The recent volatility in the stock market has obviously brought down the value of shares in TSP stock funds just as it has for the value of stocks owned by millions of other stockholders around the world. (See “I would have lost more, but that was all the money I had.“)
And, when there is rapid disruption in the value of assets, people get upset and start looking for where to place blame. Differing political philosophy, combined with an opportunity to gain political power and an economic downturn could lead to major changes in the American economic system.
On a large scale, we only have to look at Congress where some Democrats in the House are looking at the $3 trillion dollars in 401(k) retirement accounts and the $80 million in tax breaks that these retirement plans receive. The recent market downturn, combined with the thought of the federal government not getting to spend that extra tax money every year, is generating radical suggestions for changing how many Americans save for their retirement.
This proposal would set up a special government guaranteed bond fund and all working Americans would be required to put 5% of their salary into this fund that would guarantee a return of 3% a year. That 3% would probably not be enough to keep with with inflation throughout a person’s career. It would also increase every person’s reliance on government and put trillions of dollars under the control of Congress instead of putting the money to work in our economy through stocks and corporate bonds.
The fear of falling stock prices is also of concern to TSP investors. Some of the frustration is boiling in the form of complaints from a few TSP investors who have a strong belief in their ability to avoid losses by trading among the different TSP funds.
As readers will recall, earlier this year the Thrift Savings Plan put into place trading restrictions on the number of interfund transfers (IFTs) that a TSP participant can make in a month. Under this system, participants can make two interfund transfers per calendar month. After that, TSP participants can only move money from the Fixed Income Index Investment (F) Fund, the Common Stock Index Investment (C) Fund, the Small Capitalization Stock Index Investment (S) Fund, the International Stock Index Investment (I) Fund, and the L Funds to the G Fund. (See TSP Answers Frequent Questions About Trading Restrictions)
The rationale for the restrictions is straight-forward: “a very small number of TSP participants are engaging in frequent trading to such an extent that it is having adverse effects on other participants.” The impact on the other TSP participants is financial. As noted by the TSP in the article referenced above: “Frequent trading activity results in additional fund trading expenses that are borne by all participants in the fund (not just those who are making interfund transfers), and can negatively impact returns.”
The final rule on trading restrictions was issued in April 2008. (See $16 Million is Not a Low Number)
The recent stock market volatility has reignited the ire of some who have apparently been unhappy with the trading restrictions since their imposition earlier this year. For example, a reader who says he is an engineer with the Department of Defense made a lengthy comment that alleges trading costs have gone up as a result of the trading restrictions rather than having gone down. This reader, in an apparent reference to the presidential election, says that he would “prefer a safe, secure retirement without participating in the capitalist economic system, because capitalism is on it’s (sic) way out and will go full bore in about 30 days. I know many CSRS employees and I’d much rather have there (sic) retirement plan.”
He goes on to write:
“The FTRIB/Barclay Cabal told us they would they would go down. Costs have soared. Through July:
YTD costs for F fund went from 192,000 to 1,552,711
YTD costs for C fund went from -216,254 to +329,258
YTD costs for S fund went from -101,308 to + 367,371
and in July alone, I fund trading costs went from $248,847 to $2,796,49”
The internet is a powerful tool and rumors and accusations can quickly take on a life of their own without regard to their veracity. Since the value of TSP funds is of interest to all TSP investors, we decided to look into these accusations to see if the trading restrictions have somehow increased expenses before the rumor mill gets out of control.
Tracey Ray is the Chief Investment Officer for the TSP and obviously understands markets and how the TSP functions. (Anyone curious about her credentials can check out her background in this Federal Register notice on page 22055.) She is also very familiar with the complaints from those who have opposed the trading restrictions. I sent her the reader comment quoted above to ensure I was accurately conveying the point made by the reader.
Ms. Ray says that the TSP cannot control the actual cost per share to execute a trade. The costs for a trade are different depending on a variety of factors but the largest is market impact. Some days these costs are negative and other days these costs are positive. Some people have apparently interpreted the restrictions as a control on these trading expenses.
In reality, the IFT restrictions only serve to minimize the dollar volume of trading among the TSP funds. Generally, the costs will be lower when the dollar volume of the trades go down. Probably because of the IFT restrictions, the dollar volume of trades in the TSP has gone down from $41 billion through September 2007 to $28 billion through September 2008.
As anyone who reads the financial pages is aware, there is less liquidity in the marketplace this year than there was last year and the costs per share to execute a trade in the TSP have also risen.
According to Ms. Ray, the trading costs for the TSP for the period of January 07 – September 07 were $14.5 million. The trading costs for the period of January 08 – September 08 were $9.4 million. If the trading restrictions had not been in effect, the actual trading costs would have been much higher because trade volume would have been higher. In fact, if volume had stayed the same as last year, the costs would have been $17.3 million.
As the costs of the frequent trades are paid by all shareholders in the TSP program, the vast majority of TSP shareholders are generally paying less in expenses than they would have paid without the trading restrictions. For the frequent traders who contend they would have been able to make money (or lose less money) without the restrictions, there is probably little that the TSP management can say to alleviate their frustration or to disabuse the frequent traders from a strong belief that they have the ability to move their retirement money between different funds to take advantage of the market volatility.
For the majority of TSP shareholders, keep in mind that the TSP has lower expenses than the least expensive plans available to the private sector. That does not prevent your funds from going down in value in a sinking market but it does give you a substantial advantage over other investors for your long term investments.