The TSP has just put in place the most comprehensive set of changes in its policies since the program began 30 years ago. These changes touch nearly every aspect of withdrawal policies, both while in service and after separation.
Would it surprise you to learn that many TSP account holders want still more change?
The new withdrawal policies were enacted largely in response to feedback from account holders. One type of feedback came in the form of responses to surveys, where the restrictive traditional withdrawal policies stood out as an area of dissatisfaction in a program that participants otherwise view very positively.
Choice: Over one third move over to an IRA in the first year
The other came in the form of their behavior—just within the first year, more than a third transfer their accounts into IRAs or other similar tax-favored retirement savings accounts, rather than leaving the money in the TSP. By doing so, they gave up advantages including exceptionally low administrative fees and the only-in-the-TSP government securities G fund.
While finalizing the technicalities needed to put the new withdrawal options in place, the TSP as a federal agency had to go through a standard process of posting proposed rules, holding them open for a public comment period, considering those comments, and explaining in the final notice of rule-making why it did or did not accept them.
As it turned out, the TSP was either unwilling or unable (because of the tax code, which it has no authority to change) to put into effect any of those comments. But those comments provide a lesson in where investors still think the program falls short.
For example, a number of investors asked for the freedom to convert “traditional” account balances to “Roth” balances, within the account. In such conversions—most typically done with IRAs—the investor has to pay an up-front tax cost but once the money is in Roth status, it comes out tax-free rather than taxable.
The TSP, though, held out little hope of that ever happening. It said it “has, in the past, considered allowing in-plan Roth conversions and ultimately concluded that the tax complexities involved and, in particular, the potential irreversible financial pitfalls for participants, weighed against doing so. Revisiting this decision was outside the scope of implementing the changes permitted” by the law expanding withdrawal options.
Other commenters raised concerns about the program’s complexities and paperwork burdens on participants, for example in the context of requiring that FERS participants get notarized approval of a spouse for most withdrawal decisions (for CSRS participants, only notice is required). The TSP responded, essentially that the issue is out of its hands: it’s a requirement of federal retirement law.
Even if it weren’t a matter of law, the TSP said that “allowing a participant to make changes to the amount or frequency of his or her installment payments without spousal consent would undermine the protection the spousal consent rule is designed to provide by allowing a participant to effectively drain his or her account balance via a small number of large installment payments without his or her spouse’s knowledge.” Again, little hope of change there.
Withdrawal changes fall short
Others said the withdrawal changes themselves didn’t go far enough. For example, one change allows those with both traditional and Roth balances to take withdrawals from one or the other or proportionately from both, based on the size of each balance; until the recent changes, only proportionate withdrawals were allowed. One suggestion was that investors be allowed to choose their own percentage from both types of balance.
The TSP was more favorable to that idea, saying it did consider it “but determined that doing so was unfeasible from an administrative perspective. A participant will still be able to accomplish the end goal by making two separate withdrawal elections—one from his or her traditional balance only and one from his or her Roth balance only,” it added.
Similarly, the TSP said it had considered allowing investors to choose to take withdrawals only from one or more investment funds rather than proportionately across all of them. But once again the answer was no.
“Because the volume of withdrawal transactions processed by the TSP is so large, its withdrawal election form processing is highly automated. As a result, the complexity involved in updating withdrawal election forms and the associated programming to permit fund-specific withdrawals renders this option impracticable at this time,” it said.
The TSP does change direction. But slowly. And there are certain directions it never intends to go. If you want to go in those directions and you can find another financial vehicle that will provide them to you, you can still do what so many have always done after separation: vote with your feet.