Today, the average expense is $0.55 per $1,000 on balance, or 5.5 basis points. Image: TippaPatt/Shutterstock.com
By: John GrobeAll investments have expenses associated with them, including the Thrift Savings Plan. It doesn’t matter whether it’s a retirement account or a taxable account; there are costs associated with investing.
The TSP lists their major administrative and investment expenses as:
• The cost of operating and maintaining the administrative system;
• The cost of providing participant services;
• The cost of printing and mailing of notices, statements, and publications; and
• The cost of fees paid to the investment managers.
These expenses are first paid by forfeitures of the agency automatic 1% contribution of FERS and BRS participants who leave federal service before meeting the vesting requirement. Anyone who leaves federal service before serving three years is not vested in the agency automatic 1%. How much does this reduce expenses? Not too much. For example, the gross administrative expense ratio of the G fund is 0.055%, and the net administrative expense ratio (after applying forfeited contributions) is 0.049%.
To meet the total expenses, the Thrift Savings Plan makes small reductions to the earnings of the various funds (see example in above paragraph). All TSP participants in a given fund pay the same percentage of their investment in the fund to cover expenses.
The TSP is known for its low expense ratio. Back in 2015, when I was teaching a class of financial advisors about federal retirement, I told them that the expense ratio for the G Fund was 0.029%. I was called a liar by one of the participants, and another participant suggested that I didn’t know how to properly place a decimal point. They couldn’t conceive of an investment with such low expenses.
There are several reasons for the TSP’s low expenses. First, as an in-house retirement plan, the TSP doesn’t have a “retail” operation, this lowers expenses considerably because little advertising is needed. Even Vanguard, known for low fees, has a retail operation and engages in advertising to attract customers. Read any magazine or website on popular finance and you will find advertisements from Vanguard and other brokerage houses.
The TSP connects frequently with participants via email and Facebook. If you haven’t already liked the TSP, do so the next time you visit Facebook and you’ll be kept in the loop.
Another reason for low expenses is that the TSP’s investment options are primarily broad-based index funds that have little in the way of trading expenses. The new Mutual Fund Window has additional fees associated with it so that those who choose not to participate in the window have no increase in their costs.
An important reason for the TSP’s low expenses (and one that many of us are not aware of) is that there are fees associated with certain TSP transactions. For example, those who take out a TSP loan, have to pay an application fee.
Also keeping expenses down is the fact that the TSP staff is modestly compensated compared to the staffs of brokerage firms. Ravindra Deo, the Director of the TSP probably makes more money than anyone who is reading this article right now. On the other hand, the head of one of the major investment firms makes more money than everyone who has read this article today – combined. Plus bonus.
As you noticed in some of the numbers in the above paragraphs, TSP expenses are higher today than they were in the past. In 2015 the average expense for a TSP fund was 2.9 basis points – $0.29 per $1,000 in account balance. In 2016 the average expense increased to 3.8 basis points. Today it’s $0.55, or 5.5 basis points. That’s still a lot lower than you can find elsewhere.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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