Thrift Savings Plan Guidance for Federal Furlough

Last week a Senator proposed  ‘TSP For Everyone’ legislation.

Here we go again.  Every few years someone in Congress gets the bright idea that every man, woman, and child should have the same FEHB/TSP/Three Letter Acronym that Congress and Federal Employees have.

Let’s review why this is a Bad Idea.

#1 – There’s already 4.6 million participants in the TSP when you count active and retired feds and veterans.  Vanguard has actually complained about the unfair advantage (ultra-low expenses, even below Vanguard expense levels) BlackRock has in managing the steady stream of income that is the TSP particpants’ money.  Allowing every man, woman, and child in the USA access to the TSP would be an unfair volume advantage to whomever wins the TSP contract.

#2 – When you factor in that 42 percent of TSP assets are in the G Fund, and that POTUS’ proposal to initiate the MyRA (which is exclusively invested in the TSP’s G Fund), making TSP available to everyone is essentially redundant.

#3 – TSP is not supposed to be the be-all, end-all solution to the Federal Retirement Equation-  So why should TSP be expected to be the complete solution for the Private Sector?  For those with long memories, Congress broke up overhauled CSRS back in the early 1980’s because it recognized that future CSRS payouts to federal retirees would be unsustainable.  So it created the FERS system, which operates as three legs on a tripod- Those legs being Social Security, FERS Annuity, and the  TSP.   Take away any of the three legs, and the tripod falls over.  TSP was never intended to be a retirement solution by itself.  Maybe Uncle Sam should work on setting up personal pension accounts guaranteed by the Federal Government rather than another 401k product.

#4 –  If TSP grows to be a juggernaut, some market sectors will become under-capitalized.  TSP only covers 5 Vanilla Sectors – Large Cap (C Fund), Small Cap (S Fund), Aggregate Bond Market (F Fund), The EAFE Index (I Fund), and Government Bonds (G Fund).   Force-feeding everyone’s retirement dough in to these 5 Vanilla ingredients means that other markets like REITs, High-Yield Bonds, and Emerging Markets could become under-capitalized.

#5 – Costs go up.  TSP expenses are low because the inflows and outflows of cash are predictable – Federal Employees keep getting paid until they retire or expire.  TSP knows its present customer base will remain faithful and therefore TSP does not have to support frequent Hardship Withdrawals/Early Withdrawals/Lack of Participation/Rollovers.

#6 – TSP may not be a good investment fit for everyone.  As mentioned above, there’s only 5 Flavors of Investments to choose from.  Maybe too conservative if you’re a Tenured Professor at a College or a Municipal Employee.  On the other hand, most TSP offerings may be too aggressive if you’re working for a start-up in Silicon Valley who pays its employees exclusively in tips stock options.

#7- You can already mimic TSP performance on your own using a personal Vanguard IRA.  All of the investment choices in the TSP (Except the unique G Fund) can be replicated with Vanguard Index Funds.  TSP has the advantage of a few basis points (2.7 basis points- or .027%) in overall expense fees, but fees are not horrible at Vanguard (10 basis points- or 0.10%- are available on most index funds).

 

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