A close look at whether certain mutual funds available through the TSP are worth it

The so-called “mutual fund window” at the Thrift Savings Plan could disappear if a congressional policy becomes law. A House committee would bar funds relying on corporate environment, social or governance sensitivities.  Federal Drive with Tom Temin spoke with Certified Financial Planner Art Stein to see what he’s discovered about ESG funds.

Interview Transcript: 

Tom Temin And golly, nothing seems to be going right for this whole gambit, though, does it, Art?

Art Stein I feel like the TSP when I think about it, it’s like no good deed goes unpunished. Here they  they’ve had complaints throughout the years that they didn’t have enough choices and they are very few in the number of choices in terms of investment sectors. And so they put in this mutual fund window which contains for people who use it, there are about 4600 funds in it and every type of investment you can make with a mutual fund is pretty much included. And so it’s great in that sense, but very few people have used it. I mean, like very few.

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Tom Temin Well, let me ask you this. On the few people using it, I mean, people invest in their TSP. There’s a check off from their paycheck. So the mutual fund window, how does it operate? That is to say, can you have some of your weekly deduction or your your every other week deduction from your paycheck go to one of those because those aren’t strictly l-g funds, etc., of the TSP.

Art Stein It’s not super easy to use. I mean, the money that goes in the mutual fund window has to come from one of the traditional TSP funds and then it can go on the mutual fund window. There are various restrictions on how much you can put in, minimums and things and once the money is in there, it goes into a money market fund and then you can invest it in all these other funds. One problem is that the fees for the mutual fund window are high. There’s there’s no question about it.

Tom Temin And these are the fees charged by the thrift savings plan?

Art Stein In some cases, yes, there are two annual fees of $105. Then there’s a trading fee of $28.75. I don’t know that. I doubt that goes to the TSP in any form. Whoever is running this for the TSP probably keeps that money. But by today’s standards, it’s a pretty high trading fee. And then the mutual funds have their expense fees, which as far as I can tell, may be a little above average for mutual funds, but are certainly going to be higher than the funds that are currently in the TSP.

Tom Temin Well, let me ask you this. If a federal employee wanted to invest in mutual funds and somehow have it as pretax dollars because the TSP is the equivalent of an IRA for everybody else, is there a way that they could lessen what they put in the official TSP accounts and then just spend their own money on a mutual fund and that could be an IRA for them and they would still have the same tax structure?

Art Stein No, I would say no, that if you want to buy mutual funds with your TSP money, this is the only way to do it. Okay. If you want a transfer, if you’re over 59 and a half, you can transfer money out of the TSP into an IRA and then you’d have more than 4,600 or 5,000 funds to invest in lower trading fees. And so that’s something that people can always do. I mean, you can always invest not in an IRA or pretax or fashion because you have to invest, as you say, in a regular brokerage account, individual account, which is taxable. And there’s nothing wrong with that.

Tom Temin Because what I’m getting at is maybe the whole TSP’s window for mutual funds was maybe not something that needed to exist in the first place, given the take up of it and given the kind of complicated, convoluted costs and procedures to take advantage of it.

Art Stein Well, I think you’re right. And from the investors point of view, especially if they’re over 59 and a half and transfer the money out, they can easily set up an IRA and then do whatever they want. From the TSP’s point of view, they’re trying to do what their customers want. Their customer is being TSP participants, and they did, but they had to do it in a certain way with certain expenses because they wanted to make sure that the cost to the mutual fund window was only paid for with money from the people who were using the mutual fund window. And that’s one of the reasons you have $150 in annual fees. And so that was inevitable. Then they get into this other thing, which is that, of course, some of these funds invest in what are called ESG investments, environmental, social and governance, and that these are mutual funds where they’re going to services at rate companies according to how well they do on an ESG score, and then they invest in those only. And I counted there are 37 funds that have ESG in their name. Anyway in Congress, and it’s become a political issue. A lot of Republicans don’t like ESG investments. Okay. So there is a bill in Congress that would forbid the TSP from having any ESG funds in any part of it. And apparently that includes a mutual fund window. And I think TSP feels like if that passes, they’re going to have to cancel the whole thing because they cannot regulate these 4600 funds. And I agree with them because funds have a wide latitude in what they invest in and they change and it’s just probably not possible for them to do. And Tom, you may remember that a couple of years ago, I think it was, they were going to change the index for the I fund and the TSP, the International Stock Index fund, which they need to do. I mean, that would have been a good thing. But members of Congress found out that the fund they were considering, which they had decided to use, actually included investments in Chinese companies and protested and that whole thing ended. Well, there are 18 funds in this mutual fund window that have China in their name. They’re specifically investing in China. So that could be an issue, too.

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Tom Temin Well, there’s an interesting question here, though. The members of Congress that were trying to put an end to the ESG funds within the mutual fund window, again, if that is even possible, kept talking about taxpayer dollars invested in ESG or woke funds. You may or may not want to invest in this type of fund. Personally, I would do guns, alcohol and gasoline or something, but whatever. Motorcycles and motorcycles, Right. If it burns it. But the question is, that’s not really taxpayer dollars at all.

Art Stein No, this is a voluntary program. The only money going into these funds is going to be the funds of TSP participants. So it’s got nothing to do with the government. And because it’s been set up so that the mutual fund window is self-supporting, there’s not going to be any cost to the TSP to run this and set it up. There’s no government money involved.

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