The TSP needs greater flexibility
Congress is said to be contemplating changes to the Thrift Savings Plan to make the program more flexible for federal workers and to open the program to military service members.
The program can certainly use more flexibility. Currently, TSP enrollees who want to invest in the stock market can do so only through the C Fund, a Standard & Poor's 500 index fund comprised of the 500 largest U.S. companies. Although these companies have fared well during the past five years, they haven't performed as well over the long term as broader market indices such as the Wilshire 5000 or the Russell 2000. The NASDAQ market index is currently outperforming the S&P 500 substantially and also did so last year.
So why is the Thrift Savings Board limiting your stock market investments to an S&P 500 fund? Which crystal ball told them that the S&P 500 was the most representative index of the U.S. market? They certainly did not get such advice from the Clinton administration. In the administration's recent proposal to invest a portion of Social Security funds in the stock market, they chose the Wilshire 5000 as their vehicle for doing this, not the S&P 500.
And what about diversification through investing abroad? The Federal Retirement Thrift Investment Board (FRTIB) plans to offer such an option, but it remains unclear as to when that might happen. The board claims it is in the midst of a system overhaul and cannot provide this option anytime soon. If a private pension management firm gave that explanation to a client, the client would quickly become an ex-client!
Another unacceptable limit in the TSP operation is the way it handles payments to retirees. If you roll your TSP account over into an IRA with any mutual fund company and invest your money in any one of a much wider selection of funds than the TSP offers, you also can ask the mutual fund company to send you monthly payments or to take withdrawals. Whenever you wish to alter the payment amount, all you have to do is call the company. But with TSP, you must mail in your one-time, irrevocable election and be forever committed to that amount.
Yes, I would agree that the TSP needs greater flexibility!
Rep. Connie Morella (R-Md.) has introduced a TSP reform bill (H.R. 208) that would allow newly hired federal workers to begin participating in the TSP immediately, eliminating the current waiting period. It also would permit the transfer of funds from a qualified retirement plan of a previous employer to a TSP account.
I believe these provisions are sound and should be enacted. Why shouldn't a new employee be able to transfer funds from a previous employer's 401(k) plan to the TSP?
In addition to Morella's bill, Senate Republican leaders have said that one of their top priorities this year is a military pay and retirement benefits package that includes a provision to allow military personnel to join the TSP.
The plan is to permit members of the military to contribute 5 percent of their base pay with no mandatory employer match, which is exactly what employees in the Civil Service Retirement System can do.
Why this was not made available sooner is beyond me. It would cost the government nothing other than what it takes to administer the program, and it would enable participants to save for their retirement through a tax-deferred vehicle. Why shouldn't members of the military have this opportunity? Virtually every private-sector employee who works for a large employer has a 401(k) plan or something similar. That such an option has not been made available to our military is disgraceful.
The Republican plan also would permit the armed services to offer matching TSP contributions to military personnel as a retention inducement in exchange for a six-year service commitment. And it would allow military personnel to deposit enlistment or re-enlistment bonuses in the TSP on a pre-tax basis.
The TSP currently does not allow direct deposits of lump sums, but I see no reason why that cannot be changed. Of course, it will probably take the FRTIB years to implement such changes unless Congress forces it to move swiftly.
--Bureaucratus is a retired federal employee who contributes regularly to Federal Computer Week.