Publisher's Perspective

The TSP is the largest 401(k)-type retirement savings program in the world, with 4.7 million account holders and more than $450 billion on investment.

It also is unpopular.

To reconcile that apparent conflict, consider that for federal employees (and uniformed military personnel) the TSP is the only employer sponsored retirement plan available to them. If they want the power of tax-advantaged investing, with employer contributions added in for those under FERS, the TSP is the only game in town.

After people leave the workforce, though—whether for retirement or by resignation—it’s a different story. Above half of account holders bail out within a year, commonly to transfer the money into an IRA.

That is despite the TSP’s almost ridiculously low overhead fees in comparison with mutual funds and other places people might invest their money through an IRA. It’s also despite the extraordinarily good deal that the only-in-the-TSP G fund represents, providing mid-term bond returns with none of the risk to principal that comes with investing in anything but the shortest bonds.

The TSP thinks several factors are key.

One is the limited range of investments. The TSP offers five basic funds, all tracking broad market indexes, and five lifecycle funds, which mix the basic funds in differing ratios depending on the planned holding period. That’s just the tiniest fraction of what’s available on the open market.

Partly in response to desire for more choices, Congress in 2009 enacted a law allowing the TSP to create an investment “window” through which participants could direct at least part of their accounts. The TSP sat on that idea for five years and finally started getting serious about it less than a year ago. It could firmly commit to the concept anytime now, although putting it into place would take a projected two years even after that.

That’s within the program’s control. A lot of the other features of the TSP that gripe investors actually are a matter of law. For example, you can’t invest in it other than through payroll withholding, except to transfer in money from a prior similar plan. And if you have both “traditional” and Roth balances, when you take a loan or withdrawal, you can’t pick and choose where the money comes from—it has to be drawn proportionately from both. It’s political leaders who enacted those provisions, and they’d have to be the ones to change them.

Another such issue is the flip side of the limited investment choices, the paucity of withdrawal choices.

After retirement, you can take only one partial withdraw and after that, the next withdrawal choice has to be for whatever is left. And even one partial withdrawal is not allowed if you take an in-service age-based withdrawal, allowed after age 59 ½.

IRAs, for example, typically have no such restrictions: you can draw out whatever amount you want whenever you want, within certain broad limits. That’s much more flexibility if you have more than one post-retirement need for a lump-sum amount while remaining flexible regarding the remainder in your account..

That also is a matter of law, although not the tax code in this case—it’s a provision in the law that governs the TSP specifically. Again, it would take an act of Congress to change it.

It looks like the TSP will be seeking that authority. Recently it presented a document to its governing board, and to an advisory board of employee unions and other groups, called “Now and Later.” It’s an illustrated tale following a woman named Lauryn who—after starting a career in the military and then working in the private sector for a while—gets a federal job and enters the TSP.

It shows she will receive much more personalized attention, better service, and more features than the TSP currently provides. For example, Lauren would get a phone call from the TSP on hiring and one at her one-year work anniversary reminding her about the program’s features. The same would happen if she gets called up to active military duty, when she returns from such duty, if she changes federal jobs, when she turns age 50, 55 and 59, and when she retires, among other points.

In those conversations the TSP would provide consultation, not just information, about important considerations. The same would apply for example if she cut back on her investing rate, took a hardship withdrawal, or stops investing altogether for a time.

Meanwhile, transactions that now require much paper and patience will be done online—such as designating beneficiaries and changing an account personal identification number. And the TSP would join the present century in other ways, such as by producing easier to use and more helpful projections of account growth and future income more in line with the offerings of IRA providers.

Some of those ideas might work better than others. For example, there’s already concern that people will be suspicious of fraud in those phone calls initiated by the TSP. There are also questions about whether the TSP will actually provide advice, what it might cost, and who would pay for it—all investors collectively, or just those who use it. And it’s a long-term project—five years or more.

But at least the TSP of “later” would be an improvement over the TSP of “now.”