I read Mr. Brad Bobb’s article on October 26 regarding TSP costs with interest. I’d like to raise a few important points that I think FedSmith readers should also consider when they are making decisions about investing for their retirement.
Two key factors for investors are the rate of return and the expenses paid for that investment. The attached spreadsheet compares the returns of the investments Mr. Bobb referenced.
Sometimes Mr. Bobb compared TSP fund to a fund that tracks a different benchmark. For example, the Schwab SCHX tracks the total return of the Dow Jones U.S. Large-Cap Total Stock Market Index which tracks 750 stocks. The C Fund tracks the S&P 500. In those cases, I’ve put n/a because comparing the returns of 2 different indexes isn’t meaningful.
As you can see, when matched against comparable funds, the TSP returns are better almost every time.
Of course, comparisons of returns by themselves do not tell the whole story. It is essential for investors to understand that the returns for the non-TSP funds do not include other fees and expenses. The TSP returns include all fees and expenses; the others do not, and those fees and expenses can diminish or eliminate returns.
In addition to citing some funds that track different indexes, Mr. Bobb is not always comparing apples to apples with the type of funds. This also yields a misleading comparison. In several instances, he compares the TSP’s index funds to exchange traded funds (ETFs). With ETFs, you pay a bid-ask spread on every transaction. It depends by fund, but for Vanguard’s VOO, for example, that spread is 0.01% on average. It can be much higher if you buy/sell on a high volatility day. That cost must be added to the expense ratio for that fund.
There also may be a premium/discount to the net asset value (NAV – the per-share value of a mutual fund). The Vanguard BND had a small premium when we looked, which means you would pay more than NAV when you buy. The Schwab SCHF had a large discount (0.70%) at the time we checked, which means a participant gets less than expected when you sell. These premiums/discounts change over time and are dependent on the market: if more people want to sell, the discounts get large and if more people want to buy, the premiums get large.
In addition to these costs, ETFs may have transaction fees depending on where an investor is trading.
If we review index mutual funds, rather than ETFs, a different set of costs can apply. For example, the VOO ETF is also available as an Admiral share class (index mutual fund) at 0.04% which is more expensive than the one Mr. Bobb cited. For any Vanguard share class, an investor pays $20 per year for each fund unless you have a total of $1,000,000 invested with Vanguard. On a $10,000 account, $20 per year is another 0.2%, which is significantly greater than the TSP at 0.043%.
As noted, most fund families have funds with a range of expense ratios. Typically, the “core funds” like the ones listed are loss leaders. The fund family is priced in such a way in the expectation that once a customer purchases an inexpensive core funds, that customer will also purchase more expensive funds.
The TSP has no hidden fees. The C Fund costs 0.043% if you have $1,000 or $10,000 or $100,000. This means the returns on the spreadsheet are the actual returns seen by TSP participants, while the returns for the other Funds selected by Mr. Bobb may or may not be the true return on an investment.
Kim Weaver is the Director of External Affairs at Federal Retirement Thrift Investment Board (FRTIB), the agency which administers operation of the Thrift Savings Plan (TSP).