The TSP’s expenses increased by over 30 percent in 2016, but while it may sound alarming and significant to your retirement the reality is it remains almost impossible to find a lower cost retirement plan.
In 2015 the average expense for a TSP fund was 2.9 basis points – $0.29 per $1,000 in account balance. In 2016 the average expense increased to 3.8 basis points. That’s still a lot lower than you can find elsewhere. There are several reasons for this.
First, as an in-house retirement plan, the TSP doesn’t have a “retail” operation; this lowers expenses considerably because of limited advertising. Even Vanguard, known for low fees, has a retail operation and engages in advertising to attract customers. Read any magazine on popular finance (e.g., Money, etc.) and you will find advertisements from Vanguard and other brokerage houses.
In contrast, the biggest publicity push the TSP has had for a long while was for the introduction of the Roth option in 2012. The TSP’s “advertising” consisted of including a one page flyer with a mailing that was already going out to all TSP participants. The additional sheet of paper did not cause the envelope to weigh over one ounce, so there wasn’t even any extra postage. The TSP now connects frequently with its “friends” through Facebook. If you haven’t already liked the TSP, do so the next time you visit Facebook and you’ll be kept in the loop.
Another reason is that the TSP’s investment options are primarily broad-based index funds that have little in the way of trading expenses. Though the Thrift Board has indicated that they will allow participants to invest in outside mutual funds through a “window”, they have stated that those who invest in those funds will have to pay any extra expenses associated with those outside investments.
An important reason for the TSP’s low expenses (and one that most of us are not aware of) is that there are mechanisms built into the TSP to reduce fund expenses. Any federal employee who leaves federal employment before three years are up has to forfeit the 1% agency automatic contribution that they received. It is required by law that these forfeited monies be used to reduce TSP expenses. Further, those who take out a TSP loan, have to pay a $50 application fee. Money collected in loan application fees is also used to reduce TSP expenses.
Also keeping expenses down is the fact that the TSP staff is modestly compensated compared to the staffs of brokerage firms.
Though I’ve seen nothing about why the fund expenses increased in 2016, I can speculate that it was due to some of the extra expenses incurred in preparing for the armed service’s new “blended retirement” system.
A wild card about future expense increases in the effect that providing more flexibility in withdrawal options will have. Legislation has been introduced in both houses of Congress to allow more flexibility and, if passed and signed, the additional withdrawal choices allowed cannot but increase the TSP’s expenses.