- Approaching the 2-year anniversary of the TSP mutual fund window, we review if feds should reconsider “opening” their investment window.
In June of 2022, the Thrift Savings Plan (TSP) opened a “mutual fund window” that expanded the investment options from the 5 main cores funds C, S, I, G, and F (and the lifecycle funds that are comprised of those 5 funds) to around 5000 mutual funds. There are a few caveats, though, making a majority of feds hesitant to invest some of their TSP money into mutual funds within the new window.
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This article reviews the top items that feds should keep in mind when deciding whether or not to participate.
Investment Choices and Diversification
The TSP window contains mutual funds of many varieties. Some examples would be a growth-focused fund investing in US large-cap stocks, an international fund that includes Chinese companies, and a fund that tracks in the Russell 2000. Among numerous other types, the mutual fund window allows investors to target parts of the market that the core funds do not. The C-Fund tracks the S&P 500, which includes US large-cap equities, but the differentiation between growth and value stocks can’t be made like with the mutual fund mentioned above.
This can be great if you’ve got a disciplined and informed investment strategy and know how to properly diversify your investments. However, if you are sporadically selling in and out of various funds chasing returns, this can be disastrous to one’s retirement savings. With more choices comes more room for risk, but also potential for growth.
Fees and Account Restrictions
Before a TSP investor can open their mutual fund window, they need at least $40,000 in their account already. The reason for this is that there is a $10,000 minimum that needs to be transferred into the window before any mutual funds can be selected. On top of that, the maximum a TSP accountholder can have in the mutual fund window is 25% of their total TSP balance.
If those hurdles have been cleared, those who invest in the TSP window still have to be aware of fees, both to trade in and out of a specific fund plus the respective expense ratio of each of the selected mutual funds. Regarding the expense ratios of the 5 main TSP funds, they are typically lower or on par when comparing to similar investment vehicles out there. As for the mutual funds that are accessible via the window, that may not be the case for every fund. There are actively managed mutual funds available in the window and those typically charge more.
Until Next Time,
Source(s): https://www.fedsmith.com/2022/01/27/tsp-mutual-fund-window-more-options-risk-expenses/
**Written by Benjamin Derge, Financial Planner, ChFEBC℠ The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.
***The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.***
Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones U.S. style indexes are derived from the Dow Jones Global Indexes (DJGI) U.5, country index, which covers approximately 95% of the float-adjusted market capitalization of the US. stock market: Stocks representing, approximately, the top 70% of float adjusted market cap are classified "large-cap”, the next 20% are classified "midcap" and the remaining stocks are classified "small-cap". In each size category, a multivariate statistical procedure is conducted using six factors as inputs to generate three categories: growth, value and neutral. Example: Dow Jones US Large Cap Growth Index, Dow Jones US Large Cap Value Index, Dow Jones US Small Cap Index. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
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The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
