A year ago this week, President Obama signed a bill giving the Food and Drug Administration the authority to regulate tobacco products. What does that have to do with federal retirement planning? The measure also contained some very significant changes to the Thrift Savings Plan that are now in the process of being implemented.
Earlier this week, on the radio show I co-host, For Your Benefit, Tom Trabucco, director of external affairs for the TSP, provided some updates on the new provisions, and discussed some ideas that haven't become law yet. Here's a summary of his report:
Immediate employer contributions for new hires. This change, eliminating the waiting period for new hires to receive automatic contributions to their TSP accounts, was implemented almost immediately after the law was signed in July 2009. The change was followed up by a mailing to about 400,000 new hires who had not been making contributions to the TSP, asking them, "What are you waiting for now?" An astounding 11 percent of those who got the mailing began making contributions to their TSP accounts.
Automatic enrollment. If all goes according to plan, beginning in August, new employees automatically will have 3 percent of their salary withheld and invested in the TSP's government securities (G) fund. They'll get immediate dollar-for-dollar matching from their agencies on those contributions. Employees will have 90 days to back out of this automatic enrollment and have their contributions returned. The change wasn't immediately implemented last year because it requires some major changes to agency personnel operations. The TSP is working hard with agencies to make the shift a reality this summer. Accounts for spouse beneficiaries. This change, which won't take effect until the end of the year, originated with the TSP Advisory Council, made up of representatives from employee organizations, labor unions and the military services. Under the provision, spouses of TSP participants who die will have the option of leaving death benefit payments in a TSP account under their own names. Previously, spouses could transfer the death benefit only to an individual retirement account or other employer plan. Currently, under an interim provision, the spouse beneficiary can choose to keep the inherited TSP account, but the money is invested only in the G Fund and cannot be managed by the spouse.
Roth 401(k) feature. This much-anticipated new provision won't be implemented until the end of 2011. It will provide federal participants with the equivalent of a private sector Roth 401(k), which is subject to different tax rules from a Roth IRA and open to people of all income levels. Contributions to the Roth TSP will be made on an after-tax basis, and participants will not have to pay federal income tax on money withdrawn from it. Trabucco says this change likely will be welcomed by military service members, who receive pay that is exempt from income tax while serving in combat, because it would allow savings from that income to grow tax-free, too.
Contributions from lump-sum annual leave payments. This is one proposal that hasn't become a reality yet. A bill currently under consideration in Congress (H.R. 4865) would allow employees to make TSP contributions from the lump-sum payment for unused annual leave they receive when they leave federal service. The sticking point is the Congressional Budget Office has slapped a price tag on the proposal of $317 million over 10 years. So we might be waiting awhile for this one.