The Thrift Savings Plan of the Future

The author says that the Thrift Savings Plan board members are recognizing that plan participants want more flexibility in making withdrawals in retirement. She says this is a step in the right direction and will likely lead to positive changes for the TSP in the future.

The Thrift Savings Plan is a great savings tool for federal employees and military personnel.  Who can argue with the fees?  The average expense in a 401(k) plan or 403(b) plan is between 1% – 2%.  Compare that to the expense in TSP of .029%.

TSP participants can own 5000 US stocks just in the C and S funds.  They can also own more than 1,000 international stocks in 21 countries in the I fund.  The F fund allows participants to own all of the bonds in the Barclays Capital Bond Index. The G fund is the only fund guaranteed not to lose money.  It invests in non-marketable short-term US Treasury securities and is specially issued to TSP.  As of December 8th, the G fund is up 2.16%.  The closest thing most of your fellow private sector colleagues get in comparison is a money market paying practically nothing (right, nothing!) this year.

So why do so many federal employees complain about the TSP?

The three equity funds (C, S, and I), cover a lot of the global market, but not all.  What is missing are stocks from emerging markets, real estate, and specific market sectors.  What if you wanted to have a concentrated position in financials, pharmaceuticals, oil and gas, metals, water, retail, solar, goal, gold etc.?

At present these options are not available within the TSP, however, on November 17th, TSP’s governing board announced that they were going to begin studying what would be needed to create an investment “window” for TSP participants. The study will evaluate the costs of designing the system, the rules that plan participants would have to follow, and what the limit would be on the amount a participant can invest in the investment window.  At the conclusion of the study, the TSP board would make the decision whether or not to move forward with an investment window.  If the TSP board approves,  implementation is estimated to take another 18 -24 months.

Not having enough investment options is one reason TSP participants take their money out of TSP when they retire or turn age 59 1/2.  The other is limited flexibility for taking withdrawals during retirement.  At present, TSP will only allow one partial withdrawal.  The other options for drawing income from TSP are to take monthly withdrawals or take all or some of the TSP into a purchase of an annuity with MetLife.  For many retirees, this can work just fine.  For others, they choose to roll it over to an IRA where they can have more flexibility to access their funds.

To better understand how this could impact you, I will share a hypothetical synopsis of Rita Retiree.  Rita had the bulk of her savings invested in the TSP.  She retired three years ago and shorty after retirement, Rita decided to take a partial withdrawal from the TSP to take a vacation to celebrate her retirement.

Later that year, they got hit with several heavy duty snow storms and needed to replace their roof.  Rita contacted the TSP and was told that she could not take another lump sum withdrawal from the TSP since she had already made a partial withdrawal. Rita was taking monthly withdrawals from the TSP, so she asked if she could increase her monthly withdrawal and learned that she could only make a change to her monthly withdrawal in December which would go into effect the following January.

While the story of Rita Retiree is fiction, similar stories are happening all the time.  People have emergencies, wedding, deaths, etc., and not having access to their funds can be a problem.

But it looks like this may be changing, more good news for the TSP!  The TSP Board members are recognizing that participants want more flexibility in withdrawals.  Expanding withdrawal options would require a change in law, but the fact that the Board is recognizing expanding withdrawal options are necessary is a step in the right direction.

About the Author

Carol Schmidlin, Certified Financial Fiduciary®, MRFC® is the President of Franklin Planning and has been advising clients on how to grow and preserve their wealth for 25 years. In addition to her financial planning practice, she is the founder of FedSavvy® Educational Solutions, which provides Financial and Retirement Literacy Programs for Federal Employees. She is passionate about helping families with all phases of Wealth Management and is a member of Ed Slott’s Master Elite IRA Advisor Group. Her practice maintains a home office in Sewell, NJ along with a satellite office in Washington, DC. Carol can be reached at (856) 401-1101.