During the 16-day government shutdown last month, more than 14,000 Thrift Savings Plan participants withdrew money from their accounts, the highest number of hardship withdrawals in a single month ever. This may have helped participants weather the financial uncertainty of the shutdown. But, under TSP rules, it also means they’ll be unable to contribute to their 401(k)-style retirement accounts for the next six months.

Now, the Federal Retirement Thrift Investment Board, which oversees the TSP, is concerned that not all those participants will take the initiative to restart their contributions when the penalty period expires next spring.

All told, 14,361 TSP participants withdrew money from their accounts during the month of October, according to statistics presented at the board’s monthly meeting in Washington on Monday.

The average withdrawal amount was $9,361 — about $400 higher than the average withdrawal amount, year-to-date.

In addition to tax penalties — including a 10 percent early-withdrawal tax for those younger than 59 1/2 — TSP participants are moved to an “inactive status,” barred from contributing to their accounts for six months and ineligible for matching contributions from their agencies during that time. And even once that period expires, participants’ contributions don’t resume automatically.

‘We don’t always get them back’

In a normal month, getting participants who take hardship withdrawals to restart contributions is a concern for the board.

“We don’t always get them back to the active status after that happens,” said Renee Wilder, director of enterprise planning at Monday’s meeting.

So, with a record number of withdrawals last month, TSP officials are considering a few different options.

“In the short-term, there’s the communication aspect,” TSP Executive Director Greg Long said.

For example, the board is able track participants who withdrew money from their accounts during the shutdown and can contact them after the six-month period expires next spring to prompt them to begin contributing again.

Longer-term, the board is also considering rewriting TSP regulations to automatically re-enroll participants after the waiting period ends.

Another consequence of last month’s shutdown and budgetary uncertainty was the high volume of money that shifted into the G Fund, TSP officials said.

TSP participants moved nearly $4 billion into the G Fund during the shutdown, according to Tracey Ray, the board’s chief investment officer. However, much of that money is now starting to trickle back out to the other funds now that the shutdown is over.

“It was totally clear cut that this was a result of the budget crisis,” Ray said. In fact, on the last day of the shutdown alone, as negotiations to reopen federal agencies began gaining steam, participants moved some $2.2 billion out of the G Fund and back into other stock funds.

L Fund could be new default option

The board is also moving ahead with a broad plan that could make the target-date Lifecycle Funds a more prominent feature of the TSP.

Last week, the Employee Thrift Advisory Council (ETAC) gave its OK to move forward with a plan that would make an age-appropriate L Fund the default investment option when automatically enrolling new plan participants. Currently, new federal hires are automatically enrolled in the low-risk, low-reward G Fund.

The full board next month will be tasked with approving a resolution and draft legislative language that would set the stage for the move.

“This is a big step for us,” Board Chairman Michael Kennedy said at Monday’s meeting, “and a good first step for us.”

The proposal requires congressional approval.

The ETAC also gave its blessing to a proposal to restructure the mix of investments that make up the Lifecycle Funds.

The L Funds — also known as target-date funds — are a professionally administered mix of investments from the five regular funds that automatically shift toward lower-risk funds, such as the G Fund, as participants get closer to withdrawing money from their accounts during retirement.

Last month, the consulting firm Mercer recommended the board increase the allocation of the G Fund in the Lifecycle options and increase higher-reward stock options by 5 percent over the lifespan of the funds.

Board skeptical of socially responsible fund

The TSP board also reacted Monday to recent legislation introduced by Rep. Jim Langevin (D-R.I.) and Sen. Sheldon Whitehouse (D-R.I.) that would require the board to add a “Corporate Responsibility Index” to the existing five investment options available to federal employees.

In order to qualify for the index, companies would be measured in a number of areas, including corporate governance, environmental practices, workplace relations, their involvement with “repressive regimes” and their position on human rights.

The board has traditionally been reluctant to add a socially responsible investment option, however.

“There’s a low participant demand for SRI funds. … It would likely duplicate funds in the other stock funds,” said Kim Weaver, the board’s director of external affairs. “And most, fundamentally, The TSP does not exist to further social goals.”

Last year, the Government Accountability Office studied the matter, concluding that adding a hypothetical socially responsible index fund likely wouldn’t increase returns and lower volatility in the overall TSP.

Weaver said the board will be reaching out to the lawmakers who introduced the bill and their staff to share their concerns.

On the other hand, Weaver said the board is still exploring the option of adding a mutual-fund window, which would allow participants to move investments out of the TSP funds they’ve invested in and into a private- sector suite of mutual funds. The mutual fund option was authorized by Congress in the 2009 TSP Enhancement Act. But the decision of whether to actually create a TSP mutual-fund window was left up to the board.

Long said his staff is preparing a report on the option that will be presented to the board in the spring.

RELATED STORIES:

Thousands of feds turned to TSP to weather shutdown

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TSP mulls mutual-fund option

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