imported post
The most recent article from Scott Burns, a Dallas financial columnist, says
the L funds will cost 0.6% as the earlier post indicated -
Also, this is probably irrelevant since we'll all share the admin expenses, not
just those invested in L funds.
Lay off the army guy - he's right. For most investors L will be a better long
term plan than buy and hold in any one of GSFCI. Groups such as ours who
think they can beat b&h are in the minority; most of us will be wrong -
[size="+2"]
A government plan that others should emulate [/size] [size="+1"]
Federal retirement program has lower costs than big 401(k)s
[/size]
[size="-1"]
08:46 PM CDT on Monday, August 1, 2005 [/size]
[size="-1"] [/size]
How does the federal Thrift Savings Plan compare with industry plans?"
So asks F.C., a San Antonio reader.
Answer: It compares very, very well. Indeed, in
The Coming Generational Storm (MIT Press, $17), professor Laurence J. Kotlikoff and I suggest that it could be the model for privatizing Social Security.
DallasNews.com/Extra Dept. of the Interior: TSPs
Failing that, virtually every 401(k) and 403(b) plan sponsor in the country should take a close look at the Thrift Savings Plan. Then they should ask a simple question.
Why isn't our plan more like the TSP?
Let's start with the basics. The Thrift Savings Plan is one of the elements in the retirement security of federal employees. The Thrift Savings Plan, like private-sector 401(k) plans, is a defined-contribution plan.
Federal employees are allowed to contribute up to $11,000 of their income, tax-deferred. They can select from a small menu of investment options. They also receive an employer contribution equal to 1 percent of annual pay.
The plan currently has five investment options: the Government Investment Fund, the Fixed Income Investment Fund, the Common Stock Investment Fund, the Small Capitalization Stock Fund and the International Stock Fund.
The options are based on major indexes and are managed by Barclays Global (the major force in exchange-traded funds). Currently, the investment options have annual expense ratios of 6 or 7 basis points.
Small expenses Yes, you read that right. Fund expenses are 6 or 7 one-hundredths of 1 percent.
This is about one-third the cost of Vanguard index funds. It's about one-tenth as expensive as the leading managed funds with the most assets.
Fidelity Magellan and American Funds Growth, the two largest 401(k) equity funds, have expense ratios of 0.62 percent and 0.7 percent, respectively. Pimco Total Return and American Funds Bond fund, the two largest 401(k) fixed-income funds, have expense ratios as low as 0.68 percent and 0.65 percent, respectively.
Most funds used in 401(k) accounts have costs about twice as high as the largest funds – about 1.2 percent. In the worst case, many 403(b) plans are burdened with annual expenses of more than 2 percent because they are based on insurance products. These plans are available to teachers and state employees.
In fairness to private companies, it should be recognized that the Thrift Savings Plan is gigantic, with $159 billion in assets and 3.4 million participants. It can achieve massive economies of scale compared with plans for relatively small organizations.
Starting Aug. 1, the TSP will begin to offer five new lifecycle funds with maturities ranging out to 2040. These funds will be built with different allocations of the five index funds but will have a materially higher expense ratio, 0.6 percent.
Test model To test the impact of fees over a working lifetime, I used an accumulation model that starts with a 25-year-old worker who saves 10 percent of gross income. (Remember, this is just an exercise!)
The worker enjoys a gross return of 9 percent and annual raises of 4 percent in an economy where inflation averages 3 percent. The worker also hopes to accumulate enough in savings to replace about 60 percent of earning power when retired. To do that, his nest egg will need to be 17 to 25 times his final target income.
A federal worker whose plan has negligible plan expenses would accumulate 17 years of needed final income by age 56. A worker in a typical 1.2 percent annual cost plan would accumulate only 13.8 years. And a worker in an expensive 2 percent cost plan would accumulate only 12.7 years.
Workers in high-cost plans would accumulate 26 percent less than workers in the Thrift Savings Plan.
The gap gets worse, not better, for those who work longer. By age 67 the worker in the high-cost plan is at a 40 percent disadvantage to the worker in the Thrift Savings Plan.
Some readers will say high-expense plans will compensate by delivering superior performance. The answer to that is simple: Check history.
Scott Burns answers questions of general interest in his Thursday columns. Write Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, Texas 75265, or send an e-mail.
E-mail
sburns@dallasnews.com
