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TSP Proposes Regulations Ahead of Mutual Fund Window Launch

The federal government’s 401(k)-style retirement savings program will let enrollees participate in mutual fund investments as soon as this summer.

The agency that runs the federal government’s 401(k)-style retirement savings program is slated to propose regulations Wednesday that will enable the Thrift Savings Plan to provide participants access to potentially thousands of mutual funds later this year.

Talk of granting federal workers and retirees access to a mutual fund window has been ongoing for more than a decade. Congress first granted the Federal Retirement Thrift Investment Board, which administers the TSP, the authority to offer a mutual fund window in 2009 and the TSP board approved the proposal in 2015, but it was not until the agency signed a contract with a new recordkeeper in 2020 that work on implementation could truly begin.

A mutual fund window would provide TSP participants with access to upwards of 5,000 mutual funds, including issue-based investments like environmental, social and governance funds, which avoid major polluters like fossil fuels, and diversely managed funds, two features long proposed by activists and lawmakers.

In a draft rule slated for publication in the Federal Register on Wednesday, the TSP outlined changes needed to accommodate the arrival of the mutual fund window, which is slated to launch this summer. Chief among the new regulations are those governing how the agency will collect fees to cover the administration of the new investment option.

The arrival of the mutual fund window means new fees for participants, but only those who elect to invest in a mutual fund through the TSP. Those who continue to invest solely in the lifecycle or so-called “core” funds will not see increased fees due to the new investment option, according to the proposed rule.

Participants who invest in the mutual fund window will pay a $95 annual maintenance fee; a per-trade fee of $28.75; fees imposed by the specific mutual fund in which the participant chooses to invest, which will vary by fund; and a fee aimed at ensuring “the availability of the mutual fund window will not indirectly increase the share of TSP administrative expenses borne by participants who choose not to use the mutual fund window.”

Traditionally, the TSP charges participants a pro rata share of the agency’s administrative expenses, but the agency said that will no longer be sufficient to cover the TSP’s overhead when participants begin moving their money between core funds and the mutual fund window. As a result, mutual fund window users will be required to pay an annual fee of $55, and will be updated every three years.

The agency also will limit both how much and how little money participants can transfer between core funds and the mutual fund window. In order to join the mutual fund window, participants would be required to make an initial transfer of at least $10,000, and participants must have a minimum TSP balance of $40,000 to become eligible to invest in the mutual fund window. TSP participants may not invest more than 25% of their total balance in mutual funds.

Additionally, any transfers to or from mutual fund investments would count toward the maximum of two interfund transfers allowed in a calendar month. After those two transfers, which could also include transfers across the TSP’s core funds, any transfer must be into the government securities (G) fund.

The TSP is soliciting comments on these proposed rules between now and March 25.