A TSP investor behavior recently noticed by the Congressional Budget Office is something that they’re calling anchoring, which means an investor who never changes their investment, up or down. Like a ship anchor, these investors stay put.
These behaviors, while comfortable for the risk-averse, can have some noticeable effect when it comes to the TSP’s new changes. The first involves the match back for contributions from the agency, and the second involves new hires and how much money is invested in their retirement fund at the onset of their career.
For 30 years the TSP has kept their match back policy the same, which is, the agency will match up to 3 percent of the employees salary that they invest into FERS, meaning if you put in 3 percent of your own money, the agency will match you with 3 percent of their money into your account too. After that, the agency will still match you, but at a lower rate. The next 2 percent will see a match back of 50 cents for every dollar you put in. The agency will also give you 1 percent just for being employed, regardless of how much you put in. All of this ends up meaning that if you put in 5 percent, you will be matched back 5 percent too.
The agency has set it up, so that from your paycheck and automatic 3 percent is put into FERS unless you implicitly tell them you want to contribute more or less. By the middle of 2020, the agency is planning to increase this default contribution, upping it to 5 percent.
The automatic enrollment and match back program in FERS has pretty much been a success, with 92 percent of employees participating. This is compared to CSRS employees (FERS predecessor) who only see 69 percent of employee participation. FERS employees tend to have more significant investments too, which is most likely due to the match back program.
What it appears though, is that when it comes to FERS employees, most only bump their contribution up to that 5 percent, to maximize the matching percentage, but once they get there, they don’t tend to contribute more, nor do they ever really change their investment. In essence, they drop anchor and never think about it again. Even after years of employment, the average percentage of employee investment has no noticeable change from before matching contribution and default contributions were a thing, meaning that the anchoring strategy is not limited to the particulars of the structure of the FERS program.
This is the logic behind the TSP’s plan to up the contribution that each employee will be putting in by default. If most people anchor, then having a more significant contribution at the onset of the employee’s career would help them save even more.
One reason some employees might not be apt to alter their contributions is that on paper the numbers don’t sound like much: bumping up a contribution 1 percent seems almost negligible. But over time, those numbers can make a huge difference, especially if you’re only contributing the 3 percent and missing out on more of those matching contributions from the agency.
Anchoring, while popular, is not the sounded strategy when it comes to saving for your future, and it might be time for you to review your contribution to make sure you’re maximizing your investment and preparing for tomorrow.