Government service is often thankless. I saw firsthand bouncing around the country from town-to-town as the son of a life-long USDA employee. But in comparing notes between my Dad’s Thrift Savings Plan (TSP) and what I know of 401ks, the TSP might be one area where the public sector got it right. How so?
If you’re a person with a 401k, we at blooom often start with a simple question. Know what you’re paying in investment fees? Generally, the answer is no. And the cost of what they’re invested in often surprises them. That’s where we come in to help 401k clients. For people in a TSP, the fee discussion is a little different – on the surface.
And that has more to do with predatory Wall Street practices than the plans themselves.
Investment selection, rebalancing and fiduciary services could help federal employees achieve a better retirement. So, let’s explore why current and former federal employees should consider those services before cutting that last bit of government red tape known as the TSP.
Thrift Savings Plans (TSP) Have Few Investment Fees
TSP participants have access to one of most inexpensive employer-sponsored retirement plans, but only 40% of military service members take advantage of this benefit.
A TSP is a lot like a 401k, but the investment expenses are generally better in the former. Say 20 times better. Compare the average expense ratio of 0.03% for a TSP to the median 401k expense ratio of 0.60% we see pre-blooom rebalance.
Millions of federal workers are in the plans. A 2014 CNN Money article surmised why many millions more are bypassing these low-fee plans (or opting out when they leave their federal job) and perhaps paying thousands more in fees in other retirement savings vehicles.
Why Fiduciary Should Matter For Federal Workers
Sure, like other employer-sponsored retirement plans, the investment options can be limited. This is a typical argument on why not to participate.
But also picture this scenario. After spending 20 years serving our country in the military, you’re making a move to the private sector. Several months later, you receive a call from a financial advisor about how he can maximize your returns. (How did he even get your number?) He offers to buy you breakfast for your time. You reluctantly agree to meet.
The day of breakfast, this suit wearing a Rolex watch and cufflinks shows up to assure you that your best financial option is to roll your TSP into an IRA.
But is it?
The CNN Money article identified the above scenario as a more likely culprit for lower than expected TSP participation rates: marketing and sales efforts by financial firms and advisers looking to move dollars into higher-cost IRAs.
The recently approved DOL Fiduciary Rule should help provide better advocacy for current and former federal workers, provided that the firm or adviser is a fiduciary. In short, a fiduciary will provide advice in your best financial interest, not theirs. That advice could include recommending a person stay in a TSP plan (or not) instead of an IRA they manage.
Before making that rollover, that’s an excellent question to ask, “are you a fiduciary?”
The Potential Implications of Bad Financial Help
The trick can often be finding a financial advisor, who is also a fiduciary, at a reasonable expense. That access to financial help for the traditionally under-served is exactly why blooom was started.
The implications of not choosing wisely could add years to your work life.
Let’s say a federal employee rolled their money of a Thrift Savings Plan into an IRA with a Target Date Fund (TDF). The industry-wide average fee for a TDF is 0.71%. That employee would pay about $700 more per year in fees. And those fees compound over time as the account grows. This could result in more than $100,000 lost to investment fees.1
And, while the investment options in that TSP might be limited, a flat-rate managed account service like blooom can mimic the capabilities of a target date fund. By understanding a person’s desired retirement age and risk tolerance, blooom’s investment selection process and continual rebalancing would create a customized portfolio and adjust it as the individual draws closer to retirement.
There is no guarantee blooom can or will reduce your fund expenses. Blooom is limited to the funds available in your employer-sponsored retirement plan.
Published on November 9, 2017