A Financial Advantage for Federal Employees and Military Personnel

By on January 24, 2013 in Current Events with 45 Comments

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.

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources.

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  1. EquusMtn says:

    Guess this is pretty late — but my big complaint is the time lag for interfund transfers. According to the TSP website you have to make a decision by noon Eastern Time to make a transaction that doesn’t take effect until the market closes. If you’re in the C, S, or I funds, you can lose thousands of dollars during that lag. It has happened to me! I don’t understand why the 4-1/2 hour time lag is necessary, and it can really hurt.

  2. Brian says:

    The US federal government is a monetary sovereign – it issues it’s own currency. The US federal government can never default or become insolvent. The federal does not have to borrow or take funds from the G-Fund. This is just one of the many reasons that being a federal government employee is so awesome. Also, Social Security can never become insolvent. The federal government can never run out of dollars, and the capacity of the economy do absorb more dollars provided by the fed is no where close to being met, that is, inflation will most likely remain low. We actually have an extreme dollar SHORTAGE. The entire world actually wants more dollars. It’s all Modern Monetary Theory (MMT).

  3. TL says:

    Is the TSP ever going to be open to already retired federal employees?

  4. jjnewell says:

    I am a retired CSRS employee.  I think the TSP is doing just exactly what it was advertised to do.  For those who don’t think there are enough “trading” options, get your own separate brokerage account.  I do my trading and experimenting in a separate account while enjoying the monthly draw from my TSP which had NOT lost any value since I started drawing.

  5. jjnewell says:

    As a retired CSRS employee I think the TSP is doing exactly what was intended.  For those who don’t think there are enough investment options, get your own separate broker account and leave the TSP alone.  I do my trading and experimenting with a separate brokerage account while enjoying the monthly draw from my TSP.  (Jim Newell)

  6. herm999 says:

    I love the TSP. I am in CSRS and have contributed since the option became available. At 60 years old and 35 years in the USPS I have been able to max out my contributions to the IRS limit. I have used the different funds, but in last few years moved to Life Cycle 2020. As I am closer to retirement I have moved to Life Cycle Income and left my Vanguard IRAs in stocks and balanced funds.  You have to take advantage of the low fees and matching if in FERS. It’s a no brainer!!

  7. RETVET03 says:

    We have to complain about the TSP because even though it is the best managed fund around we would not have the Small Cap and International funds, nor the lifecycle funds (although I disagree with the LF concept; to me it is overdiversification).  We still need a few more options: A Gold or Precious Metals Fund and a Real Estate Fund (i.e. REIT).  That would give people a chance to diversify their retirments into some other investment vehicles when the whole stock market is crashing as it has done a few times now.

    • USPS Letter Carrier says:

      “I disagree with the LF concept; to me it is overdiversification…We still need a few more options… give people a chance to diversify”

      “LF” = LiFe Cycle Funds? How can they be overdiversified if they have no overlap? And how can you in the next breath imply that the TSP as needing more ‘options’ so ‘people’ can ‘diversify’?

      You do know that the S Fund holds REITS, and the folks at TSP essentially looked at and rejected a dozen alternative investment options years ago and thus it’s unlikey to consider them again in the forseeable future? Those who think they can invest better in a crash would invest more during the crash and in an IRA in whatever ‘option” they believe is ‘market crash’ investments. 

  8. Rambo1957 says:

    The TSP is a great vehicle for retirement savings. One way to invest is to use the TSP Pilot. They set up standard and aggressive portfolios that they change when the market warrants it. They also explain market conditions. Not for everyone.

  9. Teeka01 says:

    TSP works great if you have the spare money to put into it.  When I first started work I was a single mother of 2 on a gs 3 salary.  There was no way I could put matching funds in, we would have starved.  Now I’m close to retirement and trying to play catch up.  So unless you can spare the extra its hard.  Not everyone is married or a higher GS grade. 

    • duh1983 says:

      I am also a single mother of 2, but I started as a GS-5 and would disagree that one needs to be married or rich to make the max contribution.  I went from an unemployed college student with NO income to a poor government employee and was able to make max contribution.  I would recommend that all new employees contribute the max from day one because you wont miss what you never had.  If you wait and plan to increase your contribution in the future, you WILL miss that money on your paycheck…..as I’m sure you already know! 

      • RETVET03 says:

        What “max” contribution are you talking about?  The 17500 per year limit?  That would be 673 dollars per pay period, pretty steep for a lower GS grade.  Now if you are talking about making a 5 percent contribution to capture all the TSP matching funds then that is another story.

  10. Tanstaafl says:

    But they hate to give you your money!!  IT TAKES 6 or 7 WEEKS TO GET YOUR MONEY!
    I deposited funds into TSP over my career.  When I planned my retirement I planned to shift the funds to a Schwab IRA account for retirement management.  I duly completed the TSP-70, had my and my spouse’s signatures notarized, had Schwab agree in writibg to accept the rollover, and had it received by TSP on January 3, 2013.  Today I was told by the TSP that it would be another THREE MORE WEEKS before they would effect the transfer to Schwab…… or SIX or SEVEN WEEKS to rollover the account.

