Private sector SDBA investors generally stick to investments backed by high volume/broad-based indexes. Image: Gorodenkoff/Shutterstock.com
By: Scott Swisher, TSP Change AlertsDespite its well-documented shortcomings, the underused TSP mutual fund window provides great opportunity for better results. When deciding how—not if—to use the mutual fund window, it is helpful to analyze and compare the window to similar and equivalent choices offered in private sector company 401(k) plans. The mutual fund window in private sector 401(k) plans is better known as a self-directed brokerage account (SDBA).
According to the Advisory Council on Employee Welfare and Pension Benefit Plans:
1. 79% of Fidelity and 50% of Vanguard 401(k) SDBA’s offer access to stocks, exchange-traded funds, and mutual funds, with only 17% and 19% of plans, respectively, limiting investment options to mutual funds only.
2. Fidelity charges no fees to open SDBA’s, and most investments trade commission free. 40% of Fidelity plans charge a SDBA maintenance fee of most commonly $100.
3. The most common limit on SDBA balances is 50% of the individual’s overall account balance.
4. At Charles Schwab, from 2015 to 2020, SDBA investments in mutual funds decreased by 6% while use of exchange-traded funds increased by 3.7% over the same period.
In short summary, these data mean the vast majority of private sector company 401(k) SDBA’s are superior to the TSP’s mutual fund window because they offer more investment options at a lower cost with a higher investment limit.
The majority of SDBA’s do not limit investment options to mutual funds only. These SDBA’s are similar to the TSP’s mutual fund window, in that they provide many of the same investment options you would find in a retail investment account, including stocks and exchange-traded funds (ETF’s). ETF’s, like mutual funds, hold a basket of stocks but generally have lower expense ratios and other structural advantages over mutual funds.
The minority of SDBA’s are exactly, or equivalent, to the TSP’s mutual fund window in that they only offer investor’s access to mutual funds in the brokerage account window.
While I can understand eliminating the single stock risk of equities in the TSP’s mutual fund window, why eliminate ETF’s from the window? There is a reason from 2015 to 2020 mutual funds were used less in Charles Schwab’s SDBA’s and ETF’s were used more often. Additionally, in 2023, all ETF’s had net inflows of $600 billion while during the same period mutual funds saw outflows of half a trillion dollars! And then there are the mutual funds converting to ETF’s! Since March 2021, over 50 mutual funds with more than $60 billion in assets have converted to ETFs.
Private sector 401(k) SDBA’s also typically have lower enrollment, maintenance, and trading costs than the TSP’s mutual fund window. At TSP, you can only invest up to 25% of your account balance in the mutual fund window. Private sector SDBA’s typically double this number, limiting the SDBA amount to 50% of the overall account balance.
So the Federal Retirement Thrift Investment Board (FRTIB)—the entity responsible for administering the TSP—can and should do better in designing and administering a SDBA for TSP participants. As a TSP participant, you should write to FRTIB, attend FRTIB monthly meetings, and/or write to your local Congressional representative seeking a better solution!
So how are Charles Schwab participants investing in their SDBA’s? These participants are investing in approximately 41% stocks, 34% mutual funds, and 25% ETF’s in their SDBA’s, with trades per year of 17 for stocks, 8 for ETF’s, and 5 for mutual funds. You as a TSP participant don’t have access to stocks and ETF’s in the TSP’s mutual fund window, so throw these out, we can’t consider them. It is interesting that mutual funds continue to be held more prevalently in Charles Schwab’s SDBA’s than ETF’s, but I suspect this could largely be attributed to some SBDA’s permitting investment in only mutual funds, similar to the TSP’s mutual fund window, thus skewing this number higher in favor of mutual funds vs ETF’s.
The most relevant comparison for TSP participants interested in using the mutual fund window is the following: notice the divergence between the higher prevalence of mutual fund use vs. ETF use (34% vs. 25%) and the number of trades per year for mutual funds vs. ETF’s (5 vs. 8). One would assume more use would account for as many if not more transactions per year. But in this case, roughly half of those mutual fund holdings, as documented in the Charles Schwab data, incur transaction fees, just like those mutual funds in the TSP’s mutual fund window! Not so for the ETF’s! So it makes sense that although mutual funds do get more use, mutual fund use is more strategic and less tactical, thus avoiding the mutual fund transaction fees being charged!
Which gets us back to the question at hand…what lesson could TSP mutual fund window investors like you learn from their private sector SDBA counterparts? The window’s transaction fees make it very challenging to improve returns by using an investment philosophy likely to result in frequent trades, almost certainly eliminating sector and other concentrated mutual funds from consideration for use in the TSP’s mutual fund window. Schwab’s top 10 ETF and mutual fund holdings reveal private sector SDBA investors generally stick to investments backed by high volume/broad-based indexes. TSP mutual fund window investors should consider doing the same!
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.
OPM Advises Agencies on Conducting RIFs During Shutdown
Updated Shutdown Contingency Plans Show Range of Impacts
Use Shutdown as Justification for More RIFs, OMB Tells Agencies
Unions Win a Round in Court Disputes over Anti-Representation Orders
Deferred Resignation Periods End for Many; Overall 12% Drop
Senate Bill Would Override Trump Orders against Unions
TSP Adds Detail to Upcoming Roth Conversion Feature
See also,
Legal: How to Challenge a Federal Reduction in Force (RIF) in 2025
How to Handle Taxes Owed on TSP Roth Conversions? Use a Ladder
The Best Ages for Federal Employees to Retire
Best States to Retire for Federal Retirees: 2025
Retention Standing, ‘Bump and Retreat’ and More: Report Outlines RIF Process
