Re: Reactive1 Account Talk
TSP officials eye limits on trades
Mike Causey
September 4, 2007
Many financial analysts, including Vanguard founder John C. Bogle, consider the federal Thrift Savings Plan to be the best 401(k) anywhere.
The huge TSP is worth more than $200 billion. Most working feds, many retirees and active and retired military people count on the program for a substantial chunk of their retirement income. The TSP is considered a best buy for several reasons:
The administrative fees, or charges to manage your account, are the lowest in the business by a wide margin.
Most TSP investors — everyone under the FERS retirement system — are eligible for a matching contribution of up to 5 percent after putting in 5 percent or more of their salary. Even FERS employees who contribute nothing have accounts into which the government contributes the equivalent of 1 percent of their salary. Those matching contributions, whether 1 percent, 2 percent or 5 percent, are equivalent to a tax-deferred pay raise.
The rate of super-safe Treasury securities G Fund is set and guaranteed by the government. The fund is available only to civilian and military investors in the TSP.
Numerous people — many of them former highly paid lawyers turned federal judges — switched substantial money from their individual retirement accounts, 401(k) plans and other tax-deferred programs into the TSP. They realize the TSP is a better, safer, less-expensive investment vehicle. Many of them now have million-dollar TSP accounts.
The program receives annual oversight from Congress to the Labor Department and the General Accountability Office. Many members of Congress and their staffers have their retirement nest eggs in the TSP, along with generals, admirals, astronauts, federal law-enforcement personnel and rank-and-file civil servants.
So, if the TSP is so great, why is it studying private-sector 401(k) plans looking for improvement?
One reason is that the ups and downs of the stock market since February have many TSP investors jumping in and out of their stock-indexed funds — particularly the international-indexed I Fund — and into and out of the safety of the Treasury securities G Fund. Because of the way the TSP's interfund transfer system is set up, investors can't day trade, making instant transfers. But they can participate in what amounts to next-day trading, which can produce even more surprises in a market that can lose or gain 200 points in a matter of hours.
As Bethesda-based financial planner Dennis Gurtz said, people who attempt to time the market, or guess when it has peaked and tanked, "have to be right twice: when they go out and when they return." He said being out of the market on just 10 or 12 key days can reduce the overall return for that year.
In March, roughly 35,000 TSP investors moved about $1.7 billion from the stock index funds — mostly the I Fund — into the Treasury securities or bond funds. TSP officials said they "discourage active trading" because the TSP is a long-term investment.
At the same time that a small percentage of investors are into "active" trading, nearly a half-million investors in the TSP's Lifecycle funds are doing the opposite. Lifecycle funds base their constantly changing mix of stocks, bonds and the G Fund based on target dates. Those dates, like the year 2020 or 2040, are when investors anticipate they will begin tapping their TSP accounts. Those target dates are often later, in some cases much later, than the date of retirement. As the value of stocks drops, the target L funds buy more shares to maintain the proper target percentage value in their particular L fund. When stocks go up, they sell shares to maintain the target balance. Those funds are adjusted automatically every day.
Investors who make frequent trades do not have to pay any higher fees than those who seldom, if ever, make changes. The question facing TSP officials is whether to charge active trades, and if so, how much. They are looking at successful private-sector 401(k) plans to see what they do. Do they have limits on the number of interfund transfers that can be made? Do they have an absolute limit on the number or timing of trades, or do they charge extra when an investor goes over the company 401(k) plan limit? If so, what is a reasonable limit, and a reasonable charge that will apply to active traders, not the total TSP investor population?
The answers won't be available for some time. But for investors both active and passive, they need to be asked — and answered.
