Don’t let the TSP’s mutual fund window fees scare you off from a potentially useful tool. Image: Daniel Fung/Shutterstock.com
By: Scott SwisherThe TSP’s mutual fund window is similar to a self-directed brokerage account (SDBA) in many private sector 401(k) plans. And according to Charles Schwab, the average end of quarter account balance for SDBA users having an investment advisor was nearly double those who didn’t, with the balance for those with an advisor being $468,516 and those without an advisor being $251,723.
Now, those with higher balances may be more inclined to seek out guidance, but that shouldn’t stop anyone from trying to maximize this critical retirement savings vehicle.
However, the TSP’s mutual fund window is relatively little used – despite the financial benefits of SBDA type accounts, particularly when partnering with an advisor. Only about 0.13% of participants eligible to enroll (those with a balance over $40K) in the TSP’s mutual fund window have chosen to use it since it became available in June 2022.
In stark contrast, over 2% of participants—or more than 15 times this number—who have access to a similar SDBA within their private sector company’s 401(k) plan use it, according to the Advisory Council on Employee Welfare and Pension Benefit Plans.
The Federal Retirement Thrift Investment Board (FRTIB)—the entity responsible for administering the TSP—conducted an online survey in December 2013 in which 29% of respondents indicated they would transfer some portion of their TSP balance to the mutual fund window, according to May 2014 FRTIB meeting minutes. So why does the TSP’s mutual fund window have such a low usage rate to date?
The answer is likely multifaceted, with one of the most likely answers being the litany of fees associated with using the mutual fund window. Administrative fees, trading fees, mutual fund expense fees, they all add up! There are countless articles written by numerous financial professionals about the inequality of these fees as compared to other private sector 401(k) plans with a SDBA option.
But don’t let the TSP’s mutual fund window fees scare you off from a potentially useful tool. Let’s look at the reasons—other than, of course, the larger account balance—to consider the mutual fund window.
Don’t settle for the bare minimum. Why are the vast majority of TSP participants settling for the bare minimum? And when I say the bare minimum, I literally mean, the bare minimum. The Department of Labor sets the low bar for the investment options your company must provide for you in your 401(k) plan. Here is a list of the funds the TSP is legally required to include in your plan:
a. Large Cap U.S. Stock
b. Small or Mid Cap U.S. Stock
c. International Stock
d. Bond
e. Money Market (essentially a cash equivalent)
Do these options sound like the C, S, I, F, and G Funds, respectively? If you answered yes, you would be correct! These five options are a literal one-for-one match of what is required by law. Talk about achieving the bare minimum!
The FRTIB opened the mutual fund window to improve the plan: Since the FRTIB was first authorized to open a TSP SBDA/mutual fund window in 2009, the FRTIB’s own reports indicate the largest reason for offering the window was to make the plan more attractive, hoping to have more retired and separated participants keep their money in the TSP.
The mutual fund window was rolled out at the same time other plan changes were implemented to make the TSP more competitive with other private sector 401(k)’s and other tax-advantaged accounts, thus with the goal of retaining assets. (Not to mention, FRTIB members, as federal government employees, are TSP participants and should want the best plan for themselves.)
As of the end of November 2023, there were only slightly more than 4,000 TSP participants enrolled in the mutual fund window. Perhaps it is time for many more of the millions of TSP mutual-fund-eligible-participants to take a lesson from their private sector counterparts and take advantage of the TSP mutual fund window opportunity sitting right in front of them.
Scott Swisher helps federal government employees better manage risk where they hold their largest amount of investment account assets, in their TSP accounts. He is owner of TSP Change Alerts, a company providing TSP tactical reallocation services to individual federal government employees. Scott can be reached at scott@tspchangealerts.com.
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