Congress Approves Changing TSP Default Settings to More Lucrative Funds
The switch would only apply to new federal employees who are auto-enrolled in the Thrift Savings Plan.
The Senate passed a bill on Wednesday that would automatically enroll new federal employees in a more diverse, age-appropriate retirement fund rather than the safer government securities offering. It now heads to President Obama for his signature.
The bipartisan Smart Savings Act would change the default enrollment fund in the Thrift Savings Plan for new hires from the G Fund to the lifecycle (L) funds, which are designed to move investors to less risky portfolios as they near retirement. Both chambers had passed slightly different versions of the legislation earlier this year, necessitating another vote.
TSP launched a program in August 2010 that automatically signs up all new civilian hires to allocate 3 percent of their basic pay to the G fund, unless they choose to end their contributions or change the amount. Participants also receive a 3 percent match and a 1 percent contribution from their agencies, unless they opt out of automatic enrollment. The G Fund is the most stable investment of the TSP’s options, while the L funds are a mix of the TSP’s G, F, C, S and I offerings, and are crafted to help yield higher returns through diversity. The L funds are composed of the L Income, L 2020, L 2030, L 2040 and L 2050.
The bill would only apply to new federal employees who are auto-enrolled in the TSP. It will not affect TSP participants who are currently auto-enrolled.
The Federal Retirement Thrift Investment Board, which administers the TSP, has to issue rules on implementation before the changes take effect. That likely will happen in October 2015, said Kim Weaver, director of external affairs at the board.
The board last year requested the legislation to switch the default fund from the G Fund to the lifecycle funds. The Employee Thrift Advisory Council, which advises the TSP board on investment policies and the plan’s administration and is made up of representatives from employee organizations, unions and the uniformed services, endorsed the legislative proposal in November 2013 after initially opposing it.
FRTIB has found that while automatic enrollment has increased TSP participation, new government hires under the age of 29 have too much money invested in the G Fund -- likely a result of auto-enrollment’s G Fund default option. The government securities offering, while traditionally very stable, also does not yield very high returns.
In a move that could perhaps put some detractors of the switch at ease, FRTIB announced last year the lifecycle funds would 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.
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