It is not a big surprise to those who read the FedSmith site: The Thrift Savings Plan is implementing trading restrictions in an effort to restrict the market timing efforts of several thousand TSP investors.
In a new Federal Register notice, the governing board of the Thrift Savings Plan has issued a final rule. The rule limits the number of interfund transfer requests to two per calendar 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.
The proposal has raised the ire of frequent traders who have railed about the unfairness of the proposal. If the comments submitted by some readers on the issue in response to articles on the subject on FedSmith.com are similar to those submitted in response to the proposed change, the comments were harsh and sometimes got personal. (Check out some of the comments to just one of these articles: "Traders Taking Bite from TSP Returns" and "Exposing Long-Term Investors To Risks They Did Not Anticipate.") From reading the Federal Register notice that is being published today, it is apparent that the comments caught the attention of the decision-makers at the TSP. The result is an official notice that is unusually blunt.
For example, here is one comment from today’s Federal Register notice: "By misappropriating language used in the capital markets (buys, sells, trades), some TSP participants give the impression that their frequent interfund transfers are trades in and out of the markets which affect only their own funds. This is incorrect. All TSP assets are in a pooled investment which is designated by statute as the Thrift Savings Fund."
And, says the TSP, the market timers who are trying to beat the markets are creating a conflict with the statutory mandate that the Board provide passive investments replicating the performance of the overall market.
One of the most frequent comments we have seen on this site from those who oppose the restrictions is that the increase in costs with frequent trading activity is not significant and, if the Board wants to hit them with the extra cost of $4 or so per trade, they will gladly pay the additional fee.
Here is the response to the argument as outlined in the Federal Register: "[T]he view that exceptional costs generated by 1 percent of participants should be viewed as inconsequential if they can be charged off to 100 percent of plan participants is troubling. The resulting small average cost obscures a significant problem, i.e., the cost to other individual participants can be very high depending on how funds are invested on a particular day."
And, says the Board, it does not agree with those opposing the change who argue that $16 million in additional costs is "small." "In the context of how the TSP fiduciaries run the TSP, this additional $16 million is a very large number."
The observations of the Board do not stop there. Unknown to many TSP participants, they have been financing the additional trading costs of those who are engaging in market timing. For example, the notice states that on August 16, 2007, the additional costs to the TSP were $9,554,497 in just one day. Those with an interest in the details can check out the explanation on page 22052 of the Federal Register notice.
The Board has also been concerned about the impact of frequent traders on the G fund calling the actions of the market timers "particularly insidious." It notes that some of those who are trying to use the G fund as a trading mechanism has determined that by making one-day round trips in and out of the fund, they are able to collect a full month’s worth of earnings for 3-5 days of actual G fund investment. The notice also references a website called "G fund payday" where "like ghost workers, these individuals only show up in the G fund on the days when their calculations show that G fund shares will increase in value." While the notice did not give an address, someone at the TSP has apparently been reading the conversation threads in this forum labeled "G Fund Payday."
The result: "[T]hese individuals unquestionably dilute G Fund value at the expense of long-term investors."
And, promises the Board, this is not the end of the regulatory restrictions they will take to stop this practice. "This indefensible practice will be severely curtailed by the limit on interfund transfers. Additionally, the Agency will make a structural change beyond the purview of this rulemaking which will totally eradicate this particularly abusive form of frequent interfund transfer activity."
Some of the comments sent in by readers challenged the competence of those managing the TSP and were sometimes accompanied by chest thumping comments extolling the superior trading abilities of those who claimed to be making large sums with their frequent trades. Similar comments may have been sent in directly to the TSP as well. Generally, anyone who wants to make a persuasive argument is well-advised to leave out personal attacks as it is likely to backfire. That may have happened in this case as the Federal Register notice includes a recitation of the impeccable credentials of one senior employee because "Some participants also challenged the experience and motivations of the Agency’s Chief Investment Officer."
Money is often an emotional topic. The proposed restrictions generated a large number of responses on this site that reflected the underlying emotion. As the rule is now finalized, the dispute may have come to an end.