John Grobe, Federal Career Experts
One of the Thrift Savings Plan’s biggest advantages, as compared to similar employer provided retirement plans is its low expenses.
The TSP’S expenses aren’t just low, they are ridiculously low. I periodically give classes in federal retirement and benefits to financial planners who want to understand our benefits so that they can better serve federal clients. When I inform them of how low the TSP’s expenses are, I am often met with doubt or disbelief. For the year 2018, the expense ratio for the TSP was 4.1 basis points – that’s $0.41 in expenses for each $1,000 you have in your TSP account. Though this is up from the 2015 ratio of 2.9 basis points, you still will not find such low expenses in private sector employer provided retirement plans, IRAs or annuities. The lower your expenses, the more money that gets reinvested and compounded in your account.
There are several reasons that the TSP’s expenses are so low, they are:
First, as an in-house retirement plan, the TSP doesn’t have a “retail” operation in which it also sells funds to the general public. Such retail operations increase expenses considerably because of the need to advertise. Even Vanguard, known for low fees, has a retail operation and engages in advertising to attract customers. Read any magazine on popular finance (e.g., Money, Kiplinger’s Personal Finance, etc.) and you will find advertisements from Vanguard and other brokerage houses.
Secondly, the TSP’s investment options are primarily broad-based index funds that have little in the way of trading expenses. Actively managed funds, such as you might find in a private sector employer sponsored plan will have higher expenses due to the buying and selling of securities.
Thirdly, there are mechanisms that the TSP uses to defray expenses. All federal employees who leave federal employment before completing three years forfeit the 1% agency automatic contribution that Uncle Sam has been making to their account. Those forfeited contributions are used to reduce TSP expenses. In addition, the $50 application fees that are assessed those who apply for TSP loans are used to reduce TSP expenses.
Fourth, the staff of the TSP is modestly compensated compared to the staffs of the brokerage firms that manage the retirement plans of private sector employers. Ravi Dao, the Director of the TSP makes more money than anyone who is reading this article right now. Abigail Johnson, the head of Fidelity Investments, makes more money than everyone who has read this article today – combined.
Here’s another TSP advantage – FERS and BRS TSP participants receive a generous employer match. When you combine the 1% agency automatic contribution with the dollar for dollar match on the first 3% of salary and the fifty cents on the dollar match for the next 2%, TSP participants who receive matching contributions get 5% of their salary matched by Uncle Sam.
Twenty percent of employer sponsored defined contribution retirement plans in the private sector don’t even have a match. The most common match in a private sector plan is a three percent match of fifty cents on the dollar. So in your average private sector plan you have to put in 6% to get 3%.
Low expenses and a generous match are not the only advantages of the Thrift Savings Plan, but they are a significant advantage.