Changing the TSP: Who Will Pay for More Investment Options?

The TSP is moving ahead with adding a mutual fund window to the TSP. What is behind the change in approach, and who will pay for the new funds?

As noted in a recent article, the director of the Federal Retirement Thrift Investment Board (FRTIB), Gregory Long, has recommended that the Thrift Savings Plan (TSP) go ahead with adding mutual fund options to the TSP. (See FRTIB Director Gives His Blessing for Adding Mutual Fund Option to the TSP)

An article on CBS News about the TSP written in 2010 cited the TSP as it then existed as a model retirement plan for the rest of the country because of its simplicity and low cost. The article also reads, in part:  “Mr. Long stated that a vocal minority wants access to more choices (in the TSP)….This, of course, could allow the mutual fund industry to sell their expensive hot funds. The bad news is that it will almost certainly result in lower returns. The good news is that it could also provide the missing part of the international portfolio – emerging markets and Canada. How this is implemented will be key.”

So, with the TSP now recommending adoption of the mutual fund window (MFW), what has changed? To find out, we asked Kim Weaver, Director of the Office of External Affairs for the FRTIB, about the rationale for the change of opinion.

According to Ms. Weaver, the mutual fund window (MFW) is a way to protect the core TSP funds. The organization does not anticipate a large number of TSP users will take advantage of the various mutual funds that will be available. In the private sector, only about 1% of investors take advantage of a program similar to what the MFW will look like in the TSP. They anticipate a similar percentage will invest in these funds through the TSP when they become available.

She commented that there are some “passionate people” who are TSP investors who believe strongly they should have access to these outside funds. In effect, the organization is responding to TSP participants who wanted more investment options available to them, and some of these investors left the TSP and invested their funds elsewhere.

The number of people who have transferred the lump sum of their TSP investments to another institution is relatively small. The TSP has investments in excess of $454 billion as of June 2015. There were 4,761,838 TSP participants as of June 2015.

In 2012 and 2013, 28,531 people transferred about $3.6 billion to another institution. 63,035 people took their lump sum as cash payments, totaling about $1.2 billion.

Those who choose to invest through the mutual fund window, when it becomes available, will pay more than those that are investing in the current TSP funds. There will be two expenses associated with the MFW and those investing in these other funds will be paying these expenses:

  • Fees necessary to pay for the window
  • Fees associated with specific mutual fund

The cost of adding the mutual fund window will be paid by all TSP investors. The FRTIB estimated in a recent memo on the mutual fund option that the cost of implementing this new feature will be in the range of $6 – $10 million to make the required system modifications.

The annual fees associated with a specific mutual fund are common among mutual fund companies. While some investors may not be aware of it, there is a fee for managing mutual funds. This fee may be very small or in excess of 1% depending on the type of fund. For example, mutual funds that invest in foreign funds or small companies in emerging markets will usually charge a higher fee than funds that invest in large American companies. These fees will be paid by those TSP investors that choose to invest in new funds that are offered through the MFW. So, as a result, those who choose to take advantage of the greater selection of funds will pay more than those investors using the core TSP funds.

As noted in an earlier article, the implementation of the mutual fund window is not imminent. While the executive director of the FRTIB has recommended that the TSP move forward with adding a mutual fund window to the TSP, this is just the first step in what will be a multi-year process to implement the new features.

The survey we conducted in conjunction with this article is now closed, but you can read the results here: Users Strongly Oppose Adding Mutual Funds to TSP.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47