Trading TSP Funds: Should There Be a Fee When Investors Trade?

Our recent survey on the charging of fees for interfund transfers generated considerable interest among readers with a higher response rate and more opinions sent in than any previous survey we have run.

There is clearly a difference of opinion among readers as to the validity of any proposal to implement a charge for trading TSP funds. Some readers apparently like to trade often. Not surprisingly, these folks want their trades executed faster and most do not want any fee for the service.

Some, perhaps most, readers do not trade that often. Many of these readers think that there should be a number of trades allowed during the year without any fee for making a few trades. Still others do not think there should be any additional charges at all.

Over 2000 readers responded. Here is a quick summary of the results:

Should the TSP charge a fee for interfund transfers?

Should the TSP limit the number of interfund transfers an investor can make in a year?

Would you favor a system under which a small number of interfund transfers could be made per year but charging a higher fee when trades exceed this preset limit?

A number of readers submitted comments in response to the survey and many readers submitted comments at the end of the article

Keep in mind that no specific proposal has been published by TSP officials. The concept of charging a fee is one that has been informally raised but the concept is certainly not going to be implemented right way. No doubt, the recent market volatility has led many federal TSP investors to switch from stock funds into lifecycle funds or the G fund. That type of move does not always lead to higher returns but large numbers of trades can impact the expenses for all TSP investors–even those that may not trade very often but prefer to rebalance their investment portfolios each quarter or even once per year.

Here is a sample of the comments submitted reflecting the various points off view.

An Air Traffic Control Specialist with the FAA in Ft. Worth, Texas wrote: "The volatile market is a perfect example why NOT to limit our trades. When the market is really on the way down, you want the ability to move into or out of high risk options. If you are locked into an option and want to move out and into another fund but have met your quota of trades for the year it could cost you dearly. So NO to trade limits of any kind!"

A retired management analyst from DoD in Silverdale, WA commented: "TSP should be viewed as a long term investment strategy, and as such frequent intrafund trading should be discouraged. But investors have to be able to adjust their portfolio to fit changing family, age, and economic scenarios. They should not be penalized for moving their own money around to suit their personal requirements. However, to perhaps there should be a small administrative fee charged when an investor exceeds a preset number of "excessive" trades in any calendar year."

A program analyst with the VA in Denver had this to say: "We get nickle and dimed to death on everything. I don’t even transfer my funds – but think it is unfair that people are always trying to make a buck off of Military/Retired Military and Federal employees."

A retired geographer living in Centreville, VA is not opposed to limiting the number of trades: "If the costs of frequent trading is significant then a fee is warranted. A fee will almost certainly stop daily trading and encourage members to be more conservative. The TSP is not something that should be a speculative retirement vehicle."

An Air Traffic Control Specialist with the FAA in Anchorage, AK has a suggestion: "6 transfers per year free. Then charge a fee."

A training instructor from the Portsmouth Naval Shipyard has a different suggestion: "I think that a reasonable amount of trades (say, one per month), also known as "interfund transfers" should be available. After that, a fee to cover the cost of the trade should be imposed."

A geologist with the Forest Service in Portland, OR has a similar suggestion: "I don’t favor limiting the number of interfund transfers, but I do favor charging a higher fee for those who transfer funds among accounts more than four to six times a year."

A lawyer with the VA in Denver has a different idea: "Follow the Vanguard example. No fees charged for transfers, but if a pattern of trading develops involving specific funds, charge a redemption fee of 2% for pulling money out within a short timeframe like 6 months. This penalty stops the back and forth hyperactivity. But participants shouldn’t have to pay when their transfers only amount to a rebalancing. Everyone should be doing that."

A retired human resources specialist living in Kansas writes: "Make them pay!! Those who make changes on a daily, weekly, or monthly basis would think twice (and probably conduct fewer transactions) if they knew it would cost them money. Those of us who leave our money alone shouldn’t have to pay the administrative costs associated with their transactions."

A contract specialist from Redstone Arsenal, Alabama commented: "Some people always try to take advantage of a good system like the TSP and the rest of us have to pay the price for their stupidity. Limit free trades to 4 times a year period."

A human resources specialist with the SSA in Wilkes-Barre, PA likes the current system: "we like the system as it is right now. We have invested additional money into the TSP because of the opportunities available to transfer funds up to 12 x’s a year. It is a good and fair system, don’t change anything at this time – give the market another year and then address any changes."

A programmer with the IRS in Ogden, Utah has this thought: "While I favor a small fee for excessive trading, that fee should include a transfer deadline closer the the end of the business day so we get what we pay for. But don’t forget that the "buy and hold" L-funds rebalance every night which is the equivalent of a daily interfund transfer."

A geologist with the EPA in Dallas does not want any additional fees: "If the plan needs more funds to offset the costs of administering the program, then the Board should increase the percentage charged for administering the fund. The ‘option’ to move your money around freely should not be burdened with additional costs. The Board needs to review the numbers to see how many of the plan participants would be affected by the addition of an investment fee."

An auditor with the Department of Labor in Seattle says: "TSP wasn’t designed for day traders, speculators, or, as a person in my office told me they do, follow a "gut feeling." "

An executive assistant with the USDA in Hamilton, Montana wrote: "The TSP is computerized. There is no human interaction with interfund transfers other than audits, which would be performed as a normal course of business regardless of the interfund transfer volume. This reeks of an idea proposed by some former private banking official. If TSP starts instituting a fee schedule, they will open themselves up to true competition with the private sector investment businesses. They may not want to go there."

A federal retiree living in Essex Junction, VT has a strong view: "Considering that, in this age of instantaneous communications and data transfer, it takes a matter of DAYS to complete an interfund transfer, the thought of CHARGING for it is absurd. Additionally, I believe there is a fee already charged for the maintenance of the fund. How much more are we going to be hit for??? "

A photographer with the VA in Kansas City, MO has a similar view: "I network with other federal employees through TSP discussion groups. We do our best to optimize our retirement accounts by making moves within the funds. This opportunity costs so very little it cannot be much of a drain on the system. Let us continue to move our money as we wish. It is a great system, why make it worse?"

A firefighter with DoD in Meridian, MS is afraid of losing money as a result of any change in fees: "Since the stock market is so volatile, you could lose a lot of money by having your funds locked into certain funds and not be able to protect it by transferring to the "G" fund. In 2001, I lost $17K within three months (JUL, AUG, SEP) while in the "C" fund."