The TSP has finalized a previously announced policy to increase the default investment level of newly hired employees from 3 to 5 percent of salary, effective with those hired after September 30.
The increase is designed to help new employees capture the maximum government contribution under FERS, although as under current policy those employees will be free to choose a different personal investment level, including opting out.
Also as under current policy, the investments will be made by default into the lifecycle L fund most appropriate according to the person’s age, and in traditional (as opposed to Roth) tax status—although the employee could change those, too, at any time.
Those already in the program as of the effective date will not be affected, although under certain circumstances the new default investment level could apply to those who separate from federal employment and later return.
One reason for the increase is that the TSP has found that after having their investments set by default, many employees don’t change those decisions. At a 3 percent of salary investment rate, FERS employees get a total of a 4 percent government contribution—an automatic 1 percent and dollar-for-dollar matches on the 3 percent the individual invests.
At a 5 percent personal investment rate, investors also capture the 50 cents on the dollar match for the next two percentage points, bringing the government contribution to the maximum 5 percent.
International Markets: Underperforming, but Interesting With Upside Potential
The TSP doesn’t have any emerging markets exposure, but federal investors can still buy an emerging markets index fund or ETFs in an IRA alongside their TSP holdings, if they want that exposure as part of a diversified portfolio.