Newly hired federal employees have been required to invest some of their own money by default in the TSP for two decades—for the first half of that time at 3 percent of salary and since then at 5 percent. Image: Yellow_man/Shutterstock.com
By: FEDweek StaffPolicies requiring that newly hired employees invest by default in retirement savings plans such as 401(k)s and the federal TSP “can Substantially Reduce the Likelihood” that they will run short of money at their later retirement, says a study by the Employee Benefit Research Institute.
Newly hired federal employees have been required to invest some of their own money by default in the TSP for two decades—for the first half of that time at 3 percent of salary and since then at 5 percent. The former figure captured the full dollar-for-dollar matching rate for FERS employees while the latter in addition captures the 50-cents-on-the-dollar rate for the fourth and fifth percent of salary.
(Note: FERS employees receive a 1 percent government contribution regardless of whether they invest any of their salary. CSRS employees are ineligible for any government contributions.)
While employees can change those rates—including stopping personal investments—at any time, in practice many FERS employees simply stick with the default amount (the same applies to the default investment choice of the lifecycle L fund most appropriate for their age.)
Many comparable savings plans of private employers and of state and local governments have similar provisions—which are required for plans first established in 2023 and after—which has “led to increased participation rates,” it said.
In the TSP, the percentage of FERS employees at what is called the “full matching rate”—investing at least 5 percent of salary—has increased steadily since that was set at the default rate, and is now at a record level of above 88 percent. Only low single-digit percentages of employees opt out of investing their own money, compared with about 15 percent who did not opt in to investing their own money before default investing began.
Using a model for projecting retirement financial security, EBRI found that with a 6 percent default investment rate—one point higher than the current TSP rate—”the retirement savings shortfall among those who have access to a DC plan in the future decreases by 7%. This increases to over 10% for those ages 35–39.”
“The impact of automatic features is the largest among those who will have more years exposed to them — those younger and with more future years of eligibility in a DC [defined contribution] plan. In fact, for those with 27–30 years of future eligibility in a DC plan, the retirement savings shortfall decreases by 60%,” it said.
“These features are particularly important for individuals who have lower incomes and have been traditionally less likely to participate in a plan,” it added.
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