TSP

In April of 2017 the Thrift Savings Plan celebrated its 30th birthday. However, the 401(k) plan has been around for nine more years. It was in 1978 when section 401(k) was added to the Internal Revenue Code. This section allowed employees who invested a portion of their salary in a company profit sharing plan to defer taxes on the money. This logically followed the introduction of the Individual Retirement Arrangement (IRA) in 1974, because the original IRA provided tax deferred contributions and earnings for individuals.

401(k)s and other similar plans gained a lot of traction in the 1980s, as many companies began to abandon traditional pensions and replace them with 401(k)s, thereby shifting the investment risk from the employer to the employee. This shift coincided with the change in how corporations began to view those who they considered to be their stakeholders. Previously, employees had been considered stakeholders along with shareholders and the community, but this view quickly changed to one where shareholders were the primary (if not the only) stakeholder.

The TSP is somewhat different than a 401(k), in that it was introduced to supplement a pension, rather than to replace one. Of course, the government did shed some of its responsibility to employees because, at the time the TSP was introduced, the older and more generous CSRS pension was put on ice. The TSP was introduced in April of 1987, while all newly hired federal employees from January 1987 onward were placed in the new and less generous FERS retirement system.

When the TSP began it had just one fund – the G Fund. In January of 1988, the C and F Funds were added to the mix of investments. We had to wait until May of 2001 to have more funds added; the S and I Funds were introduced at that time. In 2005, the Lifecycle (L) Funds were added. The TSP is still one of the simplest employer sponsored plans available.

Over time the amount that can be contributed to the Thrift Savings Plan and other employer sponsored plans (the “elective deferral amount”) grew to its current $19,000 per year, and the ability to make catch-up contributions was added. TSP rules were also changed to allow more flexibility in both contributions and withdrawals. With the implementation of the TSP Modernization Act later this year, participants will have a lot more flexibility than they ever had before. IRAs will still be more flexible than the TSP, but the gap will have narrowed considerably.

In the future, we can expect more improvements in the TSP including offering a “mutual fund window” which will allow participants to invest a portion of their TSP in approved outside mutual funds.