Mario Aguilar/

Record Number of Feds Withdrew Retirement Investments in October

TSP board looks to switch default investments from government securities to lifecycle funds.

More than 14,000 federal employees turned to their retirement investments for cash in October, marking a new monthly record for the Thrift Savings Plan.

Between 10,000 and 12,000 TSP participants make hardship withdrawals in a typical month, according to Federal Retirement Thrift Investment Board officials, with the October jump coming as a result of the 16-day government shutdown that delayed paychecks for most federal workers.

Roughly 900,000 federal employees were furloughed and unsure if they would receive pay for the time they missed when the shutdown began, while the remaining employees required to work were guaranteed retroactive pay when government reopened. While Congress opted to make all federal employees whole, thousands of workers took hardship withdrawals of at least $1,000 on their plans.

Employees who made the withdrawals had to prove negative monthly cash flow or extraordinary new expenses, such as medical or legal bills, and are now banned from contributing to their accounts for six months. This means they will also lose their agency’s matching contributions for that time period.

“It is very unfortunate that these employees were forced to withdraw money that should be saved for their retirement to make ends meet,” said Colleen M. Kelley, president of the National Treasury Employees Union. “This is yet another negative and harmful effect of the shutdown that will reverberate into the future.”

FRTIB also announced it will move forward with its plan to automatically enroll new federal employees in its lifecycle funds, rather than its safer government securities offering, after receiving an endorsement from federal employee groups at a meeting Monday. The Employee Thrift Advisory Council -- made up primarily of federal employee unions and professional associations-- originally opposed the switch, saying members simply wanted the near-guarantee of TSP’s government securities fund.

The TSP overseers warned this was unsound fiscal logic, as employees would see much higher returns in the L Funds, which move federal employees to safer portfolios as they near retirement. As of April, the various lifecycle funds -- L Income, L2020, L2030, L2040 and L2050 -- had grown between 35 percent and 43 percent since their inception in 2005, while the G Fund had grown 28 percent in the same period. The board has found that many enrollees do not take the time to re-allocate their investments.

Since August 2010, all new federal employees have automatically had 3 percent of their base salaries contributed to their TSPs, unless the individual actively opted out of the plan. All employees receive at least a 1 percent agency contribution into their plans. More than 400,000 G Fund-invested, auto-enrolled accounts show no investment activity. These employees’ accounts would not be affected by the switch, as it would only apply to new hires.

With ETAC’s backing, TSP officials will consult with the plan’s Senate-confirmed, five-member board and subsequently propose the change to Congress, as the switch would require legislative action.

“While there may be concern that we are exposing a participant’s retirement savings to the risk inherent in the capital markets, we believe the L Funds appropriately address those risks in their design,” FRTIB wrote in a memorandum to announce the proposal. “Further, and importantly, those participants who conclude they do not want to assume market risk will always have the ability to change their allocations or move their account balances to the G Fund.”

In a move that could perhaps put some detractors of the switch at ease, FRTIB also announced the lifecycle funds will now allocate a larger proportion of their total configuration to the G Fund. The board contracted a consulting firm to review its L Funds allocations and opted to make the change in light of the findings.   

(Image via Mario Aguilar/