Federal Employee Retirement Savings Program to Broadly Expand Investment Options

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Starting next month, federal employees and military personnel will have a wide range of investment options for their retirement savings program.

The Thrift Savings Plan, which is the federal government’s version of a 401(k), announced Tuesday that it will open a long-planned mutual fund “window” on June 1, giving investors access to some 5,000 funds offered by around 300 mutual fund companies, and allowing targeted investments in stocks, bonds, commodities and other markets in addition to the index funds offered by the TSP itself.

The option will come with eligibility and fee restrictions, and several financial advisers who have advised federal employees about their TSP accounts have warned that this opportunity should be handled with caution.

The June 1 date was announced at the program’s monthly board meeting, which previously only said the option would become available in June.

The expansion has been in development for years, ever since legislation was passed in 2009 to allow the broader options for TSP, which has more than 6.5 million account holders and some $740 billion in investments. at the end of April. It’s part of an upgrade to the TSP’s operating platform that also adds new online services and security protections and a mobile app.

“For those of us who have been through this whole journey, this is a really special moment,” said interim board chairman David A. Jones, a financial industry veteran, during the interview. the meeting. “We had a vision of what the TSP should be…it’s totally what we were hoping for.

The mutual fund window will be available only to those with at least $40,000 in investments due to a combination of two restrictions: the initial investment through the window will need to be at least $10,000, and no new investment cannot bring the outside share above one quarter of an account’s total.

About 2.3 million of the TSP’s 4.1 million current and former federal workers have balances above that threshold, while that’s the case for only about 350,000 of the nearly 2.5 million current and former military personnel. elders with accounts.

In addition, since the 2009 law required users of the mutual fund window to bear the costs, they will have to pay an annual fee totaling $150 plus a fee of $28.75 per transaction.

“We’re not trying to put a hurdle, but we’re trying to make sure people have thought about it and researched it,” TSP spokeswoman Kim Weaver said. “We wanted to make sure the amount people were going through was substantial enough that it wasn’t significantly affected by fees. We also wanted to make sure the people using it had some investment experience.

The TSP has traditionally only offered five funds that track broad stock and bond indices and government securities, as well as funds that mix shares of these funds in different ratios depending on when they are expected to start withdrawals. . Prior to the upcoming change, the most significant options expansion had been to increase the number of target date funds from five to 10 in 2020.

Many bills have been introduced in Congress over the years seeking to add investment funds to the TSP by focusing on certain market sectors or excluding investments in certain types of businesses. On its own initiative, the program had planned to expand its international equity tracking fund to include the markets of some 20 additional countries in 2020, but it backtracked after political opposition emerged, as this expansion would have included shares of Chinese companies.

This opposition resurfaced just hours after the TSP made its announcement on Tuesday when several Congressional Republicans urged the TSP to cancel or postpone the mutual fund window until it “can ensure that no TSP funds are invested in unsafe, non-compliant or opaque Chinese securities”. The TSP had no immediate response.

“We are reviewing the letter,” Weaver said. “I would note that the mutual fund window of the TSP will be entirely voluntary and no TSP participant will be required to invest through it.”

Weaver said the TSP expects that after several years it will reach a steady state of 2-3% of account holders investing in outside funds. “There will be people who have been looking forward to this, and there will be others who will look into it and decide later,” she said.

“It’s going to open it up to a lot more choices. It’s great,” said Ian Arrowsmith, managing partner of Scarborough Capital Management in Annapolis, Maryland. investment based on their age, risk tolerance and time horizon for when they retire.”

Jim Musgrave, a financial adviser at Research Financial Strategies in Rockville, Md., said he’s seen many federal employees move money from their TSP accounts into IRAs after retirement to get a wider range of investment choices.

“I think it’s very beneficial for participants to have the ability to take funds out of the TSP,” he said. “There are a lot of more sophisticated people who would like the opportunity to go beyond these funds.”

“The downside is that many investors are looking for returns,” he said. ‘They’ll say, ‘This industry has done very well for the past six months. I’m going to put my money in it. This hot sector will eventually die out and something else will replace it. They will be heavily weighted in a sector when they should have started to reduce it.

Eligible investors will have access to the window through their online accounts, which will include a screening tool allowing them to select mutual funds that meet the criteria of their choice, including what the funds invest in and the fees they charge.

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