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Feds to Offer More Choices in TSP Retirement Plan

Participants will be able to choose from thousands of mutual funds

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The Thrift Savings Plan (TSP), the retirement savings account for federal government and military personnel, will dramatically increase the number of investment options, beginning in June.

The TSP works like a 401(k) or 403(b) plan. Workers can now invest their savings in five index funds, which track bond and stock indexes, such as the Standard and Poor’s 500 stock index. The plan also offers 10 target-date funds, which gear their investments toward a participant’s retirement date. Starting in June, however, workers will have their choice of 5,000 mutual funds from 300 mutual fund companies, as well as the ability to invest in stocks, bonds, specific industry sectors and other areas.

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The new mutual fund window won’t be available to all federal employees: It will be open to investors who have at least $40,000 in TSP savings. Further, participants must invest at least $10,000 in these new choices and can’t invest more than 25 percent of their holdings in that window. They will pay a $55 annual fee, a $95 maintenance fee and be charged $28.75 per trade. Investors will also pay other fees and expenses that the funds charge, such as the ongoing management fee.

The TSP will continue to allow investors to move their money around within current plan funds, meaning they can change the percentage of their holdings in different funds. Participants will also be able to transfer money between funds without reallocating the entire portfolio.

Changes to the TSP have been planned since 2009, when Congress authorized an expanded set of options.

Good for experienced investors?

Financial planners have mixed feelings about the changes in the TSP. “It’s outstanding for the self-directed government employee,” Dennis Nolte, a certified financial planner (CFP) at Seacoast Bank in Winter Park, Florida, said via email. Currently, investment options are limited to a few index funds. “I believe in personal choice in investing, and if folks have the time, temperament and talent to manage their own funds a bit more actively, more power to them.”

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Current research bears out Nolte’s point. During the past decade only 16.9 percent of actively managed mutual funds have fared better than the S&P 500, according to S&P Dow Jones Indices. Those managers who do beat the index rarely continue to do so. Given that professional investors have such a difficult time beating the S&P 500, ordinary people probably won’t be able to beat the index, either.

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Participants will also get a chance to better diversify their portfolios, because the TSP will now offer funds that invest in real estate stocks and other sectors, including emerging markets. Investors who are concerned about companies’ environmental, social and governance policies will also get a selection of socially conscious mutual funds.

Other financial planners are disappointed. “While the average investor may want a greater number of investment choices, studies have demonstrated that simplicity and low expenses win in the long run,” says Randy Burns, a CFP in Naperville, Illinois. “The Thrift Savings Plan has long been a champion of these two characteristics.” Some of the new choices, Burns says, may not have the virtues of simplicity and low expenses.

Evan Beach, a CFP for Wealth Manager with Campbell Wealth Management in Alexandria, Virginia, also has his doubts about the blessings of more choices in the TSP. “I think it will ultimately be bad for all except the most savvy investors,” he says. “For the rest, I fear this will lead to speculative investing.”

Rob Greenman, a CFP in Portland, Oregon, agrees. “Will they be attracted to shiny objects like actively managed funds with strong past performance? Will they chase returns from certain sectors? It will be fascinating to look back a few years after this change to see how this investor-behavior exercise unfolds.”

John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously, he was a reporter for  and  USA Today  and has written books on investing and the 2008 financial crisis. Waggoner’s USA Today investing column ran in dozens of newspapers for 25 years.

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