A healthy dose of cynicism is in order when analyzing and deciphering the intent and purpose of Congress. Here is an example and how a bill pending in Congress could impact your retirement future.
H.R. 6500 is referred to as the “Thrift Savings Plan Enhancement Act of 2008.” As the title implies, this legislation will impact the Thrift Savings Plan (TSP). The TSP is the foundation for the future retirement of many federal employees. It is also the foundation for many former federal employees who already retired.
The legislation would do several things.
First, It would allow the TSP to automatically enroll new TSP participants in the G fund or “such alternative fund or … as the Board may designate in regulations.” In other words, new federal employees would be automatically enrolled in the G fund or, perhaps, another fund selected by the TSP. The “alternative fund” would presumably be the appropriate lifecycle fund. This change to a lifecycle fund would not happen automatically but would require consultation with the Employee Thrift Advisory Council.
Second, the legislation also says the TSP Board “shall by regulation” include “a qualified Roth contribution program, under such terms and conditions as the Board may prescribe.” In other words, the bill would establish authority for setting up the Roth IRA option within the TSP. A Roth IRA would benefit TSP participants who are qualified for a Roth IRA by allowing them to put after tax money into the program. This could save a great deal of money for participants as no taxes would be paid on the money in the TSP when it is withdrawn. (See Another Retirement Option? Roth IRA’s and the Federal Employee)
The third change is the kicker. Some in Congress want to expand the options available to TSP participants, at least in part to give investment companies run by women or minorities greater access to fees paid for investment advice. (See Money, Congress and Your TSP: Watch Out for Your Retirement Money)
The result (and, presumably, the purpose of this provision) is to give politicians and financial investment firms a foothold into the TSP system. It would delete the underlying philosophy of using index funds and open the door to lobbyists by removing the requirement for Congressional approval to add new options.
HR 6500 states that the TSP Board can add new options that could be “low-cost, passively-managed index funds that offer diversification benefits” or “other investment options, if the Board determines the options to be appropriate retirement investment vehicles for participants.”
That sounds good but it is not good for TSP investors. Expenses would increase and increased expenses would reduce the rate of return for all investors. In addition, more options will create more problems. Some TSP investors will be confused with the options and, if numerous studies about investment results are correct, the change would probably reduce investors’ overall rate of return when using actively managed stock funds. More importantly, it opens up a Pandora’s box to allow various vested interests to start reaping fees from managing the billions of dollars in the TSP. Advisory fees would increase as the plan becomes more complex and political pressure would inevitably be applied to decision-makers at the TSP to allow favored industries or funds to be included among the TSP options.
Here is a quote from Newsweek columnist Jane Bryant Quinn on changes that should be made to save the 401(k)s that millions of Americans are counting on for their retirement. “Limit the Choice of Funds: Most people spread their money over three or four funds, no matter how many different options they have. But the greater the choice, the greater the risk that you’ll pick a poor investment mix. Quinn suggests two models for a “perfect” 401 (k). One is the Thrift Savings Plan, run for federal workers. “This kind of plain-vanilla saves you from obsessing over six different growth funds. Instead, you focus on the decision that matters most to long-term success — namely, how much of your money to allocate to various types of assets.”
The TSP works well. It is the lowest cost plan of its type available to Americans. Adding new options, as envisioned by HR 6500, is an opening to change a model retirement plan to provide more income to financial advisory services with political clout.
The TSP board recognizes the danger of politicians and interest groups trying to manipulate the investment options to benefit specific industries –and they should be worried. H.R. 6500 would change the investment philosophy underlying the TSP that has benefited participants but without acknowledging the primary purpose of this section and the impact it will have.
Numerous studies show that indexed funds provide the lowest cost, most reliable returns for investors. (See a few examples in this article.) Some in Congress would quickly sacrifice this model retirement plan for their own political gain or to reward those who stand to make money at the expense of TSP investors. Financial interest groups are already lining up to take advantage of the pile of money sitting in the TSP program by putting pressure on politicians and the TSP board to expand into new investments run by the companies that will profit from the changes.
The ultimate losers are likely to be the TSP investors. The winners will be the politicians who will collect campaign contributions from those that want a share of the fees from the TSP and the companies that are successful in getting their fund or company to become part of the TSP program.