Risk Management is rarely provided for free
As I teased in an earlier post about the costs of the TSP Mutual Fund Window, there may be a scenario where it makes sense to participate in the TSP Mutual Fund Window and pay-up. Here it is:
CONDITION #1: You desire to invest in assets outside of the G/F/C/S/I Fund classes and do not have a low-cost option to do this within another current or former employer’s 401k plan;
CONDITION #2: You live in a state like California that does not protect IRAs from lawsuits.
The lawsuits issue is a biggie.
401k plans and other ‘Qualified Retirement Plans’ like TSP provide you with asset liability protection in all 50 states. While a Qualified Retirement Plan won’t shield you from BEING sued if someone slips on the proverbial banana peel on your driveway, the TSP (and a 401k) do protect the ASSETS held within the Retirement Plan from lawsuits or credit judgments.
This is because a 401k and TSP are ‘Qualified Retirement Plans’ with full protection from creditors, as defined by the Employee Retirement Income Security Act (ERISA).
In other words, if you live in a state like the Democratic People’s Republic of California and most of your retirement assets sit inside of an IRA, a judge gets to decide how much you are allowed to keep in the event that you are sued:
IRAs are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires as well as for the support of the spouse and dependents of the judgment debtor.
I personally don’t like the idea of a California judge determining what is an appropriate monthly income I am allowed to receive from my retirement savings, so I maintain the vast majority of my retirement assets within TSP and a former employer’s 401k to take advantage of the ERISA asset protections. I view this as a ‘free’ liability insurance policy.
Other states like Georgia, Maine, Mississippi, Montana, Nebraska, West Virginia, and Wyoming each have some mealy-mouthed protections in place for IRA’s, with different treatments proscribed between Traditional versus Roth IRAs. There’s a good state-by-state summary of IRA protections on assetprotectionplanners.com website, but I recommend you verify this info with your own research that is relevant to your state(s) of residence.
So, knowing that only an employer’s Qualified Retirement Plan (such as a 401k or the TSP) provides iron-clad asset protection in all 50 states per ERISA, what do you do?
If you choose to keep some or all of your retirement assets in IRA’s instead of a 401k or the TSP, you can go out on the open insurance market and purchase an ‘Umbrella’ liability policy to protect your assets.
Umbrella policies are typically sold in $1M increments, with each additional million a bit cheaper than the first million. According to NerdWallet (with a secondary reference to the Insurance Information Institute), a $1 Million Umbrella Policy runs $150 to $300 per year. For our Veteran readers, know that I shopped Umbrella insurance a few years ago and found USAA’s rates to be reasonable.
So, if you want to dabble in investments outside of the TSP’s G/F/C/S/I funds AND do NOT have a low-cost option to do this within you current or former employer’s 401k plan, now you do.
You can now compare the $231 or so per year to participate in the TSP’s Mutual Fund Window versus the cost of maintaining a rollover IRA and purchasing a private Umbrella policy out of pocket to protect your retirement account value.