The Thrift Savings Plan has rejected proposals to allow federal employees to take two loans through their retirement packages, despite calls for assistance from cash-strapped workers facing pay cuts due to sequestration furloughs.
Officials at a Federal Retirement Thrift Investment Board meeting Monday also discussed changing the plan's default investment options.
TSP will continue to offer one general purpose loan to feds, the fund’s executive director Gregory Long said. But the board rejected calls for extending a second loan offer because of the overwhelming logistics involved.
Currently, all TSP participants can take one general purpose loan and one residential loan at any given time. After taking out a loan, a participant is not eligible to apply for another loan of the same type for 60 days.
To make changes to these rules would require revising regulations, reprogramming computer systems, making changes to TSP’s websites, printing and distributing new print materials and other logistical challenges that would lead to 2,000 hours of work and take 23 weeks to complete.
The changes could not be implemented before October 1, Long said, when currently scheduled furloughs will have concluded.
Instead of taking out a loan, which Long said would reduce take home pay and could eventually lead to tax penalties if payments are not made on time, employees may temporarily reduce contributions to their pensions.
“I hate to say it because it’s my job to get people to enroll,” Long said.
Cathy Ball, a National Treasury Employees Union official on the Employee Thrift Advisory Council -- which represents participants and makes recommendations to the retirement board -- rejected Long’s timetable, pointing out sequestration is a ten-year program. Long acknowledged Ball made a fair point but maintained that the additional loan offering is not feasible at this time.
The board also discussed the possibility of moving the default enrollment from the safest fund in TSP -- the G Fund, which invests in government securities -- to a riskier but overall higher yielding option, one of the lifecycle funds, which invests in a mixture of the F, G, C, S and I offerings.
TSP’s board, which has previously discussed the possibility, said the switch would be in the best interest of automatic enrollees who do not take the time to make a personal assessment of which fund to invest in. The various lifecycle funds -- L Income, L2020, L2030, L2040 and L2050 -- have grown between 35 percent and 43 percent since their inception in 2005, while the G Fund has gained just 28 percent in the same period.
“While the G Fund avoids exposure to credit risk and market price fluctuations,” said Renee Wilder, director of TSP’s Enterprise Planning Office, “over time, the fund will likely underperform the equity markets and consequently have negative implications for participants who have longer investment horizons and could benefit from being broadly invested across the equity markets.”
While representatives from some unions -- such as the Federal Managers Association and the National Association of Letter Carriers -- expressed openness to the change, the largest federal employee group rejected the proposal outright.
Jacqueline Simon, public policy director for the American Federation of Government Employees, said her members appreciate the low-risk G Fund because they “worry about losing a single dollar.”
“Anything that sounds relatively like a guarantee we take as a positive, because [our members] have so few guarantees left,” Simon said.
She added many of her members are not financially literate and would likely ignore educational mailings TSP officials promised to send to enrollees.
“I get it,” Long said of Simon’s concerns, "[but] this is designed to help them.”
He added enrollees would not be vulnerable to every ebb and flow of the stock market, as lifecycle funds are designed to move investors to less risky portfolios -- such as a higher percentage invested in the G Fund -- as they near retirement.
A change in the enrollment fund would require congressional legislation, but board members hope to vote on the proposal after consulting with its advisory council in the fall. TSP officials would then work on legislation to send to Capitol Hill.
Another potential change requiring congressional action discussed was “auto-escalation,” which would automatically increase the percentage enrollees contribute to their pensions after a set amount of time. Currently, new civilian hires automatically contribute 3 percent of their salaries to the G Fund unless they choose a different plan or amount. Employees receive matching funds from the government up 5 percent.
“Eventually we will talk about auto-escalation,” Long said. “We’re not there yet.”