TSP Mutual Fund Window Expenses: Fair or Foul?

With all of the discussion about the fees associated with the Thrift Savings Plan’s (TSP) mutual fund window, let’s take a deeper look at the individual fees and determine if, in relation to the broader financial investment industry, these expenses are fair or foul.

Administrative/Annual Maintenance Fee: In total, this is a $150 annual fee deducted directly from your core TSP account (not the mutual fund window).  In short, it is the cost to provide the option of the window to participants passed along specifically to participants using the window.  This fee helps keep the administrative fees for the core TSP funds themselves (think C, S, I, etc) down.  Though on the more expensive side, this is a fair expense.

Trading Fee: This is the fee paid per transaction in the mutual fund window.  It is $28.75 per trade.  Ouch.  The only positive I can find here is that if you are selling out of one position and buying into another position in the same fund family, you can place what is known as an exchange of shares for one $28.75 fee instead of paying two separate fees, one for the sell and then another for the subsequent buy.  The problem here is that in late 2019, the vast majority of brokers eliminated these fees altogether!  As in they went to $0.  So yes, this is a foul expense.

Mutual Fund Expense Fee: These are the fees associated with the cost of ownership of the mutual fund you choose to purchase in the mutual fund window.  These fees cover that funds management, administration, and other fees.  For the funds I like to use in the mutual fund window, these fees are 1.51%, 1.51%, 2.08%, and 2.10% respectively.  For the equivalent of these same funds on the open retail market, I pay 0.91%, 0.98%, 0.90%, and 1.03%.  Or a reduction of 0.5% to 1% across the board.  This is a foul expense.

I have categorized two of the three expenses above as foul, so of course my overall assessment of the TSP’s mutual fund window is the window is unnecessarily expensive to use right?  Correct.  Should you have better choices, you bet.  Should you consider writing to your Congressional representatives asking them to support better alternatives.  I have.

But here is the thing, fees don’t tell the whole story.

This is the classic case of being thankful for what you have, while it being ok to ask for, advocate for, and pursue improvement.

In the financial industry, the TSP’s mutual fund window is better known as a self-directed brokerage account (SDBA) window.  And less than 25% of employer-sponsored retirement plans [aka 401(k)’s] like the TSP offer an SDBA window, according to the Department of Labor.  My wife’s company doesn’t offer her a SDBA window in her 401(k) account, and I wish they did!  The bottom line is fees are only one aspect you should consider when deciding whether or not to use the TSP’s mutual fund window.

The biggest question is this—despite its fees, is the risk associated with continuously choosing from only the five core TSP funds versus the nearly 5,000 other choices available in the TSP mutual fund window actually equate to an even larger (likely much larger) expense?  I say yes, and the reason is simple, risk management.

It is hard to argue against the fact that a TSP participant can better manage risk in their investment account by using 5,000 choices instead of only five.  The core TSP’s five investment funds either go up with financial markets (aka correlation) or stay relatively the same, as is the case with the G Fund.  What about when the financial markets are going down?

The TSP’s mutual fund window contains investment choices that gain in value when financial markets fall.  When used appropriately, this allows participants to reduce their overall TSP account risk profile.  And isn’t this really what we are all after?

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.

5 Steps to Protect Your Federal Job During the Shutdown

Over 30K TSP Accounts Have Crossed the Million Mark in 2025

The Best Ages for Federal Employees to Retire

Best States to Retire for Federal Retirees: 2025

Primer: Early out, buyout, reduction in force (RIF)

See also,

OPM Guidance Addresses Pay Issues arising During, After Shutdown

The Best Ages for Federal Employees to Retire

Best States to Retire for Federal Retirees: 2025