The government’s Thrift Savings Plan is a benefit used and appreciated by most federal employees. Of course, for employees under the FERS retirement system, the TSP is essential to being able to retire.
As you would expect, changes are occasionally made to the TSP program. It was not too long ago that the small company funds (S fund) and the international stock funds (I fund) were added. Last year, the lifecycle funds were added to the program.
These changes have given TSP investors more options and, just as important, the new options have been very beneficial for those TSP investors who have chosen to use them as their rates of return have been good. (Check out the historical monthly returns for all TSP options to see how your TSP investments have done.)
There is little doubt that more changes are on the way. Earlier this year, Congress passed the Pension Protection Act. This new law will have an impact on the pensions of private sector employees but does not directly impact your TSP and its options. But the law may still have an impact on your retirement future. Here is why.
Several readers have written to ask about their option of investing in a Roth IRA. The Roth IRA is a retirement investment vehicle that is a good option for some people but you cannot currently use this within your TSP. The big advantage: An investor can put after tax money into a Roth IRA. The reason this is an advantage is that when you withdraw the money from the account after retirement, often many years later, you do not pay any more taxes on the withdrawal. That should be an advantage for many investors. But, until Congress changes the law to allow this option within the TSP, it is not open to federal employees.
Another change that may come to your TSP is automatic enrollment. Currently, federal employees have to elect to join the TSP. In the private sector, a significant number of company employees do not join their company’s retirement plan which are often similar to the TSP. That gives the employee more money in a regular paycheck but practically guarantees that employee will not be able to retire other than living a relatively meager existence on Social Security.
Most federal employees use the TSP but Congress could change the policy on automatic enrollment for federal employees. That is much more likely to happen if the organization responsible for running the TSP (the Federal Retirement Thrift Investment Board) seeks to change the law.
Another potential change in the current TSP system is changing the default fund used for participants. Right now, the default fund is the G fund. It is safe and secure but may not be the best investment vehicle for many participants. A lifecycle fund, for example, is likely to provide a higher rate of return over the life of a federal career because stocks often have a better rate of return than the G fund. (The default fund is used when a TSP participant does not designate how to invest money put into the TSP.)
FedSmith has previously written about the addition of a real estate investment trust option for the TSP. Many readers have a strong views on this issue. No decision has been made as to whether to add this option. (See “Real Estate, Retirement and Risk“) This option has the added intrigue of being the topic of lobbying on behalf of the real estate industry and some in Congress are strongly in favor of adding this feature. Whether this is because of a strong philosophical belief in the value of such a fund or the result of lobbying efforts is a question in the minds of some readers and has added to the controversy.
There is little doubt that change will continue to occur within your TSP. As the stock market has been hitting new highs in the recent past, and the value of TSP funds continues to go up, readers should pay close attention to these changes to determine how you will be impacted and changes you should make to your TSP investments to ensure a safe, secure retirement. We will keep you up-to-date as the changes occur.