FEDweek

TSP Plan Advantages Over Private Sector Plans

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The Thrift Savings Plan has many advantages over similar retirement plans outside of the government; this article will look at some of them.

THE TSP’S EXPENSES ARE RIDICULOUSLY LOW.  I will periodically give classes in federal retirement and benefits to financial planners who want to understand our benefits so that they can better serve federal clients.  When I inform them of how low the TSP’s expenses are, they don’t want to believe it.  For the year 2015, the expense ratio for the TSP was 2.9 basis points – that’s $0.29 in expenses for each $1,000 you have in your TSP account.  You will not find such low expenses in private sector retirement plans, IRAs or annuities.  There are several reasons that the expenses are so low, they are:

NUMBER ONE:  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 in the last five years was for the introduction of the Roth option in 2012.  The TSP’s “advertising” consisted of including a one page (printed on both sides) 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.  That’s beyond frugal.

NUMBER TWO:  The TSP’s investment options are primarily broad-based index funds that have little in the way of trading expenses.

NUMBER THREE:  There are mechanisms within the TSP to reduce fund expenses.  You may be aware that any federal employee who leaves federal employment before three years are up has to forfeit the 1% agency automatic contribution that Uncle Sam has been making to their account.  It is required that these forfeited monies be used to reduce TSP expenses.

If you have taken out a TSP loan over the last ten years, you have had to pay a $50 application fee.  Money collected in application fees is used to reduce TSP expenses.

NUMBER FOUR:  The staff of the TSP is modestly compensated compared to the staffs of brokerage firms.  Greg Long, the Director of the TSP makes more money than anyone who is reading this article right now.  Abby Johnson, the head of Fidelity Investments, makes more money than everyone who has read this article today – combined.

Twenty percent of employer sponsored defined contribution retirement plans in the private sector do not have matching contributions at all.  The most common match in a private sector plan is a three percent match of fifty cents on the dollar.  So in your average private sector plan you have to put in 6% to get 3%, while in the TSP if you put in 5% you get 5%.

There are more TSP advantages that we will be looking at in future articles.