14 Points to Consider. Navigating the question of moving money from TSP or leaving it there, with help from…. the Clash?
“Should I Stay or Should I Go?” by The Clash. if you bopped to this song in high school or college, you are most likely in sight of retirement, so this is an important topic. But, even if you know this from jeans or hotel commercials, this is worth a read.
In their wisdom the Clash sang, “If I leave there will be trouble… If I stay there will be double.” Not a bad metaphor for making the stay or go TSP (Thrift Savings Plan) decision. But like so many things, the devil is in the details.
At the outset I need to give a shout out to Ian Smith from FedSmith. A few months back I asked him what big question his readers had, and this topic was the #1 answer.
I want to be clear, my goal in this article is NOT to give advice on your individual decision to transfer out of TSP or to leave your funds there. Rather, I hope to offer a list of unvarnished insights from my experience and research to help you cut through the noise. Further, to do it justice this will be an article series.
This initial article will be a summary of points to consider, and my follow ups will provide a deeper dive. In the next installment I will cover the “Stays”, advantages of TSP that support the possibility of staying. I will then follow up with “Goes”, reasons to leave. Finally, I will give you the “planners perspective”. At STWS, we have over 80 combined years serving Feds so I will be sharing those earned insights with you.
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Clash composer Mick Jones once said of the song that it was “our attempt to write a classic.” I believe the creators of TSP began with similar intentions.
The question before us today is: do they continue to succeed in that endeavor?
Ready? Let’s rock!
Should I Stay?
Here are the points I believe may favor having of some money remaining in TSP after leaving federal service or reaching age 59½.
Relatively Low Cost. Please note, that this is not “lowest cost.” That is no longer the case. More on this later but for now, if you are an active TSP participant under age 59½, you can rest easy that TSP is serving your needs for now.
It’s Easy. This is a twofold comment. With just 5 core funds and 10 lifecycle funds (Mixes of the core funds) you don’t have to leaf through page after page of fund descriptions and prospectuses. Additionally, if you are already in it, doing nothing to stay that way is, well, easy.
Target Date Funds (Lifecycle Funds). This may seem like double counting but hear me out. A target date fund by its construct provides a “ready to go asset allocation.” This means that the funds will rebalance automatically without you having to do anything. If you’ve read any of my previous articles, you know how important I think that is. This does NOT mean that I think the Lifecycle funds are ideal.
The G fund. This fund is unique and unavailable anywhere else for induvial investors. Again, this does not mean I think it is ideal.
The FRTIB. The TSP was designed to exist outside of politics. Despite recent congressional onslaughts, it has generally achieved that objective. More to come on this.
Modernization of 2019. I might be in the minority here after the challenges of the 2022 rollout of the “new” TSP website and procedures. But I do believe that the modernization was a net positive. In general, it provided desperately needed improvements for withdrawal flexibility. It also provided the mutual fund window (MFW), which may or may not be an improvement. See more below.
Automatic RMDs. RMD stands for required minimum distribution. When you reach the age for RMDs, TSP will send them automatically even if you forget to request.
...Or Should I Go?
Here are some of the points for transferring money from TSP.
Not the Lowest Cost Anymore. Major fund families like Vanguard and Fidelity have index funds with lower expense ratios than TSP. I will dive more deeply into this in my follow up article. (This does not mean run out and move any yet.)
Limited Investment Options. By this I do not mean only 5 index funds. Rather, I am referring to limitations of some of those indexes. For example, the I fund is not a complete international index as it does not include emerging markets. (I promise a deeper dive to come).
TSP Always Seems to Be Behind. Compared to many private sector defined contribution plans, TSP improvements and innovations arrive much more slowly. For example, it is 2023 and TSP does not offer a true small cap index fund and as mentioned earlier does not offer a true international index. And please do not point to the mutual fund window. The TSP site does not display the available funds.
Mutual Fund Window is Opaque to Non-Users and Carries Additional Fees. As I mentioned above, non-MFW users must seek information on the available funds from outside websites. Additionally, there are administrative, maintenance, and per trade fees. (We’ll dig into this more.)
Withdrawal Options Still Limited. I want to be clear, the modernization act improved withdrawal options massively. Maybe I’ve spent too much time in the private sector side of customer service but limiting withdrawals to once every 30 days seems restrictive. Lastly, I think the pro rata withdrawal rules can be problematic, especially in volatile markets.
No Guidance. Maybe you know everything you need to know, everything you need to consider. If so, count yourself blessed. In my experience, having a trusted relationship helps. (This does not mean buy an annuity and you’re done).
Customer Service Can Be Limited. TSP is in a tough spot. It has limited ways to bring in revenue for services and service costs money to provide. The challenges faced in 2022 with the rollout of the new website are illustrative of these challenges. Wait times of up to two hours on an 800 line are tough for participants to accept.
Well, Come On and Let Me Know. Should I Stay or Should I Go?
We’re getting there. And remember, I’m not making a recommendation here.
This has been a flyover of the points for and against leaving your money in TSP after severance from federal service or upon reaching age 59½. Make no mistake, there is a lot that goes into making this decision and in my follow up articles I will do my best to cover them.
So, you when this topic comes up you won’t be asking, “Should I cool it or should I blow?”
Until next time.
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***Raymond James is not affiliated with and does not endorse the opinions or services of Fidelity Investments or The Vanguard Group. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.
