Why so few take advantage of the TSP mutual fund window

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John Grobe, Federal Career Experts

The Thrift Board said it expects only 2-3% of participants to take advantage of the recently opened mutual fund window – why so few? Wouldn’t people be leaving the TSP in droves if they didn’t have access to mutual funds? That’s what the TSP told us after its investigation more than five years ago. In this survey, the Thrift Board identified three main reasons that led participants to leave the Thrift Savings Plan after separating from federal service.

One cause was that the TSP’s rules on withdrawals were significantly more restrictive than the rules that applied to most individual retirement plans (IRAs). This led to the introduction, passage and implementation of the Thrift Savings Plan Modernization Act. After the law was implemented in the fall of 2019, the TSP rules were much less restrictive than they had been, but still not as flexible as in an IRA.

Another cause was that the participants’ financial advisors were advising them to leave the TSP. The Thrift Board really couldn’t do much about it. If a person has a relationship of trust with their financial advisor, they are likely to do what the advisor suggests.

The third cause was that people left the plan because investment choices were limited. This limited choice of investments is also the case in many employer-sponsored defined contribution plans, such as the TSP. Despite the fact that the Thrift Board had been adamantly opposed to allowing participants to participate in outside mutual funds for years, they reluctantly adopted what came to be known as the Mutual Fund Window (MFW).

The fact that the anticipated participation in the MFW is only 2% to 3% shows us how reluctant the membership of the Thrift Board really was. Let’s face it, the Thrift Board doesn’t want us to take some of our money out of the TSP and invest it in outside mutual funds. The design of the MFW is proof of this.

It appears that the MFW was designed by the Thrift Board to discourage its use by TSP participants. How?

You need to have some money in the TSP to participate. The minimum amount for an initial transfer is $10,000 and a limit of 25% of a person’s total account balance can be invested. This means you must have at least $40,000 to use the window. This excludes many early-career employees and those who have deferred their retirement savings for other reasons (e.g. paying off a student loan, buying a primary residence, saving for education for children, etc.). ).

The costs of using the window are high; more than most would pay if they invested in mutual funds through an outside IRA. Here are the costs that the TSP will impose:
$95 annual maintenance fee; and
Fee of $28.75 per transaction; and
Another annual fee that starts in 2022 at $55 and will vary from year to year.

This does not include fees (i.e. sales charges, 12b1 fees, etc.) charged by the mutual fund company.

Still want to invest in mutual funds? You might be wise to do this outside of the Thrift savings plan. Consider having mutual funds in an IRA, or even in a taxable account.

The paying TSP
With the advent of the TSP investment window in June comes a host of new fees, new risks – and opportunities – to consider, where you should be successful just to reach the threshold of profitability.

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See also,

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Dolores W. Simon