TSP Hardship Withdrawal Costs

The TSP Mutual Fund Window is going to cost you if you choose to participate.

So the Federal Retirement Thrift Investment Board (FRTIB), also known as the board who runs the Thrift Savings Plan, is about to complete the implementation of the TSP Modernization Act.

The final piece of the TSP Modernization Act is to provide the much-anticipated ‘Mutual Fund Window’, which will let TSP Participants invest in funds outside of the 5-letter funds (G, F, C, S, I) and the age-based Lifecycle fund blends of these 5-letter funds.

The ‘Mutual Fund Window’ was a solution to placate congresspeople who wanted to allow TSP participants to have ESG (Environmental Special Goodness) fund options, or to choose based on their conscience if they invest in China and/or Russia.

The Grand Compromise FRTIB/TSP came up with is that TSP participants will soon (Summer 2022) be able to use the TSP Mutual Fund Window, but there will be administrative costs and certain guidelines to follow. The admin costs were put in place so that participants who choose to stay with the original low-cost vanilla 5-letter TSP fund options do not have to pay additional expenses.

In general, the Mutual Fund Window guidelines are:

  • Participant must have minimum total TSP balance of $40k
  • Minimum transfer to the Mutual Fund Window is $10k
  • Maximum balance in MF Window cannot exceed 25% of TSP balance
  • an annual maintenance fee of $95.00
  • another annual fee of $55.00 to defray administrative expenses
  • a cost for each trade of $28.75
  • potential additional fees and expenses for some of the mutual funds

So let’s apply this to the ‘average Joe’ TSP participant. According to TSP, the average account value for a FERS participant is roughly $174k. Let’s say that Average Joe wants to fill in a TSP product offering gap by investing in a Real Estate Investment Trust (REIT) index fund.

Joe chooses the lowest cost option (which I can only assume will be available) which is the Vanguard Real Estate Index- Admiral shares (VGSLX). VGSLX Expense ratios are a low 0.12 percent per year.

Joe invests the maximum allowable 25% of his $174K, or $43,500 in VGSLX. Joe pays a total of $230.95 in fees and trading costs during his first year of using the Mutual Fund Window, or just over 0.5 percent of his MF Window balance:

TSP Mutual Fund Window Costs

At a minumum, typical TSP Participants will pay 0.5 Percent per year in Mutual Fund Window Fees (spreadsheet)

Note that Joe pays roughly $178, or 0.41 percent of Fund Window value in admin fees alone, before paying loads/expenses from the actual VGSLX fund. Note that if Joe invests the MINIMUM amount ($10,000) in the Mutual Fund Window, the admin expenses will be a HIGHER percentage of assets because the $178 fees are fixed. In this case the all-in fees to buy VGSLX will be 1.91 percent.

Are fees between 0.53 and 1.91 percent worth it for additional retirement savings diversification?

I’d say ‘no’, unless Joe has no other employer 401k plans available AND lives in the Democratic People’s Republic of California (this will be a follow-on Gubmints post).

Mutual Fund admin fees from 0.5 percent to 1.91 percent per year are not cost-effective unless there is a special provision or feature provided by the retirement account. Most retirement plan savers who want to choose options outside of G/C/F/S/I funds will be better off diversifying their retirement savings through an IRA at Schwab/Fidelity/Vanguard rather than paying TSP an additional 0.5 percent or more per year in admin fees.

ACTION PLAN for TSP Participants:

(Outside of California) If you want more Qualified Retirement Plan diversification than G/F/C/S/I funds, consider using another employer’s low-cost 401k account (if you have it) or a Schwab/Fidelity/Vanguard Rollover IRA account. You’re likely to do better without paying 0.5 percent to 1.91 percent in annual fees to the TSP Mutual Fund Window.

(California Residents) If you desire more diversification within your Retirement Savings and you do not have low-cost options in a current- or former-employer’s 401k plan, consider eating the fees within the TSP Mutual Fund Window as an exchange for the liability protection that TSP provides.


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