Lack of Legal Protections Threaten Federal Employees’ Retirement Savings

Are the funds inside of your TSP account being put in jeopardy by financial advisors who aren’t looking out for your best interests? This matter was discussed at a Department of Labor hearing last week on a proposed rule change governing the conduct of financial advisors.

Federal employees’ and retirees’ savings are threatened by poor financial advice that is not sufficiently regulated under current laws, according to Richard Thissen, president of the National Active and Retired Federal Employees Association.

Testifying this past week at a public hearing regarding the formulation on new rules on retirement investment advice, Thissen recounted the story of a former federal employee.

“Eight out of nine major investment firms told him to roll over his TSP (Thrift Savings Plan) funds into IRAs providing the same or similar investments for a substantially higher cost,” said Thissen.

Thissen quoted the latest report by the Federal Retirement Thrift Investment Board stating that more than 50 percent of TSP participants removed their funds from TSP within a year of when they separated from service.

These withdrawals are occurring despite the TSP showing returns equal to most index funds and having some of the lowest expense ratios in the industry.

In 2014, TSP reported a net expense ratio of .029%, or 2.9 basis points. Expressed another way, this means that expenses charged to each TSP account in 2014 were approximately 29 cents per $1,000 of investment.

As a comparison, in the wonderful world of index funds, the expense ratio is typically around 0.25%. Actively managed mutual funds average about 1.5%, according to the Motley Fool web site.

Expense ratios matter because over time, because higher expenses eat into the total returns of investments.

A White House Council of Economic Advisers (CEA) analysis found that conflicts of interest result in annual losses of about 1 percentage point for affected retirement savers — or about $17 billion per year in total.

To demonstrate how small differences can add up: A 1 percentage point lower return could reduce your savings by more than a quarter over 35 years. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.

Under current rules, the Labor Department believes that investors rarely know whether their adviser is supposed to act in their best interest. Many brokers, consultants, and advisers hold themselves out as expert advisers, but are not, in fact, required to adhere to a fiduciary standard.

The Department feels that many advisers have an incentive to make recommendations that generate the highest fees for them, rather than the best investment return for their client.

Even if they are attempting to act in the best interests of their clients, many financial advisers may not have large numbers of federal employees as clients and are not familiar with TSP. Focusing on mutual funds that often carry higher expenses, they may not know the advantages of keeping funds in TSP until they are needed for living expenses.

Thissen provided the hearing with several accounts of NARFE members who regretted their decision to withdraw their savings from TSP.

In one case, a member recounted that upon the advice of a financial adviser, the individual transferred their TSP to an IRA and bought two annuities. They later regretted that decision and felt they would have done better staying in the TSP’s C fund.

The Labor Department is responsible for ensuring that the retirement savings vehicles used by America’s workers — including traditional pensions and 401(k)-type plans — are secure and operated in accordance with federal pension laws and regulations. This includes setting the conflict of interest rules for both IRAs and employment-based plans.

The proposed rule by the Labor Department revises a 40-year old rule to protect retirement savings and ensure that more retirement advisers in today’s marketplace are treated as fiduciaries.

Under the proposal, retirement investment advisers and their firms would be required to formally acknowledge fiduciary status and enter into a contract with their customers in which they commit to fundamental standards of impartial conduct. These include giving advice that is in the customer’s best interest and making truthful statements about investments and their compensation.

In 2010, the Department put forward a proposal to achieve the same goal of requiring more retirement investment advice to be in the client’s best interest, but did so in a very different way than the new proposal.

Although the hearing has ended, until two weeks after the publication of the hearing transcript, anyone who wants to weigh in on the rulemaking has another opportunity.

Individuals can go to to submit their story and make comments on the proposed rule.

About the Author

Michael Wald is a public affairs consultant and writer based in the Atlanta area. He specializes in topics related to government and labor issues. Prior to his retirement from the U.S. Department of Labor, he served as the agency’s Southeast Regional Director of Public Affairs and Southeast Regional Economist.