Thrift Savings Plan
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.
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 yields similar to an intermediate-term Treasury bond fund, but with the stability of principal of a money market fund, and no default risk.
- F Fund: a fixed income index commingled trust that tracks the Barclays US Aggregate Bond Index.
- C Fund: a large-to-mid cap stock index commingled trust that tracks the S&P 500 Stock Index.
- S Fund: a mid-to-small cap stock index commingled trust that tracks the Dow Jones U.S. Completion Total Stock Market Index, commonly known as an Extended market index fund.
- I Fund: an international stock index commingled trust that tracks the EAFE Stock Index. Note that the I Fund does not have any emerging market or small-cap 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).
TSP funds are operated with extremely low expense ratios, currently at 2.5 basis points (0.025% 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.
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.
Gaining the maximum match
|TSP: How to get the Max|
|"In order to get the maximum Agency Matching Contributions, you must not only contribute 5% of your basic pay each period, but you must also contribute all year long. If you reach the IRS annual limit before the end of the year, your contributions (and consequently, your Agency Matching Contributions) will stop."|
Agency matching contributions are made each paycheck. Therefore, to gain the maximum match, an employee must contribute at least 5% throughout the entire year. If the employee reaches the IRS contribution limit for the calendar year, then the employee's contributions will automatically stop and the agency matching contributions will stop too.
Therefore, to gain the maximum match, ensure that:
- You contribute at least 5% of your salary for each pay period throughout the year.
- You don't reach the annual IRS contribution limit before the last paycheck.
For employees who want to meet the IRS annual contribution limit for the year ($17,500 for the 2014 tax year), you need to be careful that you don't hit the limit too early (and forgo agency matches) or too late (and fall short of the maximum contribution limit). This can be particularly tricky if your salary changes or if you have a variable salary. Some people also like to front-load contributions earlier in the year; if you do this, ensure that you don't front-load so aggressively that you hit the IRS limit before the end of the year, which could cause you to miss out on the maximum agency match, and don't front-load your contributions to the point where you don't have enough to keep contributing 5% of your salary in each pay period. TSP participants may wish to use the TSP's online How Much Can I Contribute? calculator in order to ensure they are contributing the maximum amount; note that in a typical year, there are 26 pay periods, but depending on the calendar year, some years have had a different number of pay periods.
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.
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.
Investors should note the lack of emerging markets, small caps, and Canadian stocks in the I Fund. TSP investors seeking to round out the gaps in the I Fund can consider the following:
- To increase exposure to emerging markets, hold the I Fund and an emerging markets fund in their IRA, such as Vanguard Emerging Markets Fund.
- To increase exposure to international small caps, hold an international small cap index fund in an IRA.
- To increase exposure to Canadian stocks, which are 8.6% of Vanguard's Total International Stock Market Index Fund, hold a Canadian stock mutual fund or ETF such that tracks the MSCI Canada Index Fund such as EWC or Vanguard MSCI Canada Index ETF Fund (VCE)
Approximating Total International Stock Market contains more information for investors who would like to hold this combination of funds.
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. According to the TSP, "The Dow Jones U.S. Completion TSM Index made up approximately 25% of the market value of the U.S. stock markets; the S&P 500 accounted for the other 75%. Thus, the combined S Fund and C Fund cover virtually the entire U.S. stock market."
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 four TSP funds and are very similar, although all of them have higher fees than the TSP. Comparable funds from Fidelity are also shown:
|G Fund||n/a - see below|
|F Fund||Barclays Capital U.S. Aggregate Bond Index||VBTIX||Barclays U.S. Aggregate Float Adjusted Index||FSITX||Barclays Capital U.S. Aggregate Bond Index|
|C Fund||S&P 500 Index||VIIIX||S&P 500 Index||FUSVX||S&P 500 Index|
|S Fund||Dow Jones U.S. Completion TSM Index||VIEIX||S&P Completion Index||FSEVX||Dow Jones U.S. Completion TSM Index|
|I Fund||MSCI EAFE index||VIDMX||MSCI EAFE Index||FSIVX||MSCI EAFE Index|
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
- RMD 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
- TSP Highlights, July 2012. As of July, not all agencies and services are accepting elections for Roth contributions because they are still making the necessary technical and programmatic changes to their payroll systems.
- Summary of the Thrift Savings Plan pp.11-12.
- Summary of the Thrift Savings Plan p 16.
- Summary of the Thrift Savings Plan p 4.
- Agency Matching Contributions at TSP.gov
- Summary of the Thrift Savings Plan p.15.
- Vanguard Total International Stock Index Fund Annual Report, 31 October 2011
- S Fund Information, Federal Retirement Thrift Investment Board, 31 Dec 2011.