Increasing TSP Fund Expense Ratios

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MichDad
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Increasing TSP Fund Expense Ratios

Post by MichDad » Mon Jul 27, 2020 10:50 am

I listened in to today’s July meeting of the Federal Retirement Thrift Investment Board (FRTIB), the agency that administers the Thrift Savings Plan. During one portion of the meeting, a staff member updated the FRTIB on the agency’s budget year-to-date. One of the Board members asked how the FRTIB’s current spend rate might impact on the expense ratios for the various TSP funds. The staff member responded that it’s too early to provide a precise answer but she estimated that the net TSP fund expense ratios should increase by about one full basis point. Right now, the net expense ratios are around 0.042 percent. She indicated that they should rise to over 0.05 percent.

The FRTIB’s Executive Director added that this increase was due in large part to the fact that the FRTIB is currently running two separate participant/beneficiary databases and is working towards creating just one database. I believe he said that one database was for federal employee and beneficiary participants and the second database was for military personnel and beneficiary participants. He said that these increased expense ratios should remain in place for about two years until these two databases are consolidated into one.

In an environment where expense ratios at well-known investment firms such as Fidelity, Schwab, and Vanguard have been declining, it’s disheartening to see the TSP’s expense ratios continuing to creep up. I recall how not too many years ago, around 2013, the TSP’s net expense ratios were around 0.026 percent. The FRTIB is now discussing net expense ratios of about two times that amount. By contrast, Fidelity now offers several zero expense ratio funds, two of which my wife and I have invested in.

I still maintain a large G Fund account at the TSP but I’ve moved all of my other holdings to lower-cost equities funds at Fidelity, Merrill Edge, Schwab, and Vanguard.

Furthermore, it continues to irk me that the TSP refuses to allow its participants to make in-plan Roth conversions. Unlike many private 401(k) plans, we are required to transfer money to IRAs in order to make Roth conversions.

MichDad

ChrisBenn
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Re: Increasing TSP Fund Expense Ratios

Post by ChrisBenn » Mon Jul 27, 2020 12:27 pm

MichDad wrote:
Mon Jul 27, 2020 10:50 am
(...)
Right now, the net expense ratios are around 0.042 percent. She indicated that they should rise to over 0.05 percent.

The FRTIB’s Executive Director added that this increase was due in large part to the fact that the FRTIB is currently running two separate participant/beneficiary databases and is working towards creating just one database. I believe he said that one database was for federal employee and beneficiary participants and the second database was for military personnel and beneficiary participants. He said that these increased expense ratios should remain in place for about two years until these two databases are consolidated into one.
(...)
Ouch - so at ~550 billion aum .042 -> 0.05 (assuming those are fund weighed) gives us 44 million a year to turn two databases into one. For two years.

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MichDad
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Re: Increasing TSP Fund Expense Ratios

Post by MichDad » Mon Jul 27, 2020 12:58 pm

ChrisBenn wrote:
Mon Jul 27, 2020 12:27 pm

Ouch - so at ~550 billion aum .042 -> 0.05 (assuming those are fund weighed) gives us 44 million a year to turn two databases into one. For two years.
As of April 30, 2020, the FRTIB was managing about $593,669,000,000 in assets. Here's a link to my source:

https://www.frtib.gov/pdf/minutes/2020/ ... y-Att1.pdf

I believe the US and international equities markets have risen since then. I admit my math skills aren't terrific but when I multiply this AUM figure by 0.01%, I get $59.4 million per year in added expenses. If the expense ratio increases by "only" eight tenths of a basis point (0.42 to 0.50), I calculate $47.5 million per year in added expenses. Either way, this is a great deal of money. So, "ouch" is appropriate.

MichDad
Last edited by MichDad on Mon Jul 27, 2020 2:44 pm, edited 1 time in total.

Mako
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Re: Increasing TSP Fund Expense Ratios

Post by Mako » Mon Jul 27, 2020 1:06 pm

I'm mildly irked by the transfer rules as well, though I hope they improve by the time I'm ready to retire in 15+ years. It is hard to complain too much about the ERs when Vanguard's 500 index is still at 0.04%, total bond at 0.05%, extended market 0.06%, and developed market (I know it's not the same) at 0.07%. The TSP doesn't have anything to subsidize loss leaders like Fidelity. Still, if they could do it at 2.6 bp before, why not now?

I'm more irked about the lack of choices and politicization of things lately, so I'm still leaning toward leaving for greener pastures when I retire.

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Re: Increasing TSP Fund Expense Ratios

Post by whodidntante » Mon Jul 27, 2020 1:19 pm

404 outrage not found.

The TSP is still a great example of a low cost defined contribution plan. The administrators obviously care about keeping expenses low and it shows.

