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:
U.S. Growth Stock
U.S. Value Stock
Emerging Market Stock
Non-U.S. Small-cap Stock
High Yield Bonds
Emerging Market Debt
Private Real Estate
Corporate Governance Funds
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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