Soon, military and federal government employees will be able to invest in more than 5,000 mutual funds through the Thrift Savings Plan, under a proposed rule in the Federal Register.
Currently, participants in the Thrift Savings Plan can invest in any of five diversified index funds that contain investments in the S&P 500 (C fund), the Dow Jones Index (S Fund), international stocks (I fund) or government bonds and securities (G and F funds). Target Date Retirement Funds (L Funds) are also available.
Starting this summer, the TSP will provide a “mutual fund window” for investors to buy mutual fund shares. However, the opportunity comes with more risk and additional costs.
Here’s what you need to know.
Table of contentsWhat is an investment fund? How Much Do TSP Mutual Funds Cost? Requirements for TSP Mutual Fund How the TSP Mutual Fund window works TSP Mutual Fund Manager will modernize platform TSP mobile app and more Transition may limit TSP access in May
What is an investment fund?
Mutual funds are pools of investor money that are spent on other investments, including stocks, bonds and other securities. Investors buy shares directly from mutual funds rather than buying from other investors in a larger market.
Mutual funds are not as diversified as the TSP’s core index funds, so they can be risky investments. But they also give investors more control over the companies, causes and issues they want to spend their money on, such as environmental, social and governance (ESG) funds.
Responsible and sustainable investing is on the rise. In a 2021 investor survey, Callan, an institutional investment firm, found that a record 70% of respondents already include or consider ESG funds in their investment decisions.
How much do TSP mutual funds cost?
By law, TSP participants using the mutual fund window must pay fees that do not apply to core fund investors.
Among which:
$95 annual maintenance fee $28.75 per trade $55 annual fee to cover administrative costs so traditional index fund investors don’t have to pay for an option they don’t use. The board proposes to adjust this fee every three years to keep up with the service costs. All fees and expenses specific to individual mutual funds
This is outrageously expensive, according to The Military Wallet columnist and Certified Financial Planner Daniel Kopp.
“I’m thinking of a junior officer or conscript with only $40,000 in the TSP. For the regular TSP fees, they pay less than $20 a year,” Kopp said.
Assuming 12 monthly trades in mutual funds, in his example it would cost the investor about $565 per year to participate in the new option – more than 30 times the price for investing in index funds.
“The only scenario where I could see this makes sense is for someone with a large TSP balance of, say, $500,000 or more with little to no assets in an IRA, and wants to add some specific investments,” Kopp said.
“Even then, I would recommend that they access those factors with an IRA through a custodian like Vanguard, Fidelity, or Schwab. Those custodians have no trading fees for ETFs and have thousands of mutual funds with no transaction fees.”
Requirements for TSP Mutual Funds
The Federal Retirement Thrift Investment Board has proposed restrictions to minimize investor risk.
TSP investors must have a minimum of $40,000 in their account. The minimum initial transfer for the mutual fund window is $10,000. Mutual fund transfers cannot exceed 25% of an investor’s TSP index fund balance.
Mutual fund transfers also count towards the TSP’s maximum transfer limit of two per calendar month (excluding the G Fund).
How the TSP Mutual Fund window works
Under the proposed rule, TSP investors are required to create a mutual fund window account and sign an acknowledgment of risk.
Once you’ve done that, you can choose to transfer money from your TSP balance to a sweep account. Sweep accounts are high-interest money market funds that hold your money until you choose your mutual funds.
You cannot make or withdraw automatic contributions to mutual funds. Your money must first be in an index fund. (Note that transfers back and forth may incur fees).
If you receive payments from a TSP under a court or IRS order, your index fund accounts must have enough money to cover it.
If the funds are insufficient, the board will perform an automatic “force transfer” of your sweep account or mutual fund investments back to the index funds in your contribution allocation. If you have less than $25,000 in mutual funds, the board will forcibly transfer the entire balance.
TSP Mutual Fund Manager Will Modernize Platform
The TSP’s new mutual fund window is about 13 years in the making.
In 2009, Congress authorized (but not required) the Federal Retirement Thrift Investment Board to offer the option to TSP participants after a survey revealed investor interest.
The Participation Council and the Board of Directors – which manages the Salary Savings Plan – initially did not agree on the establishment of the program. In 2014, the board of directors presented the results of several years of research and the following year the investment fund received unanimous approval.
In 2019, proposals for archiving services started pouring in. The Council awarded the contract to Accenture Federal Services in 2020.
“It is an honor to support the FRTIB in reshaping retirement services and improving the customer experience of the TSP,” wrote Elaine Beeman in November 2020.
Beeman is the civil leader and senior managing director of Accenture Federal Services. She said Accenture will not only implement the mutual fund option, but also create a more modern platform for TSP investors.
TSP mobile app and more in the future
Accenture aims to streamline routine TSP processes and reduce paperwork by introducing digital signatures, mobile check deposits for TSP rollovers and a secure digital mailbox.
Customer service enhancements include 24-hour automated virtual assistance and a dedicated “ThriftLine” live chat. Users can also call the ThriftLine hotline for telephone assistance.
The TSP mobile app, which will launch in mid-2022, will allow users to manage their TSP and interact with virtual assistants on the go. The app offers easy login options tailored to your smartphone’s built-in software, such as fingerprint access and facial recognition.
“The new features will provide participants with more self-service options to meet the expectations of an increasingly digital, savvy TSP customer,” said Beeman.
Transition May Limit TSP Access in May
In a February 2022 announcement to TSP participants, Ravi Deo, executive director of the Federal Retirement Thrift Investment Board, said some trades will be unavailable “for a short period in May 2022.”
“But don’t worry, your money will still be invested during this time,” he said.
The expected transition dates are set out in an email to TSP participants:
Expected transition dates: May 16 to the first week of JuneAll transactions temporarily unavailable: May 26 to the first week of JuneFull access and transactions restored: First week of June
Deo said that after the transition period, users will have to set up online account access again.
“In the coming months, you will receive communications from us with instructions on how to complete those steps,” he wrote in the announcement.
This post TSP opens window for investment funds in the summer of 2022
was original published at “https://themilitarywallet.com/tsp-mutual-funds/”
