The Thrift Savings Plan is a fantastic savings tool, offering tax benefits, high contribution limits, diversified investments, target-date options, and low fees. There aren’t very many better places to keep your hard-earned money for retirement.
There are some weak points, however, especially as it relates to taking withdrawals out. It is at this point that many feds will consider using outside investment accounts and professionals to help them manage it all.
As with all things, there are both good and bad options available, and it is vitally important to know if you are working with someone competent and who has your best interest in mind. Here are a few things you should ask any potential advisor before moving a dime out of the TSP.
How did you get my information?
Federal agencies don’t give out employee lists to outside businesses. Federal employees are big target for many financial professionals, though, and many will go to great lengths to specifically target them. You should be wary of anyone who contacts you unsolicited. You can be much more comfortable if you are the one reaching out to them, either because you got a referral from someone you trust, read an article by or about them, or know they have a good reputation with federal employees.
Are you associated with or approved by the federal government?
Any answer other than a very direct “no” to this question should be a major red flag. The TSP does not offer advice, especially on moving money out, and nor does any other agency.
You should also beware of the potential alphabet soup of acronyms that many people will put behind their name in an attempt to appear more qualified or even sanctioned by the government. Even the Certified Financial Planner (CFP) designation (which is one of the few with rigorous training) doesn’t mean that someone knows anything about the intricate federal retirement system. This does not mean that an advisor is bad if they are not affiliated with the government, as there really is no other option. It can give you an idea if someone is making an attempt to be misleading, though.
Are you a fiduciary?
There has been a lot of discussion about this topic lately, especially with the recent rule from the DOL that requires financial professionals to be fiduciaries when working with retirement accounts. Most of the rule was recently delayed for 18 months, so this is still a very important question.
Not all people claiming to be financial professionals are fiduciaries, meaning that they are legally bound to act in your interest instead of their own. Insurance agents and commissioned brokers in particular are not fiduciaries. You should always make sure you are working with someone has your best interests in mind.
Do you provide investment advice or sell products?
This question is closely related to the fiduciary discussion. A product salesman (typically a broker or insurance agent selling annuities) will focus primarily on the product they have to sell, while a true advisor will focus on your situation and what best fits your needs. In many cases, a good advisor will only get around to discussing any actual investment recommendations at the very end once your entire situation is discussed. This is not to say that all products are bad all of the time, but they are only appropriate in limited situations and shouldn’t be the first option discussed.
Product salesmen tend to have a very well-rehearsed sales pitch, which will seem to address every objection you may have about what they are selling. Beware of phrases like “you can’t lose money”. There is always a cost to any investment, even if that cost is in the form of lost opportunities or what else you could have done with the money. Keep in mind that insurance companies are very good at making money for themselves, and are not just being altruistic by offering you such an amazing deal. If you start to get that feeling, or if you are eerily reminded of that time you went to a time-share sales seminar to get a free gift, you should end the discussion immediately and walk away.
How much does this cost, and how do you get paid?
It is always important to understand what is in a deal for the person on the other side of the table. Some financial advisors have clear fees indicated up front, while other brokers and salesman will receive compensation in various forms from the products they sell. Some accounts will have other fees for transfers, transactions, withdrawals, etc.
If someone you are considering working with cannot tell you exactly how much you will pay (and how they get paid) in a few seconds, you will definitely want to dig a little deeper. That is especially true for any product or investment which does not seem to have any fee at all. Remember, there is no free lunch.
What are your conflicts of interest?
Once again, any answer that there are no conflicts is a major red flag. Brokers or insurance salesman will have different commissions based on what they can sell you. Even advisors can have different compensation based on what type of account you may open.
The biggest conflict of all is in the recommendation of moving money out of the TSP itself. Quite obviously, the more money you move out to be managed by someone else, the more they will make. That leads to the next question.
How much money should be moved out of the TSP?
This is a bit of a loaded question, since the answer will vary wildly depending on your own particular situation. The key point to keep in mind is that there should be a good reason for every dollar that is moved out of TSP.
If you don’t need the money, the easy (and typically correct) response is to simply leave it where it is.
When it is appropriate to make a withdrawal, it does not usually need to be a full withdrawal. In many cases, it makes sense to have some money outside the TSP and leave some in.
When making these decisions, consider your ability to make future withdrawals (TSP is talking about adding some more options, though it hasn’t been finalized yet), tax implications, early-withdrawal penalties, and flexibility needs. Look out for someone recommending that you immediately move all of your money out without a very compelling reason.
The same argument will also apply to using the age-based in-service transfer once you are over age 59.5. This can sometimes be appropriate if you have a specific immediate cash flow need or large expense right at retirement, but is usually not a good idea otherwise. Anyone recommending that you move it out just so that they can manage it is likely basing the recommendation more on their financial need than on yours.
Are you familiar with the federal retirement system?
This one should be fairly obvious, but it is amazing how many people end up working with someone who makes a good initial presentation but then makes mistakes because they did not know the federal system. There is a lot of nuance in many of the rules regarding survivor benefits, FEHB coverage, FEGLI options, TSP withdrawal options, early withdrawal penalties, etc. that can have a large impact on your retirement success and peace of mind. If you find yourself having to explain what TSP stands for, you are unlikely to get the best advice regarding your situation.
Do you do comprehensive financial planning?
TSP withdrawals should only be contemplated in the context of the bigger picture, and should work within an overall retirement income plan. That would include discussions of Social Security filing, retirement dates, estate planning, tax management, other assets and income sources including your spouse’s, and specific financial goals (college, weddings, etc.). If your discussion started and ended on what to do with your TSP balance, you are not getting the type of all-inclusive planning that leads to the best results.
When do I have to make a decision by?
One of the keys to being happy in retirement is to be comfortable with the decisions you make. In the vast majority of TSP withdrawal decisions, there is no timeline other than what you may put on yourself.
If you are being pushed to decide on a new product or investment quickly, you should walk away. What makes sense today will also make sense tomorrow, next month, or next year.
A good advisor will do what is in your best interest, even if it means that you don’t actually do any business with them for a long time. That is especially true when it comes to TSP withdrawals, since the best thing to do with the funds in the TSP is to keep them in the TSP until you need to start taking some out. You may need to put together a withdrawal strategy at that point, but not until then.
Major financial decisions can be a huge source of buyer’s remorse, and you cannot hit rewind on anything having to do with the TSP. If you aren’t 100% comfortable with what you are considering, don’t move forward.
Bonus Question: Can I get the answers to all of these questions in writing?
Anyone who is willing to stand by their answers will have no problem giving you written documentation.