Social Security Reform
Social Security Reform: The Thrift Savings Plan (TSP) for Federal Employees
Research Report
Laurel Beedon, AARP Public Policy Institute
July 1998
Table of Contents
- The Basics
- Investment Options: The Funds
- Rates of Return
- Administration
- Participation Rates for FERS-Covered Employees8
- Deferral Rates
- Age, Salary, and Deferral Rates of TSP Participants
- Participation and Deferral Rates of TSP Participants by Gender
- Allocation of Investments
- Early Withdrawals for In-Service Employees
- Lump Sums, Rollovers, and Cashouts
- Loans from Individual TSP Accounts to In-service Employees
- Conclusion
- References
- Footnotes
FERS employees are automatically a part of the TSP.1 Their employing agencies are required, by law, to contribute an amount equal to 1 percent of each individual's salary to the plan. Employees may contribute up to 10 percent of their salaries each pay period2 on a tax-deferred basis and they receive agency matching contributions on the first 5 percent.3 CSRS employees may contribute up to 5 percent of their basic pay, but there is no government match. The maximum amount an individual (CSRS or FERS) can contribute to a TSP account in 1998 is $10,000.
Participants in the TSP may contribute to any or all of the three investment funds. They may move their money among the funds, apply for loans based upon their accounts, and at separation, receive a distribution from their accounts.
As of April 1998, there were approximately 2.3 million participants in the plan and investments of $66.6 billion.
The TSP is a participant-directed plan. A participant may invest any portion of his/her account in the three TSP investment funds:- Government Securities Investment (G) Fund-- The G Fund comprises short-term, safe, nonmarketable U.S. Treasury securities specially issued to the TSP.
- Common Stock Index Investment (C) Fund-- The C Fund is invested primarily in the Barclays Equity Index Fund that tracks the Standard & Poor's 500 (S&P 500) stock index.
- Fixed Income Index Investment (F) Fund-- The F Fund is invested primarily in the Barclays U.S. Debt Index Fund designed to track as closely as possible the Lehman Brothers Aggregate (LBA) Index.
Two additional investment choices were authorized in 1997 and will be made available to participants in approximately three years.
Returns on the TSP funds are calculated and individual accounts are updated monthly.4 Since their inception, the three funds have earned different rates of return. (See Table 1.)
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The low-risk Treasury securities G Fund was consistently outperformed by the higher risk, market-based C Fund, as
was the bond index F Fund. The market-based C and F Funds have been more volatile than the G fund. The compound annual rates of return for the G Fund, C Fund and F Fund are 7.7 percent, 15.7 percent, and 8.1 percent, respectively, since the inception of the funds through March 1998. (Examples of recent rates of return are shown in Table 2.)
Administrative expenses are funded from two sources:5
- Forfeitures of any nonvested6 agency automatic contributions are used to reduce costs7.
- Earnings and agency contributions are used to pay the balance of administrative expenses. They are deducted from the earnings of the three funds in proportion to the size of each fund. Investment management fees of the C and F Funds are borne exclusively by the participants investing in those funds.
Administrative expenses affect the rates of return. How much they are affected is determined by the expense ratio of each fund. The monthly expense ratio equals the total of monthly administrative expenses charged to each fund divided by the average fund balance during that month. An individual's share of the TSP net administrative expenses is based on the size of the individual's account balance. If, for example, the expense ratio of the G Funds were .08 percent in 1998, the individual's earnings from that fund in 1998 would be reduced by $0.80 for every $1,000 in his/her G Fund account balance.
For calendar year 1997, the net plan administrative expenses were .07 percent. In other words, the net investment return to participants was reduced by approximately $.70 for each $1,000 of account balance invested in the plan.
Participation Rates for FERS-Covered Employees8
There has been steady growth in TSP participation rates of FERS-covered employees since 1987. For these workers, participation increased from 44 percent in 1987 to 82.9 percent in 1996 and 85 percent in early 1998. Since the first full year of operation, the percentage of base pay individual workers contributed9 to the TSP has increased steadily -- from 4.9 percent in 1988 to 5.1 percent in 1990 and 6.4 percent in 1996.Age, Salary, and Deferral Rates of TSP Participants
The median age and salary of those who contributed to the TSP were higher than those who did not contribute -- 40.0 years of age and $35,565 salary and 38.1 and $28,549 respectively.The rates of deferral varied greatly by salary with those in the lower salary brackets deferring significantly less to the plan. Sixty-eight percent of FERS participants in the lowest salary group deferred 5 percent or less to the TSP. (See Table 3) Those in the highest salary group had the highest deferral rates -- one in 15 contributed 3 percent or less, fewer than 25 percent deferred 5 percent, and over one-half deferred at the maximum rate of 10 percent. (CSRS participants also had higher deferral rates among higher salaried individuals. Over 80 percent of CSRS participants in the $60,000-$64,999 group contributed at the maximum.)
