Beginning May 1, Thrift Savings Plan participants will be limited to two interfund transfers per calendar month, the Federal Retirement Thrift Investment Board announced on Thursday.
The regulation, published in the Federal Register, rebuked frequent traders, saying they misunderstood the nature of the TSP and traded at the expense of their fellow participants.
"By misappropriating language used in the capital markets (buys, sells, trades), some TSP participants give the impression that their frequent interfund transfers are trades in and out of the market which affect only their own funds. This is incorrect," Gregory Long, executive director of the board, wrote in the regulation. "All TSP assets are in a pooled investment, which is designated by statute as the Thrift Savings Fund."
The regulation could mark the end of what has been a tense debate over the rule, which is aimed at curbing costs and preserving plan stability. TSP participants would be allowed unlimited transfers into the Government Securities Investment, or G Fund, to protect themselves from market fluctuations.
The board voted to restrict transfers last November. That vote spurred a round of comments on the proposal from participants and employee groups, a debate that sharpened as the market entered a volatile period prompted by slumps in the credit and housing markets.
During the comment period on the proposed regulation, the TSP board sent warning letters to more than 3,500 frequent traders, restricting them to three trades per month, and then eventually told 549 plan participants who exceeded that limit that they would have to submit their trades by mail. After sending those letters in January, trading volumes fell by almost half in February.
National Treasury Employees Union President Colleen Kelley said earlier this month that the change had been sufficient to address the problem, describing a two-transfer limit as "draconian."
"If for some reason, the board feels it is necessary to act now to change the system, then NTEU proposes a revision to the board's plan: allow two transfers per month and after two transfers, attach a fee for servicing the transfer," Kelley said at the time.
But the regulation said a set fee system was inadequate to cover the variable costs of trades. Those include the difference between the costs when a trade is made and the value of a fund when the market closes; the loss of profit when fund managers hold on to money to cover trades rather than invest it; and the loss of interest to other plan participants caused by the three-day delay in transferring funds to the TSP after a trade.
"Fund managers who use trading limitations and fees do so as a double deterrent, not as a way to accommodate more transfer activity," the board wrote in the regulation.
The board rejected other alternatives, including charging a percentage fee for transactions -- noting the same difficulty and lag time in measuring the true cost of trades -- and establishing a quota for transfers per year but not restricting them by month. Such plans still allow participants to transfer funds frequently during market fluctuations, the regulation argued, which would defeat attempts to maintain the funds' stability and foster a long-term approach to investing.
The regulation took particularly sharp aim at investors who transfer their investments to their G Funds on days when that fund produces its largest amount of return. The rule referred to the practice as "mercenary" and pointed to a message board on the Web site TSP Talk as evidence that the practice was organized and widespread. More than 4,000 TSP participants signed a petition on the Web site objecting to the transfer restrictions.
While the regulation is final, objections to the new rules may not disappear.
"I am just at a loss to understand why all of the letters to Congress and replies to the TSP about limiting my ability to move my money more then twice a month have gone unheard," wrote a commenter named Chuck Wamack in a discussion on Government Executive's Web site. "Seems they had already made up their minds before they asked the question."