First, the board approved adding withdrawal options for TSP participants.
“That is really meaningful for all of our TSP participants, because right now our withdrawal options are fairly restrictive,” Kim Weaver, the board’s director of external affairs, told In Depth with Francis Rose on Tuesday.
This change harkens back to the formation of the TSP in the mid 1980s, when the 401k industry was in its infancy and no one knew how to create withdrawal options.
Back then, Congress made the TSP withdrawal options similar to those of an annuity.
“That’s not what you want in a 401k or a Thrift Savings Plan withdrawal,” Weaver said. “And so, we have been hearing from our participants that they would like more options, and we have been seeing in our data that people have been rolling their money out to IRAs, which are generally more expensive than we are. And one of the reasons that they consistently cite is they wanted more withdrawal flexibility.”
Flexible options would help TSP participants to more easily access their money and make it more likely they would keep their funds in the TSP longer, which would help to keep costs down for all participants.
“It’s going to require legislation,”Weaver said. “It won’t be something that’s quickly done, but it is something we think is meaningful for our participants.”
For naysayers who might balk at Congress moving expeditiously on such a request, Weaver pointed out Congress took just nine months to approve the board’s request last year to make the L-fund the default fund for new federal employees who are automatically enrolled in the TSP. She said it’s unlikely that this request would be approved just as quickly — especially in an election year — but Congress has shown a willingness to respond to the board’s requests provided it has all its ducks in a row.
“The thrift board is not known for being whimsical,” Weaver said. “We don’t tend to run up to the Hill just here and there. So, we do seem to get response when we go up and ask and present our rationale.”
Board seeks mutual fund window for TSP
The board’s second decision was to pursue a mutual fund window for TSP participants.
“In a 401k, private sector companies have this as well, you have your core line-up,” Weaver said. “For us, it’s our five funds and our five life-cycle funds. People want other things. They want access to gold funds or socially responsible funds or whatever. For us, we don’t think that the those things make sense as part of our core funds, but there are people who feel quite adamantly that it’s something that they want.”
The window would allow TSP participants to take some of their money and invest it in a mutual fund that matches their particular interests.
To make this happen, the board will have to issue a request for proposals from investment firms for a mutual fund window that TSP participants could use.
“In the private sector, in those plans that offer mutual fund windows — and it’s a majority of plans that offer them — only about 1 to 2 percent of their participants actually use them,” Weaver said. “So, this is definitely something that is aimed at a minority of your participants. We’re not going to be going around saying this is what you need to do. It is for those people who feel that they really need that to complete their investment portfolio.”
One of the things that will have to be determined is who is going to pay for the mutual fund window.
“Under the law, people who are in the window pay for the window,” she said. “So, I know that will be a point of interest for our participants as well.”
Another topic that came up at Monday’s meeting was to provide access to financial modeling technology, whereby participants could input data to determine how much they needed to invest for retirement based on various factors. Weaver said this proposal was still in the very early stages of discussion.
“We’ve all spent the past 20-some years getting people to contribute and now people are at the point where they’re starting to really need to withdraw their 401k or TSP money for retirement,” she said. “And people are a little uncertain about that We’re hearing more from people, ‘We’d like some advice. We need to know if we’re on track. We need to know if we’re making the right decisions.’ We have by no means reached the decision to do this, but we’re educating our board on what is going on in the industry.”