More changes are likely to be coming to the Thrift Savings Plan (TSP) in the coming months and years.
The TSP is planning to make these changes to the investment program to, in part, encourage investors to leave money in the TSP when they leave federal service. As noted in a recent memo to members of the Federal Retirement Thrift Investment Board (FRTIB):
“TSP transactional data shows that in 2013, separated participants transferred $9 billion out of the TSP to other institutions. TSP survey data further shows that 27% of these participants cited a desire for additional withdrawal flexibility as a motivating factor behind these transactions.”
$9 billion is a great deal of money but, to put this into perspective, the TSP currently has invested almost $455 billion as of June 2015 so that amounts to about two percent of the total currently invested in the TSP. The TSP memo notes that, of the money transferred to other institutions: “Virtually all of these transferred dollars are moving into accounts with higher expenses than are available within the TSP, a fact that appears to run counter to the participants’ interest.”
The FRTIB memo says the reason for the changes is the self-interest of TSP investors. According to the memo:
“Our mission is to administer the TSP solely in the interest of participants and beneficiaries, and as such, one of our primary goals is to help participants make smart choices that advance their ability to retire with dignity. All else equal, moving into a higher cost retail IRA from the low cost of the TSP would reduce a participant’s net returns and negatively impact his/her retirement readiness.”
Looking at the funds withdrawn from the TSP, a percentage were cash withdrawals – meaning participants had the funds sent directly to them, paid the taxes, and then used the proceeds to pay off a mortgage, take a long-planned trip or do anything else they were inclined to do with the money they had invested. Whether these financial decisions would be altered by increasing investment options or changing withdrawal restrictions is unknown.
For many TSP investors, at least some of the proposed changes to the TSP will be welcome. Adding additional investment options and withdrawal options to TSP investors, for example, will be welcomed by many investors although others will see adding more complex investment options as decisions that remove the unique attributes of the TSP that some cite as making it a “model retirement plan” and one of the best retirement plans in the country: i.e., the simplicity and exceptionally low cost of the TSP.
The study looked at actions by TSP investors who left federal service in 2012. These were the results:
- 49% Took no action with their TSP
- 2% Took only a one-time partial withdrawal
- 8% Received a cashout
- 41% Took a full withdrawal, which included:
- 37% Received a lump sum payment
- 11% Transferred the lump sum to another institution
- 26% Took the lump sum as a cash payment
- 4% Initiated a monthly payment stream
- 1% Initiated an annuity purchase
- 37% Received a lump sum payment
With a priority of convincing TSP investors to leave their money in the TSP upon separating from federal service, the FRTIB is considering several options of expanding options to TSP investors. Here is a quick summary from the TSP of the types of withdrawal options to an investor separating from the federal service, the current and proposed rules and what the expected outcome is of implementing the proposed rules.
Post-Separation Withdrawals
| Withdrawal Type | Current Rules | Proposed Rules | Expected Outcome |
|---|---|---|---|
| Partial post-separation withdrawal | Allow only one partial post-separation withdrawal. After this is executed, only full-withdrawal options are available. A partial post-separation withdrawal is also not available if the participant previously executed an in-service age-based withdrawal. | Add flexibility by allowing multiple partial post-separation withdrawals. | Partial withdrawals will increase but more participants will elect to retain balances in the TSP, as withdrawals can be timed to their individual needs. |
| Full withdrawal via periodic payments | Currently, periodic payments can only be selected in monthly intervals. Additionally, the payment amount can only be adjusted once per year and this must occur just prior to the beginning of the next calendar year. These payments can be reduced to as low as $25/month. However, the recurring payments cannot be stopped unless a participant withdraws their entire remaining balance. Once a participant is in periodic-payments status, he/she cannot elect a partial withdrawal or annuity purchase. | Add flexibility to periodic payment withdrawals by allowing the election of quarterly or annual payments. Permit the payment amount to be changed at any time throughout the year. Permit stoppage of periodic payments while allowing the remaining balance to stay in the Plan. Permit flexibility to select a partial withdrawal or annuity purchase while in periodic payment status. |
Periodic payments will increase as will long-term account retention. The additional flexibility will allow TSP withdrawal strategies that meet individual needs which may change over the course of retirement. Balances are more likely to be retained in the TSP. The added flexibility will increase communication challenges related to tax withholding rates and early withdrawal penalty rules. |
Consideration is also being given to changing the rules for withdrawing money from the TSP while remaining as a federal employee. Here is a quick summary of these proposed changes:
Withdrawal Options and Proposed Changes While in Federal Service
| Withdrawal Type | Current Rules | Proposed Rules | Expected Outcome |
|---|---|---|---|
| Age-based (59 .) | Allow only one age-based withdrawal. If a participant takes this type of withdrawal, he/she is not allowed to take a partial withdrawal once separated. | Add flexibility by allowing multiple age-based withdrawals. Remove the restriction on post-separation partial withdrawals. | The average amount of age-based withdrawals will decline. Fewer age-based withdrawals will result in full-account liquidation. |
| Hardship | Allowed at any age and without limit on how many one can take if financial hardship is certified and contribution suspension period has ended. Contributions must stop for 6 months following the hardship withdrawal. We send a notice to the participant at the end of 6 months, but he/she must take action through the respective agency payroll to restart contributions. | No change to hardship approval rules. However, after the 6-month period expires, we will create a mechanism for the agency payroll to restart contributions unless the participant affirmatively declines to restart. | The number of active participants with a deferral rate of 0% 7+ months after a hardship withdrawal will decrease. |
Finally, there are proposed changes to eliminate deadlines in order to encourage TSP investors to leave their money in the TSP when leaving federal service:
| Provision | Current Rules | Proposed Rules | Expected Outcome |
|---|---|---|---|
| Withdrawal Election Deadline | TSP participants are required to make a post-separation withdrawal election by April 1st of the year following the year in which they turn 70. and are separated from Federal service. This withdrawal election deadline is independent of the IRS requirement to begin distributing required minimum distributions (RMDs) annually by April 1st of the year following the year in which they are 70. and separated from Federal service. |
Eliminate the withdrawal election deadline. The deadline does not impact the need to pay RMDs as we once thought it would. Participants often conflate the withdrawal election deadline and the RMD requirement. It is also easy for them to confuse the requirement to make a withdrawal election as a requirement to withdraw their entire account balance. |
Full account cash-outs at age 70+ will decline. Participants will not feel compelled to withdraw balances in excess of the Required Minimum Distribution because of the deadline to make a post-separation withdrawal election of some type. |
The proposed withdrawal options are not going into effect immediately and no specific timetable is now available as to when or if they will be fully implemented. It is more likely that the withdrawal options will be available sooner than the expanded investment options also being considered by the FRTIB but changing the withdrawal options requires legislative changes which will not happen for some time.
