For federal employees approaching retirement, there are a lot of questions and considerations to take into account. One of the more well-known and frequently asked questions involves the Thrift Savings Plan (TSP), specifically whether you should leave your retirement savings in the TSP or move them to an IRA.
It’s a weighted question and one that often causes confusion with all the varying opinions and biased information out there. In an effort to simplify, let’s compare the TSP vs. IRA by solely focusing on the costs, since that’s what most folks are concerned with anyways.
Breakdown of Expenses
There are three major areas to prioritize when deciding what to do with your TSP in retirement:
- Investment options
- Liquidity (access to your money)
- Cost (expenses associated with the investment vehicle and underlying investments)
The challenge with comparing TSP to IRA expenses is that most of the information found online is simply inaccurate.
Generally, the assumption is made that there will be high expense investments in the IRA or an investment professional will be hired to manage the IRA. This is not a fair comparison because the additional investment options or investment advisory services are not being offered within the TSP.
Conversely, high expense investments and hiring an investment advisor to manage your IRA is not mandatory, so it’s not an “apples to apples” comparison.
An “Apples to Apples” Comparison
A more accurate comparison would look at managing your own IRA using low cost index funds. Outside of the G Fund, the objective of all the other individual funds (C, S, I, F) is to match the performance of broad indexes.
- F Fund – Objective is to match performance of the Bloomberg Barclays U.S. Aggregate Bond Index
- C Fund – Objective is to match performance of the Standard & Poor’s 500 Stock Index
- S Fund – Objective is to match performance of the Dow Jones U.S. Completion Total Stock Market (TSM) Index
- I Fund – Objective is to match performance of the MSCI EAFE (Europe, Australasia, Far East) Index.
- G Fund is invested in short-term U.S. Treasury securities specifically issue to the TSP. Rates are similar to U.S. government bonds and notes.
So why can’t you do that on your own outside of the TSP? Well, you can.
If the TSP Funds simply track broad index performance, then the question becomes what is the most cost efficient way to do this in an IRA?
Many low cost mutual funds and Exchange Traded Funds (ETFs) track the performance of broad indexes in the same way the TSP funds do. ETFs also have expense ratios very close to that of the TSP’s expenses and in some cases, slightly lower.
One example is the SPDR Portfolio Total Market (SPTM) Stock Market ETF and SPDR Portfolio Large Cap ETF Index (SPLG). Both have net expense ratios of .03% and the TSP’s net expense ratio is .033% as of 2017.
If you’re looking at fixed income / bond funds, the SPDR Portfolio Aggregate Bond (SPAB) ETF has a net expense ratio of .04%.
As for the G Fund, there are Short Term Treasury mutual funds and ETFs with expenses comparable to the G Fund. You can also consider purchasing individual Treasury bills and notes, which do not have an expense.
Are There Hidden Fees?
The .033% TSP expense is all inclusive. There are no additional annual maintenance fees or trading costs, however; interfund transfers are limited in the TSP.
Every financial institution is different when it comes to annual maintenance fees and trading costs with IRAs. If you do your research, you will find that many of the large firms have no annual maintenance fees and a robust list of No Transaction Fee (NTF) Mutual Funds and ETFs.
In A Nutshell
If you are eager to keep costs low and manage your own retirement account, you can nearly recreate the investments options and low expenses of the TSP in your own IRA. Certainly there are many other options available if you chose to move to an IRA from the TSP that could have increased costs. As with all things, there are pros and cons.
Many people rely on guidance of an investment professional / financial advisor to help them manage their investments and financial goals. Vanguard conducted an insightful study stating that an advisor may add up to 3% in net portfolio returns over time.
However, if you are an investment “DIYer”, then don’t listen to the hype about high IRA fees. Is an IRA more expensive than the TSP? In short, no. Can an IRA be more expensive than the TSP? Yes, but that is completely up to you.
Past performance doesn’t guarantee future results.