Thrift Savings Plan Guidance for Federal Furlough

The TSP just released a 3rd party study  conducted by Hewitt EnnisKnupp to review the product offering of funds within the TSP.

I’m on record stating that I like the low fees and simplicity of the TSP, but I’ve always been an advocate for more TSP investment choices  like REITs, foreign bonds, and commodities to provide complete diversification within the TSP.  I would be OK with having these items available as either TSP index funds (with a ‘Letter’ assigned to each new fund) or as options within a self-directed (brokerage) TSP option.

Unfortunately, after reading through the full report, I’m not convinced this was truly an ‘independent’ review- most of the Hewitt findings parrot the TSP’s mission statement and report findings such as:

One of the hallmarks of the Thrift Savings Plan is its simplicity and efficiency. The Plan offers low-cost, broadly diversified options that provide coverage of the broad asset class segments that form the core building blocks of diversified portfolios.

   For most Feds, the TSP is the bulk of their retirement savings.  There’s no way to diversify your TSP/401k-type assets beyond the current TSP product choices other than retiring or resigning from federal employment and rolling some or all of your TSP assets in to a Traditional IRA (I am of course leaving out the early-witdrawal option due to its costly penalties).   So if the average TSP account balance is over $70,000, and the average Fed makes over $80,000 per year, isn’t it reasonable that SOME feds want the ability to diversify investment holdings beyond the five ‘vanilla’ choices- EAFE, S&P500, Small Cap Indes, Total Bond Index, Treasury Index?

Among other things, the TSP asked Hewitt to review potential additional investment choices inside the TSP.  Hewitt reviewed:

Equities 
U.S. Growth Stock
U.S. Value Stock
Global REITs
Emerging Market Stock
Non-U.S. Small-cap Stock
Frontier Markets

Fixed Income
Non-U.S. Bonds
High Yield Bonds
TIPS
Emerging Market Debt

Alternatives/Other
Private Real Estate
Private Equity
Commodities
Hedge Funds
Socially Responsible/
Corporate Governance Funds
Infrastructure

    I’m disappointed that no self-directed (brokerage) option was ever considered.   Looking further into the study (page 13),  almost one in three (32 percent) 401k-type plans offer a self-directed option.  I know that the TSP’s ‘Hallmark is its Simplicity’, but if we’re all a bunch of simpletons who crave simplicity, we can simply choose not to engage in individual stock/ETF trading.  
   Also, 22 percent of 401k plans offer a USA-based REIT product, but Hewitt recommends it be kept off the table.  I’m not in agreement with this finding and am disappointed that a US-REIT Index product was not even reviewed. 

I’m further confounded by the study’s conclusion:

While non-U.S. small cap markets have grown to an adequate size and index products are now offered by major index providers, the level of assets passively managed are still low at only $4 billion.
   We would prefer to take a more broadly diversified view of international stocks. More broadly defined investment options will make education easier and participation more likely. Non-U.S. small cap may rank second, next to emerging market equity, as one of the higher risk offerings and are not commonly offered, as a stand-alone investment option. The high risk associated with non-U.S. small cap stocks may result in material losses.
    We would prefer to see non-U.S. small cap included, as part of a broader, international stock investment fund alternative invested in their respective market capitalization proportions. For these reasons, we would not recommend non-U.S. small cap stock be included as a stand-alone
investment fund alternative.

…In the end, the only recommended action for TSP is to expand the EAFE Fund (also known as the ‘I’ Fund) to include International Small Caps.

That’s the negatives from the study.  Here are some positives I have to say about FERS,  the TSP, and the Hewitt Study:

  • TSP is only one of the ‘Three Legs of the FERS Tripod’ – TSP, FERS Annuity, and Social Security.  TSP isn’t perfect, but it is nice to have the FERS annuity there as a retirement income floor/backstop.  Don’t get me started about Social Security, though…
  • While I’m not ecstatic about the TSP’s limited product offerings, at least the TSP is low-cost and the leadership is competent and (I believe) trustworthy.   Feds could have it a lot worse:
    • …If we worked for a small company with a high-load 401k plan. 
    • …(far worse) If we were Public School Teachers in the State of California (the nation’s #3 retirement plan based on assets under management),  where the pension fund (CalPERS) managers are presently being indicted for fraud.
  • If you look in the appendix at the end of the Hewitt Study, there is a nice table showing expected returns by asset class over the next 10 years plotted vs risk (page 107).  Also a table showing the correlation between asset classes (page 106) evaluated in the study.  If an investor went searching for this market info on his/her own,  it would take a whole bunch of googling to find useful summary data like these all in one document.

 

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5 thoughts on “New TSP Fund Choices? 3rd Party Study Endorses New Fund

  1. You have a good critique here, but asking for many more investing options for the TSP is unrealistic in my opinion. Overall I’m very happy with how much of the total market I can cover with just the TSP.

    Here is where I diversify our retirement savings in our Roth IRAs: VNQ, VWO, and USAGX; that is REITs, emerging markets, and precious metals (& miners).

    I think the emerging markets and metals/commodities are a bridge too far for the TSP, but I think domestic REITs are a logical next step. Including REITs in your portfolio would make it look more like the overall market than just stocks and bonds.

    Reply
    • Rob –

      Agree that perhaps the brokerage option and a commodities fund may be asking too much of the TSP, as the TSP’s goal is to encourage everyone to save for retirement without intimidating them with too many choices. The TSP end product is the Lowest Common Denominator for all Feds and Military participants.

      I also agree that the payoff generated from diversification begins to flatten out once you get past 5 or so asset classes. However, with average account balances of over $75k in the TSP, I think it is a worthwhile endeavor to provide a few more diversification options within the Thrift.
      Personally, I follow a version of Bob Clyatt’s ‘Rational Investing Portfolio’, and only a small portion of the Portfolio can be replicated within the TSP. Without my IRA (Rolled over from my private sector 401k), I would not have access to some of the ‘cats and dogs’ asset classes inside of a Qualified Plan, because they are not offered within TSP.

      Reply
  2. I’m not familiar with Clyatt — what are the best links?
    If TSP were to offer only one more fund, what should it be? My choice is a clone of VNQ.

    Reply
    • Rob-
      Bob’s website is workless-livemore.com. (Same title as his book).

      If I had to choose 1- and only 1- fund to add to TSP it would be VGSIX/VNQ and I would call it the ‘R’ Fund.

      Reply
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