The TSP – a Not-So-Hidden Gem

TSP Overview:

Among the many savings plans federal employees have at their disposal lies one of the most valuable pieces of the Federal Retirement system – the Thrift Savings Plan (TSP). TSP offers a tax-deferred retirement savings and investment plan. Participants who in enroll in TSP benefit from having the opportunity to save part of their income for retirement, receive matching agency contributions and shrink their current taxes.

The Thrift Saving Plan is an investment expense, which reduces returns. Participants in TSP invest in diversified markets. The financial contributions produce a return without any special effort from the investor. Employees only have to participate and to receive the market’s return.

TSP – Hidden Advantages:

In a turbulent economy, it is nice to find a financial opportunity that is economically sound and advantageous for your bank account. Employees who invest in the Thrift Savings Plan will experience very low costs associated to their account; on average, ranging from 0.029 – 0.049 percent of account assets. Comparatively, there is not another investment program that allows for employees to invest in their future for roughly 49 cents on every $100 invested.

For the investment novice, the minimal fee may not seem like a huge selling point, but it is. TSP’s low costs translate into rather high anticipated investment returns. Greater investment returns equals more money in your pocket later on. Gaining a peace of mind for your finances during your golden years.

The variance between the Thrift Savings Plan’s cost and the cost to the standard retail mutual fund is around 1 percent. Hypothetically, if an employee invested in a diversified portfolio, consisting of TSP funds they have the potential to capture over 99% of the market portfolio’s return. Putting all of these seemingly miniscule percentages in perspective, over the length of 40 years could cost a benefactor up one-third of their portfolio…..wait, seriously?

The cost of owning another investment option, such as an IRA, charges a higher fee – that goes into the pocket of the middle man. Federal employees who have invested into TSP and have accumulated a substantial balance may be swayed to move their funds into an IRA. Employees should be wary of transferring their hard-earned funds into an alternate portfolio that can boast a substantially higher percentage in expenses. To the surprise of many, in addition to fund expenses, an IRA account can charge sales commissions, service fees, advisory fees, costs and account-level administrative expenses; potentially costing an employee 2-3 percent more than the TSP’s expense; the higher-cost investment plan can greatly damper your retirement expectations. Staying cognizant and well-educated of your finances can help retirees reap the benefits of decades of hard work.

Overall, the TSP combined with the availability of the G Fund, the TSP’s negligible costs make it a premier investment and retirement plan for federal employees.  Employees will reap the benefits of their Thrift Savings Plan account by investing and leaving their contributions for as long as they can.

TSP – Current News:

This month, Congress is weighing in on some dramatic changes to military retirement. Under the current plan, the military invests retirement money exclusively in U.S. Treasury bills, and guarantees that retirees will receive a specified level of benefits.

With the new changes in policy, the guaranteed benefits will be reduced and 3 percent of service members’ pay will be transferred into the federal Thrift Savings Plan (TSP) – the government will match an additional 1 percent to all contributions.

The TSP is comparative to a 401(k) investment retirement program offered by private sector employers. The Thrift Savings Plan invests money with private financial firms and does not guarantee a set amount of retirement income. According to the system’s financial statements, TSP currently invests more than 55 percent of its assets with BlackRock.

The Thrift Savings Plan will still offer enrollees to waive investing in actively managed funds and enroll into the lower-risk U.S. Treasury bill option – but will still guide all participants within the system to diversify their portfolio for greater return. Theoretically, if the new plan is enacted, approximately $91 billion in service members’ compensation would be transferred into the TSP over the next 25 years. Supposing military participants invest in a similar manner as other enrollees, such as federal employee, the financial shift could end up channeling up to $50 billion to BlackRock during that time period.

In addition to the shift of funds, service members may say goodbye to no additional fees to Wall Street money managers and hello to annual fees for their pension plans. If the Obama administration’s changes are approved, new service members in the TSP will pay investment management fees to either the Thrift Savings Plan or BlackRock.

Recently, on June 4, the Senate unanimously passed the legislation allowing federal law enforcement officers and firefighters will be able to access retirement funds earlier without penalty. The amendment will allow federal law enforcement officers, firefighters and specific border protection and customs officers to withdraw funds from their Thrift Savings Plan after the age of 50 without a tax penalty.

Currently, federal law enforcement officers are eligible to retire after 20 years of credible service and at the age 50 – many are required to retire by age 57. Usually the earliest possible withdrawal date without penalty is 59.5 years old. Meaning that there is a long lag between an employee retiring and being able to have access to their hard-earned retirement fund.

Other TSP Related Articles

What Are Your TSP Options With the New Phased Retirement Program? by June Kirby

Understanding The Thrift Savings Plan, By Todd Carmack

Are You Thinking About a “Deferred” Retirement? by Gary Fouts