Publisher's Perspective

The TSP is still exploring an authority it gained in 2009, but so far hasn’t put in place, to create an investment “window” through which participants could invest part of their account in funds outside the TSP’s own offerings.

The TSP has been criticized for many years from various directions, including from Capitol Hill, for offering only a limited number of funds—five linked to broad stock, bond and government securities indexes and five target-date funds that reflect varying mixes of the underlying funds.

The TSP governing board could move to a decision soon. Agency staff recently presented a feasibility study saying there are “arguments both for and against the idea.” It noted that surveys of TSP participants, including one conducted last year, have consistently found that more than a third of investors think the program would be better with outside investment options.

The study also looked at similar retirement programs that already offer such investing, in some cases allowing choices from among thousands of mutual funds and other investments. It found however that few of their participants – in the low single digit range – invest in funds outside the plan’s own offerings. Further, in many cases there are minimum initial investment amounts ranging up to $5,000 as well as restrictions on how much of an account could be directed to outside investments, plus fees ranging up to $100 per transaction.

The study suggested: setting a minimum initial investment of $5,000 and charging an annual fee of up to $100, plus an additional small administrative cost, for those wishing to invest through the window; that those investors would be limited to having no more than 25 percent of their accounts in outside investments; that the TSP discourage investors from concentrating too much of their money in just one outside investment; and that only no-load mutual funds with administrative fees of no more than 1 percent per year be available.

The TSP’s management could make a formal recommendation shortly, after results of an ongoing study of those who take their money out of the TSP on separation even though they are allowed to leave their accounts in place. Nearly half withdraw their accounts totally within a year of separation and of those, three-fourths of the money is transferred to another financial institution or employer plan.

In particular, the TSP is examining “if this is driven by a desire to access greater investment choices, the need for investment advice, desire for additional withdrawal flexibility, or simply because participants though they were required to close their account.”

A formal agency recommendation in favor of outside investing, should that be the outcome, would be only the beginning of a lengthy process. Assuming final approval is given by the governing board, putting such a program in place would take an estimated 18 more months. Numerous issues would have to be worked out in that time, including how outside investing would fit with the TSP’s loan and withdrawal policies, revisions to record-keeping procedures, and much more.

Don’t count on passing any money through a TSP window anytime soon.