Statement by Edward W. Kelley, Jr., Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Civil Service of the Committee on Government Reform and Oversight, U.S. House of Representatives, February 25, 1999

Federal Reserve Bulletin, April, 1999 by Edward W. Kelley, Jr.

The Federal Reserve Thrift Plan is the System's defined contribution plan comparable to the government's Thrift Savings Plan (TSP). Both Board Plan and Bank Plan employees are eligible to participate and receive employer matching funds. The Federal Reserve Thrift Plan differs from TSP in that it offers both pretax and after-tax savings components and a wider variety of investment options. It also allows higher contribution rates from participants (up to 20 percent of salary), subject to IRS limitations.

MANAGEMENT OF PENSION PLAN ASSETS

The Federal Reserve System, composed of the Board of Governors and twelve Reserve Banks, vests fiduciary responsibility for the investments of its defined benefit (pension) and defined contribution (savings) plans in a committee of five senior System officers. The System's investment oversight committee is currently composed of three Reserve Bank presidents, one member of the Board, and the first vice president of the New York Reserve Bank. The pension and savings plans had investments valued at $8.1 billion as of year-end 1998, with $5.8 billion representing pension plan assets. I represent the Board on this committee and have done so since 1994. The committee is chaired by one of the Reserve Bank presidents (currently Gary Stern of the Minneapolis Reserve Bank). Day-to-day oversight of the investments is the responsibility of a small staff (three) in New York directed by our Chief Investment Officer, Paul Lipson, CFA.

Our oversight committee has long sought to distance itself from asset allocation decisions because such activity might bring with it the appearance of a conflict of interest for the System. Instead, the committee functions as a manager-of-managers --selecting independent investment firms and giving them a common balanced investment mandate. That mandate is set forth in our Investment Objectives and Guidelines document, which has been provided to the subcommittee. This document is part of the investment advisory agreement with each firm and delegates to them asset allocation decisions (within broad parameters set by the committee), securities selection decisions, and the voting of proxies.

Currently, eight firms are retained to manage our $5.8 billion in pension assets (of which about two-thirds were invested in equities as of year-end 1998). Those balanced accounts range in size from $350 million to $1 billion. Managers are selected by criteria that include past performance, desired equity and fixed-income investment "styles," trading and research capabilities, expense levels, and so on. Management expenses for the entire plan are less than one-quarter of 1 percent of invested assets. No pension assets are managed in-house. The staff in New York monitors portfolio activity and performance, reporting on both to the committee on a monthly basis. The committee meets with its portfolio managers at least once a year; the staff meets with most of them quarterly. No consultants are retained for any aspect of the investment process, although the staff in New York makes extensive use of generally available analytical software to assess returns and various measures of risk.