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Thrift Savings Plan Review


Thrift Savings Plan (TSP) IRA review: pros, cons, federal/military investment options, mutual funds offers, account rating, cost, fees.



Thrift Savings Plan


Thrift Savings Plan is the retirement platinum standard and is one of the benefits people most envy about those who worked for the federal government. The Thrift Savings Plan (TSP) is well regarded as offering rock bottom expense ratios, simple fund selections, and good advice. As the TSP enters its thirtieth year of operation with 5 million plan participants and $490 billion invested, is the 401(k) equivalent still a good choice for retirement savings or is it time to reconsider its sterling reputation? Does TSP still live up to the hype or are better retirement options available?


Thrift Savings Plan Overview


The Thrift Savings Plan was created 30 years ago to give federal employees and military service members an opportunity similar to a 401(k) to save for retirement. TSP allows investors under 50 years old to save up to $18,000 a year in a traditional, pre-tax account or a Roth account. Investors older than 50 can make additional “catch up” contributions and invest up to $24,000 a year into their TSP accounts. There are essentially two plan offerings, one for all federal employees and one for military service members. The contribution limits remain the same, but there are some key differences.

Federal employees enjoy the benefits of automatic matching contributions. FERS employees receive an automatic 1% agency contribution and benefit from a 100% match on the first 5% that they contribute. A federal employee contributing 7% of their pay will see a total contribution of 12%, due to the 5% match.

TSP for service members is different. Most military service members do not receive any matching contributions for their TSP investments. This is because they enjoy a pension that starts at 20 years of service and pays a defined benefit from the day of military separation. Currently serving members can choose to remain in this retirement system or they can elect to participate in the new Blended Retirement System (BRS). BRS will be mandatory for all new entrants to military service starting on January 1, 2018.

BRS has a lot of aspects to it, but the big takeaway related to TSP is that in exchange for lowering the value of the service member’s pension, members can take advantage of the same TSP matching that FERS employees enjoy. An Airman investing 5% of her pay in BRS would see a total TSP contribution equal to 10% due to automatic investing and matching and would get a pension that paid 40% of her base pay instead of the current 50% of base pay without matching.

Service member contribution limits and tax treatment is also different. Service members deployed to tax free areas can contribute up to a total of $53,000 a year into their TSP accounts. They can only place $18,000 a year into the Roth TSP and must put the rest in the Traditional (pre-tax) option. Contributions to the Traditional TSP by service members serving in tax exempt duty areas remains tax free forever and can be rolled directly to a Roth IRA upon separation from service without any taxes owed.


Thrift Savings Plan Investments


TSP’s popularity is at an all time high and interest in the plan is growing due to changes in investor preferences. The trend towards using ultra low fee index funds to passively track the market is undeniable. Retail investors are fleeing from high fee, actively managed funds that try to pick winners and losers and are instead buying the entire market through low fee index funds. Evidence showing that actively managed funds not only fail to beat the market, but drastically underperform it when fees are considered are shocking investors and changing the way they save for retirement.

How big of a deal are fees in retirement plans? Someone making a one-time $10,000 investment that returns an average of 6.0% a year will lose just $809 in returns over a 25 year time period due to fees and lost growth if they pay a net expense ratio of 0.03% on their investments. That same investor would lose out on a whopping $28,925 over the same time frame if they paid the nationwide average net expense ratio of 1.25% for their retirement plans.

The math above is why the allure of TSP’s offerings can be found in the expense ratio of the funds. Charging just .038% to invest in the funds, a TSP investor will pay just 38 cents for every $1,000 invested for retirement in the plan. TSP investors can select from six different funds, all of which are maintained through BlackRock, an asset management fund that manages more than $5.4 trillion in investments worldwide. The six funds offered are the G, F, C, S, I and L funds.

The G Fund is the Government Securities fund and it forms the base of TSP. The fund only invests in special government treasury bonds that are not ordinarily available to retail investors. The stated purpose of the fund is to avoid any risk of loss due to market activity or inflation. If you invest in the G fund, your money will grow at a historically sluggish rate of 2.6% but you will not see the fund’s value drop. The fund is very similar in performance and composition to Vanguard’s Short-Term Government Bond Fund (VGSH).