    The SEC advises that a mutual fund should effect a similar rollover to another broker within THREE to FIVE DAYS.

    The TSP management has set up a system of consecutive actions that is convenient to them — the TSP’s focus is entirely internal — we fund owners are simply irritants in their otherwise slow-paced and relaxed existence.

    /s/ still trying to get my money

    Tanstaafl

    PS
    I also agree with those who worry about the Pres & Cong breaching their fiduciary duties and looting the G funds as they did the Soc Secy funds.   We SS depositors now have no trust funds (non-marketable IOU’s are not trust funds) and must rely upon the grace of Pres & Cong to annually appropriate money to redeem their “IOU’s.”  We the bi-partisan brinksmanship now routine, I would not be surprised at a further delay in withdrawal during a re-occurring freeze on funds.
    PPS, 
    At least Guitner used my “borrowed” G funds to pay for my accrued leave, so I have a cash flow.

  11. Tanstaafl says:

    TSP hates to let you access your own money!
    I recently retired and as part of my planning to manage my retirement I applied to roll my TSP account into a Charles Schwab IRA account.  My wife and I got our signatures notarized, Schwab agreed in writing to accept the funds into an IRA account created to accept the funds, and my TSP-70 was received at TSP on January 3rd.  Today I was told by TSP that it will be  THREE  MORE WEEKS before TSP will effect the transfer of my money to my account (and, No, my TSP-70 was perfect, no corrections needed). Assuming the 3-week estimate holds, it will have taken me SIX or SEVEN WEEKS to get TSP to effect a transfer that the SEC advises should be done in the private sector in three  to five  DAYS.The problem is the totally internal focus and orientation by TSP — they have set up a cumbersome system that is convenient for TSP – not the funds’ owner  — when you want your money TSP  views you as an irritation and bother, not as customers.  PS,
    As we see in Soc Sec’y our govt (both dems & repubs) is quite  willing to loot and spend our deposited money and then dicker and try to avoid paying it back.    Soc Sec’y’s   mis-labeled trust funds were simply looted  by Pres & Congress (so no interest or growth by the funds) and the result is we depositors now have to hope the Pres & Cong will pay back the looted funds  — since the ” IOUs”  are not negotiable.  
    I expect to see the same beltway breach of fiduciary duty in the future regarding the “borrowed”   TSP funds.

    • duh says:

      You did work for the UNITED STATES GOVERNMENT right????  Did you expect it would be overnighted to you??? sheesh

    • duh1983 says:

      You did work for THE UNITED STATES GOVERNMENT right?  Did you honestly expect that anything would be immediate??  Nowhere in this article did the author claim that one could withdraw funds quickly.  No, the point is that one can make WAY MORE MONEY in a shorter amount of time.  So what, you had to wait a few weeks.  Find a real problem.

  12. Tport2 says:

    One improvement for us retirees with a TSP account would be more distribution options once you retire.

    • USPS Letter Carrier says:

      The limited withdrawal options are perhaps the weakest facet of the TSP. I’ll likely withdraw most of my TSP account sometime after retirement, leaving the balance in the G Fund. Also don’t care for the pro-rata investment scheme regarding the Roth TSP. So my Roth investment will be limited to my Roth IRA while I will continue to max out the traditional TSP every year. That’s enough out of pocket.

    • Guest says:

      The limited withdrawal options are perhaps the weakest facet of the TSP. I’ll likely withdraw most of my TSP account sometime after retirement, leaving the balance in the G Fund. Also don’t care for the pro-rata investment scheme regarding the Roth TSP. So my Roth investment will be limited to my Roth IRA while I will continue to max out the traditional TSP every year. That’s enough out of pocket.

    • RETVET03 says:

      A dozen thumbs up for that although I’d have to think: while the all at one time or none approach seems brutal it does keep the administrative costs down;  all they have to concentrate on is basic admin and keeping the fund in line with the index.  If they had to manage all the accounts down to monthly withdrawls it might just be cost prohibitive.

  13. trevor1953 says:

    The TSP will always be incomplete without and option for devleoping world fund. it was the reason i left after retiring 5 years ago and this fund (EEM) helped me outperform the market in more than one year

  14. Irma Wilson says:

    In the G fund, is the government withholding the interest accrued on the investment or are they dipping into the principle? For example, if a person invested $40,000 into the G fund and is accruing interest on a daily bases, is the government going into the $40,000?  or withholding the interest earned on the $40,000 to be reimbursed at a later date?  Either way, it stinks…

  15. grannybunny says:

    Thanks for a positive article about TSP.  It matches what I have seen in other articles comparing various widely-available investment options.  The TSP matches — or beats — the performance of the well-known for-profit private-sector funds.  In addition, in the unfortunate event that one might need to borrow against their TSP account, the interest rates on loans are incredibly cheap, say 3-4%, maybe even lower in this time of low interest rates. 

