FEDweek

What a TSP Open Door Policy Would Mean

Some politicians argue that the government can’t get much of anything right—the big exception being the benefit programs it administers for its own employees. Those programs, there seems to be unanimous agreement, are role models for the workforce in general.

This is most commonly seen with the FEHB program, whose structure was cited as a shining example for health insurance reform going back at least to the Clinton administration and through every administration since. Including the present one, which used certain features of the FEHB as the basis for the Affordable Care Act (Obamacare) and which in addition gave OPM the responsibility to administer multi-state marketplaces under that law as it does for the FEHB.

Meanwhile, proposals continue to be raised to open the TSP to private sector workers whose employers don’t offer retirement programs. As with the FEHB idea, that has a certain appeal on the surface but there are many potential implications that would need careful examination first.

One attraction of the TSP to advocates of this idea is that it offers investing at an exceptionally low overhead cost. In addition, it offers an investment fund, the government securities G fund, available nowhere else that pays a far higher return than other guaranteed investments these days (it pays the rate of medium term government bonds without the risk of principal loss if interest rates go up).

The TSP, of course, is not set up to handle anything close to the level of activity that could result from the general public being invited in. Currently, investments come in from only a handful of payroll processors that handle the payrolls of just about all federal agencies. Employing agencies to an extent subsidize participants by bearing some of the transaction costs through the fees they pay to those payroll providers.

Similarly, the TSP needs to provide service to a population of less than five million account holders—the vast majority of whom in any given year do not need individual-specific service such as making a withdrawal or taking out a loan.

How could the TSP handle transactions for potentially hundreds of thousands of employers and tens of millions of investors? Simply, it couldn’t, not as it is structured today.

Either there would have to be a separate parallel agency established, or the current TSP governing agency would have to be greatly expanded—eventually leaving federal employees and retirees as a minority in their own program, as would happen if the FEHB doors were opened and the premium pools were not kept separate.

And would those private sector employers bear the transaction costs in the way that federal agencies do now for federal employees? Probably they wouldn’t, at least not completely, since that cost is one reason those companies haven’t set up 401(k)s already. Once that happens, what could be the justification for federal employees in the TSP paying lower investment costs than everyone else?

Another big attraction of the TSP, at least for the large majority of federal employees who are under FERS, is the employer contribution of up to 5 percent of salary. Again, it’s hard to see private sector companies duplicating that match since they already are free to do so but aren’t doing it. Similarly, what could be the justification for federal employees in the TSP getting a larger employer share than everyone else?

These questions are especially crucial if the two pools would be mixed together, but also apply even if the result would be a separate, parallel program.

Or maybe it would be better to just leave well enough alone.