Will the Thrift Savings Plan (TSP) for federal employees be impacted by the 2016 federal budget?
While some readers may assume the federal budget will not directly impact the TSP, that is not necessarily true. With the Congress changing to Republican control in the latest elections, there is concern in Congress about the large national debt that currently exceeds $18 trillion and is growing much larger each year. While tax revenues are setting new records, in part because of new taxes being imposed by the Affordable Care Act (Obamacare), yearly deficits are still adding hundreds of billions of dollars to the national debt each year.
With that background, there are likely to be major political disputes over the federal budget as the ideological differences between Democrats (who generally want to increase federal spending and generally are not opposed to raising taxes) and Republicans (who generally want to reduce the federal deficit and generally are opposed to raising taxes) are reflected in budget priorities.
With regard to the Thrift Savings Plan, there is one item of interest to investors that is mentioned in the report from the Committee on the Budget in the House regarding the G fund (The full report is below this article). This section reads as follows:
“Securities within the G-Fund are not subject to risk of default. Payment of principal and interest is guaranteed by the U.S. Government. Yet the interest rate paid is equivalent to a long-term bond. As a result, those who participate in the G Fund are rewarded with a long-term rate on what is essentially a short-term security. This could save up to $32 billion over 10 years.”
In plain English, the provision assumes that the G fund pays more interest to TSP investors than is required to be paid because there is no risk of default. A good comparison would be money market funds available through companies such as Vanguard. While the G fund does not pay a high rate of interest in the current low inflation environment, it does pay more than the money market funds pay to investors.
For comparison, the Vanguard Admiral Treasury Money Market Fund paid investors a return of 0.01% last year. The Vanguard fund invests in short-term U.S. Treasury securities and “is considered one of the most conservative investment options offered by Vanguard.”
By comparison, the G Fund paid investors an annual return of 2.31% for the year. If the proposal to change the interest rate for the G Fund was implemented, the G Fund interest rate would drop to about the same rate as that currently paid by Vanguard to their Admiral Treasury Money Market Fund investors.
Obviously, that $32 billion a year savings referenced in the committee report would come from not paying out the higher interest rate to G fund investors.
Reaction of the TSP to Changing G Fund Interest Rate
Kim Weaver, Director, Office of External Affairs for the Federal Retirement Thrift Investment Board (FRTIB), provided a response to the proposal: “We strongly oppose this change – it would make the G Fund virtually worthless for our participants and have (and will continue) to share our views with Congressional offices.”
Currently, the interest rate of these securities resets monthly and is based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. Ms. Weaver noted that “If the G Fund interest rate is amended to a 3 month maturity, the interest rate payable on the G Fund would drop precipitously to 0.01%. Such a change would make the G Fund virtually worthless for TSP investors, as account growth would not keep pace with inflation.”
- Interest on the Treasury securities issued to the TSP is calculated using the same formula as the securities issued to the Civil Service Retirement and Disability Fund and the Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds.
- Of the $436.8 billion invested in the TSP as of January 31, 2015, $191 billion is invested in the G Fund. Of the roughly 4.7 million TSP participants, more than 4.3 million participants have all or some of their account balance invested in the G Fund.
- Ms. Weaver also commented that the FRTIB would respond in several ways if this change to the G Fund rate was enacted.
- First, the $21.2 billion currently invested in the G Fund as part of the L Fund allocations (as of January 31, 2015) would need to be reallocated to the other Funds to properly balance risk and return.
- Second, the FRTIB would likely approach Congress to request a legislative change to allow the FRTIB to offer a new fund, as the G Fund served the purpose of a money market fund, a stable value fund and an inflation protected securities fund.
- Third, the FRTIB would conduct an education campaign alerting TSP participants to the change in the interest rate.
In effect, she observed, the total savings would be diminished because of the response by the FRTIB and TSP investors.
It is still early in the budget process. Many of the proposals that will be made will be thrown out. As the process progresses, we will advise readers on issues likely to impact the federal community.