The TSP’s Future -- and Yours
Here are some highlights of our conversation.
Long provided a series of noteworthy facts about the TSP:
- It is the world's largest defined contribution savings plan. As of July 1, the balance of funds in the TSP totaled $224 billion.
- There are 41 accounts with balances of more than $1 million within the TSP. Of those, about half were helped in getting there by transferring money in from other sources, such as 401(k) plans or rollover IRAs.
- The TSP has very low administrative expenses. Long said the expense ratio of all of the TSP funds is 3 basis points (100 basis points would be 1 percent.) The average mutual fund's administrative expenses exceed 100 basis points.
- More than 86 percent of people covered by the Federal Employees Retirement System actively contribute to a TSP account.
Even with that level of participation, Long wants even more federal employees to sign on. He noted that a 1 percent increase would mean an additional 20,000 employees would have a better chance of living a higher quality of life in retirement.
To accomplish this increase, the thrift board has backed the idea of making TSP contributions automatic for new hires. Currently, new employees must choose to participate. Legislation will be required to implement the change, which would have employees automatically contribute 3 percent of salary to the TSP. Unless the employee chose otherwise, the funds (and agency matching contributions) would be directed to the TSP life cycle (L) fund appropriate to his or her age.
For now, though, the board has decided not to endorse the idea of adding a Roth 401(k) type of account to the TSP. Such an option might be attractive to military investors and younger employees, as well as those in the upper pay brackets. But usage rates of such an option within large 401(k) plans have been low. It would cost more than $10 million to create a Roth option, Long said, and payroll offices have indicated that it would cause processing complications. The board has agreed to revisit this issue within two years. Security Issues
Long said the TSP Board has a series of initiatives under way aimed at improving security. For example, it is now using eight-digit alpha/numeric personal identification numbers, replacing four-digit numeric PINs. By September, Social Security numbers no longer will be used on the TSP Web site.
The fund also is making changes to withdrawal processing. From now on, when former employees go online to withdraw funds, they will receive payment by paper check. Conversely, if they request the withdrawal by paper form, then it can be directly deposited into a bank account. TSP officials don't want the process to be entirely electronic, because that's how thieves were able to steal money from some former employees last December.
In the scam, the Social Security numbers and passwords of some former employees and retirees were stolen, and the information was used to request withdrawals, with the money electronically deposited into bank accounts. All of the banks involved gave the money back to the employees who were affected.
Statements in the Mail
The TSP will go back to mailing annual participant statements next year. The board has found that 16 percent of participants rarely or never check their account balances. By providing an annual mailing, officials hope participants will notice their balances at least once a year, so they can check up on their investments and rebalance accounts, if necessary.
About 2,000 people chose a TSP annuity as their withdrawal choice last year. That's not a big number, which could be due to the fact that most current retirees are covered under the Civil Service Retirement System, which has a more attractive basic annuity than FERS. Many folks under CSRS don't need steady income from their TSP investments.
An advantage of choosing a TSP annuity is that it will provide steady income for life. Those participants who are in good health and manage to outlive their life expectancy will receive more than they contributed and will not have to worry about "outliving their money." But remember, once chosen, the annuity cannot be changed, stopped or recomputed -- it is yours for life.
New L Fund
Finally, if you're wondering what will happen to the L2010 fund when the year 2010 rolls around, Long said it will go out of existence. It will roll into the L Income Fund, and, at the other end of the spectrum, the L2050 fund will be created for employees just beginning their federal careers. This does not take an act of Congress. The TSP Board already has the authority to make the change.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.