Workers who separate from their jobs should take care about moving their retirement savings accounts, according to a recent Government Accountability Office report that applies equally as well to federal employee TSP accounts to private sector 401(k) accounts.
When a federal employee retires or leaves government for another reason, that person has a range of options including leaving the TSP account in place, transferring the funds to a similar plan of a new employer if taking another job, or transferring the money into an IRA.
Said GAO, "The current rollover process favors distributions to individual retirement accounts. Waiting periods to roll into a new employer plan, complex verification procedures to ensure savings are tax-qualified, wide divergences in plans’ paperwork, and inefficient practices for processing rollovers make IRA rollovers an easier and faster choice, especially given that IRA providers often offer assistance to plan participants when they roll their savings into an IRA."
In addition, when account holders contact financial services companies, they typically "receive guidance and marketing favoring IRAs" even when the firm giving such advice has "only minimal knowledge" of the account holder’s financial situation. The account holders "may find it difficult to understand and compare all their distribution options. Information participants currently receive is either too generic and without detail, leaving participants without understanding of the key factors they need to know to make decisions about their savings, or too long and technical, leaving participants overwhelmed and confused."
The companies have an obvious motive to encourage moving money into IRAs, since they will reap management fees on the accounts.
For TSP participants, leaving the money in place could be a more attractive option in many cases. It is a familiar program with extremely low overhead charges, when compared with mutual funds or other types of investments available through private sector financial companies. It also offers the unique government securities G fund, which returns interest at about the level of mid-length government bonds but with none of the risk of losing value that comes with making such investments if interest rates later go up.
There are minimum distribution requirements for TSP account holders after age 70 ½, but the same applies to other similar plans and to IRAs, except for Roth IRAs.