Will COVID-19 Impact TSP Options?

When will the new I Fund index take effect, and will TSP investors be allowed to withdraw up to $100,000 without a penalty?

The federal government’s Thrift Savings Plan (TSP) has made a number of changes in recent months. Most of the proposed or actual changes had nothing to do with the COVID-19 coronavirus, but unexpected events can have an impact. In this case, a proposed change is expanding the I Fund to include more companies and greater emphasis on emerging markets, including China.

The CARES Act, passed in response to the pandemic from COVID-19, may also have an impact on TSP investors who may want to withdraw money from the TSP without paying a penalty.

Changing The Impact and Content of the I Fund

One of these changes is to increase the investment in international stocks (the I Fund) in the TSP’s Lifecycle funds. The amount in the Lifecycle funds allocated to international funds was increased from 30% to 35%. (This is the ratio of the I Fund to the C+S+I ratio.) This new allocation was implemented in a one-time trade on January 4, 2019.

At the same time, a higher allocation of equity funds (stock funds) in the Lifecycle Income Fund was increased from 20% to 30%. The transition to this new ratio was initiated in January 2019 and will be completed in July 2028. As of January 2020, the L Income Fund has a target of equity allocation (i.e., stock funds) of 21.50%.

Changing Composition of the I Fund

Plans are underway to alter the I Fund (International Stock Fund). The current benchmark for the I Fund is one that measures the stock market performance of developed markets outside of the U.S. & Canada (MSCI EAFI Index). 

The I Fund has stocks from 21 developed markets and represents more than 600 companies in both large and mid-sized companies.

Controversy Over I Fund Index

A group of Senators is pressing the chairman of the Federal Retirement Thrift Investment Board (FRTIB), the agency that oversees the Thrift Savings Plan, to reverse its decision to switch the underlying index tracked by the TSP’s I Fund.

The new index to be used will be considerably different as more than 6,000 companies are represented in the index with 22 developed markets and 26 emerging markets. It will also have large, medium and small companies represented. (This is the MSCI ACWI ex-US IMI Index)

A number of readers have previously commented that the I Fund should include emerging markets or that there should be an emerging market fund. The new benchmark will reflect some of these concerns when it is implemented.

$50 Billion In Fed Retirement Assets Exposed to Chinese Companies

Changing the I Fund index has not been lacking in controversy. Senators Marco Rubio (R-FL) and Jeanne Shaheen (D-NH) have commented in writing that changing the I Fund to mirror a new benchmark index would “expose nearly $50 billion in retirement assets of federal government employees, including members of the U.S. Armed Forces, to severe and undisclosed material risks associated with many of the Chinese companies listed on this MSCI index.”

This controversy was prior to the current scare and economic impact of the COVID-19 situation and China’s role in the initial appearance of this virus. We do not know what the impact of this new aspect of controversy regarding China’s impact on the world will have on changes to the TSP.

Effective Date for New I Fund Index?

Several readers have recently asked when the new I Fund index will go into effect. In response to a question about the implementation date for the new index, Kim Weaver,  Director, Office of External Affairs for the Federal Retirement Thrift Investment Board (FRTIB) commented that “We are working on this; we have no date to announce at this time.”

In effect, it appears that using the new index is still being considered but without any specific date for implementation.

Withdrawing From Retirement Accounts With No Penalty

A provision in the CARES Act would allow a participant of any age to withdraw up to $100k from a retirement account without the 10% early withdrawal penalty if they either had the coronavirus or were impacted by it.  

Allowing investors in the TSP to withdraw up to $100,000 from their account without the usual penalty for doing so would potentially be attractive to some investors.

Will this be allowed and what will the process be for taking this action? As we have not seen any definitive information, FedSmith asked the TSP where this stands for TSP investors. Ms. Weaver says that “The CARES Act does provide this authority to the TSP; we have a project team determining whether/how to implement.”

Withdrawing up to $100,000 from the TSP without having to pay a penalty may not be a good idea as paying that much money back would be difficult for many investors. It seems likely that the option will become available to TSP investors but, as of today, we do not know with any certainty if this option will be made available to TSP investors or when it will happen.

The impact of the Coronavirus is likely to impact our society in ways that would not have been predicted a short time ago. For many TSP investors, the rapid drop in the stock market has been an emotional ride if they have been watching their investment total drop, and the number of millionaires in the TSP dropped by more than 45% in a short time.

While the I Fund percentage in Lifecycle funds has been increased, we do not yet know when the new index for the I Fund will be introduced or if that will be derailed by the virus. And while the CARES Act, passed in response to COVID-19, appears to open up new withdrawal options for some TSP investors, it is too early to know how this will play out for TSP investors. Probably more surprises are still to come before the pandemic is over.

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