Starting next month, federal employees and military
personnel will have a broad new range of investment options for their
retirement savings program.
The Thrift Savings Plan, which is the federal government’s
version of a 401(k), said Tuesday that it will open a long-planned mutual fund
“window” on June 1, providing investors with access to some 5,000 funds offered
by about 300 mutual fund companies, and allowing for targeted investing in
stocks, bonds, commodities and other markets in addition to the index-based
funds the TSP itself offers.
The option will come with eligibility restrictions and fees,
and several financial advisers who have counseled federal employees about their
TSP accounts cautioned that the opportunity should be handled with care.
The June 1 date was announced at the monthly meeting of the
program’s governing board, which previously had said only that the option would
become available sometime in June.
The expansion has been in development for years, since a law
passed in 2009 to authorize the more broad options for TSP, which has more than
6.5 million account holders and some $740 billion on investment as of the end
of April. It is part of an upgrade to the TSP’s operating platform that also
adds new online services and security protections and a mobile app.
“For those of us who have been along this entire journey,
it’s a really special moment,” acting board chairman David A. Jones, a
financial industry veteran, said at the meeting. “We had a vision of what the
TSP should be … it’s very much in line with what our hopes were.”
The mutual fund window will be available only to those with
at least $40,000 in investments because of the combination of two restrictions:
The initial investment through the window will have to be for at least $10,000,
and no new investments can bring the outside share above a quarter of an
account’s total.
About 2.3 million of the 4.1 million current and former
federal workers in the TSP have balances above that threshold, while that is
the case for only about 350,000 of the nearly 2.5 million current and former
military personnel with accounts.
Also, because the 2009 law required that users of the mutual
fund window bear its costs, they will have to pay annual fees totaling $150
plus a $28.75 per-trade fee.
“We’re not trying to put up a hurdle, but we’re trying to
make sure people have thought about it and researched it a little,” TSP
spokeswoman Kim Weaver said. “We wanted to make sure the amount that people
were moving through was substantial enough so that it wouldn’t be substantially
affected by the fees. We also wanted to make sure that people who were using it
have some investing experience.”
The TSP traditionally has offered only five funds tracking
broad stock and bond indexes and government securities, plus funds that mix
shares of those funds in differing ratios depending on the expected date to
begin withdrawals. Ahead of the upcoming change, the most significant expansion
of options had been increasing the number of target-date funds from five to 10
in 2020.
Numerous bills have been introduced in Congress over the
years seeking add investment funds to the TSP focusing on certain market
sectors or excluding investments in certain types of companies. On its own
initiative, the program had planned to widen its fund tracking international
stocks to include markets of some two dozen more countries in 2020, but it
retreated after political opposition arose because that expansion would have
included stocks of Chinese companies.
That opposition resurfaced just hours after the TSP made its
announcement Tuesday when several congressional Republicans urged the TSP to
cancel or postpone the mutual fund window until it “can ensure that no TSP
funds are invested in dangerous, non-compliant or opaque Chinese securities.”
The TSP had no immediate response.
“We are reviewing the letter,” Weaver said. “I would note
that the TSP’s mutual fund window will be entirely voluntary and no TSP
participants will be required to invest through” it.
Weaver said the TSP expects that after several years, it
will reach a steady state of 2 to 3 percent of account holders investing in
outside funds. “There will be people who have been eagerly awaiting this, and
there will be others who will look into it and decide later,” she said.
“This is going to open it up to a lot more choices. That’s
great,” said Ian Arrowsmith, managing partner of Scarborough Capital Management
in Annapolis, Md. “However, people have to be careful making the right
investment choices for their age, their risk tolerance and their time horizon
for when they’re going to retire.”
Jim Musgrave, a financial adviser with Research Financial
Strategies in Rockville, Md., said he has seen many federal employees transfer
their TSP account money into IRAs after retirement to get a wider range of
investment choices.
“I think it’s very advantageous for participants to have the
option to go outside of the funds in the TSP,” he said. “There’s a lot of
people who are more sophisticated who would love the opportunity to go beyond
those funds.”
“The downside is that a lot of investors chase returns,” he
said. ‘They’ll say, ‘This sector did really well the last six months. I’m going
to put my money there.’ That hot sector is eventually going to die down and
something else is going to replace it. They’ll be heavily weighted in a sector
when they should have started to trim it.”
Eligible investors will have access to the window through
their online accounts, which will include a screening tool allowing them to
select mutual funds meeting criteria they choose, including what the funds
invest in and what fees they charge.
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