Mutual Fund Window, ESG Funds, and the Thrift Savings Plan

ESG investing is an investment catchword. Mutual funds in the TSP will open up these investment opportunities and create greater risk and rewards.

As noted in a FedSmith article recently, the Thrift Savings Plan (TSP), has had a mutual fund window planned for some time. The mutual fund window is not yet a reality for TSP investors but it is on the horizon as the TSP responds to changes in the political and social environment.

Although details are not yet available, this is a major change that will likely change the character of the TSP. The window will certainly include a wide variety of funds, including ESG funds.

ESG Funds Are Current Investment Fad

In the investment community, there is always a “next big thing”. A current investing fad cited in the press and a favorite topic of the Biden administration, as it pushes for more spending and political activism for climate change, is the availability and desirability of ESG funds.

ESG is an acronym for environment, social, and governance investing. Many things and companies can be included or excluded in a mutual fund using this acronym.

Investing in ESG funds will make some people feel good about themselves and how they are investing their money. No doubt, some of the investment options are good ones and will be profitable for investors. The ESG label is apparently an effective technique for selling investment products in any event.

Mutual Fund Window for the Thrift Savings Plan

ESG funds and many others will be available through the mutual fund window of the TSP in the summer of 2022. Some 5,000 funds will reportedly be available to TSP investors through the mutual fund window.

One enthusiastic article about the new mutual fund window stated: “the Thrift Savings Plan (TSP), will implement 5,000 ESG options in its lineup beginning in summer 2022. According to reports, the ESG funds will be available in a new ‘mutual fund window,’ similar to a brokerage option, for the plan.”

No doubt, there will be a number of ESG options available through the mutual fund window. Many, probably most, will not have an ESG label despite the claim in the quote above. There will likely be a wide variety of funds giving TSP investors a chance to invest their money as they see fit—through ESG funds or otherwise.

What will make the mutual fund window possible is a new record-keeping contract that was awarded by the TSP in November of 2020. This will go live in the summer of 2022.

The mutual fund window will provide options to take a portion of their TSP account money and invest in a wide variety of choices to customize their retirement portfolio.

About 100,000 TSP Millionaires: Up from 208 in 2012

The federal government’s Thrift Savings Plan has been very successful. It now has about 6.3 million participants and more than $760 billion in assets. The program has been growing fast with the surge of stock market prices and automatic enrollment of new people who are qualified to be in the program.

The success of the program is highlighted by the recent report that there are now almost 100,000 millionaires in the TSP. That is about a 17% increase over the first quarter of 2021. In 2012, when FedSmith first reported on the number of TSP millionaires, there were only 208 millionaires in the TSP.

Adding ESG funds to the TSP will certainly be a boon to the funds offering ESG investments. As one investment advisor noted: “The size and scale of the TSP will encourage employers and investors to consider adding the funds to their lineups, too. The federal TSP is huge, so to be allowed on that platform will really escalate the exposure of ESGs and what investments are there.” 

New Opportunities and Risks for TSP Investors

Adding a mutual fund window will have a significant impact on the TSP.

Investors in the TSP now have a conservative selection of funds from which they can choose. This approach has worked very well for federal employees and retirees who take advantage of the selections in the TSP.

The TSP uses an index fund approach to investing. As noted in its recent response to a GAO investigation regarding climate change and the TSP, the TSP wrote:

{T}he FRTIB subscribes to a strict indexing discipline using the broadest possible market opportunity set. As such, individual companies are held in the TSP index funds at their market weights in line with the theory that markets are generally efficient and that the market portfolio is the most efficient from a risk and return perspective.

With a limited number of options, and a method if indexing investments, TSP investors have fared very well in funding their future retirement income.

The TSP uses broad market indices for its funds. This reduces the risk for the reasons explained in the quote. Expanding options to include 5,000 or so funds to choose from means some investors will take more risk in seeking a higher reward for their TSP returns. The possibility of greater rewards also involves a greater risk of losing money.

Expanded options will create greater opportunities for higher returns as well as the possibility of experiencing lower returns that has been the case under the current TSP system.

The TSP has a wide audience and it is growing. Some investors will thrive with more choices. Some will not do as well. Some will stick to the tried and true investment options in the current TSP. In fact, based on experience in private sector TSP funds, there is a good chance the vast majority of TSP investors will stick with the current fund options and not use the new options.

The TSP is also a low-cost way to create a retirement investment portfolio. Adding thousands of options to investors creates a massive record-keeping responsibility. Presumably, the added expense of the new options will be paid for by the investors in some way. A few years ago, the FRTIB estimated the cost would be in the range of $6-$10 million to make the system modifications at a time when there was much less (about $450 billion) in the TSP and about 4.7 million TSP participants.

As the Federal Retirement Thrift Investment Board (FRTIB) moves closer to implementing a mutual fund window, more information will become available. We will eventually see the type of funds that will be available to TSP investors.

The FRTIB has done an exemplary job in providing investment options and minimizing risk for investors. That creates confidence that the new system will also be a very good one. No doubt, the more complex approach will create new opportunities and new challenges (including political pressure from Congressional representatives).

In a few years, it will be interesting to see if investors yearn for the older, simpler system that provided excellent returns with minimal risk or favor a newer one with its own risks and rewards.

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