TSP Board Starts to Tackle Military Retirement Reform

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The agency that administers the Thrift Savings Plan doesn’t anticipate having to hire new staff to handle an influx of service members into the government’s 401(k)-style retirement benefit. But if it becomes necessary, the Federal Retirement Thrift Investment Board will build it into its budget, said Kim Weaver, director of external affairs at the FRTIB.

The agency has roughly two years to implement a provision in the fiscal 2016 National Defense Authorization Act, which mandates the auto-enrollment of new troops into the TSP. The FRTIB manages a program that has approximately 4.7 million participants, 700,000 of whom are service members, so it’s already big. Auto-enrolling service members could add up to 250,000 new participants each year.

“We are very excited to have the opportunity to play a larger role in uniformed services retirement,” Weaver said during a recent interview with Government Executive.

The changes to the military’s retirement system – which has not seen significant reform since the World War II era – are based on recommendations from the Military Compensation and Retirement Modernization Commission. The new blended retirement system, which will take effect in 2018, will automatically enroll new troops into the TSP at 3 percent of their pay with a 1 percent government deposit. After two years of service, the government would be able to match up to 5 percent of any extra contributions service members make. The main purpose of the retirement reform is to allow non-career military members to boost their retirement nest eggs. Those who serve less than 20 years in the military – 83 percent of troops – do not receive a pension.

Weaver said the agency has pulled together an intragency team to gear up for implementing auto-enrollment for service members, and is working with Defense to “make sure we are not out of sync.” This is not entirely new territory for the FRTIB. In 2010, the agency launched a program that automatically signs up all new civilian hires to allocate 3 percent of their basic pay to the G (government securities) fund, unless they choose to end their contributions or change the amount. 

In December 2014, President Obama signed into law the Smart Savings Act which changes 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. TSP enrollees apparently are happy with their retirement options: a 2013 Federal Employee Benefits Survey found that respondents were most satisfied with the TSP among other benefits.

To encourage members to stay in the military, the new law also includes a measure providing continuation or retention pay after 12 years of service. Service members who stay in the military for 20 years, and are thereby entitled to a retirement pension, would receive a less generous calculation for their annuity under the reforms. Current service members can opt into the new system, or stay in the current one.

The new system really benefits that 83 percent who do not stay in the military long enough to draw a pension, said Michael Meese, a retired Army Brigadier General and the chief operating officer of the American Armed Forces Mutual Aid Association. Those in the current system who opt into the new one could accrue more retirement savings or come out even, though it really depends on the individual’s situation and choices, Meese said. “But it does unequivocally help those people who stay shorter than the length of retirement (at least 20 years),” he said. Meese’s group is a nonprofit that helps educate service members on their benefits and financial planning. Financial education is a big component of the new law, and Defense will have to make sure service members understand their options and the risks associated with them.

Meese praised the commission for its recommendations on expanding retirement benefits to those non-career members. Its goal was to make the military “more effective in terms of recruiting and retention, recognizing that defense is critical to what the federal government does. When you come at it from that perspective, you may be able to save money, but more importantly, you can adjust incentives to get the right force mix our nation needs.”

Choices are good, said Meese, whose background is in economics, but “we’re notoriously bad at knowing what we want to be when we grow up.” Service members, like everyone else, don’t always accurately anticipate how long they will remain in their current careers, which makes financial education and planning vital. Another upcoming change to the military retirement system allows those who stay in 20 years or more to take a lump sum, or a continuous payment upon retirement. Lump sum payouts are a new option, and have attracted some controversy.

A lump sum payout looks like “a giant payday,” Meese said, but unless you make a wise investment, it could backfire.

“I can certainly imagine a 45-year-old taking $150,000 and starting up a brand new business and really becoming a great entrepreneur,” Meese said. “I could also imagine someone taking that $150,000 and not spending it as productively, and then not having any income coming in until age 67,” when the pension checks restart. An eligible service member also could opt for a partial lump sum, as opposed to the entire payout, under the new option. 

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