I read Mr. Stubbs’ article on March 8, 2023, 8 Things the TSP Still Did Not Fix, regarding the Thrift Savings Plan (TSP) with interest. The article’s title was incredibly misleading, as the 2022 recordkeeping conversion was not intended to address any of the items he listed in the article.
1. Unlimited Reallocations and Fund Transfers
Mr. Stubbs implies that the TSP is out of line with other defined contribution plans and mutual funds. That is not accurate. Placing limits on the movement of assets within the TSP is sound policy that helps reduce costs for all participants. GAO reviewed this issue and found that limits on fund transfers or fund reallocations were common. (See https://www.gao.gov/assets/gao-15-427r.pdf)
2. Limited Investment Options
DC plans have been moving toward TSP’s simple and comprehensive fund offerings. The TSP core Funds lineup of index funds provides nearly perfect exposure to risk and return in that it largely covers the U.S. investment grade bond market without overlap, it provides exposure to virtually the entire U.S. public equity market without overlap, and it covers a very significant portion of the international stock markets, also without overlap. This supports participants’ ability to make sound investment choices, assisted by a low-cost structure. Studies show that presenting investors with a large menu of investment choices leads to reduced investing by savers and sub-optimal allocation decisions for most investors.
In addition, the statute authorizing the mutual fund window (MFW) requires users of the MFW bear all costs associated with providing the MFW. The TSP is explicit in the fees charged to participants. That is not universally true with mutual funds.
3. The Ability to Choose Which Fund Your Distributions Come From
An option available to TSP participants is to rebalance their holdings to their target allocations as they withdraw their money and continue to do this throughout the withdrawal period. The effect is the same as giving participants the ability to withdraw from a given fund. The reason the TSP uses pro-rata distribution is to ensure that the participant always receives their desired payment. If the participant requests monthly withdrawals come only from the G Fund, for example, then the TSP would not be able to process a monthly withdrawal for that participant once their G Fund is depleted.
4. How the Government Manages the G Fund
The G Fund is protected by law and TSP participants have never, not once, been adversely affected by “emergency measures”. Any non-TSP fund designed for capital preservation will also have exposure to Treasuries and would also be negatively affected by any debt ceiling-driven issues.
Mr. Stubbs is not making an apples-to-apples comparison. He seems to suggest it is a choice between the TSP G Fund or some non-G Fund investment in an IRA. If this means:
- Put your money in an IRA and invest in U.S. Treasuries, then an investor is no more protected with that Treasury guarantee than in the TSP’s G Fund. The full faith and credit backing of the U.S. government is the same; or
- Put your money in a non-Treasury investment within an IRA, then a participant could do this just as easily in the TSP’s other Funds while keeping the participant inexpensively and broadly exposed to the markets.
5. No Dedicated Advisor
This is a matter of personal preference. In addition, advisors come with a cost. Advice from a financial advisor doesn’t require a participant to disinvest from the TSP. The core Funds should be viewed by individuals and their advisors as some of the most efficient and profitable means to obtaining desired exposure. For many people, the L Funds help achieve their long-term asset allocation needs throughout their lives, with or without the assistance of advisors. Advisors acting in the best interest of their clients should carefully consider the costs and investment advantages of remaining with the TSP, including rolling other retirement assets into the TSP in situations where it makes sense.
6. You Cannot Make Immediate Trades
The TSP operates like mutual funds do, and only allow trades once a day. Investing for retirement is, by definition, long-term investing. Most investors in the TSP are better served by not having the ability to trade immediately. While ETFs do have the ability to trade intraday, there are costs to that activity, such as commissions and bid-ask spreads that are invisible to many investors, but impact returns negatively.
7. Doing Roth Conversions Inside of the TSP
The TSP is reviewing this issue. Based on an initial inquiry, the large majority of defined contribution plans do not offer Roth in-plan conversions. The taxes associated with Roth conversions, which must be paid with non-TSP assets, can be prohibitively expensive, and might make this option of use to very few participants.
8. Qualified Charitable Distributions (QCD)
The Internal Revenue Code does not allow QCDs from the TSP or any other 401(k) plans. This is not a rule the TSP can change.
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).