The F Fund offers TSP participants the choice of investing in fixed income assets. It tracks the Barclays Capital Aggregate Bond Index by investing in private, government, and mortgage backed bonds. The fund offers investors more growth potential than the G Fund while exposing them to less volatility than the stock based funds. With a 4.59% average annual return over the past decade, the fund is favored by income investors in retirement. The Vanguard equivalent to the fund is found in the Vanguard Total Bond fund (BND).

The C Fund is the Common Stock Index fund. It is entirely invested in domestic stocks and is designed to track the performance of the S&P 500. A 7.0% average annual return over the past decade and white hot 14.7% average annual return over the past 5 years makes this fund an investor favorite for those saving for retirement. It forms the basis of most TSP accounts. The Vanguard equivalent to the fund can be found in the S&P 500 index (VOO).

The S Fund is the Small Capitalization Stock Index fund and it tracks the Dow Jones U.S. Completion TSM index. The fund invests in the small, up and coming businesses that typically experience explosive swings win growth and contraction. The fund’s average annual return of 8.13% makes it a favorite for more aggressive investors who are seeking better performance to support retirement goals. Vanguard’s comparable product can be found in the Extended Market Index (VXF).

The I Fund provides TSP participants international exposure. It tracks the MSCI EAFE index and invests in the world’s largest international corporations. Roughly half of the fund’s investments are made in Europe with an additional third of the investments going to the Pacific region. Companies like Nestle, Samsung, HSBC, and Toyota are all represented in the fund, whose Vanguard equivalent can be found in the Developed Markets index (VEA).

Participants wanting a totally hands off approach can make use of the Lifecycle Funds (L Funds). The five L funds are TSP’s target retirement fund equivalents. They allow investors to put 100% of their monthly contribution into a single fund that invests in a combination of the five main funds. The amount of money invested in each fund shifts based on assumptions that are made about the investor’s risk tolerance. Investors closer to retirement have more money invested in the ultra-conservative G Fund while younger investors have more money placed in the C fund.


Thrift Savings Plan Commissions, Fees, Minimum Deposit, and Set Up


TSP is arguably the best deal in investing because participants pay no commissions or loads, the fees are a rock bottom .038%, and there are no minimum deposits for any of the funds. Setting up TSP is an interesting experience for younger investors because so much of the process is still done via snail mail and paper. New investors create an account through the TSP.gov site and have an account number mailed to their home address of record.

Once service members have their account number, they can log onto MyPay and set up their contribution and TSP.gov to direct their monthly deposit into the various TSP funds. FERS employees need to set up allocations through their payroll provider.

Service members and federal employees can keep their money invested in TSP once they leave federal service, but they cannot continue to contribute to the plan. They can roll future (and previous) employer sponsored IRAs into their TSP account to take advantage of the outrageously low expense ratios.


Thrift Savings Plan Drawbacks


TSP is unquestionably a great, basic retirement vehicle, but it has a number of drawbacks that tarnish its otherwise rosy shine. The problems with TSP mostly stem from the fact that the plan has not been updated to be competitive with some private plans. TSP’s lack of a 457 / deferred compensation plan is frustrating and makes it less attractive for heavy savers than some state and municipal plans. The funds offered are outstanding on price point, but with only five options the low fees and simplicity of TSP comes at the price of being able to pursue advanced investing strategies.

The biggest areas of potential improvement are found in the inability of participants to convert money from a Traditional TSP account to a Roth TSP account and in the withdraw options available to investors. The inability to convert from a Traditional to a Roth is an enormous downside, especially for military service members. If they had the ability to execute an in service conversion, they could return from combat deployments after making substantial tax exempt contributions, convert the sum to Roth, and never owe taxes on any of the money. It would be a dramatic incentive to continue saving for retirement.

