Carol Schmidlin and Ann Vanderslice
(Editor’s Note: This is part 1 of a 2 part article)
The Thrift Savings Plan is an important component in any federal employee’s retirement plan. If you are in the FERS retirement system, TSP is intended to provide one-third of your retirement income. If you are in the CSRS system although you have a more sizable pension, TSP still plays an important role as a supplement to your pension income.
The TSP is the largest defined contribution plan in the country. It currently has assets of over $244.4 billion with 4.3 million participants enrolled. Last year total contributions to this plan were $16.4 billion in participant contributions and $6.3 billion in agency matching contributions for a total of $22.7 billion.
Why you need to take an active role in your TSP
A good start is to maximize your contributions. For 2010, the maximum is $16,500 and if you are 50 or over, you can contribute an additional $5,500 in catch-up. If you are in the FERS system, you receive an automatic agency contribution of 1%, regardless of whether or not you contribute to TSP.
The government also matches the first 3% of an employee’s contributions dollar for dollar, and 50 cents for every dollar of the next 2% the employee puts in, making a total of 5% government funds to match the first 5% of an employee’s contribution.
At the very least, FERS should contribute 5%, because there is nothing better in a retirement plan than free money.
You will need more in retirement than you think.
Federal pensions, fortunately, have cost of living built in, but they have typically not kept up with real inflation, especially within the FERS system. In addition, the rising cost of health care continues to be a huge burden for retirees and is expected to get even worse in the future. Even with the government continuing to pay 72% of your health premiums in retirement, will you be able to afford health care throughout your retirement years?
The management of your TSP will play a crucial role in your ability to maintain your standard of living throughout your retirement years.
Social Security is not what it used to be.Today the average retiree’s Social Security benefit accounts for 40% of their income. Given both the problems Social Security is facing along with the growing number of baby boomers that are beginning to collect their entitlement, many experts forecast that future retiree’s Social Security will account for only 14% of their income.
The good news is that the expenses within TSP are extremely low. In 2009, it was .028%. This is unheard of in the private sector. TSP is able to maintain these low fees by keeping it simple and taking advantage of huge economies of scale. There are five funds along with additional lifestyle funds compromised of the five funds in the TSP’s current offering.
- G Fund (Government Securities Fund). Consists exclusively of investments in short-term, non-marketable U.S. Treasury securities specially issued to TSP. There is no risk of loss in the G Fund.
- F Fund (Fixed Income Fund). Invested in Barclays U.S. Debt Index Fund which tracks the Barclays Capital U.S. Aggregate Bond Index.
- C Fund (Common Stock Fund). Invested in Barclays Equity Index Fund which aims to match the performance of the Standard & Poor’s 500 stock index.
- S Fund (Small Capitalization Index Fund). Invested in Barclays Extended Market Index Fund which aims to match the performance of the Wilshire 4500 Completion Index.
- I Fund (International Stock Index Investment Fund). Invested in Barclays EAFE Index Fund which aims to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australia and Far East) stock index.
One problem, however, is that there is very little information about the TSP funds available to conduct an extensive analysis. The majority of participant’s funds are sitting in the G Fund earning low returns (2.97% for 2009). Some of this is due to the severe market downturn in 2008 when many participants panicked and moved into the G Fund. Unfortunately for those sitting in the G Fund in 2009, the rates of return in the equity funds were +26.8% in the C Fund, +30.8% in the I Fund and +34.85% in the S Fund.
Imagine having a loss in 2008 of 38%, moving your money into the G Fund, resulting in a gain of 2.97% in 2009, and missing the opportunity that the equity funds provided. For participants that managed to time the market by buying high and selling low, do not be too hard on yourselves.
The reason many participants struggle is that you didn’t have the tools or the guidance which is so important in managing such a pivotal piece of your retirement.
As we meet with federal employees throughout the country, regardless of agency, position, demographics, and gender, there are five common strategies that TSP investors use to allocate their TSP. The first one includes going to the TSP website and looking at last year’s returns to try to get in on the trend. While this may work occasionally, more commonly you will find that last year’s winner is this year’s loser.
The second strategy is to go to the investing guru in your office—every agency has one—and let them tell you how your TSP should be allocated. Even if this person is a true investing genius, unless they are finding out a lot of information about your retirement and income goals, true risk tolerance, years to retirement and very detailed personal information, they may be doing you a tremendous disservice. Everyone is unique and your TSP portfolio allocation should be unique to you.
The third strategy we see is that panic during a market downturn often makes even the most aggressive investors fearful enough to move their entire portfolio to the G Fund—thereby locking in a loss. This, unfortunately, affected many TSP participants over the past decade.
The fourth strategy could be called the ostrich strategy. Especially common in periods of market downturns, many TSP investors simply do not bother to look at their statements because by not looking you can avoid seeing losses and pretend everything is okay.
The fifth one is generally not as popular, but is typically seen among younger investors who believe that time is on their side and stay 100% invested in the most aggressive funds. Even aggressive investors should have a sensible, tactical strategy in place.
Now that you’re clearly seeing the problem, you’re probably wondering about a solution. Watch this column next week for a the remainder of this article—with a solution!