Sometime this summer, the number of investment choices in the federal Thrift Savings Plan will jump to include roughly 5,000 mutual funds. Right now, federal 401(k) plan investors are limited to five fund options. The C, S and I stock index funds, the bond-index F fund and the G-fund invested in treasury securities, and 10 Lifecycle Funds that are built on those five core funds. But after the changeover, TSP investors will be able to earmark a portion of their current accounts to any of the new funds in the program. Some of them will be so-called ESG funds. ESG stands for environmental, social and governance. Companies, politicians and a growing number of investors have pushed for the options for more than a decade. Lots of people want a piece of the TSP which is now valued at $770 billion. That’s billion with a B. Enough to buy a couple of small countries! Despite heavy political pressure from politicians, brokers and ordinary investors, the board running the giant TSP resisted adding new core funds. The mutual funds will answer that demand and will include, but not be limited to, ESGs.
When Congress set up the federal 401(k) program, the watchword was KIS. As in Keep It Simple! And low-cost to both the taxpayers and investors. The idea was to keep politics and social causes — noble if you support them, radical nonsense if you don’t — out of the investment mix. It also protected ordinary investors who, studies show, are often bewildered by too many choices. Some often don’t have a clue which fund or funds they are invested in, much less their track record and purpose. Later on, the TSP added Target Date funds composed of different percentages of the C, S, I, F and G funds. Their mix adjusts over time getting more cautious (with more G and F funds in the portfolio) as it gets nearer to the target date when the investor plans to start spending down his or her TSP. Following the KIS rule resulted in the lowest administrative fees for TSP investors which, over time, can eat into a portfolio. Many, if not most, of the mutual funds in the mutual fund window, including ESGs, will have higher costs to investors. The new ESG funds will keep causes out of the core investment mix. Most agree the board running the program has done that. Most of the reviews of the new, expanded TSP options, have been good to great.
For people who want more options, the mid-year change will give them just that. Some may make a lot of money. For others — hunch investors, market-timers, or people who invest with their heart rather than brain — the newer options could be problematic.
So we asked a 30-year plus investor and TSP watcher for his take. In the past, he has been very critical of adding new choices to the TSP portfolio because so many of them were, in his eyes, politically-tainted. Or designed more to support and finance a cause than to make money for the investor. Here’s his take:
“As a long time fed who began investing in the TSP on day one, what I’ve heard so far about the mutual fund window sounds good. For myself, I am quite pleased with the current investment choices. I’m in my 70s now and, thanks to the current TSP investment choices, I’ve accumulated more retirement savings than I ever dreamed possible. I suspect the vast majority of my contemporaries feel the same. But some think differently, which is the American way. It’s their money and they should be able to invest as they please as long as it doesn’t diminish the overall Plan for other participants.
My chief concern with changes like this to the Plan has always been that the many industries, activists, politicians and others who want to use federal employees’ retirement savings to advance their own causes (which always includes themselves) might somehow muck up this “sweet and simple” program. You’ve ably reported for nearly 35 years (but who’s counting, Mike?) on the many lobbying efforts that would have done just that.
The design of the mutual fund window appears to provide much more choice for those who want it without harming the interests of those who don’t. Those non-radical folks over at the TSP also seem to have put some reasonable limits on this new venture as they have wisely done for all the other improvements they’ve made over the decades. Those initial limits have often been loosened as the improvements become better understood and sound administrative procedures become accepted and routinized.
I consider the mutual fund window to be a net plus for all TSP participants, including those who choose not to use it. It should put an end to the recurring lobby efforts of outsiders who have wanted to use our Plan to advance their interests. The law requires that the TSP be administered solely in the interest of the participants and their beneficiaries. It seems to me that with the design of the new mutual fund window the TSP fiduciaries have again met that very high standard.”