The TSP’s Fatal Flaw

It’s a well-documented fact that I am a big fan of the Federal Thrift Savings Plan (TSP), which is Uncle Sam’s version of the 401(k).

It’s also well documented that I’m a critic of TSP for being a bit too Vanilla.  The Vanilla investment offerings in TSP are a likely cause for the $10 Billion in closed TSP accounts last year.  Due to the wonders of the G Fund, I’m no advocate of zeroing-out your entire TSP balance, but recently FedSmith.com put together a good argument pointing out the ‘other’ fatal flaw in TSP- The inflexibility of TSP withdrawals.

Summarizing the TSP withdrawal options, TSP lets you do a once-in-a-lifetime ‘Partial Withdrawal’, which lets you withdraw or rollover to an IRA any dollar amount (note GubMints has already done a Partial Withdrawal and left some TSP $$ in the G Fund).  TSP also lets you make a once-in-a-lifetime ‘Full Withdrawal’, which can come in the form of a Lump Sum, Annuity, or Monthly Payments (which can be adjusted once per year).

The FedSmith article points out the major downfall of the TSP – Full Withdrawal inflexibility:

… hypothetical synopsis of Rita Retiree. Rita had the bulk of her savings invested in the TSP. She retired three years ago and shorty after retirement, Rita decided to take a partial withdrawal from the TSP to take a vacation to celebrate her retirement.

Later that year, they got hit with several heavy duty snow storms and needed to replace their roof. Rita contacted the TSP and was told that she could not take another lump sum withdrawal from the TSP since she had already made a partial withdrawal. Rita was taking monthly withdrawals from the TSP, so she asked if she could increase her monthly withdrawal and learned that she could only make a change to her monthly withdrawal in December which would go into effect the following January.

Rita Retiree is hosed.  She has already taken her Partial Withdrawal and has already elected her Full Withdrawal using the Monthly Payments option.  She can only adjust her Monthly Withdrawal amount once per year and cannot take another Partial Withdrawal.

Why is this? Private Sector 401k’s pretty much let you take as much money out as you want any day of the week, and Twice on Sunday.

Why doesn’t TSP allow this?  I can’t imagine this would drastically increase the costs of administering the TSP, as TSP already allows participants to change investment options (salary witholding and/or asset allocation) in a wholesale manner more than twice per month.

TSP’s Withdrawal Inflexibility is a bigger problem than TSP’s Vanilla investment choices.  Until TSP/FRTIB/Congress fixes this, TSP will continue to fight the uphill battle against the TSP Rollover Scam.
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