The Thrift Savings Plan has been saying for some time now that it is clamping down on frequent traders who are using the TSP funds as a way to try and time the market. (See, for example, "Market Timing and Your TSP.")
Probably no one thought the Federal Retirement Thrift Investment Board was kidding around but, if anyone thought it was not a serious proposal, this week’s Federal Register announcement may put any doubts to rest.
In an announcement on March 10th, this notice was published in the Federal Register: "The Federal Retirement Thrift Investment Board (Agency) proposes to amend its interfund transfer regulations to limit the number of interfund transfer requests to two per month. After a participant has made two interfund transfers in a calendar month, the participant may make additional interfund transfers only into the Government Securities Investment (G) Fund until the first day of the next calendar month."
Anyone wanting to comment on the proposal has until April 9th to send in their views. For those who previously sent in comments on the interim regulation, the announcement notes that those views will be considered in this phase of the process and need not be resubmitted.
The Federal Register notice outlines the philosophy of the TSP management. The recent notice emphasizes that the interfund transfer program was set up in 1988 allowing a transfer of funds twice each year during the bi-annual open season. The booklet on the TSP from that era stated "Your Plan contributions are invested for your retirement, and you should make your investment decision with this long-term goal in mind."
In 1990, the options for TSP investment were changed to allow up to four transfers per year and to eliminate the open season concept. Transfers were linked to the TSP’s monthly valuation cycle as that is how the TSP funds were valued at that time. The result was to allow a transfer in any month up to four times a year.
In 1995, the TSP again changed to allow up to 12 transfers per year. A 1998 review found that 91 percent of participants who made IFTs requested one (75 percent) or two (16 percent) during the year. 42 TSP participants requested the maximum number of 12 transfers.
By 2006, there were no limits on the number of transfers between funds and the funds had switched to a daily valuation instead of monthly for each fund. At that time, according to the TSP, a small number of participants with relatively large account balances started to focus on the I fund, probably based on the idea that the noon Eastern Time deadline for submitting an IFT request (inter-fund transfer), a participant might anticipate whether overseas markets would open up or down. And, according to the Federal Register notice, this activity has become more frequent and less random during the past year.
The result is that "when this small cohort rapidly removes funds in anticipation of short-term market losses, any losses which in fact materialize are spread over fewer remaining participants and are therefore more severe for those who maintain the long-term approach. Those who rapidly shift out secure the higher value based on the closing price for the day, while the remaining investors bear the losses when the shares are sold at he lower opening price on the following business day."
The result is that the large majority of TSP investors who are using the TSP for the purpose for which it was intended are being put at risk by the actions of a small number of active TSP traders. The large number of passive investors did not anticipate the risk of their investments being potentially damaged by those who are trying to time the market.
The TSP has decided not to allow the frequent trades or to impose an additional fee on those who are frequently trading "because it is impossible to correctly assign the exact costs to those who are making interfund transfers." The board also defends its proposal noting that the proposal to limit trades is "more accommodating than necessary for optimal rebalancing frequency and demonstrably more liberal than the policies of 40 record
keepers which use the same processing system as the TSP."
Not surprisingly, the TSP proposal to limit frequent trades has attracted the ire of those who want to try and time the market. A group called TSPShareholder.org says in its press release that "While the number of TSP Participants increased from 3.68 million to 3.9 million, the actual cost of trading per TSP shareholder declined in the year ending December 31, 2007. " A spokesman for the organization also says that "We’ve been trying to tell the TSP Board all along that their numbers don’t show a problem, and now we have the data to prove it", said Jim Pratt, a Federal Union Representative, and founder of TSPSHAREHOLDER.ORG. "Now that the data shows that costs are actually declining, it’s time for the Thrift Board to rethink their efforts to restrict employee’s control of their money.". (sic)
Comments on the proposal to restrict market timing in the TSP funds must be received on or before April 9, 2008 and sent to Comments may be sent to: Thomas K. Emswiler, General Counsel, Federal Retirement Thrift Investment Board, 1250 H Street, NW., Washington, DC 20005.