TSP Mutual Fund Window Officially Beginning in June

A final rule implementing the new TSP mutual fund window is set to go into effect on June 1, 2022.

A final rule published today in the Federal Register implementing the new TSP mutual fund window is set to go into effect on June 1, 2022.

The Federal Retirement Thrift Investment Board (FRTIB), the agency tasked with overseeing the Thrift Savings Plan, published the final rule. It said that the previously published proposed rule was being adopted without any changes.

The Federal Register notice states:

The Federal Retirement Thrift Investment Board (FRTIB) adopts as final, without changes, a proposed rule concerning the Thrift Savings Plan (TSP)’s mutual fund window—which we will make available to TSP participants beginning in June 2022. This final rule establishes a fee designed to guarantee that the availability of the mutual fund window will not indirectly increase the share of TSP administrative expenses borne by participants who choose not to use the mutual fund window. We are also adopting policies to govern fund transfers to and from the mutual fund window, including a restriction on the amount that a participant may invest through the mutual fund window.

Comments on the TSP Mutual Fund Window

The final rule responds to comments on various aspects of the new mutual fund window that were submitted on the proposed rule when it was published previously.

Fees for Using the TSP Mutual Fund Window

A number of comments said that they did not think the $95 annual maintenance fee and a $28.75 per trade fee were competitive with prices for other retirement plans.

FRTIB said that it values transparency and wants TSP participants to see the dollar amount of the fees they pay for their mutual funds. The final rule states:

The FRTIB values transparency. We believe TSP participants need, and deserve, to see the dollar amount of the fees they pay for their mutual funds. Toward that end, TSP participants will pay account maintenance fees and certain transaction fees directly rather than paying them indirectly through revenue sharing. Furthermore, FRTIB has contractually required the TSP record keeper, their trading platform provider, their broker-dealer(s), and any of their other affiliates or subcontractors to rebate all revenue sharing payments, or any other type of indirect compensation, they receive in connection with participants’ mutual fund window investments. The rebates will be credited to participants’ mutual fund window accounts. This ensures that the dollar amounts of all fees and expenses borne by TSP participants for services provided in connection with their mutual fund window investments are explicitly disclosed.

The FRTIB also said, “…many TSP participants are under the impression that other retirement plans negotiate free brokerage services. We looked into what have been described as “free”, “no-transaction-fee”, and “zero cost” mutual fund trades offered to participants in other retirement plans. We found that those prices are often caveated with fine print disclaimers…”

It shared on example of this:

No-Transaction-Fee (NTF) mutual funds are no-load mutual funds for which [brokerage firm] does not charge a transaction fee. NTFs, as well as other funds, have other continuing fees and expenses described in the fund’s prospectus. [Brokerage firm] receives remuneration from fund companies for record keeping, shareholder and other administrative services. The amount of remuneration is based in part on the amount of investments in such funds by [brokerage firm] clients.

It also adds:

The remuneration ( i.e., fees) that brokerage firms receive from fund companies are treated by the fund companies as fund expenses, which are ultimately passed on to the people who have already invested in the fund. This type of arrangement between a brokerage firm and a fund company is called revenue sharing.

The rule goes on to state, “By including the fees in the fund’s expense ratio, the return on an investment in that fund is reduced. Most participants in private sector plans have no idea that revenue sharing exists, much less how much it decreases the return of their investments.”

The fees were also made explicit to try to eliminate confusion about the fees. The final rule states:

One commenter expressed concern that participants might inadvertently incur fees which can, over time, cause serious damage to their retirement savings. We share this concern. Even small differences in fees can translate into large differences in returns over time. That is why we have chosen to make the fees paid to our service providers explicit at the risk of appearing less competitive than plans that compensate their service providers through revenue sharing arrangements.

25% Limit on Investments in Mutual Funds

A number of comments wanted to know why TSP participants were going to be limited to only putting 25% of their retirement savings into mutual funds. One commenter called it “punitive” and “suggested that it casts doubt on the FRTIB’s sincerity in touting the mutual fund window as a benefit to TSP participants.”

The FRTIB said that these comments fail to understand the purpose of the TSP mutual fund window. It is not intended to replace the core TSP funds. As the rule states, “The mutual fund window enhances the TSP as a supplement to, rather than an alternative to, the core fund options.”

About the TSP Mutual Fund Window

According to the final rule, the new TSP mutual fund window will give TSP participants access to about 300 mutual fund families which means the total number of available mutual funds “will be in the thousands.”

These new mutual fund options will come with additional fees. These fees and expenses fall into four general categories: 

  • An annual maintenance fee of $95
  • A per trade fee of $28.75
  • $55 annual fee
  • Fees and expenses imposed by the specific mutual fund(s) in which the participant chooses to invest

Investments in the mutual fund window may not exceed 25% of the TSP participants total balance, and the initial transfer into the mutual fund window must be at least $10,000. These two restrictions, taken together, would require a participant to have a minimum TSP balance of $40,000 before becoming eligible to invest through the mutual fund window.

Subsequent transfers to the mutual fund window would be limited to amounts that do not cause the portion of the participant’s TSP balance that is invested through the mutual fund window to exceed 25 percent of their total TSP balance.

There will be an upcoming maintenance period that requires downtime for some transactions and services in order to implement the new mutual fund window as well as some other new features coming to the TSP, such as a mobile app. Additional details can be found in this article: Transition Dates Announced for Launching TSP Mutual Fund Window, Other New Features

For additional information about the upcoming TSP mutual fund window, also see these articles:

About the Author

Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce.