FRTIB Director Gives His Blessing for Adding Mutual Fund Option to the TSP

By on July 27, 2015 in Pay & Benefits, Retirement with 92 Comments

Image of mutual funds header section in newspaper

The executive director of the Federal Retirement Thrift Investment Board (FRTIB), the group that oversees the Thrift Savings Plan, has recommended that the TSP move forward with adding a mutual fund window to the TSP.

The Thrift Savings Plan Enhancement Act of 2009 gave the authority to the FRTIB to add a mutual fund window to the current offerings inside of the TSP. The FRTIB has been conducting extensive studies over the last two years to determine the feasibility and pros/cons of adding mutual fund offerings.

In a memo released today, executive director Gregory Long said that despite some potential downsides, moving forward with the mutual fund window makes sense for the TSP.

Federal employees anxious to have mutual funds to invest in with their TSP plans should note, however, that this is the first step in what will be a multi-year process to ultimately implement.

Long noted in his memo that a majority of TSP participants surveyed they would like a mutual fund option and/or that they would invest in mutual funds if they were available.

Long also noted in the memo that addition of mutual funds would be a possible way to entice TSP participants to leave their money in the TSP after they leave federal service. Federal workers who had separated from federal service withdrew nearly $10 billion from the TSP, with roughly 72% of that amount being transferred to other financial institutions. Long said that the absence of mutual funds within the TSP are likely a contributing factor to so much money being transferred out of the TSP.

Long noted that adding mutual funds to the TSP would come at a high cost, roughly a total of $6,725,000, the bulk of which would be for TSP system and financial reporting modifications to make changes such as updating the TSP website and the statement process to support the addition of mutual funds.

Another potential downside that Long presented in his memo is that the addition of mutual funds to the TSP’s offerings would add complexity. The simplicity offered by the TSP’s current options has helped the TSP develop a reputation for being a straightforward retirement plan with clear choices that help to protect participants from investment redundancy and to avoid unintentional risk exposures. Obviously increasing the complexity of investment choices could confuse some participants and/or expose them to unnecessary risk with their retirement savings.

In light of the history and the pros and cons found in researching the situation, Long concluded by recommending moving forward with adding mutual funds to the TSP. Long said in his memo:

A mutual fund window offers participants the opportunity to fine-tune their asset-allocation strategies. While we note the concerns with the MFW [mutual fund window], such as introducing higher cost investment options and increasing the risk of poor investment decisions, I believe that we can mitigate some of these concerns through participant communication and effective structuring of the option. More importantly, we believe the benefits of the account retention and protection of the core fund menu far outweigh the concerns and provides a benefit to all TSP participants, regardless of their use of the MFW. Thus, it is my recommendation that a mutual fund window should be added to the TSP.

Gregory Long Memo – Mutual Fund Window Option

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Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce. Ian also has a background in web development and does the technical work for the FedSmith.com web site and its sibling sites.

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