Should I Stay or Should I Go? The 3rd article in our series on the thrift savings plan (TSP). Should you stay or go?
Hi again. Time to dive into volume 3 of our 4-part series covering the topic of transferring funds out of TSP or keeping them in the plan. Allow me to stress again that we are not making a recommendation either way. By this point you know we’re having some fun and following the Clash song ‘Should I stay, or should I go?’
This indecision's bugging me. / If you don't want me, set me free
Now, TSP most likely wants you to stay. Let’s take a closer look at the 7 points to consider for potentially transferring funds out.
TSP is Not the Lowest Option Anymore
This may come as a shock, but it has occurred as a result of a few actions taking place within TSP and within the overall financial services landscape.
Learn all about your TSP options at a no-cost webinar:
TSP has had to spend to improve service and cyber security. And these are good things, but they also lend to increasing costs. For example, TSP expense ratios have increased 109.9% since 2017. Simultaneously, the open market in financial services has moved to ever lower fees. The net result as I’ve mentioned before is that major fund families now have index funds with lower expense ratios than the TSP core funds.
In an of itself is this a reason to move, maybe not. But we felt it was important to share.
Limited Investment Options
To be clear, the TSP indexes are broad but not all inclusive. For example, the I fund in its current state excludes wide swaths of the world. It follows the MSCI EAFE index which per MSCI includes:
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
We think you can see that a whole lot of the world is missing - including Emerging Markets.
Additionally, we feel not having Value Indexes are a meaningful omission. (We promise to dig into why this matters in our wrap up article).
Further, we think not providing more than one Bond Index (for example short term or intermediate term bond indexes) also constitute a miss. We have others but don’t want this section to turn into a rant.
TSP Always Seems to Be Behind.
In our flyover we gave the examples that in 2023 TSP still has no emerging markets index fund among the core funds as well as not having a true small cap index. But there is one example that we consider to be a significant lag. The rule permitting 401Ks to contain a ROTH option went into effect on January 1st, 2006. TSP did not add its ROTH option until 2012. Six years later. We get it, the wheels turn slowly and it takes time but when you consider that many Feds exceed the income limits for ROTH IRAs, not having the ROTH TSP option for six years means they missed out on being able to choose this option. But believe it or not that is not the biggest delay. TSP went live in 1987 with the G Fund. In January of 1988 the C fund was added (not a big delay), the F Fund was added in 1991 (also not too bad). But the S fund was not added until 2001. 14 years later. By many measures the small cap stock asset class has the highest overall rate of return. Missing out for 14 years was a long time. So how long for emerging markets and the bond indexes we mentioned. And please do not point to the mutual fund window because:
Mutual Fund Window is Opaque to Non-Users and Carries Additional Fees.
Let’s begin with the fees. From the TSP website:
“Fees you’ll pay:
- $55 annual administrative fee to ensure that use of the mutual fund window does not indirectly increase TSP administrative expenses for TSP participants who choose not to use the mutual fund window
- $95 annual maintenance fee
- $28.75 per-trade fee
- Other fees and expenses specific to the mutual funds you choose, which you can review in each fund’s prospectus”
That last one represents the expense ratio for the individual funds (what we talked about with TSP’s lower expenses). Additionally, you will be capped at 25% of your total balance. If the window is an improvement, why cap participation?
And we consider it to be a big problem, that you can’t see the funds in advance. Again, we don’t want to rant. But check our bios, we’re from fed families. Unable to see the fund options in advance? WHAT?!
Withdrawal Options are Still Limited.
The modernization act made substantial improvements to what could only be described as a restrictive set of rules. Now, up to 12 withdrawals may be made in a year (if you space them carefully apart.), is substantially better. But we do see some obvious shortfalls here. Let’s say you are making a withdrawal for some home improvement work, and you request a distribution to start the process. So far, so good. Then, your contractor lets you know that he can get a deal on supplies if you buy them in the next 10 days. Good news, right? Only one problem. You will need to wait 30 days for your next TSP withdrawal.
