Though the TSP Has Changed, There Are Still More That Participants Want

The Thrift Savings Plan just recently did an overhaul on their withdrawal rules for both current and retired employees, which was implemented on Septemeber 15th of this year–a move that has not been done since the TSP started well over three decades ago.

These new withdrawal policies were finally made largely due to the participants’ feedback over the years, where the majority viewed the program quite well aside from the withdrawal policies that most were unhappy with and wanted to see changes.

However, there are still other changes that TSP participants would like to see changed.

Although there were surveys that the TSP used to determine what needed to be changed, they also analyzed the actions of their members. Just in the first year, they saw that over a third of eligible participants moved their TSP into IRAs or other third party tax-favorable retirement accounts instead of keeping their funds within the Thrift Savings Plan. These moves had them forfeit benefits of low admin fees and investing in the G Fund, which is government securities fund specifically for the TSP. However, it seemed that the flexibility to access their money was more important.

During the stages of analyzing and reviewing what new withdrawal options should be put in, the TSP had to post their proposed policies publicly to allow comments and feedback from their participants, which they had to review then and explain the comments why such rules were or were not added to the new change.

Unfortunately, it seemed that the board that manages the TSP was unable or not compelled to make any changes based on these comments on the postings. They stated for some remarks that because of tax codes, they were not able to make certain changes as it fell under the jurisdiction of the Internal Revenue Service. However, the comments are a great way to know what changes they would still like to see in the TSP.

One of the popular requests made by participants was to have the ability to convert their traditional TSP into Roth balances from the account. These conversions, which are well-known to be done with IRA accounts, would have the individual pay income taxes on the balance, but they would be able to withdraw from their Roths free from the liability of more taxes.

The TSP responded that though they have contemplated the idea of granting Roth conversions from within the accounts, they concluded that with tax complications that would arise and the substantial risk of unrecoverable financial problems that they would not make this change. Along with that, but this matter was out of the sphere of what changes they were allowed to make by the TSP Modernization Act of 2017.

Another change that was asked for was in regards to the TSP’s process and procedure on paperwork and filings for withdrawals or changes to the accounts. The main issue was about having to receive a notarized signature from a spouse consenting to most changes or withdrawal requests. Though for those under CSRS, which only requires a notice to the spouses, the TSP stated that this a procedure that needs to be met under the law.

However, they also replied that even if the law was not involved, permitting an investor to change the amount or regularity of their installment payouts without the agreement of the spouse would disregard why the rule was created in the first place; to protect the spouse from having the participant deplete their accounts without agreement. Because of this, it is highly unlikely this will ever be changed.

Other comments touched on how the withdrawal options that were being changed were not sufficient. For instance, one policy change will let participants with both a traditional TSP and Roth account elect where the money comes, whether just from the traditional balance, Roth balance, or a proportionate withdrawal from both. Before the new rules, the latter option was the only option available. In the posting, it was suggested that account holders should be able to select the percentage or amount from both accounts.

The board state that they did also review this possibility but that it would be impossible to do administratively. However, an account holder can still do this by making one withdrawal from their traditional TSP and then another withdrawal from their Roth account.

The board also thought about letting participants choose to make withdrawals from one or multiple funds instead of the proportional formula that is in place. However, they decided against it at this time because of the amount of overhaul that would need to be done in regards to changing withdrawal forms and the programming system to allow those types of withdrawals.

Though the TSP does make changes, it can be said that it is done very slowly. Though, they have made it clear on what changes they do not ever plan to make. For those of you that still want to see those changes for the options that will be accessible to you, you can still mostly do them by withdrawing your account and taking your money somewhere else.