A number of recent mainstream media articles tout the ‘great benefits’ afforded Thrift Savings Plan (TSP) participants who elect to transfer some, or all of their funds out of TSP. Articles repeating a “low fee” mantra have appeared in several prominent publications, including: Bloomberg (Aug 2014), The Washington Post (Sept 2014), and CNN Money (Oct 2014). TSP officials echo and underscore the same “low fee” motto. Apparently the way TSP sees it, their fees are so low that no one should consider withdrawing or transferring them elsewhere.
According to TSP officials, 45 percent of participants who left their federal jobs in 2012 withdrew their entire account within the next year—a total of $10 billion in 2013. “There’s a good chunk of our participants that are firing us and one of the reasons for it is a desire for more investment flexibility,” Long told the board at its November monthly meeting in Washington.
Really? A “good chunk”? Actually, $10 billion of what was a total balance of around $400 billion in 2013 amounts to less than 3% of the total funds – which hardly seems like a “chunk” (much less, a good one). A closer look at the funds withdrawn shows that nearly half were cash withdrawals – meaning the participant had the funds sent directly to them, paid the taxes, and then used the proceeds to pay off their mortgage, eliminate other debt, take a trip around the world, or do anything else they were inclined to do with the money. And, of course, it is their money to do with as they please.
The remainder of withdrawals were taken as transfers, partial withdrawals, or monthly payments. The transfers and partial withdrawals probably moved to other financial institutions, while the monthly payments are likely going to the participant as income.
Based on anecdotal evidence, some federal retirees no longer feel as proud of being a member of the federal workforce. Many earlier federal employees were more inclined to have higher morale, proud of what they had accomplished, and felt more respected as a contributor to American society than more recent retirees. In other words, working for the federal government is not as “cool” as it once was and some retirees reflect this attitude by choosing to place a greater distance between their money and their former employer. (“Ask Not What Your Country Can Do For You” vs. Making Government “Cool”)
Let’s consider for a moment the original purpose of the Thrift Savings Plan, moving back in time to the birth of the Federal Employees Retirement System “FERS” in 1987. This new retirement system imposed greater responsibility on the federal workers themselves—contributing to Social Security, earning a lower pension than their Civil Service Retirement System “CSRS” counterparts, but eligible to contribute to TSP (with government-matched contributions up to 5%). FERS is often described as a ‘tiered system’, providing income to retirees from three sources. So presumably (and in most cases) at retirement, an individual under the FERS plan would need to begin drawing income from all three sources; 1) FERS pension, 2) Social Security (or the supplement), and 3) the new retirees’ painstakingly-saved TSP account.
In 2009, Congress passed legislation (interestingly enough, as part of the Tobacco Act ) that included provisions affecting TSP. One of these provisions established the authority to offer a Roth TSP. Another provision gave TSP’s governing body, the Federal Retirement Thrift Investment Board, the ability to add mutual fund choices to the five core funds and five lifecycle funds that are the current investment options. The Roth TSP became a reality in May 2012; however, TSP’s Board has not been moving very quickly with respect to adding mutual fund options.
The Board has previously indicated that adding mutual funds would increase participant fees, that mutual funds are too complicated – and most curiously – they don’t believe it’s in their participants’ best interest. However, increased numbers of dollars transferring out of TSP in favor of other investment options, have caused the board to seriously consider adding mutual funds to the TSP allocation offerings. In a November 12 meeting, the executive director said the agency favors moving forward with a mutual fund window for TSP participants because “there is a demand among participants for greater investment flexibility, and more options mean participants will stay enrolled in the TSP longer, instead of parking their money elsewhere.”
That raises the question . . . Why do they care?” The reality is, with TSP fees the lowest by far in the defined contribution/401(k) world (.0268% in 2013), no one is getting rich off fees (including BlackRock, who manages TSP’s F, C , S and I Funds). Total annual fees after adjustments (again, in 2013) amounted to about $95M, a ‘drop in the bucket’ on the profit and loss statement of a big Wall Street player like BlackRock. TSP itself only uses enough of the fees to pay its administrative expenses – it’s not showing a profit. So why is their a concern over participants withdrawing their funds?
Here are some possibilities:
- The fees in the TSP are very low and the track record of index funds in general do well against most actively managed funds that try to beat the market. It may be the belief of the TSP that TSP investors do not understand how well they are doing and are concerned they will not fare as well with other investments. Or, in other words, there is an attitude of paternal benevolence in protecting TSP investors against the dangers of the wider investment world outside the government’s TSP plan.
- As the largest defined contribution plan in the country – TSP likes where they sit now, and wants to stay that way. Although CalPERS (California’s state plan) runs a distant second, perhaps they’re concerned that another plan could surpass their total assets.
- With an ever increasing number of retirees, what is now a nominal percentage of withdrawals could soon increase dramatically as more and more FERS employees retire and begin taking income from TSP. Logically speaking, FERS employees tend to have more in their plan (most of the TSP millionaires are in FERS), so their withdrawals will likely be more significant. One factor that enables TSP to maintain low fees is their huge ‘economies of scale’. That is, having a larger amount of federal employee investment dollars actually helps them keep their fees low.
- The federal government has the ability to access TSP’s G Fund account balance. Whenever there’s a Continuing Resolution issue or debt ceiling crisis, one of the Secretary of the Treasury’s ‘go-to measures’ is the ability to “borrow” from federal employees’ G Fund accounts. If the value of TSP is lower, the G Fund balances are likely lower – which in turn, means there is less for the government to borrow.
The last bullet may seem far-fetched, but the question arises as to why it matters to the TSP and why they’ve become so vocal – even critical – about participants taking their own funds out of TSP . . . and doing whatever they want with their money. Moreover, there have been numerous comments on this website and others from readers concerned about the security of their money and the government using the G fund to fund government expenses during a government shutdown. The reality is that even while the G fund was used for a short time, the government has in the past decided it can use the money that belongs to these TSP investors for this purpose. That type of action can make any investor nervous and, as the TSP assets continue to grow, the temptation to use this money will likely increase.
If you have other possible reasons for TSP’s recent attention to withdrawals, please feel free to comment below.