TSP to Frequent Traders: “Go Play Somewhere Else”

The TSP says that a few people who are engaging in frequent trading are costing all other TSP participants money and creating a “great risk of performance deviations” in the TSP fund benchmarks. The answer to the problem: Limit the frequent trading. A new interim regulation is effective as of today, January 7th.

The Thrift Savings Plan has been building up to limiting frequent trading among TSP funds and is now doing something about it. (See Market Timing and Your TSP).

According to the TSP folks, frequent trading activity has cost other TSP investors quite a lot of money. The actions of a few traders has also created the possibility of instability in the funds with "greater risk of performance deviations from the TSP Funds’ benchmarks." The costs have been paid by everyone who has invested in the I fund and "in 2006, transaction costs caused all long-term investors in the I Fund to earn 0.08% less than they otherwise would have."

So what should be done about it? Their goal, again according to the TSP is "to stop this excessive trading immediately and also, after continued analysis, to design an interfund transfer policy that provides for administrative efficiency, investment flexibility, and retirement security, as well as reduced trading costs."

Their way of doing this is to issue an interim regulation that will probably be followed by a regulation to be published in the Federal Register. If (or, more likely, when the final regulation is issued), it will restrict TSP participants to only two interfund transfers (account rebalancings) per calendar month but would also allow subsequent unlimited interfund transfers into the very safe and conservative G Fund.

The interim regulation gives the TSP Executive Director the right to request that the frequent traders stop their trading practices right away. And, if they don’t, the TSP will restrict the frequent traders to having to request transferring money between funds by using regular mail service. The new interim regulation is effective today, January 7, 2008.

From the numerous comments posted on this site, it is apparent that this move will be very unpopular with a couple of thousand TSP participants who are actively trading their TSP funds. Obviously, the TSP board was increasingly concerned about these activities and has taken action to put a stop to it right away.

Feel free to comment on this article and the policy. Please remember that we will not post comments that are not with our guidelines (See the article Play Nice)



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. Follow Ralph on Twitter: @RalphSmith47