For decades, tobacco products have carried warnings about the health hazards of using them. Also for many years, cups for hot coffee at fast-food restaurants have included warnings that the coffee inside is hot.
A popular type of lawnmower comes with a warning that when the engine is running, the blades are turning. Sleeping pills warn against driving after taking them. And of course, any type of financial investment includes the caution that past results do not guarantee future results.
So it should come as no surprise that the Thrift Savings Plan’s recent description of its upcoming investment window comes with warnings—as well as disincentives.
The TPS always has argued in favor of investments in low-fee, passive index funds—that is, what its offerings always have been limited to—over targeted, actively managed ones. That’s been its response to years of proposals that it offer funds that focus on specific economic sectors or that exclude certain companies or countries.
Meanwhile participant surveys over the years have shown a demand for more investment options; many investors further have accused the TSP of having a “we know better than you what’s good for you” attitude.
If you’re so inclined, you might see that in the Federal Register notice outlining planned details of the new feature. A few samples:
“Unlike a plan’s core funds, the investments available through a brokerage account are not ordinarily vetted by a plan fiduciary to determine whether they are prudent investments.”
“The mutual fund window will allow access to funds that are not as diversified as the TSP core funds and therefore may expose participants to greater market risk. The mutual fund window is intended for TSP participants who are experienced investors. It is not suitable for all TSP participants.”
While there “may be legitimate reasons for a participant to invest in undiversified funds, such needs can be met through limited portfolio allocations” and there is “increased risk” in doing even that.
The availability of the investment window around mid-year will come 13 years after the TSP received the authority and seven after it formally committed to putting it in place. Kind of like a student waiting until the night before a long-term project is due to start it.
The TSP would answer that it has actually been at work all along—at least over those seven years—and that it couldn’t put the window in place until it finished an upgrade to its IT, what it calls its record keeping system. It also would point out that rather than just contracting with one big mutual fund provider—as seemed to be the course at one time—the option will offer access to funds of many providers, potentially some 5,000 funds in all.
Fair enough. But the TSP also built in a series of reasons not to use it. Foremost among them is no investment in the outside funds could be made if they would bring the total to more than 25 percent of the total account value—that is, at least 75 percent would have to be in the TSP’s own funds.
Not incidentally, that requirement, along with that one the initial investment through the window will have to be at least $10,000, means the option effectively won’t be available to investors with accounts below $40,000—most commonly, relatively new account holders and/or those making relatively lower levels of investment.
Also, there will be no direct investing in outside funds. You first will have to put money into a TSP fund and then transfer it out—first into a holding fund and then into the desired mutual fund or funds. That process would work the same way in reverse for withdrawals.
Each move in or out of the window would count against the limit of two unrestricted account transfers per month—any further transfer could only move money into the government securities G fund—effectively restricting investors to only two uses of the window per month even if they make no transfers of money among the TSP funds.
In addition, each transfer would incur a $28.75 fee, in addition to two separate fees coming to $150 a year which those with such accounts would pay. That’s in addition to fees the mutual fund charges investors.
Will it be worth it to you to deal with all those restrictions, and to pay those fees, to invest in certain specific funds through the TSP? Especially when you could invest in those funds—as well as in individual stocks and other types of investments beyond mutual funds—more easily and at less cost in other ways?
You’ll get to answer for yourself in a couple of months.