In a bid to keep more people participating in the Thrift Savings Plan even after they leave the government, members of the plan’s oversight board have approved a million-dollar-plus study of new investment options, including mutual funds that focus on real estate, emerging markets and socially responsible companies.

Despite the unanimous vote, the Federal Retirement Thrift Investment Board members said they were not sure that they eventually would approve the so-called mutual fund window, warning that it was sure to cost participants more in fees than the current mix of index funds.

Index funds have “the least expensive fee structure you can have,” said Board Member Dana Bilyeu.

Even the board’s executive director, Greg Long, who pitched the study of the mutual fund window, acknowledged it was a tough call. He initially had been reluctant to support it, he said.

“I recommend the board support this as a good idea, but not a good idea at any price,” he said.

The study will include an evaluation of the costs of designing the new system, the rules that plan participants would have to follow and the information that the board would have to provide so that participants can make educated decisions.

As the window is now envisioned, participants would be able to invest a limited share, perhaps 25 percent, of their savings in the mutual funds. To do so, they would have to pay an access fee of $100 or so. The fee would cover some of the operating costs. The rest would be borne by all 4.7 million TSP participants. The fee also would force participants to think carefully about investing in the mutual funds, Long said. With those restrictions, he expects fewer than 2 percent of participants would choose a mutual fund window.

But the reasons for studying the window ultimately go beyond the small fraction of participants who would actually use it. The board found that 45 percent of federal employees who quit or retired in 2012 withdrew all of their retirement savings within a year, at a cost to the TSP of about $10 billion. The plan lost another $2 billion from participants who withdrew some of their money when they became eligible at age 59 ½. All told, about a quarter of those employees said they wanted more investment options.

“A good chunk of our participants are firing us. One reason they’re doing it is investment flexibility,” Long said.

The board is trying to compete with an industry built around convincing federal retirees that they would be better served by putting their money in private retirement vehicles, such as IRAs. Those options usually are more expensive, Long said.

“The market is telling us something. We’re putting up a counterattack,” said board member Ronald McCray.

If participants stay with the TSP after leaving the government, then they will avoid paying the higher costs to private advisers, Long said. But all participants in the plan, with a balance of $431 billion, would pay less in administrative costs.

“It would be a tiny improvement for everyone,” he said. “Overall, the math works out.”

But there must “be a significant component focused on education,” said Bilyeu. People should be aware of the higher costs of investing in mutual funds, she said.

“If you have that headwind ahead of you, meeting your retirement goals is much more challenging,” she said.

The same look at 2013 withdrawals found, however, a bigger concern than the lack of investment options. Nearly three in 10 participants who zeroed out their TSP accounts said they wanted more flexibility to withdraw their money as they saw fit. The board is studying the issue, but is limited in what it can do. Congress most likely would have to pass a law to change withdrawal options.

The problem “is bigger than mutual funds,” said board member David Jones. “The three areas of investment, withdrawal and education have to be addressed at the same time. From the board’s point of view, we should be thinking about this in totality.”

The study of the mutual fund window will take at least six months to complete. Should the board eventually vote to create a mutual fund window, it would be “several years” before participants could enroll in it, Long said.

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