The good thing about an anchor, in terms of sailing, is that it keeps you where you are.
The bad thing about an anchor, in terms of retirement savings, is that it keeps you where you are.
“Anchor” is the term the Congressional Budget Office used in a recent analysis of TSP investor behavior—specifically, those who never budge from a level of investment.
The study examined the potential impact two possible changes in the TSP: increasing the agency matching contributions for those under FERS, and increasing the default investment rate for newly hired employees.
The FERS matching investment formula has been the same since the TSP started more than 30 years ago. For the first three percent of salary the employee invests personally, the agency matches dollar-for-dollar. For the next two percent, it matches 50 cents on the dollar. Thus, the highest potential match is 4 percent, on top of an automatic contribution, which is the same regardless of whether the employee invests, equal to 1 percent of salary—a total maximum employer contribution of 5 percent.
The default investment feature was added only in 2010; instead of having to opt into the program, those employees invest 3 percent of salary by default although they can change that amount, including opting out of personal investments, at any time. The 3 percent level captures the dollar-for-dollar aspect of the match. The TSP intends to use its already existing authority to boost that to a 5 percent default starting in mid-2020 to capture the total potential match.
The other change, raising the matching contribution, would be a financial benefit to employees but a financial cost to the government that would require a change in law. That makes it both more attractive to employees and more difficult to accomplish. And not surprisingly, the CBO found that of the two, that would do more to boost employee investment levels.
It noted, for example, the difference between investment levels between FERS employees and CSRS employees, who receive no government contribution: 92 percent of FERS employees invest at least some of their own money, while only 69 percent of CSRS employees do so. Among those in both systems who do invest, the average FERS investment is higher than for those under CSRS, which it again attributed to the power of matching contributions.
In a look at percentages of FERS employees investing at various levels, it noted a spike at 5 percent of salary, which “indicates that many workers anchor to the matching threshold.” Similarly, it found that of those hired since the default contribution feature began, there is a tendency to stick with the 3 percent figure—even though the employee can change the amount (including opting out of personal investing entirely) at any time.
“The default contribution rate might serve as an anchor that workers are drawn toward, as the matching threshold appears to do,” it said.
That effect is so pronounced, it said that after about five years the average investment level across all of those hired since default investing began is about the same as that of all of those who were hired before it began and who had to opt in. Although more of the latter group do not invest at all, those who do invest do so at a higher rate on average than those hired under default investing.
That’s obviously a good reason for the TSP to raise the default investment level as it plans to do in a year, but that’s an issue for those hired in the future. What about those currently in the federal workforce?
First, if you’re one of those who has been investing at 3 percent since you were hired, why haven’t you changed? Do you realize you’re missing out on another 1 percent of salary match?
If you simply can’t afford to increase your savings, that’s one thing. But CBO said that one explanation for employees remaining at the same level is that they “believe that choosing a rate is not consequential enough.” Is a 1 percent pay raise not consequential enough that you (and your spouse, if married) could not find a way to reduce your spending so that you could increase your savings by just 2 percent of salary?
If you’re not a default investor who has stayed put, unless you’re investing at the maximum—$19,000, plus $6,000 for those age 50 or older this year—you too have room to increase and can do so at any time.
How long have you been at your current TSP investment level? When is the last time you calculated how an increase of 1, 2 or more percent of salary would translate into account growth over the remainder of your career?
For that matter, when is the last time you gave your TSP investment level a thorough look? If you can’t answer off the top of your head, it’s time to at least consider weighing anchor.