FedSmith recently ran a survey to gauge reader reaction to the possibility of the Thrift Savings Plan imposing a limit on the number of trades that participants could make or imposing a fee for TSP participants who trade frequently.
The TSP has studied transaction costs and day trading recently and come up with some interesting statistics. As a result of its findings, there is an internal recommendation to begin imposing limits on the number of TSP trades each month.
Here is a quick summary of the data. In 2004, trading costs for the TSP were $2.2 million. In 2005, the costs jumped up to $6.7 million. In 2006, trading costs continued their upward spiral and hit $15 million. These fees and their percentage increases over the previous year are illustrated in the table below.
| Year | Fees | % Increase |
| 2004 | $2,200,000 | – |
| 2005 | $6,700,000 | 204.55% |
| 2006 | $15,000,000 | 123.88% |
The biggest expenses in 2006 resulted from trades in the I fund. Expenses for this fund came to $13.8 million out of the total costs of $15 million.
Trading I fund shares has become more frequent. In September and October, the average I fund daily trading totaled $224 million. That compares to an average of $49 million in daily I fund trades in 2006. According to the TSP study, most of these costs came from frequent traders. In other words, TSP participants who bought or sold shares in the I fund completed a "round trip" of trades within 60 days. In effect, there are about 3000 TSP participants who trade their funds frequently and are accounting for much of the TSP’s total trading costs. Part of the costs created by frequent trading is due to the loss of interest that occurs because of delayed settlements. This interest loss has been approximately $1.2 million so far in 2007–in addition to the higher expenses being paid.
It is not only the I fund that has experienced the surge in day trading. It has impacted other funds as well. Here is a chart that shows the dollar amount traded in funds through October 2007 and the dollar amount for these funds in all of 2006:
| Fund | Total $ Amt. Traded (2006) | Total $ Amt. Traded (2007 YTD) | % of Fund (2006) | % of Fund (2007 YTD) |
| F | $2,389,469,901 | $8,006,268,543 | 23% | 69% |
| C | $7,954,559,207 | $9,214,817,528 | 11% | 11% |
| S | $6,086,286,346 | $11,257,570,924 | 39% | 60% |
| I | $12,306,580,227 | $23,467,413,406 | 72% | 88% |
Here is one example of how some Thrift Savings Plan participants have been using the TSP funds:
- On October 19, $371 million was transferred into the I Fund
- On October 24, three business days later, $391 million was transferred out of the I Fund
- 2,018 participants who redeemed on 10/24 had purchased on 10/19
- The dollar amount attributable to those traders was $295 million
- 323 of these participants traded $250,000 or more
- In the previous 60 days, these 323 traders completed 5,804 exchanges of the I Fund for a total trade amount of $1.9 billion
The trading costs of TSP funds are also going up considerably for other TSP funds. Ultimately, these costs impact the returns of the funds that are realized by all TSP participants. Most private sector funds have implemented some type of restrictions on trading, especially in international stock funds similar to the I fund. These restrictions vary from charging additional fees to imposing a limit on the number of trades in a specified time period.
In order to cut down on these costs, an internal recommendation has been made to limit the number of TSP transactions that can be made. Under this proposal, an investor would be restricted to two interfund transfers per calendar month. After these two trades, participants would still be able to move more money into the safety offered by the G fund.
The rationale is that two interfund transfers would be enough to allow TSP participants to relance their portfolios every other week and make a total of 24 trades per year. This restriction would effectively eliminate the day trading or frequent trading of the fairly small number of investors who have been increasing their trading activity. The restrictions could be imposed in March or April of 2008.
The restrictions are apparently going to be implemented in March or April of next year. In the meantime, there is also a recommendation to try and slow down the frequent trading in the I, S and F funds. The TSP organization is going to consider mailing a letter to the several thousand people who are frequent traders and urging them to refrain from frequent trading or face being restricted to requesting interfund transfers through the Postal Service until new, automated curbs take effect.
