Far and away, the biggest argument I receive for federal employees to contribute to the TSP above and beyond the match is the low fees.
AND, this is for good reason.
The Thrift Savings Plan DOES have some of the lowest fees anywhere. And for some people that’s all that matters.
However, for many people, investing involves much more than just fees.
What I plan to decipher today is whether the phrase, “you get what you pay for” applies to the Thrift Savings Plan, what the fees are, and what you receive for the fees you pay.
I plan on this being a rather lengthy discussion so strap in, grab your pen and paper, and let’s do this!
Are TSP Fees Really That Low?!
Believe it or not, I’ve met quite a few people who didn’t even know TSP charged fees.
In fact, a majority of the people I initially sit down with are completely unaware of the fees charged by any of their investments; be it in the TSP, a 401(k), or their IRA’s.
This, to me is a BIG problem that is rarely addressed.
So, for those of you reading this unaware THERE IS A FEE FOR INVESTING IN THE TSP.
Good, I’m glad that is now cleared up.
In order to plan for the future, you need to know what’s coming in and what’s going out. If fee’s are going out of your investments, that’s fine, but make sure you know what they are and where they are going.
There’s no need to pay increased fees if what you receive for the fees doesn’t match up.
This being said, it often takes a few years to see if the fees you’re paying are worth what you’re receiving. Investing is a long-term game. Trading on the other hand is for the short-term and should be left to professionals.
So, now that you know that the TSP DOES have fees, you’re probably wondering, “well Cooper, what are the fees?”
Let me tell you, but first, lets look at what makes up the TSP Expense Ratio:
- The costs of operating and maintaining the TSP’s record-keeping system,
- The cost of providing participant services, and
- The printing and mailing of notices, statements, and publications.
These are standard fees, but where the TSP really shines is how they’re able to keep the expenses so low.
“Expenses are offset by the forfeitures of Agency Automatic (1%) Contributions of FERS employees who leave Federal service before they are vested, other forfeitures, and loan fees. Because these amounts are not sufficient to cover all of the TSP’s expenses, TSP participants share in the remainder of the costs.” – TSP.Gov
Essentially, rather than pocketing the contributions of FERS employees who left before they were vested, they throw them at their own expenses.
Still, there isn’t enough money to cover all of their expenses. So, they turn to you, the TSP investors to shore up the rest.
For 2015, the average net expense was .029% or $0.29 per $1,000 invested.
Now, it must be noted that fees associated with securities lending aren’t included, which is a standard industry practice.
So, for every $1,000 you invest, you’re going to pay on average $0.29 per year.
On a $100,000 account that equates to $29. Not too shabby.
What do the TSP fees get me?
The reason you pay a fee, is to get something in return.
You wouldn’t pay for something if there wasn’t anything offered in return; even if it’s just an opportunity. For many of you this is best seen in your gym membership. You pay to use the gym, don’t use the gym, but you like knowing it’s available if you need it.
You know who you are!
In relation to the Thrift Savings Plan, you’re paying fees for the opportunity of growth in the money you invest in the various available funds.
This is the MAIN reason for investing in the TSP, however you also get a few other things.
First and foremost, as stated, you get the opportunity to participate in the various TSP Funds.
Those funds as I’m sure the majority of you are aware are the G, F, C, S, and I as well as the L-Funds. The L-Funds are simply a composition of all of the funds, but allocated based upon your retirement date.
These funds cover nearly (not all) asset classes available. Ranging from short-term U.S Treasury securities in the G-Fund to International Markets in the I-Fund.
In fact, the C-Fund and the S-Fund combined make up just about the entire U.S. Stock Markets.
These funds vary in performance, but you can see returns in the graph borrowed from TSP.gov below:
Now, the funds certainly are limited in that there are only five, however, they cover a large percentage of the market and are thus pretty well diversified.
I could go on and on about the the TSP Funds.
In fact, I often do and the reason is because it’s very important to understand the composition and risks/rewards available. You should never, ever invest blindly. EVER.
Another thing you get with the TSP is mailed correspondence.
Now, is this a unique offering only given by the TSP? No, you’ll get correspondence wherever you invest, but it’s important to factor all you get, even the obvious.
The account summaries given by TSP are in my experience easy to read and well put together.
In relation to the mailed correspondence, you also get online account access that many take advantage of.
This again is not a unique offering to the TSP, but having online account access in today’s fast-paced world is essential to keeping track of your investments.
Through the online dashboard you can see your account value as well as where you are allocated. The features provided through the online portal are in my experience in working with federal employees underutilized.
This brings me to one thing that the TSP lacks versus commercial competitors:
Limited allocation changes
Is this a BIG deal for the majority of TSP investors?
No, it’s not.
But, for some, especially those that are constantly watching the market, the ability to hop in and out of the G-fund as much as possible would be a great feature.
Now, you don’t have to pay for Interfund Transfers, which certainly is a benefit, but in my opinion, I’d like TSP to offer an option to pay for additional transfers.
For one, it wouldn’t cost very much, and for two, it would allow those who have the knowledge and desire to trade more often.
Will we ever see this? No idea, but I think it would be a welcome addition.
Getting into more specifics on Interfund Transfers, there are a few rules that must be followed:
- You can make an Interfund Transfer at any time, barring these limitations.
