What makes the Thrift Savings Plan so different from employer-sponsored contribution plans?
Kelly Fasterling has worked for many years to help people achieve their financial freedom goals. As an independent financial advisor, she educates clients at or near retirement on strategies to position their assets to maximize benefits and create peace of mind.
What makes the Thrift Savings Plan so different from employer-sponsored contribution plans (401(k), 403(b), etc.)? The one aspect that makes them so different is the fund choices. There are only five essential funds that are available. If you count the L funds, then there are 10 funds that your money can be invested in.
Talk about simplicity – sometimes good, sometimes bad. What’s the bad aspect?
Participant surveys from the Thrift Board suggest TSP participants tend to want a broader array of investments. 45 percent of TSP participants usually withdrawal everything in the account one year after retiring from federal service.
Perhaps those that don’t take the money out choose this route because there are a limited number of investments to choose from. Most of those that do, do it for two reasons:
- To avoid the plan’s restrictive withdrawal choices, benefiting from the IRA’s flexibility.
- Their financial advisors advise that it could potentially be the better option.
If you have questions on your own TSP plan, be sure to reach out to a knowledgable financial advisor for assistance.
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Some Allowances Made for Mutual Funds
The TSP, to retain people who would choose to leave the option because of the limited number of investment choices, are offering a mutual fund window. Once this window has been implemented, the TSP participants can invest some of the money in outside mutual funds.
Of course, it will take some time before the MFW is implemented. According to the Thrift Board, it’ll be at least 18 months after an awarded contract for the MFW to be set up. There’s not even been a Request for Proposals released yet. Once this has been issued, participants will know how the MFW is going to look and how its activation will affect the money remaining in the traditional TSP funds.
A good number of people see the TSP’s simplicity as something god. For example, John Bogle once said the TSP is as good of a retirement plan as anyone can have. Bogle, who founded the Vanguard Funds, gives high praise to this type of investment. When you don’t have many choices, you’re less likely to feel overwhelmed than those who have too many investment choices.
When the TSP was first introduced in April 1987, the only fund available was the G Fund. In January 1988, two more funds were introduced– C and F Funds. It was 13 years later when more funds were introduced– May 2001 led to the introduction of the I and S Funds.
Today, the TSP is loaded with funds, and no more have been introduced since then.
However, in July 2005, the TSP came up with the target date funds, which took the five existing funds and mixed them all. The L funds center around on how much someone needs money. People who need the money quickly should invest in the L Income Fund. If the money isn’t needed until later on, they can place the money in the L 2050 Fund.