The Thrift Savings Plan, used by millions of federal
workers, is like a 401(k), except it's a lot cheaper. Last year it charged an
average expense ratio of a mere 0.03%. That means just $3 in fees for $10,000
in savings, or $30 for a $100,000 portfolio. IRAs or employer-sponsored 401(k)s
typically charge more than 10 times that amount. Nevertheless, federal workers
are rolling billions in savings out of the low-fee plan when they leave their
jobs, even though they don't have to.
Last year nearly half (45%) of participants who left federal
service in 2012 had withdrawn all of their savings -- nearly $10 billion
collectively. Workers on government message boards cite a number or reasons for
leaving, including frustration with the thrift plan's limited investment
options and strict withdrawal rules. But some retirement savings experts
suspect that a heavy sales pitch by private financial firms and advisers might
also be a factor.
John Turner, an economist and director of the Pension Policy
Center and a former federal worker himself, said he became troubled when he
heard of friends who had pulled out of their funds only to pay thousands in
fees. As an experiment, Turner called up major IRA providers and asked for
advice, explaining he was a former government employee with savings in the
thrift plan. Only one firm acknowledged he could do better by staying with the
plan's super low fees, while the rest all encouraged an IRA rollover.
FutureAdvisor created three sample portfolios to show how
much more savers can pay in fees if they roll their money out of the Thrift
Let's say a worker has $100,000 invested in the Thrift
Savings Plan. Even if she rolled her money into the cheapest comparable ETFs on
the market, she would still spend $54 more in fees each year despite getting
If the worker were to roll that money into an IRA, invested
in mutual funds with average fees of 0.74%, she would pay an extra $716,
FutureAdvisor found. And if she opted for a pricier portfolio, say one with
fees of 2.4%, she could shell out more than $2,300 in extra fees in a single
To be sure, participants in the Thrift Savings Plan, which
has five main funds, can find more investment options in private IRAs. Yet
Turner said the thrift plan offers enough stock and bond index funds that track
domestic and international markets to give most savers what they need.
FutureAdvisor, in its analysis for CNNMoney, found that
typical investors can almost always get higher returns from the government plan
compared to similar investments, especially after fees are taken into account.
Last year, for example, the thrift plan outperformed the
sample high-cost portfolio by 3%.
So how does the government thrift plan keep fees so low? It
partly subsidizes plan expenses with revenue from loans taken from the plan and
forfeitures from employees who leave before fully vesting -- a practice termed
"quite unique" by FutureAdvisor Chief Investment Officer Simon Moore.
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