    • USPS Letter Carrier says:

      As per the TSP > Current Limits and Rates:  “Loan interest rate for new loans is
      1.500%.”

    • USPS Letter Carrier says:

      As per the TSP site> Current Limits and Rates:  Loan interest rate for new loans is
      1.500%.

    • RETVET03 says:

      Not to mention that the “interest” you pay on the loan you pay to yourself!

      • grannybunny says:

        Yes, but unfortunately, that’s usually a smaller percent than the borrowed funds would have earned had one not had to borrow them.  I don’t recommend borrowing from TSP, but it’s good to know that it’s available if necessary.

        • RETVET03 says:

          Not necessarily…

        • Akws23 says:

          When the market is down borrowing from TSP is a good idea (if you need to borrow money)  because the money you borrow is not subject to the declining value of the stocks; repaying when the market comes back up.  Buying as much stock as allowable via allocation from you pay in a down market is also a smart move because historically the market always recovers and increases so buy as much stock as you can in a down market.

  16. Rweeks says:

    Thank you for this article.  We do pre-retirement seminars and extolling the virtures of the TSP is one of points we really try to hammer home to the classes.  Frankly, the TSP and the federal agencies do a rather poor job of “tooting” their own horn and that’s a shame because TSP stands alone as the premier 401(k) type paln in the country. 

  17. NoDonkey says:

    I can’t understand why anyone would fail to take advantage of the matching in TSP.  I looked at my statement and even though I’ve been in fed service for only four years, my investment is already up to $40,000 and that’s making the minimum contribution to get the matching funds. 

    • crocket838 says:

      Wise choice!  Just keep plugging along and it will grow.  And if you can, try and increase your contributions every year.  Maybe put those increases into the Roth?  I’ve been in it since it first started.  My one big regret was not moving money from my G fund to the C fund when it became available.  It went gangbusters for a while.  I still have most of mine in the C fund.  I know I should probably start moving it over as I get closer to retirement.   

      • NoDonkey says:

        I’d like to put in more but it’s simply not possible currently.  I need to get my wife to get a job once our children get older. 

  18. Ajr129 says:

    When the country’s credit rating was lowered last year, didn’t US backed securities (like the G-fund) become the global market’s favorite?

    The TSP is a much better value than a typical 401k. For those who want more, get an e-trade account.

  19. Doughco says:

    I invested the maximum possible amount for the 18 years I was elegible for the TSP and wound up with ‘way more money than I care to spend.  Granted, I live simply in a low-cost area but I also vacation in Europe nearly every year and fly business class.  Pretty good for a guy who had a net worth of less than $2,000 when he entered government service. 

    As an aside, my brokerage accounts didn’t fare quite as well and I’ve had them longer than I’ve had my TSP account.  If you’re looking at a 30-40 year career, I’d highly recommend taking the full-contribution course!

  20. Current G Fund says:

    “They” can take your money away?  Good grief!  The use of the G Fund monies to keep the government running is only because our elected politicians cannot agree to anything even something as ridiculous as the debt limit.  If “they” are unable to pay back the G Fund then we all are in way worse shape then any of the news people have reported.  I for one will let “they” borrow my G Funds because I’m not going to be using the funds for a few years. 

  21. YesterDay4 says:

    I agree TSP worked for me … but I don’t like the capability that “they” can just take my money when ever they want.  For that reason I’m going to remove my money.

    • Bell Raymond says:

      Be smart and keep your money in the TSP, simply don’t invest in the G Fund; this is the fund that the government would tap into if needed.  If all your funds are already in the G Fund, just transfer to other funds.

    • Retmil1997 says:

      The government has borrowed from the G fund several times and has always paid it back plus interest.  It makes some people uneasy because some of the corporations that borrowed from the employees pension funds and then end up going backrupt.  So far this has not been the case for our government.  If we could only get congress to do their job, which is to do the best for the country not their political parties and pass a balanced budget every year, we should not have to worry about being paid back. 

    • WORLDBFREE2 says:

      I would rethink that.

    • OldFed says:

      They can only “borrow” from the G fund, not any of the others. So move to other funds. You will find the TSP administrative costs are FAR below what big-name investment companies charge, and you have many funds to choose from. I only wish I had invested in the TSP years sooner. I am CSRS so don’t get the match. It’s still a great deal.

    • TheRealOldFed says:

      They can only “borrow” from the G fund, by law. So  move to the other funds. You will find TSP Administrative costs FAR below the big-name investment firms. Instead of you paying the huge salaries to those investment fund managers, you are making money for yourself. I only wish I had invested in the TSP years earlier. I am CSRS so don’t get the match. But it is still a GREAT deal.

    • Richard Jefferson says:

       The treasury used the G fund the last time the debt ceiling was reached, Aug of 2011 I believe. By law, the money has to be put back along with any interest that would have accumulated had it not been touched.

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