02nz
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Re: Increasing TSP Fund Expense Ratios

Post by 02nz » Mon Jul 27, 2020 1:29 pm

whodidntante wrote:
Mon Jul 27, 2020 1:19 pm
404 outrage not found.

The TSP is still a great example of a low cost defined contribution plan. The administrators obviously care about keeping expenses low and it shows.
+1. The correct comparison is not with brokerage/IRA accounts at Vanguard, Fidelity, etc., but with other employer plans. And while some do have slightly lower costs than 0.04-0.05%, it's generally because the plan admin costs are picked up by the employer, while TSP's costs are born by employees. Many plans are an order of magnitude higher (around 0.5%) and even those are far from the worst.

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MichDad
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Re: Increasing TSP Fund Expense Ratios

Post by MichDad » Mon Jul 27, 2020 1:32 pm

Mako wrote:
Mon Jul 27, 2020 1:06 pm
I'm mildly irked by the transfer rules as well, though I hope they improve by the time I'm ready to retire in 15+ years. It is hard to complain too much about the ERs when Vanguard's 500 index is still at 0.04%, total bond at 0.05%, extended market 0.06%, and developed market (I know it's not the same) at 0.07%. The TSP doesn't have anything to subsidize loss leaders like Fidelity. Still, if they could do it at 2.6 bp before, why not now?

I'm more irked about the lack of choices and politicization of things lately, so I'm still leaning toward leaving for greener pastures when I retire.
Fidelity Zero Total Market Index Fund (FZROX) has an expense ratio of 0.00 percent.
Fidelity Zero International Index Fund (FZILX) has an expense ratio of 0.00 percent.
Fidelity US Bond Index Fund (FXNAX) has an expense ratio of 0.025 percent.
Vanguard Total Stock Market EFT (VTI) has an expense ratio of 0.03 percent.
Schwab Total Stock Market Index Fund (SWTSX) has an expense ratio of 0.03 percent.

I agree with you that politics has now entered into the FRTIB's decision making for the first time in its history as exhibited by its decision to delay (and possibly end) its move to expand the I Fund to include equities from China.

MichDad

stan1
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Re: Increasing TSP Fund Expense Ratios

Post by stan1 » Mon Jul 27, 2020 1:38 pm

Thanks for the report, was there any discussion about the I Fund or is that all deferred to future meetings (or closed session)?

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MichDad
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Re: Increasing TSP Fund Expense Ratios

Post by MichDad » Mon Jul 27, 2020 1:43 pm

02nz wrote:
Mon Jul 27, 2020 1:29 pm
whodidntante wrote:
Mon Jul 27, 2020 1:19 pm
404 outrage not found.

The TSP is still a great example of a low cost defined contribution plan. The administrators obviously care about keeping expenses low and it shows.
+1. The correct comparison is not with brokerage/IRA accounts at Vanguard, Fidelity, etc., but with other employer plans. And while some do have slightly lower costs than 0.04-0.05%, it's generally because the plan admin costs are picked up by the employer, while TSP's costs are born by employees. Many plans are an order of magnitude higher (around 0.5%) and even those are far from the worst.
Current federal employees and military personnel over the age of 59.5 may make up to four withdrawals from their TSP accounts each year. Those TSP participants (along with separated TSP participants), at least, may want to compare the TSP's expense ratios with those they can achieve at Fidelity.

MichDad

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MichDad
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Re: Increasing TSP Fund Expense Ratios

Post by MichDad » Mon Jul 27, 2020 1:50 pm

stan1 wrote:
Mon Jul 27, 2020 1:38 pm
Thanks for the report, was there any discussion about the I Fund or is that all deferred to future meetings (or closed session)?
No, there was no discussion regarding the I Fund. At its May 13, 2020 meeting, the FRTIB voted to defer decisions on the I Fund expansion until after the newly-nominated Board members have been confirmed. Here's a link to those meeting minutes:

https://www.frtib.gov/MeetingMinutes/2020/2020May13.pdf

I suppose it's possible the FRTIB discussed the I Fund expansion issue in closed executive session. Many of their meetings have a closed executive portion but they do not reveal the topics discussed therein.

MichDad

AlwaysLearningMore
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Re: Increasing TSP Fund Expense Ratios

Post by AlwaysLearningMore » Mon Jul 27, 2020 1:56 pm

MichDad wrote:
Mon Jul 27, 2020 1:32 pm
Fidelity Zero Total Market Index Fund (FZROX) has an expense ratio of 0.00 percent.
Fidelity Zero International Index Fund (FZILX) has an expense ratio of 0.00 percent.
Fidelity US Bond Index Fund (FXNAX) has an expense ratio of 0.025 percent.
Vanguard Total Stock Market EFT (VTI) has an expense ratio of 0.03 percent.
Schwab Total Stock Market Index Fund (SWTSX) has an expense ratio of 0.03 percent.

