John Hechinger and John Turner recently published an article picked up by Bloomberg and Businessweek alerting TSP and TSP participants to the well-known TSP ‘IRA Rollover Scandal’.
In the TSP Rollover Scandal, brokerage houses recommend any retired or separated TSP participant take their TSP balance and roll it over to their Brokerage House IRA. In most cases, this benefits the Brokerage House much more than it does the former TSP Account Holder, as the Brokerage house can collect lucrative fees by managing the participant’s retirement balance in-house. The article was well researched and rightfully took some jabs at ‘GoldBug’ IRA Brokerage Houses, but I think the author went a bit far by bashing NFCU and USAA. USAA and NFCU are Friend- Not Foe- of the Veteran’s wallet.
In defense of NFCU, USAA, Schwab, Fidelity, and Vanguard, I present the following…
5 Reasons Why Thrift Savings Plan Sucks
1) Vanilla Fund Choices in TSP
TSP is the In-N-Out Burger of 401(k) programs- Let me explain.
If you want the best burgers available at the best price anywhere, then the choice is simple- You and your family head to In-N-Out Burger.
But if Mom wants chicken, Daughter wants pasta, and Dad & Son want burgers, you’re headed to Applebee’s. You’re going to pay more at Applebee’s, the burgers aren’t quite as good, but there are plenty of choices at Applebee’s to keep everyone placated. Your family pays a premium for the variety of choices available under one roof at Applebee’s.
TSP only offers 5 Vanilla Index options on its menu (plus blends of these 5 Funds re-packaged as ‘Lifecycle Funds). TSP is the In-N-Out Burger of 401(k) providers.
Fidelity, Schwab, Vanguard, and USAA offer every stock, ETF, and almost every mutual fund available in the market. Fidelity, Schwab, Vanguard, and USAA are the Applebee’s of 401(k) providers- You pay more for a menu that provides more variety.
2) Big Brother wants to choose your TSP Investment Allocation
Let me explain why letting Congress or the the TSP Director choose your retirement fund allocation is a bad idea.
Even if you are in one of the ‘L’ funds as recommended by Congress and/or the TSP’s Director, you’ve got a significant amount of money parked in TSP’s ‘F’ Fund.
The TSP F Fund is the index formerly known as Lehman Brothers Aggregate Bond Market, and is closely approximated in the ETF world by Vanguard’s BND ETF. At the time of this writing, BND and F Fund have a Duration of 5.62 years, which means that if interest rates go UP by 1 percent, the value of BND and F Fund goes DOWN by 5.62 percent.
Investing in the F Fund right now is rather foolish in my opinion- Current F Fund yield is 2.00 percent. If interest rates (which are now near ZERO) go up by one percent, you’ve LOST 3.62 precent (2.00 % – 5.62%) on a supposedly ‘safe’ bond index investment.
TSP does not publish key monthly statistics (like Duration) on its funds because it thinks you are too stupid to process the data (TSP does provide them once per year in the F Fund Information Sheet if you go searching for it).
If you want ‘safe’ money, park it in the G Fund, not the F Fund- The G Fund has never had a bad day, and is currently yielding 2.375 percent.
3) TSP has some rather Arcane Withdrawal Rules
Basically, you have a One-time option to do a partial withdrawal (or IRA rollover), followed by a one-time option do do a ‘full’ withdrawal (which has many one-time format options to choose from like lump sum, market-rate annuity, fixed dollar amount, etc).
Timing and quantity of withdrawals has improved with the TSP Modernization Act, but you still cannot ‘cherry pick’ which funds or portions of investment funds to withdraw from- all withdrawals are spread equally from your existing investments.
4) TSP is Mining Personal Data on You
Are you a Fed who is fed up with all the workplace rules about safeguarding Personally Identifiable Information (PII)? Well, TSP does not follow these rules. At a minimum, the TSP knows your Skin Color, Birthday, Wage Grade, and Education Level, and they are trying to collect more. Think Vanguard, Schwab, and Fidelity could get away with this? Vanguard executives would have handcuffs slapped on them if they collected this data on their 401(k) participants.
5) TSP is resistant to change- Both Market-Driven and Congress-Driven
Consider the following TSP history in resisting or implementing change:
The Roth TSP option was authorized by congress in the TSP Enhancement Act of 2009 but took over 4 years to implement:
- TSP finally acknowledged the existence of the Roth Option in December 2010 (> 1 year).
- TSP took another year to publish planned regulations (December 2011, 1 year).
- TSP did not complete rollout to all Roth-TSP eligible participants until 2013 (4 years later).
TSP is highly resistant to alter or expand their current product offering:
- In 2013, TSP ignored sage advice to broaden the scope of the International ‘I’ Fund.
- TSP has been ignoring the advice to add 3rd Party Mutual Funds to its product offering since 2009. TSP is still sitting on the congressionally approved Mutual Fund Window (MFW) option that was authorized back on June 22, 2009 (in the TSP Enhancement act of 2009).
In summary, I’m still a huge fan of TSP, but it’s not a complete product.
For TSP participants hearing the ‘Siren Song’ of the IRA Brokerage Houses, the G Fund alone is reason enough to keep at least a few thousand bucks in the TSP. You can always roll money back in to TSP (at any time, for any reason) and use the G Fund as your ‘safe’ money to cover your next few years’ of retirement living expenses. You can read more on how to do a Partial or Full TSP Withdrawal here.
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