In a world of microwavable meals, lightning-fast computers, immediate access to numerous facts on your phone, and instant oatmeal, intensely embraced old-school bureaucracy can sure be frustrating.
For nearly 13 years, many federal employees (and advisors working closely with Feds) have been waiting for additional Thrift Savings Plan (TSP) investment options. This is what we might call being rushed along at the Speed of Bureaucracy.
Five index funds (although there could be some argument about the accuracy of calling the G Fund an index fund) have always seemed to be a bit thin in providing investment options. Even with the addition of pre-allocated blends of Lifecycle (L) funds (varying mixtures of the same five index funds), the choices were lean.
The greatly anticipated alternatives are upon us. The Federal Retirement Thrift Investment Board (FRTIB) now brings us…The TSP Mutual Fund Window!
Timeline of the development of the TSP Mutual Fund Window (MFW)
An important date to the enhanced individualized structuring of federal retirement savings was June 22nd, 2009. The Thrift Savings Plan Enhancement Act of 2009 (the Act) 111-31 was signed into law. Specifically, the Federal Retirement Reform Act of 2009, Sec. 104, Authority to establish mutual fund window.
Tic-Toc, Tic-Toc, SIX YEARS LATER, the TSP board approved the enhancement proposal.
Eleven years after the aforementioned “Thrift Savings Plan Enhancement Act of 2009,” the FRTIB contracted with a “recordkeeper,” thus crossing a major hurdle in allowing for the detailed planning and implementation of the MFW.
If you have been anxiously awaiting augmented investment alternatives, your wishes will be answered this coming June. However, for all the time it has taken to reach this point, these future changes may not be precisely what you had expected. The modifications may fall well short of expectations, mainly where costs and participation are concerned.
The Federal Retirement Thrift Investment Board has announced that up to 5,000 mutual fund options will be available through the “Mutual Fund Window.”
Who is the Federal Retirement Thrift Investment Board (FRTIB)?
- The FRTIB is a small branch (approximately 250 employees, according to Owler.com) of the Executive branch responsible for administering the Thrift Savings Plan (TSP).
The TSP is the tax-deferred defined contribution plan available to federal civil servants and those serving in the military.
- Being a part of the executive branch, the board is subject to change with each new presidential election.
- The FRTIB’s stated goal – “To administer the TSP solely in the interest of participants and beneficiaries.”
The FRTIB has pointed to an established target range of summer 2022 to open the MFW for several years. It seems they will hit that target date this coming June.
Details About the TSP Mutual Fund Window
Some of the upcoming changes, charges, and questions about the new TSP MFW additions:
- $55 Annual Administration fee – This fee is used only for those utilizing the MFW. No Fed will be required to move assets out of their TSP index funds into the MFW. The fee is projected to keep TSP administration costs from being indirectly impacted for those that don’t avail themselves of the new MFW.
- $95 Annual Maintenance Fee – This seems self-explanatory. If you use the MFW, you will be charged an annual fee of $95.
- $28.75 per trade fee – Ostensibly, each time a trade is performed in the MFW, this fee will be applied. Costs could begin to rack up if TSP participants aren’t careful. Note: There will be a limit of two (to or from) inter-fund transfers per month. If you attempt to make more than two monthly transfers (including transfers to and from the current core funds), additional transfers must go into the G Fund.
- Other fees and expenses – Depending on the mutual funds selected. – These fees will be imposed by certain MFW funds and will vary from fund to fund; specifics on those fees are not readily available yet.
- Limits – 25% of account value (at least $10,000) – Here is where boundaries are set. You will not be allowed to invest more than 25% of your TSP balance into the MFW. So, if you were hoping to have 100% access to mutual funds within your TSP account (and not significantly tied to the existing index funds), you might be disappointed. Sorry; much of the TSP “bowling bumpers” will remain in place. You will also not be able to invest less than $10,000.
- With 5,000 funds available, will they be screened, vetted, and verified? If so, by whom? – A potential concern may be that by adding so many funds, who is watching the proverbial “henhouse?” Will these funds be evaluated for:
- Environmental concerns (if “green” issues are important to you, how will you learn if your MFW selections fall in line with your priorities),
- “Sin” products (cigarettes, tobacco, gambling, etc.),
- Foreign managed investment products?
- Will the MFW list be inclined to include previously banned Chinese-controlled funds? – Are you resolute in your desire to avoid contributing to any Chinese-owned or controlled company or fund? If so, then an essential issue for you may be to discover how the FRTIB will verify the disentanglement of China from MFW funds and how they will enlighten TSP investors.
The FRTIB’s stated goal is “To administer the TSP solely in the interest of participants and beneficiaries.” In addition, perhaps the FRTIB could have less publicized objectives, such as:
- Zealously promoting low costs – Undoubtedly, low costs should be perceived as a subset of the TSP’s stated goal. Minimal expenses are definitely in the best interest of the participants and beneficiaries. However, price is only one measure of a comprehensive retirement account (401k, TSP, IRA, etc.).
Low pricing may struggle to provide for individual needs or wants, such as strategic or tactical predilections, risk vs. reward objectives, alternative growth opportunities, professional management, and diversification (to name a few). There could also be valuable aspects of assets inside a retirement account.
- Grow TSP controlled balances – At its essence, the TSP program is a tax-deferred defined contribution plan with employee and employer participation. But perhaps less well understood, the TSP is also a pre and post-retirement money manager. Any money manager’s job is to grow and maintain assets. Thus, historically the FRTIB has done that, in part, by jealously guarding and advertising low costs. However, limited investment options may have stifled TSP growth through the appeal and pull of low pricing.
As the TSP begins to offer more choices, the allure of low costs will (at least for that portion) potentially become watered down. Thus, the argument the TSP has held onto for decades on the paramount value of low costs may become undermined…a self-imposed error? Note: As mentioned above, TSP participants are not allowed to fully avail their TSP balances to the MFW.
“Price is what you pay. Value is what you get.” – Warren Buffet
No argument; the price of holding funds in the TSP has historically been low. The “Value” of keeping portable assets in the TSP, however, may have been encumbered by limited choice.
When a federal employee leaves federal service or turns 59 ½, they have the option of moving their TSP assets out of the TSP and into a private IRA (called a rollover), penalty and tax-free.
There are various individualized and professionally managed options, such as generally inexpensive advisory accounts, available to feds outside of the TSP umbrella. Over the years, many federal employees have considered these options preferable due to a wide variety of investment options, low costs, active management, one-on-one advisory benefits, and flexibility.
A Look at the New Costs For Those Wanting to Participate in the MFW
While the annual administration fee and the annual maintenance fees are unique to federal employees, they do not appear outrageous. $150 yearly cost to have access to over 5,000 funds in and of itself seems reasonable.
Note: Since these fees are fixed amounts, the more you invest in the MFW, the lower the percentage costs. Example: If you invest $10,000 into the MFW, these fixed fees (not all costs, just these fees) will cost you 1.5% of the amount invested in the MFW. ($150 ÷ $10,000 = 1.5%).
Ok, so perhaps you had hoped for more than this. Out of the gate, it will undoubtedly have some issues. Costs, limits on personal control, and a transparent vetting process head the list for now. But, if the FRTIB has been diligent in putting together a well-thought-out enhancement, these changes could be a welcomed improvement to federal employee TSP benefits.
It has taken 13 years to get here. Let’s hope it wasn’t rushed.
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 involves risks, including the loss of principal. No strategy assures success or protects against loss. Silverlight Financial, Infinity Financial Services, and its affiliates do not provide tax, legal, or accounting advice. This material is not intended to provide and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com.