The TSP Moves Closer to Offering Mutual Fund Options

In 2012, 45% of those who left government work withdrew completely from the TSP, totaling $10 billion in total withdrawals.

Federal Employees who are over age 59½, but still working, took out another $2 billion. Much of this $12 billion total was rolled over into IRA accounts.

This is causing major concern among the TSP Board and Congress, and has become a prominent discussion in the press.

The TSP holds over $400 billion in assets and is the largest pension fund in the United States. Such a large flight of federal retirees from the TSP reflects poorly on how the government takes care of its own workforce.

It seems that the TSP governing board has taken notice, and is listening to TSP participants. They want more investment choices than the TSP’s five funds, so the TSP is moving closer to offering an option with access to various mutual funds in the marketplace.

A Defensive Move

The law already allows the TSP to include an investment window beyond the five TSP funds, but the governing board has been hesitant until now to give TSP participants more choice, pointing to higher fees and no guarantee of better returns than what the TSP already provides.

But TSP Executive Director Greg Long recognizes that TSP account holders, particularly when they retire, are often swayed by what he calls “the IRA salesperson” who disparages the TSP’s five fund menu.

Human Nature

401(k)s are also operated by private employers and tend to have limited investment choices, but, unlike the TSP, many 401(k)s offer access to a wider range of products for an additional fee.

Mr. Long notes that only 1 or 2% of those who have 401(k) accounts actually purchase this extra access, but it’s human nature to want a variety of choices, even if most people do end up sticking with their original option.

He hopes that offering a mutual fund option will reduce TSP flight, even if very few people decide to opt in. But there is one other change the TSP board believes should be addressed in order to keep people from leaving the TSP after retirement withdrawals.

Withdrawals

Federal retirees are frustrated by the limited TSP withdrawal options.

In retirement, the TSP allows one lump sum or two partial withdrawals (applicable only if you did not make a previous age-based in-service partial withdrawal) or monthly withdrawals.

Many people who withdraw their funds roll the accounts over to IRAs because of the increased withdrawal flexibility. With an IRA, account holders age 59½ or older can withdraw funds any time they want without penalty.

Congress, however, will have to change the law in order for the TSP to move in that direction.

Will it Really Work?

As federal retirees see that their private sector counterparts have access to all kinds of investment vehicles and withdrawal options, it’s no wonder so many of them take the first opportunity to cut and run from the TSP.

But TSP leadership is looking for new ways to keep investors after age 59½ and into retirement.

So is the TSP really moving closer to offering mutual fund options? We’re waiting and watching to see how it all turns out.

For over 30 years, federal employee retirement planning has been a key focus of Medallion Financial Group. We recognize that FERS retirement benefits have extra layers of complexity, such as the Thrift Savings Plan (TSP), 401K, Pension plan, FEGLI and more. It’s easy to get lost in a sea of bad advice when so few people understand the basics. We help with the basics and beyond to enable our clients to get the education and advice they need to retire with confidence.

Our focus is twofold: first and foremost, we stand against any violation of laws, values and ethics. Second, we treat our clients as part of our family, putting their needs before our own. We strive to exceed client’s expectations – because we have high expectations of ourselves.