Major Changes to the TSP
There are big changes on the horizon for the Thirst Savings Plan (TSP). Current employees will not see any modifications to the original terms set when they enrolled in TSP, but new employees and employees who are reinstating after a break in service will fall under the new guidance laid out for TSP.
Starting September 5, The Federal Retirement Thrift Investment Board will implement new regulations for new federal employees. All new or reinstated employees, with a zero balance in their TSP will no longer deposit 3 percent of their paycheck into the G Fund, but a riskier investment plan. All future deposits made on behalf of an enrollee who does not already have contribution allocations in place will be enrolled into an age-appropriate TSP Lifecycle Fund.
This will mark the first time since 2010 that federal agencies began automatically enrolling new employees into the TSP with the G Fund as the default. The dramatic investment change was ratified by Congress last July.
The request for a change in tactics came in 2013. The Employee Thrift Advisory Council, which advises the TSP board on investment policies and administration matters. The board is comprised of representatives from employee organizations, unions and uniformed services. The motion for change was passed in November of 2013.
Federal Retirement Thrift Investment Board worked to pass the motion because while enrollment in TSP dramatically increased with automatic enrollment; it was realized that new employees under the age of 29 had too much money invested into the G Fund. The high deposit rates are most likely due to few employees opted for alternate investment options.
The Board also found that by diversifying more deposits into the Lifecycle Funds a larger proportions of their total configuration would go to the G Fund.
The Lifecycle Fund, or L Fund’s strategy is to invest a more appropriate mix of the G,F,C,S and I Funds to be more conducive to an employees’ time horizon or target retirement date. As a target date approaches, the investment mix of the enrollee’s target date will become more conservative.
L Funds mix TSP’s government securities, common stock, small cap stock and fixed income bonds. In short, the L Fund is made up of investments from all other federal TSP funds; these funds are designed to contain more risk earlier on in an employee’s career and then gradually switch over to safer stocks as an employee’s career begins to wind down.
“The objective is to strike an optimal balance between the expected risk and return associated with each fund,” stated the TSP website.
The new retirement deposit approach will remain effective it is either superseded by a following contribution allocation or the account balance is reduced to zero.
Currently, federal enrollees are automatically enrolled in the G Fund at the time of their in-processing, unless the employee chose another option. Furthermore, the employee was also required to acknowledge that their financial investment decision was made at their own risk. When alternate deposit options are picked, the employee is also stating that they will not be protected by the United States Government of the Board against any loss on the investment; additionally, the United States Government, nor the Board guaranteed a return on investment.
So far this year, all of the Lifecycle Funds were negative for the month of August; only the G Fund was positive. While the Funds are considered much riskier, they stand to yield a higher return on investment.
Nearly 45 percent of the TSP’s $450 billion in holding is invested into the G Fund. However, as the default investment paths change the G Fund is set to dramatically drop. Fears have arisen that current employees with deposit options in the G Fund would no longer benefit from the stable account.
It has also been stated that the G Fund would no longer be an attractive option if returns are unable to keep pace with inflation. Should this occurs, serious damage would occur in the TSP and lead to costly administrative changes.
The Board will ensure that all employees are notified of the newest default plan and the employee’s option to request a refund of any default contributions.
While many are cautious about the change, the Board feels that change will provide a benefit to many future federal employees. While rates are uncertain today, there is confidence that they will be positive for the future.
However, many employees are not sold on the proposed new system. Around 73 percent stated that they opposed adding mutual funds to the TSP, and 78 percent stated that would elect to invest into the mutual funds if they were an available option. Furthermore, of those who said that they would not invest into a mutual fund, 80 percent said they would not be willing to do so even under the guidance of a financial advisor.