TSP board mulls legislative agenda

With less than a month left before the midterm elections, the board of the Thrift Savings Plan has started crafting a legislative agenda for the next Congress that may include requests for new rules for automatic enrollment and for default investments.

At a monthly meeting Monday, TSP Executive Director Gary Amelio also laid out three other areas in which the board could potentially ask members of the 110th Congress for legislation: post-tax investment options, loan restrictions and fund choices. He said none of the options would be worked out until after the holidays.

Perhaps the biggest of the possible changes would be a switch to automatic enrollment. Right now, employees have to actively opt into investing in the $194 billion federal employee 401(k)-style retirement savings plan when they join the civil service. Automatic enrollment would require employees to actively opt out of the plan instead.

Congress gave fiduciaries of private 401(k) plans the authority to use automatic enrollment in the Pension Protection Act it passed this year, but separate legislation would be necessary before the TSP could mirror that practice.

Already, more than 85 percent of employees in the Federal Employees Retirement System invest in the TSP and more than 67 percent of those in the Civil Service Retirement System do. But TSP also is open to members of the uniformed services, and only 23.6 percent of them participate.

The uniformed services generally do not match employee contributions to the TSP, which could account for some of the lower participation numbers. But there is a small pilot project under way to test TSP matching contributions as a recruitment and retention tool for the military. The TSP board is eager to bring more military members into the plan.

Switching to automatic enrollment would come at a price, Amelio said. Even if a small percentage of employees opt out, with 3.6 million participants, the change could mean 50,000 to 100,000 people would need new paperwork and systems.

The second potential change is an idea Amelio and board members raised several times during the past year: altering the default TSP investment for participants who do not designate how they want their savings allocated.

With Congress' approval, the default could be changed from the G Fund, made up short-term Treasury securities specially issued to provide a higher return than inflation, to the new life-cycle (L) funds. The L funds are mixes of the five standard TSP funds that automatically shift money from riskier to more conservative allocations as participants age, and will likely provide a greater return than the very conservative G Fund.

Still, the board would have to decide which employees are placed in which L Fund, Amelio said: "Do we default everyone to the same L Fund, or pick funds based on age or years of service?"

Another possible legislative change, although less definite, is the addition of a Roth option to the TSP. Roth options allow employees to pay taxes at the time of investment instead of when they take their money out upon retirement. This could mean some employees would pay less overall in taxes.

"For [some] people, it's good," Amelio said. "For a large percentage of people, it doesn't make sense. It's going to cost all the participants money to implement."

Amelio and the board offered much less information on the last two potential items on the legislative agenda: added loan restrictions and more fund options.

Amelio said he is still looking for ways to "continue belt-tightening on the loan program," which allows participants to take out loans on their savings and then pay themselves back. Since becoming executive director in June 2003, Amelio added fees and restricted the number of general purpose loans to one for each participant. This brought the number of borrowers down to about 750,000 as of September, from about 800,000.

As for the possibility of new funds, the board is in a standoff with some members of Congress who are pressuring it to add a Real Estate Investment Trust option. Board members are waiting for consultants from Ennis Knupp & Associates to complete a review of all possible fund additions.

The board also is awaiting results of a TSP participant survey, the first of its kind in 16 years. About 20,000 participants will be randomly selected to complete a mail-in survey, which will ask for opinions on all of the TSP board's legislative ideas. Results are expected by the end of the year.