TSP

Opinion | Commentary
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John Grobe, Federal Career Experts

The Thrift Board has said it expects only about 2% to 3% of participants to take advantage of the recently opened Mutual Fund Window – why so few? Weren’t people going to leave the TSP in droves if they didn’t have access to mutual funds? That’s what the TSP told us after their survey five plus years ago. In this survey, the Thrift Board identified three main reasons that caused participants to leave the Thrift Savings Plan after they separated from federal service.

One cause was that the TSP’s rules on withdrawals were significantly more restrictive than the rules that applied to most Individual Retirement Arrangements (IRAs). This led to the introduction, passage, and implementation of the Thrift Savings Plan Modernization Act. After the act was implemented in the fall of 2019, the TSP rules were far less restrictive than they had been, though still not as flexible as you would find in an IRA.

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Another cause was that participants’ financial advisors would advise them to move out of the TSP. The Thrift Board really couldn’t do much about this. If an individual has a trusting relationship with their financial advisor, they are likely to do as the advisor suggests.

The third cause was that individuals left the plan because the investment choices were limited. This limited choice of investments is also the case in many employer sponsored defined contribution plans such as the TSP. Despite the fact that the Thrift Board had been adamantly opposed to allowing participants to participate in outside mutual funds for years, they reluctantly embraced what came to be known as the Mutual Fund Window (MFW).

The fact that anticipated participation in the MFW is only 2% to 3% shows us how truly reluctant the Thrift Board’s embrace was. Face it, the Thrift Board does not want us to take any of our money out of the TSP and invest it in outside mutual funds. The design of the MFW is proof of that.

It appears that the MFW was designed by the Thrift Board to discourage its use by TSP participants. How so?

You have to have a bit of money in the TSP to participate. The minimum amount for an initial transfer is $10,000, and a limit of 25% of a person’s total account balance may be invested. This means you must have at least $40,000 to use the window. This excludes many early career employees and those who have delayed saving for retirement for other reasons (e.g., student loan payoff, purchase of a primary residence, college savings for children, etc.).

The costs to use the window are high; higher than what most would pay if they invested in mutual funds through an outside IRA. Here are the costs that the TSP will impose:
Annual $95 maintenance fee; and
A fee of $28.75 per trade; and
Another annual fee that begins in 2022 at $55 and will vary from year to year.

This does not include any fees (i.e., sales charges, 12b1 fees, etc.) that are charged by the mutual fund company.

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Still want to invest in mutual funds? You might be wise to do it outside of the Thrift Savings Plan. Consider having mutual funds in an IRA, or even in a taxable account.

The Pay-to-Play TSP
The advent of the TSP’s investment window in June comes with a host of new fees, new risks – and opportunities – to consider, where you’d have to have success just to break even.

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See also,

House Republicans Revive Retirement Benefit-Cutting Proposals

Installments vs. Annuity: Using Your TSP for Regular Income

Retiring from a Federal Job – Getting Started

Retiring from a Federal Job: Make Sure Your Agency Gets it Right

Nine Hours on Hold: Pressure Builds on TSP to Improve Customer Service

FERS Retirement Guide 2022