Is There Anything Wrong with the Thrift Savings Plan Today?
Although a thrift savings plan (TSP) works like a 401(k), it isn't a 401(k) plan since it's not under section 401(k) of the IRS tax code. The TSP walks, talks, and quacks like a 401(k), which would make it the largest 401(k) plan with over $800 billion.
One would expect such a massive plan containing over 6 million federal employees' retirement assets to be run cautiously and allow smaller organizations to lead the charts. The goal for TSP should be to perform respectively and avoid conspicuous failure.
The Claim
This is, however, not the case based on the email released last week. The note said Uniformed Service and Civil Servants deserve healthier performance, oversight, and service than what the Federal Retirement Thrift Investment Board provides. It also says that;
The board's low capacity and lack of financial literacy have led to mismanagement of the plan.
Participants can achieve better results investing in ETFs and private sector funds at a personal level.
Inept supervision has led to low performance of funds and inferior services offered to participants with inefficient record-keeping, data security, and fund windows.
Several pages of analysis followed this to support the claim of weak returns. Next was a recommendation that the current investment lineup is replaced with selected private sector investment options.
But while the note seemed convincing on the surface, someone with investment experience would find the charges a bit awkward. The allegations were conducted haphazardly – which sets off an alarm. Also, the author failed to analyze every thrift savings plan's performance using the exact, consistent measurement.
The Investigation
So we'll do that to see if these allegations are true. TSP has a limited investment menu, which consists of five standalone funds, including small U.S stocks, large U.S stocks, international stocks, short government, and intermediate-term bonds.
These are all custom offerings. The annual expense ratio for various TSPs options ranges from 0.04% to 0.07%. This means participants pay about $40 to $70 in management fees for every $100,000 invested. Amongst these funds, only the short government is run in-house. The other stand-alone funds are BlackRock-run. This alone defeats the statement that the boards bypass the private sector.
The lifecycle fund is composed of all five funds, with allocations set by the board. The image below shows the 10-year performance of each TSP fund through December 31, 2020, alongside the Morningstar Category average for the mutual fund alternatives.
The funds are arranged in order of size because TSP’s two largest funds account for two-thirds of its assets – and their performance matters most when analyzing TSP performance to its participants.
The chart shows that the thrift savings plan U.S stocks performed excellently. Its international stock and fixed-income funds exceeded their rivals' average. The longer-dated Lifecycle funds matched their competition, while the Lifecycle income fund only lagged by a percentage point.
The email author focused on numbers from five-year performance, which isn’t a bad yardstick for evaluating retirement plans, but it is worth seeing if there’s anything to the contrary in the long run.
The second image below shows the results of the exercise for the trailing five years. It also contains an additional fund, the Lifecycle 2050, which only has a five year history at that date.
While these results are worse, the U.S stocks still performed optimally. The small fund also performed well, but the other funds slipped. Still, with five of the nine funds outperforming their competitors, one can claim that investors could do “much better” by choosing other funds.
Also criticizing the Lifecycle funds’ performance during a strong bull market is bed analysis. The lifecycle income has about 22% of its assets in equities compared to its competitors averaging 28%. Should equity performance reverse, they’ll experience a strong performance.
To succeed with 401(k), all plan sponsors had to provide participants with low-cost access to the market and allow them to make the decisions themselves. The TSP board did just that.
If there's anything that should attract criticism to the board, it's the fact that one-third of TSP assets are in short government funds, which is an equivalent of cash accounts. The percentage is higher than the industry-recommended 10 percent in cash and 10 percent in bond funds.
The board addressed this by launching the Lifecycle series, which would attract funds that would otherwise be invested in a short government fund. Unfortunately, the implementation has been slow.
In conclusion, dissing the thrift savings plan due to its investment selection would be reasonable but somehow harsh, considering that it's not the only 401(k) plan with an imperfect asset allocation. Still, the claim would merit discussion, not an email with allegations. There's no proof that the TSP would improve by having the private sector manage its funds.
