A Financial Advantage for Federal Employees and Military Personnel
by Ralph Smith |
We occasionally see negative comments from readers about the Thrift Savings Plan (TSP). The most common complaints are that the TSP restricts trading which inhibits investor performance, there are not enough options available for investors and, more recently, the federal government uses the G fund as a convenient way to avoid hitting the debt ceiling.
Despite these occasional comments, the TSP is a good deal for federal employees. It is a better deal than available to the private sector. And, despite occasional complaints about limited investment opportunities, the program provides very good returns without making financial decisions too complicated. That is not just a personal opinion. Two Wall Street Journal articles recently outlined some of the advantages of this benefit for the federal workforce.
Great News for Federal Employee Investors—Including the Pessimists
Jason Zweig is a financial columnist for the Wall Street Journal. I have been reading his work since he worked at Forbes where he was a mutual fund editor. I have also followed his columns in Money magazine. His observations are down to earth, well researched and articulated in an easy-to-understand style and his views are highly respected and well worth noting by investors. A positive remark by him in a column is significant. Two columns praising an investment program is an incredible gift by a mutual fund or financial firm.
With that background, here is what he recently wrote about the Thrift Savings Plan in the Wall Street Journal:
“Can you beat the market by not even trying? Yes, if you are among the 4.6 million people fortunate enough to invest in the Thrift Savings Plan, a series of funds run exclusively for federal employees and members of the U.S. military.”
While many readers may not be aware of it, the TSP opens up to them an avenue for investing in assets that provide a good return with investment expenses that are much lower than other investments. Here is how Mr. Zweig describes the TSP funds:
“The record of these funds is remarkable. In 2012, the bond fund beat its benchmark…the sixth year in a row that it has outperformed. The large-stock fund also outpaced the Standard & Poor’s 500-stock index by 0.07 point last year; it has beat the market in four of the past six years and tied it the other two. Both the small-stock and international funds surpassed their benchmarks in 2012 for the third year in a row.”
Moreover, the I fund also beat its benchmark with its investments in Europe, Australia and Asia including a “remarkable” differential of 1.3 points in 2012 to quote from Mr. Zweig’s analysis. One significant reason for the performance differential is that the TSP fund (the International Stock fund or the I fund) has federal tax-exempt status. This means that foreign income tax is not withheld on the dividends earned by the stocks in this fund.
More Good News
If you are an investor, you can increase your chances of success by cutting down on investment expenses. This has been a philosophy of successful investment companies such as Vanguard—often regarded as the low cost leader for investors.
Federal employees also have an advantage in this area because the investment expenses for the TSP are so low no other company matches what is available to the federal community. Here is Jason Zweig’s observations on the TSP’s expenses: “The TSP funds are dirt cheap. The average U.S. stock index fund charges 0.59% in annual expenses, or $59 per $10,000 invested. The TSP funds charge just 0.025%, or $2.50 per $10,000–less than one-20th the cost.” (The emphasis is mine and not the author’s.)
About the TSP
According to Kim Weaver, Director, Office of External Affairs for the Federal Retirement Thrift Investment Board, the fiscal year 2013 budget for the Thrift Savings Plan is $170.5 million. The fiscal year 2012 budget was $143.1 million. In the budget memo provided to the Board, the organization projects that by fiscal year 2017 the budget would reach $215 million. That is a projection only but provides insight into how the board sees the future of the TSP.
The TSP organization was authorized to have 143 Full-Time Equivalents (FTE) by the end of fiscal year 2012. As of September, it had 110 employees. The fiscal year 2013 budget of $170.5 million assumes an FTE level of 165 employees.
The operating expenses for the TSP are funded by TSP participants and do not come from appropriated funds according to Ms. Weaver.
What Should You Do as an Investor?
Surprisingly, there are a number of federal employees who do not take advantage of the Thrift Savings Plan, including the match to the investments available to current employees from Uncle Sam. Only 86.3% of federal employees in FERS are participating in the TSP. Only 62.7% of CSRS employees are investors in the TSP and just over 40% of military personnel participate.
Here is free advice: If you are a current federal employee, and particularly if you are in the FERS system, you should invest in the TSP. If you are unsure of how to invest, put your money into the appropriate lifecycle fund. Particularly for younger federal employees who probably have less to invest, remember that you are giving away money by not taking advantage of the TSP and the matching funds provided by the federal government.
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by Ralph Smith |