TSP’s Future: Flexible Withdrawals and Mutual Fund Options

Members of the board that oversees the Thrift Savings Plan gave agency staff the green light on Monday to move ahead with plans to eventually provide participants with more flexibility to withdraw money from their accounts, and offer federal employees the option to invest in mutual funds.

Greg Long, executive director of the Federal Retirement Thrift Investment Board, however, emphasized that both changes are a long way -- years -- from implementation. Changing TSP withdrawal rules requires legislation; Congress gave the board the option in the 2009 TSP Enhancement Act of adding mutual funds, but the agency and federal employee advocates have been weighing the pros and cons of introducing the option to the TSP portfolio ever since.

“I am perfectly fine pushing this out until we have all the king’s horses and all the king’s men in line to make this work,” Long said, of a mutual fund window for TSP participants, during the board’s monthly meeting on Monday.

Long said he saw changes to withdrawals as the more urgent need because of data the agency has collected on why participants are leaving. In 2013, enrollees who separated from the government transferred $9 billion out of the TSP to other financial institutions. Twenty-seven percent of those participants said they were motivated to move their money because they wanted more withdrawal flexibility.

“Participant actions and their feedback provide clear indications of meaningful dissatisfaction with our withdrawal options,” Long said in a July 7 memo to board members – a sentiment he reiterated during Monday’s meeting. He said retaining participants is “not about asset accumulation; it’s about better financial outcomes for participants.” The TSP board manages more than $450 billion in federal employee retirement funds.

The TSP currently offers two main withdrawal categories for participants, one for those who want to take money out while they are still working for the government (in-service) and another for employees who leave the government (post-separation). There are various rules surrounding the who, what, when and how of withdrawals now, which some enrollees find too restrictive. The number of hardship withdrawals (in-service) were up 13 percent in June from May, though the TSP said it reflects a “similar seasonal increase in prior years” related to paying for vacation and college tuition.

Among the proposed changes the TSP is considering:

• Allow multiple withdrawals (currently only one is allowed) for the age-based (59 and a half) in-service withdrawal, as well as remove the restriction on post-separation partial withdrawals related to this type of transaction.
• Allow multiple partial post-separation withdrawals. Currently, participants can only choose one partial withdrawal under this option; subsequent transactions must be full withdrawals.
• Eliminate the withdrawal election deadline for post-separation withdrawals.

For more information on current TSP withdrawal options, see this Retirement Planning column from Government Executive columnist Tammy Flanagan.

Long said the natural concern over changes to withdrawals would be that it leads people to exhaust their retirement savings. “Just because people want more flexibility, does not by itself mean it is prudent for the TSP’s fiduciaries to provide that flexibility,” he said in the memo to the board, which was passed out at Monday’s meeting. “Although it may appear counter-intuitive, the research on this issue demonstrates that additional withdrawal flexibility leads to more participants keeping money inside the employer-based qualified plan system longer.”

The agency is talking to the Employee Thrift Advisory Council early next month about proposed changes to TSP withdrawal rules.

On the mutual fund option, ETAC (which includes representatives from several federal employee advocacy groups) has said it supports moving forward after initially expressing some trepidation about the cost of implementation and potential risks to enrollees that cropped up when the idea became a possibility in 2009.

The FRTIB has estimated that creating the mutual fund window will cost about $6.7 million, and although relatively few participants (between 1 percent and 3 percent) are expected to opt into it, one of the pros is that it encourages enrollees – and their money – to stay in the TSP.

“If a MFW were available in 2013 and it caused just 10 percent of distributed dollars to stay at the TSP, our net cash flow would have improved by $1.2 billion,” according to a July 27 memo from Long to the board on the mutual fund window offering. “In addition, the directly-affected participants would be paid substantially lower fees, and all [emphasis in original] TSP participants would have benefited through marginally lowers asset-based administrative fees.”

Some concerns over the MFW are that it makes the TSP more complicated, and could lead to confusion and poor investment decisions by participants.

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