For years the Thrift Board has been concerned about the fact that many employees are rolling their money out of the Thrift Savings Plan and into IRAs or other tax deferred investments immediately upon their separation from federal service. In mid-2015, they decided to do something about it.
The Thrift Board rightly noted that the primary reasons separating employees roll their TSP funds into other accounts are the limited investment options and restrictive withdrawal choices of the TSP. Therefore the TSP has decided to consider changes to both investment options (adding more) and withdrawal choices (becoming less restrictive).
No one ever accused the TSP of acting rashly, so it’s not surprising that no changes have been announced as of this time. I would expect (hope) that the changes will be announced later this year and implemented soon after their announcement.
Regarding investment options, the TSP has stated that they will be allowing mutual funds to be offered within the TSP. They were granted this authority by Congress in 2009, but hadn’t yet acted on it. They have not yet said anything about how they will implement this, so the following few points represent my speculation as to what they will do.
- They will offer a limited number of mutual funds from a reputable brokerage or brokerages.
- The funds that are to be offered will be “no-load” funds; that is, they will not have sales charges.
- Any additional investing expenses of the offered mutual funds will be borne by those who choose to invest in them.
Regarding withdrawal choices, the TSP did give us an idea of how they were considering expanding them.
- Allowing more than one “single payment”. This would also apply to those taking “age-based” withdrawals while still employed if age 59 ½ or older. I doubt that TSP participants will ever have the flexibility that IRA owners do of taking payments whenever they feel like it, but the TSP’s current practice of allowing of only one partial payment and one single payment is overly restrictive.
- Allowing more frequent changes to the amount of monthly payments. Currently, those who have elected “substantially equal monthly payments” can only change the amount of their payment once a year in an open season that runs from mid-October to mid-December.
- Allowing participants to stop and re-start monthly payments while keeping their money in the TSP. Currently, the only way that a participant who is receiving monthly payments can stop them is to “cash out” of the TSP by taking a final single payment. It is, however, possible for participants to reduce their monthly payments to as little as $25, which is tantamount to stopping.
- Allowing more annuity choices. The current TSP annuity is a single premium immediate annuity from MetLife. The annuity choice is irrevocable. I would assume that there would be more (and more flexible) annuity choices offered, including the ability to opt out of an annuity (perhaps by paying a surrender fee).
When I retired, I left my money in the TSP and, after a while, began taking monthly payments. Just recently, due to the TSP’s lack of flexibility, I cashed out my TSP and moved it to an outside plan.
When the TSP implements changes that allow more flexibility in investment options and withdrawal choices, the number of folks who leave the TSP will go down, but will not stop. Financial advisers will still be suggesting that their federal employee clients roll their money out of the TSP into an outside investment.