| Salary | 1% | 2% | 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% |
| $15,000 - $19,999 | 13.4 | 10.9 | 14.7 | 8.8 | 19.8 | 5.8 | 3.9 | 2.4 | 4.0 | 16.5 |
| $30,000 - $34,999 | 4.9 | 7.2 | 8.0 | 7.6 | 27.6 | 4.4 | 4.6 | 3.2 | 3.5 | 29.1 |
| $45,000 - $49,999 | 2.2 | 2.8 | 5.3 | 3.7 | 23.5 | 4.9 | 4.8 | 3.4 | 4.1 | 45.4 |
| $60,000 - $64,999 | 1.1 | 1.9 | 3.5 | 3.0 | 21.9 | 4.2 | 4.4 | 3.3 | 4.3 | 52.3 |
Participation and Deferral Rates of TSP Participants by Gender
There is only a small difference between the average overall participation rates for men and women -- 84 percent and 82 percent respectively. It is worth noting that when the participation rates were adjusted for salary difference between men and women, participation rates for women were slightly higher than for men. (See footnote 8.)On average, men have slightly higher deferral rates. However, the differences in deferral rates between men and women are substantially less among older and more affluent workers. For example, women aged 30-39 defer 5.6 percent of pay and men in the same age group defer 6.5 percent; but women aged 50-59 defer 7.1 percent of pay and men in the same age group defer 7.4 percent. In terms of salary, women in the $20,000-29,000 bracket defer 5.2 percent while men at the same salary defer 5.9 percent; but men and women in the $50,000-59,000 group both defer 7.6 percent of pay. (See Figure 1.)
This savings behavior contrasts with the findings reported in a 1998 study of 401(k)10 plans (Clark) that showed women were more likely to participate and deferred a larger portion of their pay than their male colleagues. The exception was among younger and less well-paid workers who, the study found, responded like TSP participants -- men at low earning levels contribute a higher portion of their earnings than do women at similar earning levels.
The average allocation of 1996 investments by contributing participants leaned heavily in favor of the low risk/no-risk option -- 56 percent in the US Treasury securities fund (G fund), 38 percent in the common stock index fund (C Fund), and 6 percent in the bond index fund (F Fund). (For a graphic description of the average allocations, see Table 4.)
| Investment Choice | 1995 | 1996 | 1996 | 1996 | 1996 | 1996 |
| Overall Average Allocation | Overall Average Allocation | Youngest | Oldest | Lowest Salary | Highest Salary | |
| G Fund | 63% | 56% | 49% | 69% | 65% | 43% |
| C Fund | 30% | 38% | 44% | 26% | 29% | 50% |
| F Fund | 7% | 6% | 7% | 4% | 6% | 7% |
As seen in Table 5, men make lower average allocations to the G Fund and higher average allocations to the C Fund than women in all age groups and in all but the highest salary group. Hinz (1997) found the same gender allocations, i.e., women appear to invest their pension assets more conservatively than men. Only 28 percent of women as opposed to 45 percent of men allocated any of their TSP funds to the more risky C Fund. (For further information, see Table 5.)
Early Withdrawals for In-Service Employees
Until late 1997, a worker could not make a withdrawal from the TSP while in federal service. Since November of 1997, two withdrawal options have been made available to in-service employees: (1) those who are 59 ½ years of age or older may make a one-time withdrawal; and (2) those who can prove "financial hardship" may make a withdrawal. Both types of withdrawal are restricted by law, and the money received is taxable. Because these options have only been available a short time, available data do not provide much insight into potential trends.
