The TSP mutual fund window (which is scheduled to be released in the summer of 2022) is an exciting new feature but has a dark side.
It can be much more expensive.
What is a Mutual Fund Window?
For those that aren’t familiar with what a mutual fund window is, it is basically an option to invest your TSP money into thousands of different mutual funds.
This will certainly bring more options and consequently more complexity.
And here are 3 rules to keep in mind when using this option:
- You must have at least $40,000 in your accounts to use the window.
- The minimum initial transfer for the mutual fund window is $10,000.
- You can’t invest more than 25% of your TSP in the mutual fund window.
There certainly might be more rules in the future but this is what we know so far.
Does it Cost Extra to Use the TSP Mutual Fund Window?
Yes, it certainly does. Here is a summary of the different fees:
- An annual maintenance fee of $95
- Per trade fee of $28.75
- The Mutual Fund fees (Will depend on which mutual funds you pick)
- $55 annual fee. The board has proposed adjusting this fee every three years to keep up with the cost of service.
To put that in perspective, the only fees you pay right now in the TSP is a management fee in each individual fund.
Right, the average TSP Fund fee is 0.076%. And as funds fees go, that is relatively low.
As an example, if you have 400k in TSP, you pay $304/year in fees
But now let’s compare that to what you’d pay using the mutual fund window.
If you Invest 100k (remember you can only put up to 25% of your money in the window) of your 400k in a mutual fund with a 1% fee your total fees would be:
- $95 Maintenance Fee
- $55 Annual Fee
- $28.75 Per Trade (Let’s assume 4/year) so a total of $115/year
- 1% Mutual Fund Fee on 100k is $1,000
- .076% Fee on your other 300k is $228
So in this example, you’d pay about $304/year to invest in the regular TSP funds and you’d pay $1,493 to use the mutual fund window as well.
That is a fee increase of 491%!!
But Are the Fees Worth It?
In my opinion, no, the fees are not worth what you get and Forbes seems to agree.
If the fee meant that you’d do better than the market (aka the C and S funds) then that would be a tempting proposition.
However, the majority of mutual funds do worse than the market and the ones that do beat the market don’t do it consistently.
Is There Anything Good About the Mutual Fund Window?
The one advantage that I see in potentially using the mutual fund window is to access investments that aren’t available in the original TSP funds.
For example, real estate or emerging markets (a.k.a. companies in countries on the rise).
Do I Have To Pay the Higher Fees if I Don’t Use the Window?
As of now, it seems that the extra fees would only apply to those that actually use the mutual fund window.
This means that those who would like to simply use the core TSP funds can still enjoy the relatively low fees there.