Publisher's Perspective

The TSP has yet to address an area of dissatisfaction among account holders: limited investment offerings.

For the rest of the summer, there will be a lot of focus on the TSP and September, when the program will go live with a number of new withdrawal options to replace policies that reach back to the TSP’s beginnings in the late ‘80s. Over the coming months as the startup date approaches there will be a blitz of information from the TSP and employing agencies about the new options. However, account holders will have to remain hopeful and wait for additional investment options to be crafted down the road.

Nonetheless, many investors have been awaiting the withdrawal changes eagerly and no doubt will start taking advantage of them right away. That always happens when the TSP offers something new: there’s a surge of early adopters, reflecting pent-up demand. But as the TSP constantly reminds its account holders, the program is designed for the long run. What happens after September?

The answer seems to be that there will be some incremental changes, but nothing regarding the other area of the most dissatisfaction among account holders, the limited investment offerings.

Dissatisfaction with the limited withdrawal options was the driver behind the upcoming changes, which were ordered in a 2017 law that the TSP requested.

To review, the key changes will be to:

– End the policy limiting account holders to only one partial withdrawal post-separation (with the second withdrawal requiring that a choice be made for the remaining account balance) by allowing unlimited post-separation withdrawals (although at least 30 days apart).

– Expand the “substantially equal payment” withdrawal option, including the ability to: elect quarterly or annual payments in addition to monthly payments; change the payment amount any time (only once per year is now allowed); and elect an annuity with the remaining balance after stopping those withdrawals rather than being limited to a lump-sum withdrawal.

– Allow those with both traditional and Roth account balances to designate the entirety of a withdrawal to come from one or the other—so long as it is sufficient; if not the rest will come from the other—in addition to taking withdrawals on a prorated basis, which is the only option today.

– Allow four age-based withdrawals (available without tax penalty to active employees aged 59 1/2 or older, but only one per lifetime under current policy) per year.

– Allow those who take financial hardship withdrawals to continue investing uninterrupted, rather than wait out a current six-month bar on new investments.

*These options will be available even to those who already have begun withdrawals under the current more restrictive policies.

One intent is to encourage participants to leave their money with the TSP after they retire (or otherwise separate) rather than transfer it into an IRA, which offers much more flexibility in taking withdrawals. About a third of account holders now do that just within the first year of separation. While the TSP does not stand to profit institutionally by having any particular number of accounts open or any particular amount on money on investment, it does make a good point that its almost comically low overhead fees make it a good place to keep retirement money. At least for those satisfied with the investment options.

And there’s the rub: the investment options. Even before the change in law authorizing the new withdrawal options, dissatisfaction with investment options had spurred a change in that law. The TSP offers only five basic funds, all of them linked to broad indexes, plus five lifecycle funds consisting of different mixes of those basic funds depending on a projected date to start withdrawals.

That earlier law authorized an investment “window” through which investors could steer some of their TSP funds into offerings by an outside mutual fund company. Such offerings would include, for example, funds targeted toward certain sectors of the economy such as health care, energy, transportation or whatever.

The difference between the two laws was that while the TSP was ordered to offer the new withdrawal options, the new investment option is at its discretion. And the TSP hasn’t shown much initiative in that area.

The latest sign came in a meeting of the Employee Thrift Advisory Council, a little-known body consisting of unions and other federal employee organizations that meets once a year with the TSP board to be briefed on the program and offer input.

The TSP’s presentation to that board naturally focused mostly on plans for the new withdrawal options, but buried in the presentation is a timeline of what comes next.

It shows the TSP intends to:

– require that those who access their accounts online use two-factor authentication — that is, after entering the password, they receive a code number on a cell phone that they then must enter—with no date given;

– offer lifecycle (L) funds in five-year segments—previously announced, but the documents for the first time show an effective date, July 2020;

– increase the default investment for new hires to 5 percent from the current 3 percent starting in October 2020; and

– starting in January 2021, take steps to automatically correct mistakes made by investors regarding elections of “catch-up” investments, an amount beyond the normal investment limit allowed for those age 50 and older in a given year.

The timeline ends in a circle saying the result will be “happier participants.” Nowhere on that line is anything about expanded investment options.

For the meantime, in the face of continued inaction, several bills have been introduced in Congress to compel the TSP to offer certain kinds of specialized funds, or to restrict investments in current funds so that money does not underwrite certain activities. The TSP, as always, has signaled that it opposes such bills.

What many investors are looking for from the TSP, but are not seeing, is a sign of commitment to open that investment window, which it formally committed years ago to doing. That would make them much happier that what the TSP currently has in mind.