Is the New TSP Mutual Fund Window Worth Using?

Should federal employees use the new TSP mutual fund window? A financial planner shares his opinion.

The TSP mutual fund window, coming soon since 2009! Will it be worth the wait?

I found myself looking over the proposed TSP mutual fund window again last weekend as the comment period winds down. My wife is also a participant and we’d love to have more than the 5 core funds – C,S,I,G,F – to choose from (not a fan of the lifecycle funds). I was optimistic at first, but not as much anymore. 

A quick summary of some the details that have been widely discussed here: 

  • Limited to 25% of your TSP account value 
  • $40,000 minimum account balance to qualify. Minimum $10,000 initial transfer to window.
  • $28.75 per trade
  • Complicated process to get money in and out of the window
  • $150+ in annual maintenance fees (admin and offsets)
  • Limited to actively managed mutual funds (from initial reports)
  • Participant signs disclosure on risks involved

What’s the purpose of the TSP mutual fund window in such limited format? 

For what it’s worth, you’ll likely be able to access various ESG (environmental, social, governance) or specialty funds with your window allowance as well as buy big-name fund companies and managers. However, the 25% limit reduces the ability to work toward a more robust asset allocation plan outside of the core funds in the plan. 

How about retirees looking for more flexibility and choice from fixed income and lower risk options? With the 25% limitation, this isn’t available in a meaningful way in the current or proposed format. Of course, retirees have the option to leave the plan, and we work with many families that do. 

The timeline on the mutual fund window is also odd: In 2009 congress passed legislation that authorized, but didn’t require the FRTIB (TSP Board), to offer a mutual fund window to participants. The TSP Board then formally committed to a window more than 7 years ago in 2015. 

During that period in waiting, innovation in the investment world has grown at an incredible pace. The number of low-cost ETF and index options has exploded and money flows into these types of investments have been substantially outpacing money flowing into mutual funds for several reasons. 

Long story short – the window’s proposed form feels like the FRTIB has simply checked the box; they can now say they offer the mutual fund window that was requested.

Why not expand the core TSP funds? 

The Thrift Savings Plan is massive; there are more than 6 million participants and $800 billion in assets in the plan. That represents a heck of a lot of people with differing situations. How does an investment menu of 5 core funds work for all?

We need choices around growth and value stocks, mid and small cap options, and fixed income and conservative offerings to get started. I must imagine the mutual fund window when originally requested was thought of as a solution to create choice, however it doesn’t fit the bill in such limited and costly fashion as proposed. 

There are plenty of TSP participants who are experienced and savvy enough to make smart investment decisions, and there are many resources available for those who don’t feel comfortable – access to information, advice, and professionals are all at your fingertips at any moment. 

My family will wait to see how the window evolves before deciding on using it, but for now I can’t see the benefits outweighing the costs associated.

The time to expand the core funds menu is now. TSP participants deserve better. 

* The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions and it may not achieve its investment objective. No strategy assures success or protects against loss.

This blog was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice specific to your needs, such advice services must be obtained on your own separate from this educational presentation.

About the Author

Justin Holtz CFP® is a financial advisor with 18 years of experience and is the managing director at District Financial Advisors. He is passionate about helping federal employees reach their financial goals.