Maybe we’ve been in the client care side too long but we CAN NOT imagine telling a client yes, you can have your money… but not for another month. Enough said.
Lastly, we think the pro rata rule for taking money out of TSP is impractical. What does that mean? If you have $ 1,000,000 in your TSP allocated as follows: $ 300,000 in the C fund, $150,000 each in the S fund and I fund and $ 200,000 each in the G and F funds, this would be a generally speaking a 60/40 moderate posture. So far… so good. If you then requested a $ 100,000 withdrawal, it would be taken as follows; $ 30,000 from C, $15,000 each from S & I and $20,000 each from G and F. Makes sense, right? Maybe not. What if the stock market is down? Selling equities at this time might not be in your best interest. Taking the entire distribution from G (or a combination of G and F) would allow you to draw the funds you need and allow the equity funds to recover. Likewise, if the market is flying high, it might be best to take the withdrawal from the equity funds. We truly feel that this is a big and under-discussed issue.
TSP is a no frills moderately low-cost plan. As such, there is an implied do-it-yourself factor built in. You might be the rare person with the time and the access to build a sophisticated accumulation and distribution plan. If so, good for you. In our experience, a huge number of Feds find that doing their jobs well and living their lives well consumes 24 hours pretty quickly. Having a trusted contact and relationship can be a powerful advantage in navigating life’s financial challenges. And please note, we stressed ‘a relationship.’ This does not mean spending a few hours with someone and the buying an annuity. Our founder is fond of saying “In nearly 40 years, I have never found where problems are solved, or opportunities are maximized through a single product, rather a suite of cohesive strategies tends to make the difference for people.” We can’t say it any better. Good strategy is frequently born of a good relationship.
Customer Service Can Be Limited.
We reiterate, TSP is in a tough spot. It’s ability to generate revenues are limited and expenses keep rising. The organization has had to make big investments to bring cyber security and online access up-to-date. That does not leave a lot of room for a big compliment of customer service representatives. In addition, one of the top complaints we hear from participants have to do with password issues. “Now I have to wait for my reset information to come in the mail.” We believe that as people transition from working to retirement, the need for access and convenient communication rises. You will want answers and access quickly. The current system seems to be struggling here.
So you got to let me know/ Should I stay or should I go?
To close out, we want to stress again that we are not making a recommendation to move your money from TSP just as we did not make a recommendation to keep your funds there in our last article. Our goal has been to educate and offer an outside perspective to help you navigate these decisions.
That’s all for now. We’ll be back with our final article covering Stay or Go from an advisors’ perspective. We hope the series has been illuminating for you so far.
**Written by the STWS Team. 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 the STWS team 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. **
***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.***
*** If you've changed jobs or are retiring, rolling over your retirement assets to an IRA can be an excellent solution. It is a non-taxable event when done properly - and gives you access to a wide range of investments and the convenience of having consolidated your savings in a single location. In addition, flexible beneficiary designations may allow for the continued tax-deferred investing of inherited IRA assets.
In addition to rolling over your 401(k) / TSP to an IRA, there are other options. Here is a brief look at all your options. For additional information and what is suitable for your particular situation, please consult us.
- Leave money in your former employer's plan, if permitted
Pro: May like the investments offered in the plan and may not have a fee for leaving it in the plan. Not a taxable event.
- Roll over the assets to your new employer's plan, if one is available and it is permitted.
Pro: Keeping it all together and larger sum of money working for you, not a taxable event
Con: Not all employer plans accept rollovers.
- Rollover to an IRA
Pro: Likely more investment options, not a taxable event, consolidating accounts and locations
Con: usually fee involved, potential termination fees
- Cash out the account
Con: A taxable event, loss of investing potential. Costly for young individuals under 59 ½; there is a penalty of 10% in addition to income taxes.
Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets.