The American Savings Act would create a system for investing that is closely linked to the Thrift Savings Plan (TSP) for federal employees. As reported recently, a bill to create a system very much like the TSP has been introduced to provide another method of savings for Americans who work for a company that does not provide a retirement system.
One of the organizations that would be impacted, of course, would be the Thrift Savings Plan administered by the Federal Retirement Thrift Investment Board (FRTIB). The FRTIB has previously taken the position that the TSP should not be opened up to all working Americans. The reason for their opposition to expanding the TSP to a large number of American workers is easy to understand.
The fundamental design and structure of the TSP is a simple design with five core funds and five lifecycle funds. While the American Savings Act has a goal of having expenses as low as those of the Thrift Savings Plan, the ability of the FRTIB to maintain low fees for so many new participants within the TSP would be fundamentally changed. Opening the TSP up to the more than 70 million Americans without retirement coverage is such a fundamental change it would require a completely different set of operational capabilities.
Setting up a computer system to handle millions of small accounts would be expensive. A telephone call center to deal with millions of people with accounts would have to be established and a secure website that could handle all of the data for millions of investors would be expensive as well. The TSP does not now have these capabilities.
Presumably, the American Savings Act would establish an organization similar to the TSP in order to leave the current structure for federal employees, federal retirees and military personnel functioning as it does now—complete with its low fee structure and limited investment options.
We asked Kim Weaver, Director of the Office of External Affairs for the FRTIB, about how they would view the American Savings Act and how it may impact the Thrift Savings Plan.
As the bill has just been introduced, they have not yet done an in-depth review of the proposed legislation. However, their major point of concern with the bill, based on an initial reading of the document, is that the FRTIB Executive Director and three of the FRTIB Board members would serve on the governing Board of the new organization that would be established. According to Ms. Weaver: “We have significant concern about that because it would split our Executive Director and Board’s fiduciary duties between the TSP participants and ASA participants.”
Of course, some of the concerns that the FRTIB had about being able to maintain very low expenses while creating a new system that would have to handle millions of small accounts with call centers and a secure website to handle a large amount of traffic would also be concerns of the new organization.
So, while the idea sounds intriguing to those supporting legislation to create an investment organization like the TSP, setting up the organization while keeping expenses low would, at best, be challenging to the new American Savings Account Board of Directors. The concerns expressed by Ms. Weaver about splitting the fiduciary duties between the TSP and ASA participants, and the impact this could have on the efficient organization of the TSP, appear to be justified.
In part because of the cost of setting up such a system, and its interrelationship with existing 401(k) plans and IRA plans, there is not a great chance that this bill will be enacted despite the enthusiasm of some groups to see it become law.
If the bill advances in Congress and appears to have a greater chance of becoming enacted, we will keep readers updated.