Lump Sums, Rollovers, and Cashouts
When a worker leaves the federal service, his/her TSP account can be withdrawn.11 In 1997, there were 86,316 withdrawals from the TSP representing $1.366 billion. Three types of withdrawal were prevalent: transfers, lump sums, and cashouts. Of the withdrawals, 25,645 were trustee to trustee transfers into other qualified plans. The $723 million in transfers represented more than half of the 1997 withdrawal dollars.
| Salary | G Fund | G Fund | C Fund | C Fund | F Fund | F Fund |
| Men | Women | Men | Women | Men | Women | |
| $10,000 - $19,999 | 60.7 | 67.4 | 32.6 | 26.9 | 6.7 | 5.7 |
| $30,000 - $39,000 | 59.4 | 64.0 | 34.9 | 30.3 | 5.7 | 5.7 |
| $50,000 - $59,999 | 44.7 | 49.9 | 48.8 | 43.4 | 6.5 | 7.2 |
| $70,000 and Over | 43.5 | 43.5 | 50.1 | 49.0 | 6.5 | 7.5 |
There were also 29,759 lump sum payments representing $403 million. Unlike transfers, lump sums are dispensed to the individual. As a result, it is not known whether or what portion individuals rolled into retirement savings vehicles and/or what portion they spent.
If a worker's account is less than $3,500, a single payment, termed a "cashout," is made. Cashouts were received by 19,256 workers totaling $23 million. Data are not available on whether these workers invested or spent their cashouts.
Loans from Individual TSP Accounts to In-service Employees
A loan program gives currently employed workers access to the money they have contributed to their accounts. However, a worker cannot borrow more than half of the money in his/her account, and the amount can never be more than $50,000.
Two types of loans are available: general purpose and residential. In 1997, 204,344 general purpose loans averaging just over $6,300 and 16,510 residential loans at an average amount of just over $6,700 were disbursed.
Loans are repaid through payroll allotments. The minimum loan amount is $1,000 and the maximum amount depends, in part, on the individual's account balance, as well as the IRS rules. The interest rates are the latest available on the G Fund.
As one part of the Federal Employee Retirement System that also includes Social Security and a defined benefit pension, the TSP provides federal employees the opportunity to invest a portion of their income, on their own, toward the goal of retirement income security. It is important to keep in mind, however, that the TSP is not a "magic retirement savings bullet." The data show that not all federal employees take advantage of this opportunity. And, the majority of those who invest in the TSP neither invest the maximum amount nor invest their money aggressively. As well, more individuals made lump sum withdrawals (though the total dollar amount was less) than trustee to trustee transfers, strongly suggesting that not all of the TSP dollars are saved until retirement.Hinz , Richard P, David McCarthy and John Turner. 1997. "Are Women Conservative Investors? Gender Differences in Participant-Directed Pension Investments." In Michael S. Gordon, Olivia Mitchell, and Marc Twinney (eds.), Positioning Pensions for the Twenty-first Century. Philadelphia: University of Pennsylvania Press.
The Federal Retirement Thrift Investment Board (FRTIB). 1997. "Analysis of 1996 Thrift Savings Plan Participant Demographics." Washington, DC.
Clark, Robert L., Gordon Goodfellow, Sylvester Schieber and Drew Warwick. 1998. "Making the Most of 401(k) Plans: Who's Choosing What and Why? Report prepared for presentation at the Pension Research Council Symposium "Forecasting Retirement Needs and Retirement Wealth."
1 The employing agency begins TSP contributions on behalf of the newly hired worker in the the first pay period of the last calendar month of open season. There are two open seasons per yer: May 15/July 31 and November 15/January 31.
2 Newly hired workers may elect to contribute to the plan in the second open searson after hiring.
3 Agencies match the first 3 percent on a dollar-for-dollar, for a 4 percent total agency contribution.
4 Daily valuation will be available when the new record keeping is in place, in early 2000.
5 TSP administrative expenses are not borne by the taxpayer. The TSP fund is responsible for its expenses.
6 Most FERS employees become vested in the automatic 1 percent agency contribution after three years. FERS employees in congressional and some non-career positions are vested after two years.
7 Earnings on those contributions reduce the expense ratio by approximately .02 percent.
8 All data about TSP participants, unless otherwise noted, are drawn from information provided by the Federal Retirement Thrift Investment Board.
9 This excludes those who do not voluntarily contribute to the plan.
10 The study used 1995 administrative records of more than 150,000 employees in 87 401(k) plans.
11 An individual must be separated from federal service for 31 or more full calendar days to be eligible to withdraw from the TSP account.
Written by Laurel Beedon, Senior Policy Advisor, AARP Public Policy Institute
July 1998
© 1998 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E. Street, NW, Washington, DC 20049
Pub ID: IB33