Thrift Savings Plan
From Bogleheads
The Federal Thrift Savings Plan (TSP) is a retirement savings plan for civilian and military employees of the United States Government. It is similar to a 401(k) in that it is a defined contribution plan that is managed by the employee, and it has the same contribution limits.
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Funds
There are five core funds in the TSP and a family of Lifecycle funds that invest in the core funds. The core funds are:
- G Fund: a uniquely attractive bond fund that provides returns similar to an intermediate-term Treasury bond fund, but with the stability of principle of a money market fund, and no default risk.
- F Fund: a fixed income index fund that tracks the Barclay's Aggregate Bond Index.
- C fund: a large-to-mid cap stock index fund that tracks the S&P 500 Stock Index.
- S fund: a mid-to-small cap stock index fund that tracks the Wilshire 4500 Index.
- I fund: an international stock index fund that tracks the EAFE Stock Index. Note that the I fund does not have any emerging market holdings.
In addition to the core funds the TSP offers Lifecycle (L) funds. Each of the L funds are Target Date Retirement Funds which maintain a mix of the above five core funds that adjusts over time in anticipation of the employee's expected retirement date (similar to Vanguard's Target Retirement Funds).[1]
Fees
TSP funds are operated with extremely low expense rations, currently at 1.8 basis points (0.018% expense ratio). Vanguard, which has the lowest expense ratios available to regular investors, typically has expenses 10 times higher. Most mutual funds in 401(k) plans have expenses 100 or even 200 times higher than the TSP. For current and former federal government employees who have access to it, the TSP is a spectacularly good deal.[2]
Matching
The federal government matches employee TSP contributions for certain civilian employees, but not for members of the military or employees under the Civil Service Retirement System. For those qualified for matches, the match rates are: 1% automatic match (independent of employee contribution), followed by 1% for each 1% of employee contribution (up to a maximum of 3%), then 0.5% for each 1% of employee contribution (to an additional 1% maximum). Thus, employees may receive up to 1% + 3% + 1% = 5% of their salary in matching contributions.[3]
Fund Transfers
A TSP participant may redistribute TSP assets across funds at any time (called an "Interfund Transfer" or IFT). IFTs submitted before noon Eastern are effective at close of business that day. IFTs submitted later are effective at close of business the following day. IFTs are limited in number per month to curb costs of frequent trading. Participants can make two unrestricted IFTs per calendar month. After that, only IFTs that transfer funds into the G fund are permitted. If one of the first two IFTs in a month moves funds into the G fund it counts toward the two unrestricted transfers for that month.[4]
G Fund
The G Fund offers the opportunity to earn rates of interest comparable to those of intermediate-term Government securities but without any risk of loss of principal and very little volatility of earnings. The G Fund is invested in short-term U.S. Treasury securities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. Government. Thus, there is no "credit risk". The interest rate resets monthly and is based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. Earnings consist entirely of interest income on the securities. Interest on G Fund securities has, over time, outpaced inflation and 90-day T-bills.
The G Fund is a uniquely good deal for investors, as it has a risk/return profile unrivaled by any other fixed income instrument:
- It is risk-free, like Treasury bonds;
- The yield is equal to the average of intermediate-term Treasury bonds;
- Like a money market, and unlike Treasuries, its price never goes down;
- And, because it repurchases its bonds daily, it provides some of the inflation protection of TIPS.
International Funds
Investors should note the lack of emerging markets in the I fund. TSP investors seeking exposure to emerging markets can either do so by holding the I fund and an emerging markets fund in their IRA, such as Vanguard Emerging Markets Fund. Or, they can place all of their international investments with Vanguard (e.g., in the Vanguard Total International Stock Market Fund).
Replicating Total Stock Market
Many TSP investors wish to use the C and S funds to replicate the Total Stock Market. You can hold the C (tracks the S&P 500) and S (tracks the DJW 4500) funds in a 4 to 1 ratio to approximate the total stock market. You can track that this ratio remains correct on the Vanguard benchmark statistics page.
Transferring into TSP
The TSP allows current and former employees of the federal government to rollover their 401(k)s and IRAs into the TSP. For example, a federal employee might switch to an employer where she has a 401(k) plan. If she then leaves there, to a third employer, she would normally rollover her 401(k) to an IRA, such as one with Vanguard. Since the TSP offers the lowest cost funds available anywhere, it provides a better value than Vanguard. (The TSP is almost certainly a better value than the second employer's 401(k) plans, which typically have expenses 100 to 200 times worse than the TSP.) The employee can move rollover the assets from her second employer's plan to the TSP. Thus, as long as federal employees never close their TSP accounts by withdrawing their full balance, the TSP remains a valuable benefit to federal service, even after switching jobs.
Most Similar Funds
Since the TSP funds do not have tickers, people occasionally want to know which funds most closely approximate the TSP, for substitutions in spreadsheets and online fund trackers. Vanguard's Institutional funds track the same indexes as the main 4 TSP funds are very similar, although all of them have higher fees than the TSP:
There is no good equivalent for tracking the G Fund. Many people just use the Prime Money Market (VMMMX) to simulate the lack of volatility, and adjust the balance upwards every few months to match their G Fund balance.
Required Minimum Distributions
- MRD Suspended for 2009
- "If you're over age 70½, you won't have to take required minimum distributions (RMDs) in 2009 from your tax-deferred retirement accounts under new legislation signed by President Bush.
- The 2009 RMD suspension applies to traditional IRAs, 401(k)s, 403(b)s, and other defined contribution plans. The suspension also applies to investors under age 70½ with inherited IRAs or inherited retirement plan accounts that would otherwise be subject to RMDs."--Vanguard News release, December 23, 2008
Links to Resources
References
- ↑ Summary of the Thrift Savings Plan pp.10-12.
- ↑ Summary of the Thrift Savings Plan p 12.
- ↑ Summary of the Thrift Savings Plan p 3.
- ↑ Summary of the Thrift Savings Plan pp.11-12.
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