- The Federal Retirement Thrift Investment Board does not intend to use the practices in its planned mutual fund window platform.
- The Navy Exchange Service Command and Tennessee Valley Authority Retirement System used one practice, but have not used the others.
- The Army and Air Force Exchange Service has used two practices, and partially used two practices.
By using the key practices, the entities GAO reviewed could widen the pool of candidates in their asset manager searches and help ensure that they find the most qualified firms. In keeping with federal interests, the practices could also help address barriers MWO firms face and increase opportunities for them.
Why GAO Did This Study
Asset management firms registered in the United States manage more than $70 trillion. MWO firms manage less than 1 percent of those assets. The federal government has an interest in increasing opportunities for MWO businesses. Questions have been raised about how often federal entities use MWO asset managers and the transparency of their selection processes. GAO was asked to examine, among other things, (1) competitive challenges MWO firms face and how institutional investors address them, (2) selected federal entities' use of MWO firms, and (3) the entities' asset manager selection processes, including their use of key practices. GAO reviewed investment policies and financial statements of 8 entities that manage or sponsor federal retirement plans, an endowment, and an insurance program. GAO also interviewed 14 state, local, and private retirement plans and foundations and 10 MWO asset managers (selected based on size and other factors).
Recommendations
GAO makes four recommendations to increase opportunities for MWO firms, in keeping with federal interests. Four federal entities should use key practices, as appropriate. The Army and Air Force Exchange Service, Navy Exchange Service Command, and Tennessee Valley Authority Retirement System agreed. The Federal Retirement Thrift Investment Board disagreed. GAO maintains that key practices should be used, as discussed in the report.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Army and Air Force Exchange Service | The Chief Investment Officer of the Army and Air Force Exchange Service should fully implement key practices to increase opportunities for MWO asset managers as part of its selection processes. Specifically, the Chief Investment Officer should complete actions related to top leadership commitment and removing potential barriers. (Recommendation 1) |
In October 2017, trustees for the Army and Air Force Exchange Service pension plan (plan) issued a letter to the plan's consultant requesting that the consultant take actions to increase opportunities for minority- and women-owned (MWO) asset managers. The letter stated that it was the trustees' intent to increase opportunities for MWO asset managers and expressly requested that the consultant (1) continue to actively research and include MWO asset managers in the consultant's database, and (2) when practical, forward MWO asset managers when conducting investment manager searches for the plan. The consultant agreed to take these actions.
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| Federal Retirement Thrift Investment Board | The Chief Investment Officer of the Federal Retirement Thrift Investment Board should use key practices as appropriate to increase opportunities for MWO asset managers if and when implementing its mutual fund window platform. Specifically, the Chief Investment Officer should take actions to demonstrate top leadership commitment, remove potential barriers, conduct outreach to MWO firms, and communicate its priorities and expectations for an inclusive selection process to its staff and consultants if and when it begins to search for a mutual fund window platform. (Recommendation 2) |
In November 2020, the Federal Retirement Thrift Investment Board (FRTIB) awarded a new recordkeeping contract to Accenture Federal Services (Accenture). FRTIB officials stated that when the recordkeeping solution goes live, Thrift Savings Plan participants will have access to a mutual fund window with over 5,000 mutual funds. As part of its requirements for the mutual fund window, Accenture is working to ensure that all appropriate managers are considered. Specifically, Accenture plans to include a screener tool in the client portal for the mutual fund window, which will allow participants to screen for different funds, including funds managed by women and minority-owned firms, to the extent that such data is available and accessible in the market.
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| Navy Exchange Service Command | The Chief Investment Officer of the Navy Exchange Service Command should fully implement key practices to increase opportunities for MWO asset managers as part of its selection processes. Specifically, the Chief Investment Officer should take actions to demonstrate top leadership commitment, and to the extent that staff and resources are a constraint, should direct its consultant to conduct outreach to MWO firms and communicate its priorities and expectations for an inclusive selection process by requesting its consultant conduct more inclusive asset manager searches specifically for the Navy Exchange Service Command. (Recommendation 3) |
In September 2017, trustees for the Navy Exchange Service Command Retirement Trust (Trust) issued a letter to the Trust's consultant directing the consultant to take actions to increase opportunities for minority- and women-owned (MWO) asset managers. The letter stated that it was the trustees' desire to remove barriers that may restrict opportunities for MWO firms and expressly asked the Trust's consultant to (1) continue conducting outreach to MWO firms to expand its database, and (2) conduct an inclusive search specifically including MWO firms when researching investment managers for the Trust. The consultant agreed to take these actions.
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| Retirement System | The Chief Investment Officer of the Tennessee Valley Authority Retirement System should fully implement key practices to increase opportunities for MWO asset managers as part of its selection processes. Specifically, the Chief Investment Officer should take actions to demonstrate top leadership commitment, and to the extent that staff and resources are a constraint, should direct its consultant to conduct outreach to MWO firms and communicate its priorities and expectations for an inclusive selection process by requesting its consultant conduct more inclusive asset manager searches specifically for the Tennessee Valley Authority Retirement System. (Recommendation 4) |
In December 2017, the Tennessee Valley Authority Retirement System (TVARS) amended its Service Provider Interaction and Evaluation Policy, which establishes guidelines for the TVARS Board and staff to communicate and interact with potential service providers, including asset managers. The amendment documented TVARS' commitment to ensuring equal opportunity and access for all potential service providers, including minority and women-owned (MWO) firms. Further, in May 2019, TVARS officials stated that they worked with their consultant to set up a process for providing TVARS with information on potential MWO asset managers researched and evaluated by the consultant and have requested the inclusion of at least one MWO asset manger when identifying a short list of top, qualified firms for further evaluation and consideration. Finally, in June 2019, TVARS officials told us that its consultant has engaged in outreach to MWO firms, including forming a committee to help identify MWO asset managers and meeting with several MWO asset mangers from April 2018 to March 2019.
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