TSP participants are generally satisfied, but there’s room for improvement

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The high satisfaction rates among participants in the Federal Retirement Thrift Savings Plan got reaffirmed recently. Nearly 90% of survey respondents reported they like the TSP. Director of wealth management at the Government Employees Benefits Association, Greg Klingler, says it’s important not to overlook a few issues that might need attention. He joined Federal Drive with Tom Temin to discuss why.

Interview transcript: 

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Tom Temin: Mr. Klingler, good to have you on.

Greg Klingler: Thanks for having me.

Tom Temin: Alright. So is everything hunky dory? Everybody loves the TSP, everybody’s satisfied, maybe a little bit less so than a couple of years ago, because some of the returns are down because of pandemics, so nobody loves their investment plan in that sense, but what else can we learn from this other than everything’s hunky dory?

Greg Klingler: Well, from the surveys perspective, we’re sitting in a situation where I think it’s refreshing as a financial advisor who works primarily with federal employees, what they see as being their primary benefit drivers and what is affecting their employment decisions, which is the the federal health insurance, the TSP and their pensions — that’s right in line with what it should be. That’s excellent news. But to your point, the TSP, which is an excellent accumulation plan in a lot of different ways, I don’t want to diminish the positives of the TSP primarily fees being one of those really big positives. But the issues that exist today after the implementation of the TSP Modernization Act is the investments that they have in the account. They have five investments, all of which are passive, it is very, very difficult to round out our portfolio the way it should be with such a limited number of investments.

Tom Temin: Do you feel that people should be able to move their money more easily or should there be just more options? And for example, should there be the option of buying individual stocks? Some people like that.

Greg Klingler: I know there’s been some talk thrown around with the TSP widening the breadth of the investment choices. And to be honest, long term, that’s probably a way a place that the TSP needs to go. The TSP Modernization Act did give a lot of flexibility as far as the ability to withdraw, both in-service and post-service withdrawals. So a lot of those administrative issues have been corrected when it was implemented back in September of last year. But the five investment choices that we have, we have the the C Fund, which is effectively the S&P 500, the S Fund, the total stock index. Those are excellent funds, they work very well from a passive standpoint. And frankly, they should be the core of any portfolio. But then we have some weaknesses. One of which being international, every portfolio should be international, but we’re sitting here looking at the I Fund, which is I would say legislatively diminished because they don’t allow you to invest in certain investments that have shown and proven to be higher returns.

Tom Temin: Got it. So does that mean they should be able to create brand new funds, W-X-Y-Z in addition to the ones they have or round out with more inclusions the funds that they do have?

Greg Klingler: If I were making changes personally, I would look at additional funds. Every portfolio should have some characteristic of real estate in there, they should have emerging markets in there, they should have actively managed fixed accounts in there, just to name a few. And then again as I said before, we look at international, every portfolio should have international, but it should be an international fund that is actually up there and generating returns that we expect to see from its peers.

Tom Temin: And when you say actively managed fixed, what is that and who manages actively?

Greg Klingler: Alright, so well fixed accounts would be in our case the G or the F fund. What we’ve seen, especially as interest rates have condensed very, very tightly, and the spreads are very, very low, active investments where a manager actively trades within an account of primarily bonds and dividend producing stocks, that has shown and proven to be a place and a source for higher returns even after the larger fees associated with active management.

Tom Temin: The G fund is never expected to do great. It’s supposed to be the steady-Eddy there, but it’s really not done very well at all in the last almost two years, say from October 2018 it’s really been anemic. So what’s your thought about maybe boosting that a little bit?

Greg Klingler: Yeah, that’s kind of an interesting situation because our legislators have actually talked about cutting yield on the on the G fund, because the G fund is tied to the 10 year bond, yet it is liquid and they think that it should be actually less. This year, it’s paying out, if we’re looking at annual annualized returns, somewhere in the .7% range, which is probably not going to keep up with inflation this year. In over 10 years it’s paying about two and change, 2.3-2.4%, which again, struggles to keep up with inflation. Having all your money in the G fund, you may have your account actually lose purchasing power, which is is something we want to be very careful about not doing.

Tom Temin: So I guess there’s nothing really that can be done with the G fund except as you point out maybe make some more active managed choices as part of it or in addition to it.

Greg Klingler: The G fund and the F fund. The F fund would be, I guess, a more apples to apples comparison as they’re looking at corporate stocks and the Barclays index. But yes, active investments on that side could very well benefit federal employees going forward.

Tom Temin: And do you think that a large degree of active activity, trading and selling and buying, could be done consistent with the TSP’s low fees or lack of fees? Usually in actively managed funds, you got to pay a little scotia every time there’s a switchover.

Greg Klingler: So yeah, actively managed funds are going to have higher fees without a doubt. The TSP is known for having incredibly low fees, below .05% across the board. If TSP were to bring in additional investments that were more active in nature, you would probably see fees at the .2-.3 maybe .4%. My view of fees as a financial advisor is I don’t mind fees if you can prove to me those fees are worth something. And that’s kind of how I make recommendations for our clients here at Kiva.

Tom Temin: Yeah, because if, say the fee is $9, or $27, or something to buy a block of Tesla, and then you triple your money in six months, then the fee seems pretty trivial depending on the millions you could make with Tesla or Apple or some of these crazy stocks we’ve seen in recent months.

Greg Klingler: Yeah. When we talk to federal employees, we do talk about the pros and the cons of low fees. Low fees are obviously very important and should be an active conversation when we’re talking about portfolios. But if we can show with 3-5-10 year return, that after fees beats out those passively invested accounts, well then it probably makes sense to at least reposition a portion of your assets into something like that.

Tom Temin: Yeah, especially if you’re on the younger end of the working scale and you’ve got time to recover from the mistakes, maybe that’s the time to play around a little bit.

Greg Klingler: The markets never gone down over a 10 year period, so if you have 10 years or you have dollars associated with lasting 10 years or longer, you can really take the ride.

Tom Temin: What about participation rates among the different classes of federal employees? Have they licked that one? I mean, that’s something that TSP has paid attention to and made changes regarding over the last number of years.

Greg Klingler: Oh, absolutely they’ve been making changes. And they take participation rates and withdrawals very, very seriously over the TSP, and they try to make changes accordingly. For the most part with typical federal employees, their participation rates are incredibly high. People accessing up to the match, incredibly high. But then we’re seeing this new population, those blended military, now the military is the TSP and their smaller version of the pension. Those people seem to be a bit uninformed. They’re also not participating as much as their civilian federal counterparts.

Tom Temin: Yeah, so there’s an opportunity for is it the TSP would you say to do outreach? Or what about some of the leaders in those components?

Greg Klingler: I would say definitely probably both. One of the issues that we deal with when we work with HR people is people are very, very hesitant to give recommendations. And they err on the side of not giving recommendations, which can have the potential side effect of not giving out information period. When information is not given out in they’re not educated in this match and all this other good things that the TSP offers, well then that leads to people not taking advantage.

Tom Temin: Yeah. And the longer you go, as we mentioned a moment ago in life, the less return you’re going to get — so you really want to get people in at the soonest moment they can.

Greg Klingler: Absolutely. Get your money in, get it working for you, get it generating returns. The longer you do that, the more money you’re going to have.

Tom Temin: That’s always a good thing I guess. Greg Klingler is director of wealth management at the Government Employees Benefits Association. Thanks so much for joining me.

Greg Klingler: Thank you for having me.