Hill OKs changes to thrift plan

The Thrift Savings Investment Fund Act of 1996 (S. 1080) which passed just before Congress adjourned last year expanded the retirement investment options available to federal employees through the Thrift Savings Plan (TSP). The legislation added a small capitalization stock index investment fund and an international stock index investment fund to the plan's three existing investment options. It also will improve the liquidity of TSP accounts by expanding the loan program and creating two new withdrawal options.

In addition the legislation allows TSP participants to tailor a retirement plan that best meets their financial needs.

These changes were designed to give employees greater flexibility and encourage them to begin saving for retirement. Here are the details:

The TSP will add the two new retirement investment options cited above to the three options already available: a government bond fund a Standard & Poor's 500 index fund and a corporate bond fund.A small capitalization stock fund is one that invests in growing companies. Although the term "small capitalization" is not defined precisely in the committee report accompanying the legislation the term generally refers to companies with a total market value of $500 million or less.

The small capital index fund would mirror the performance of the Russell 2000 Index an index of 2 000 small capital stocks.

The international stock index fund probably will be constructed to replicate the Morgan Stanley International Stock Index.

While passage of the legislation will allow federal employees to diversify their retirement savings more broadly there is one drawback. The Thrift Investment Board anticipates that it will take two or three years before federal employees can invest in the new funds because the board is installing a new computer software system. The system's development will dictate the time frame for the availability of the new funds.

We all know that when government agencies enhance or modify their computer systems the process can be time-consuming. That being the case I am puzzled as to why the Thrift Investment Board given a congressional blessing to offer the new funds did not try to find a way to implement them while the computer system was being upgraded.

I spoke to a board official who said Congress agreed with the board's decision to offer the two new funds after the computer software system was installed. But that does not explain why the board chose that route. I suspect there are speedier ways to make these two investment options available to federal employees while the computer system is undergoing revision.

In the liquidity area the legislation postpones the requirement that TSP participants elect how they wish to receive their savings plan funds until they actually begin receiving them. TSP funds on deposit with the Thrift Investment Board will remain on deposit until payment is requested by plan participants. At that time the participant or beneficiary will indicate how he wants the money paid out.

Previously TSP participants could select only one method of withdrawal when they left government service. Under the new law a separated employee can elect one or more of the approved withdrawal options. For example he can request that part of the money be rolled over into an individual retirement account (IRA) and another part be converted to an annuity.

Under the previous law the Thrift Investment Board had to purchase an annuity for a TSP participant if the participant had not made a valid withdrawal election by Feb. 1 of the year following the latest of:

* The year in which the employee turned 65.

* The 10th anniversary of the year in which the employee became subject to the provisions of the Federal Employee Retirement Securities Act.

* The year the employee left government service.

Because this year marks the TSP's 10th anniversary the 10-year automatic annuity option would have been triggered for some participants. The change in the law eliminates this provision.

Instead it requires that annuity payments begin by the later of the following two dates:

* April 1 of the year after the employee turns age 70-1/2.

* April 1 of the year after the employee separates from service unless a withdrawal action is made before that time.

This puts the TSP withdrawal provisions in line with provisions that apply to other retirement plans such as IRAs and 401(k) plans.

In the area of TSP loans the legislation removes a requirement that loan applicants prove they are qualified to borrow under one of four criteria enumerated in the previous law. Employees will be able to borrow money when they need it for any reason.

Another new provision allows employees older than age 59-1/2 to withdraw all or part of their vested funds before leaving federal service. That means federal employees can withdraw retirement funds at age 59-1/2 regardless of whether they continue to work for the government.

Yet another provision allows federal employees of any age to withdraw their own contributions and associated earnings prior to separation if they can show a financial hardship. Such a withdrawal would be considered taxable and subject to an early withdrawal penalty of 10 percent for employees under age 59-1/2. Although this penalty would discourage early withdrawals the law would permit them when there is a clear and demonstrated need.

Bureaucratus is a retired federal employee who is a regular contributor to Federal Computer Week.

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