TSP’s limited withdraw options are another area of potential improvement. Retirees who are pulling from TSP contributions in retirement are forced to withdraw from both Roth and Traditional accounts in proportion to the respective accounts’ balances. An investor with balances of $500,000 in Traditional TSP and $300,000 in Roth TSP wanting to pull $2,000 a month from the account is forced to draw down $1,250 a month from the Traditional fund and $750 a month from the Roth fund. This handcuffs retirees who are trying to make tax efficient withdraw decisions and is a major reason why so many retirees roll the TSP to IRAs upon separation. There is currently a push in Congress to modernize TSP and changes to the withdraw limitations are at the forefront of the proposal. What these reforms ultimately will look like or even whether they will move forward is still up for debate.

Thrift Savings Plan Annuity


Retirees separating from federal service can use a portion of their retirement to purchase an annuity through the approved TSP provider. That is currently MetLife. The annuities are simple guaranteed life annuities that guarantee the retiree payment for the rest of their life or for their life and the life of another person, like a spouse. The annuities pay a fixed interest rate that varies monthly. As of July 2017 the TSP annuity rate is only 2.25%.

While annuities can offer attractive investment advantages for some retirees, the TSP annuity just misses the mark. In exchange for a lot of liquidity and fund options, the annuity guarantees an anemic growth rate that is about what a retiree would get if they just left the money invested in the G Fund. Retirees buying the annuity are locked into the interest rate that was advertised at the time of purchase. In today’s ultra low rate environment, that means that when rates likely go up annuity recipients will be left in the dust.

Very few federal employees opt for the annuity. In one surveyed year, of the 50,000 federal retirees that qualified for an annuity, only 5% of retirees opted for the plan. Because the annuity option is so limited in terms of performance and overall return, it is very likely that the option makes no sense for the vast majority of investors.

Retirees wanting the stability of an annuity and better growth options would be well advised to either roll their TSP balance to a low fee annuity broker, like Vanguard or Schwab, or to seek out an ultra low fee, long term fixed income retirement fund. Vanguard’s Managed Payout Fund (VPGDX) is one option that significantly outperforms the TSP annuity and allows your heirs to inherit whatever is left of your account balance at the time of your death.


Thrift Savings Plan Service, Support, and Advice


TSP’s customer service is exceptional. It is call based, highly responsive, and can resolve complex matters in moments. TSP participants gain access to the advice section of the TSP website. Truthfully, the information found there is fairly basic. Retirement calculators, paycheck estimators, and retirement income requirement summaries are all available and simple to use. While this section of the TSP site offers nothing unique, it does allow the TSP platform to be a fully independent operation and destination for retirement planning.


Thrift Savings Plan Pros


- Fees – TSP’s fees are rock bottom. Historically the funds’ fees were far lower than anything that was offered on the private market. The pressure Vanguard and TSP placed on other brokers resulted in a price war that created a host of ultra-low fee options that are available to private investors. Charles Schwab is now offering ETFs with net expense ratios that compete with TSP.

- Simplicity – The plan is incredibly simple to use and for federal employees, it interfaces perfectly with existing technology. You can access the TSP portal from government computers and make allocation changes at will.

- Security – The requirement that certain transactions be confirmed with a code that is physically mailed to you boosts account security and is a massive plus.


Thrift Savings Plan Cons


- Lack of Options – The plan really only offers 5 different fund options. Investors cannot hold individual stock in the portfolio and withdraw options are incredibly limited.

- Lack of Roth Conversion Options – You cannot convert pre-tax contributions to Roth contributions while in federal service.

- Lack of Withdraw Options – This was once a massive disadvantage but is being corrected with pending legislation.

Thrift Savings Plan Review Summary


So does it live up to the hype? Yes! That’s a great thing because if you’re a federal employee, you don’t have much of a choice. The TSP provides federal workers a great way to make a well diversified index fund based retirement plan. Diversification and more complex investment options are lacking, but TSP participants can seek out greater complexity in their Roth IRAs or can build the TSP balance and roll the sum into an IRA at any number of brokerages that offer competing products. If you are able to access TSP, it makes sense to do so and to keep the account as a safe harbor from fees and unnecessary costs.



Thrift Savings Plan IRA reviewed by Brokerage-Review.com on . Rating: 4



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