Is TSP a model for Social Security?

Bush cites Thrift Savings Plan as model for personal accounts

Summary of Ryan-Sununu legislation (H.R. 1776 and S.857)

In his State of the Union address earlier this year, President Bush talked about using a portion of Social Security payroll taxes to create personal retirement accounts. He compared his proposal to the Thrift Savings Plan, a retirement benefit for federal employees.

The plan lets employees invest a portion of their paychecks in any one of five investment funds. "It's time to extend the same security and choice and ownership to young Americans," Bush said.

Little has been said about how the federal government would administer personal retirement accounts for tens of millions of Americans. Social Security Administration officials said it would be premature to comment. Likewise, Gary Amelio, executive director of the Federal Retirement Thrift Investment Board, which administers the Thrift Savings Plan, said he could speak only about it.

But some policy advisers insist that, despite differences, the plan is the administrative model behind some legislative proposals to change Social Security. So how do federal administrators manage personal accounts for 3.4 million employees?

The investment board administers the federal plan with a staff of 90 employees, most of whom are policy and oversight officials and some of whom are information systems employees. "We're running very efficiently," Amelio said.

The federal government has 130 payroll offices that remit employees' payroll contributions to the investment board, which handles recordkeeping internally. The board recently bought a new IBM mainframe, which has 10 times the capacity of the old one, to process and store all the personal account information, Amelio said. "I can tell you it looks like Darth Vader," he said.

Since 1986, when the Thrift Savings Plan was authorized by Congress and offered to federal employees, the Agriculture Department's National Finance Center in New Orleans has handled many back-office functions for the plan on a cost-recovery basis.

But as part of a three-year cost-cutting effort, Amelio said, this year the board will offer companies a chance to bid competitively on call centers and other back-office functions.

The federal retirement savings plan has among the lowest administrative costs of any defined contribution investment plan, Amelio said.

"We operate at about six basis points," he said, which means administrative costs are 60 cents per $1,000 invested.

"If you look at most defined contribution plans in this country, the average basis-point charge that the participants are paying is anywhere from 40 to 150 basis points," he said.

Compared with most companies' 401(k) plans, the federal plan is inexpensive to administer because it has a large volume of assets — $155 billion — and a high participation rate. About 3.4 million civilian and military employees contribute to personal accounts. With such large numbers, "you get economies of scale," Amelio said.

Other factors contribute to the plan's administrative efficiency. Of the five funds in which federal employees can invest, four are index funds. Investors typically pay no management fees for such funds because the investments match broad market indexes such as the S&P 500 for stocks or the Lehman Brothers Aggregate Bond Index. The federal statute that created the savings plan prohibits its administrators from offering more expensive funds that charge portfolio management fees.

"If we were to not use index funds or go out and use other exotic investments, it would drive our costs up 100 to 200 times," Amelio said.

Since 1986, Barclays Global Investors has won a succession of contracts from the board to execute federal employees' investment choices in the four index funds. Working with the Treasury Department, the board administers a fifth fund, the G or government fund, which lets employees invest their money in U.S. government securities.

"We're a daily plan, which means participants can move their money on any day that the markets are open," Amelio said. Federal employees can move their money into different funds by informing the plan administrator via the Thrift Savings Plan's Web site, a toll-free response line or a paper form.

"We're doing the bulk of our interfund trades now online," he said. "We do about a quarter of a million trades each month."

Amelio's pet project has been adding life cycle funds to the mix. He said those "funds of funds" combine the plan's five existing funds using an asset allocation model that corresponds to employees' retirement plans.

The life cycle funds, which the board will offer this summer, will give employees who expect to retire by 2010, 2020, 2030 or 2040 the option of choosing current retirement income or future investment income.

The funds will be rebalanced daily and reallocated quarterly so that they remain aligned with the funds' investment objectives, Amelio said.

The Thrift Savings Plan, with significant differences, is the model for Social Security legislation introduced by Rep. Paul Ryan (R-Wis.) and Sen. John Sununu (R-N.H.).

"That's the model, but there'll be a lot more people and more funds" and authority to pay contractors to do the accounting, said Peter Ferrara, a senior fellow at the business-oriented Institute for Policy Innovation and director of domestic policy for the Free Enterprise Fund.


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The feds' 401(k)-style plan

Some policy-makers have adopted the Thrift Savings Plan as their model for Social Security personal retirement accounts.

Here are several facts about the retirement savings plan for federal employees:

  • Annual administrative costs are less than $26 per participant.
  • Plan assets are valued at about $155 billion.
  • The annual budget for the board that administers the plan is $92 million.

— Florence Olsen

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