Often we don't know what we don't know. That's certainly true of the Thrift Savings Plan, the investment program in which federal employees' retirement nest eggs are incubating. But the decisions you make on your TSP investments will have repercussions on your financial well-being for the rest of your life, so it's a good idea to have a working knowledge of how the TSP works.
Here are some tidbits about the TSP, arranged in question-and-answer format. These questions were sent in by Pay and Benefits Watch readers.
Who runs the TSP?
The TSP is managed by the Federal Retirement Thrift Investment Board, an independent agency. The board has five presidentially appointed members and an executive director, who are charged with managing the TSP "prudently and solely in the interest of participants and their beneficiaries," according to the board. The Agriculture Department's National Finance Center in New Orleans runs the computer systems that hold federal employees' TSP records.
How much money is invested in the TSP?
Back in January 1998 when Government Executive's cover article, "Nest Egg", told the story of the TSP, we reported that $55 billion of federal employees' money was invested in the program. As of August 1999, there was $85.6 billion invested in the TSP.
Which funds do people invest in?
The TSP has three funds in which federal employees can invest their money: the C Fund (common stocks), the F Fund (fixed-income bonds) and the G Fund (government securities). Of the $85.6 billion currently residing in the TSP, $51.7 billion is in the C Fund, $4 billion is in the F Fund and $30.1 billion is in the G Fund. About 12 percent of TSP participants only invest in the G Fund. Most people, however, have diversified their investments.
The average investor who makes more than $70,000 a year invests 37 percent of their TSP money in the G Fund, 57 percent in the C Fund and 6 percent in the F Fund, according to 1997 data. By age, the youngest federal employees put 40 percent in the G Fund, 54 percent in the C Fund and 6 percent in the F Fund, while the oldest federal employees put 64 percent in the G Fund, 32 percent in the C Fund and 4 percent in the F Fund.
On average, what percentage of their salaries do federal employees invest in the TSP?
Employees in the Federal Employees Retirement System can invest up to 10 percent of their salaries in the TSP, up to a $10,000 limit. Civil Service Retirement System employees can invest up to 5 percent of their salaries, also with a $10,000 limit.
The average FERS employee invests 6.8 percent of his or her annual salary in the TSP, according to 1997 data. The average CSRS employee invests 4.4 percent of his or her annual salary in the TSP.
How are the annual limits on TSP investments determined?
The FERS 10 percent and CSRS 5 percent limits were set in the law that established the TSP in 1986. The IRS sets the $10,000 overall limit because TSP contributions are tax-deferred. In November each year, the IRS announces the limit on so-called "elective deferrals," which has been the same for the past two years. In 1997, the limit was $9,500.
In the table showing how much the various TSP funds are returning on employees' investments, if you add up the return rates for each month in a 12-month period, they don't add up to the annual return rate shown. Why is that?
In one word, the answer is compounding. The TSP board has provided the following three-step method for calculating the return rates for any period:
- Convert percentages to decimals (move the decimal point 2 places to the left) and add 1. You must add "1" to the returns and multiply the resulting factors together to include the effect of monthly compounding. If you just add the returns together, you ignore the effect of compounding.
January 6.22% = .0622 + 1 = 1.0622
February .79% = .0079 + 1 = 1.0079
March (4.13%) = -.0413 + 1 = .9587
April 6.00% = .0600 + 1 = 1.0600
May 6.07% = .0607 + 1 = 1.0607
June 4.45% = .0445 + 1 = 1.0445
July 7.94% = .0794 + 1 = 1.0794
August (5.59%) = -.0559 + 1 = .9441
September 5.46% = .0546 + 1 = 1.0546
October (3.38%) = -.0338 + 1 = .9662
November 4.61% = .0461 + 1 = 1.0461
December 1.71% = .0171 + 1 = 1.0171 - Multiply the factors together:
1.0622 x 1.0079 x .9587 x 1.0600 x 1.0607 x 1.0445 x 1.0794 x .9441 x 1.0546 x .9662 x 1.0461 x 1.0171 = 1.3317 - Subtract 1 and multiply by 100 to convert the product to a percentage:
(1.3317 - 1) x 100 = .3317 x 100 = 33.17%When calculating period returns, the Board uses the actual 8-decimal place returns used in the allocation of earnings, rather than the 2-decimal place returns shown on the Fact Sheet. Therefore, you may get slightly different results due to rounding.
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