- The first two Interfund Transfers of any calendar month may redistribute money in your account among any of the TSP funds, including moving the entire balance into the G-Fund.
- Any subsequent Interfund Transfers in the same calendar month can only move money into the G-Fund.
Based upon these rules, you have two allocation changes a month, and an unlimited amount there after as long as the money is moved into the G-Fund.
The main reason they allow you to move as much as you’d like into the G-Fund is they don’t want people to be caught with their shorts down on a large market correction without anywhere to go.
The G-Fund is the proverbial safety net always available in case you get too fancy in your trading.
Limited Withdrawal Options
Far and away, the biggest gripe people have with the Thrift Savings Plan is the withdrawal options.
In my opinion, this is simply one of things you give up in favor of lower fees.
Ever heard the phrase, “you get what you pay for?”
For you younger federal employees, you may be thinking that this doesn’t matter to you, and although you may be right in the short-term, your retirement will come soon enough. At that time the withdrawal options will become a BIG deal and you will understand why so many have complained.
Now, there are SOME withdrawal options available, it’s just that they’re limited. I won’t go into too much detail as I have future articles planned for this topic, but I will give you a basic rundown of the options.
You are allowed one partial withdrawal and one full withdrawal. These withdrawals can be sent to you, or a qualified transfer to an IRA can be made.
For a full withdrawal you have a few options to choose from which include:
- Full Withdrawal as a Single Payment
- Full Withdrawal as a Series of Monthly Payments
- Specific Dollar Amount
- Life Expectancy
- Full Withdrawal as a Life Annuity
- Full Withdrawal as a Combination of Options
To read more in detail on each one of these, TSP.gov has a great write-up on the options that can be found here.
No Roth IRA
Now, I know what you’re thinking. “I’m pretty sure when I look at my account I have the ability to invest in a Roth TSP?”
You would be correct. However, the Roth IRA and Roth TSP are not the same; they’re so different in fact that in my opinion they shouldn’t even share the same name.
For you federal employees who are under the income limitations (most are,) you have the ability to invest in a Roth IRA.
With a Roth IRA you:
- Have the ability to withdraw your contributions without tax or penalty anytime.
- Don’t have to include it in the Provisional Income Threshold (PIT) that determines how much tax you pay on your Social Security.
- Have no Required Minimum Distribution (RMD) at 70 1/2 years old.
- Don’t have to take proportional withdrawals.
With a Roth TSP you:
- DO NOT have the ability to withdraw your contributions without tax or penalty anytime.
- DO have to include it in the PIT.
- DO have an RMD.
- DO have to take proportional withdrawals.
The TSP has limited investment options
You have 5 options for funds to invest in.
and you have the L-Funds which are simply a composition of all of the funds.
Now, this being said, for the majority of TSP investors, this is enough options. But for you more savvy investors, this somewhat limits you on options for more specific investing and/or trading
I actually created a PDF for my Federal Employee Clients called the TSP Quick Reference Guide that details the TSP Funds and can be helpful in deciding how to invest. You can sign up and download here.
The TSP does have pretty good returns.
Although the TSP is lacking in a lot of features I’d like to see. The returns by and large are in all reality quite good.
Now there are certainly opportunities to gain greater returns outside of the TSP, but just for example, the C Fund actually for the most part outperforms the S&P 500 slightly (the index it’s trying to mimic.)
From the standpoint of fees and somewhat for returns, the TSP is pretty excellent. That being said, as shown, there’s more to deciding where to invest than just those two.
The TSP also gives you limited advice.
By limited advice, I’m mostly referring to the only advice you get, and that’s through the internet.
If you call 1-TSP-YOU-FIRST there isn’t going to be a qualified financial planner on the other line who is going to give you advice on where to allocate, when/how to take withdrawals, what the economic forecast looks like, etc. There will be an hourly worker who can answer a limited amount of basic questions and other than that they’ll send you to their website.
This leads me to my next topic in relation to fees:
The Importance of Advice
Now, just so I don’t get a hundred different comments of people with pitchforks at the ready, not EVERYBODY needs a financial planner.
This being said, I believe everyone DOES need a financial plan. AND, a very large majority of you reading this have:
- no financial plan,
- no investment strategy,
- no budget,
- and very little idea on where your money is being invested.
Now, do you have to leave the TSP to utilize the services of a financial planner?
No, of course not, but many connect the idea of a financial planner with being just investment related. Although this may be the case for some planners, a true financial planner views investments as merely a small part of the large picture. That large picture being your financial life.
So, seek out the advice of professionals on your TSP and other areas of your financial life, because TSP is simply not in the position to provide it.
There are a few other things, both negative and positive that the TSP offers, but these are, at least to me, the main points.
In writing this, I’ve tried to come at it with a completely objective view point. There’s a lot that the TSP doesn’t provide, but in the same sense it has some REALLY great features. The fees are crazy low and for those of you who find cost to be the main factor in your decisions, you probably won’t find anything better elsewhere.
There’s negatives and positives just like everything else in the world. Deciding how much to invest in the TSP is a personal decision, but I will say nearly everyone reading this should invest at least 5% in the TSP to receive the match.