Bill Would Change TSP Default Settings to More Lucrative Funds
A Senate committee will consider a bill on Wednesday that would automatically enroll new federal employees in a more diverse, age-appropriate retirement fund rather than the safer government securities offering.
The Smart Savings Act, sponsored by Sen. Elizabeth Warren, D-Mass., would change the default enrollment fund in the Thrift Savings Plan for new hires from the G Fund to the lifecycle (L) funds designed to move investors to less risky portfolios as they near retirement. The Senate Homeland Security and Governmental Affairs Committee plans to mark up the legislation during a business meeting on Wednesday. The House Oversight and Government Reform Committee reported out that chamber’s companion bill in March.
The TSP launched a program in August 2010 that automatically signs up all new civilian hires to allocate 3 percent of their basic pay to the G fund, unless they choose to end their contributions or change the amount. Participants also receive a 3 percent match and a 1 percent contribution from their agencies, unless they opt out of automatic enrollment. The G fund is the most stable investment of the TSP’s options, while the L funds are a mix of the TSP’s G, F, C, S and I offerings, and are crafted to help yield higher returns through diversity.
The legislation would only apply to new federal employees hired who are auto-enrolled in the TSP. It will not affect TSP participants who are currently auto-enrolled.
The Federal Retirement Thrift Investment Board, which administers the TSP, last year requested the legislation to switch the default fund from the G Fund to the lifecycle funds. The Employee Thrift Advisory Council, which advises the TSP board on investment policies and the plan’s administration and is made up of representatives from employee organizations, unions and the uniformed services, endorsed the legislative proposal in November after initially opposing it.
“This proposal is one way to help people save money for retirement -- it's a no-brainer that will make a real difference for many federal employees by helping to increase their retirement savings without any additional cost to the government,” said Warren, when she introduced the bill in March.
FRTIB has found that while automatic enrollment has increased TSP participation, new government hires under the age of 29 have too much money invested in the G Fund – likely a result of auto-enrollment’s G Fund default option. The government securities offering, while traditionally very stable, also does not yield very high returns.
For instance, last month the G Fund inched up 0.20 percent, increasing 2.26 percent since May 2013. The L Income Fund for TSP participants who already have started withdrawing money gained 0.64 percent last month. L 2020 increased 1.20 percent in May; L 2030 gained 1.46 percent; L 2040 was up 1.63 percent; and L 2050 saw a 1.78 percent boost.
Overall, participation in the TSP is growing; it climbed to 87.4 percent in May, according to the latest data from the board released on Monday during its monthly meeting. The total plan balance increased by 1.51 percent, and now exceeds $412 billion. The average account balance for TSP participants enrolled in the Federal Employees Retirement System increased to slightly more than $111,000 in May. The average 401(k) account balance for private-sector workers was $89,300 in 2013, according to a February CNN report.