I agree with you that politics has now entered into the FRTIB's decision making for the first time in its history as exhibited by its decision to delay (and possibly end) its move to expand the I Fund to include equities from China.

MichDad
Would be interesting to see how many employer 401(k) plans actually offer these Fidelity Zero ER funds. I perused the Fidelity web site but could not see if they routinely offer the Zero ER funds in 401(k) plans with which they're involved -- of course each plan varies by employer, too. (Hopefully they do.)

Found this interesting article from a couple of years back:
"A mediocre 401(k) adviser would likely embrace one of these zero-expense funds, whichever asset manager is providing them, without question. But a good one would realize that there’s a hidden risk for participants.

Fidelity isn’t running a charity for retail investors. Observers say the company will still make money via securities lending, which entails loaning securities out to borrowers for profit. Fidelity isn’t the only asset manager to engage in the practice — almost all index providers engage in securities lending...."
https://tinyurl.com/y6zznuqn

rkhusky
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Re: Increasing TSP Fund Expense Ratios

Post by rkhusky » Mon Jul 27, 2020 1:56 pm

Mako wrote:
Mon Jul 27, 2020 1:06 pm
Still, if they could do it at 2.6 bp before, why not now?
They have implemented a number of changes recently. Perhaps once all the changes have been finished expenses will go down.

antiqueman
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Re: Increasing TSP Fund Expense Ratios

Post by antiqueman » Mon Jul 27, 2020 2:13 pm

So with the increased fees how much would total fees be on $500k?

I get confused dealing in basis points.

Thanks

ionball
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Re: Increasing TSP Fund Expense Ratios

Post by ionball » Mon Jul 27, 2020 2:34 pm

I think your increased expense will be more than $40 on that $500k balance. Up from $210 to more than $250.

02nz
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Re: Increasing TSP Fund Expense Ratios

Post by 02nz » Mon Jul 27, 2020 2:57 pm

AlwaysLearningMore wrote:
Mon Jul 27, 2020 1:56 pm
MichDad wrote:
Mon Jul 27, 2020 1:32 pm
Fidelity Zero Total Market Index Fund (FZROX) has an expense ratio of 0.00 percent.
Fidelity Zero International Index Fund (FZILX) has an expense ratio of 0.00 percent.
Fidelity US Bond Index Fund (FXNAX) has an expense ratio of 0.025 percent.
Vanguard Total Stock Market EFT (VTI) has an expense ratio of 0.03 percent.
Schwab Total Stock Market Index Fund (SWTSX) has an expense ratio of 0.03 percent.

I agree with you that politics has now entered into the FRTIB's decision making for the first time in its history as exhibited by its decision to delay (and possibly end) its move to expand the I Fund to include equities from China.

MichDad
Would be interesting to see how many employer 401(k) plans actually offer these Fidelity Zero ER funds. I perused the Fidelity web site but could not see if they routinely offer the Zero ER funds in 401(k) plans with which they're involved -- of course each plan varies by employer, too. (Hopefully they do.)

Found this interesting article from a couple of years back:
"A mediocre 401(k) adviser would likely embrace one of these zero-expense funds, whichever asset manager is providing them, without question. But a good one would realize that there’s a hidden risk for participants.

Fidelity isn’t running a charity for retail investors. Observers say the company will still make money via securities lending, which entails loaning securities out to borrowers for profit. Fidelity isn’t the only asset manager to engage in the practice — almost all index providers engage in securities lending...."
https://tinyurl.com/y6zznuqn
I could be wrong but my recollection was that the ZERO funds are not available in 401k or other employer plans, only inside brokerage/IRA accounts.

retiredjg
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Re: Increasing TSP Fund Expense Ratios

Post by retiredjg » Mon Jul 27, 2020 3:01 pm

The TSP, even with its clunkiness, is still an excellent plan.

As they have added new and more flexible features, costs have gone up. I don't find that surprising. While the TSP is no longer the lowest cost plan on the planet, it is still an excellent plan.

I think there is an inherent conflict between wanting more features and wanting the costs to go down.

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MichDad
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Re: Increasing TSP Fund Expense Ratios

Post by MichDad » Mon Jul 27, 2020 3:34 pm

retiredjg wrote:
Mon Jul 27, 2020 3:01 pm
The TSP, even with its clunkiness, is still an excellent plan.

As they have added new and more flexible features, costs have gone up. I don't find that surprising. While the TSP is no longer the lowest cost plan on the planet, it is still an excellent plan.

I think there is an inherent conflict between wanting more features and wanting the costs to go down.
Somehow, Fidelity, Schwab, and Vanguard have been able to introduce more features and reduce their expenses charged to customers at the same time. If the TSP was able to simply keep its expense ratios constant, I'd be happy. The increases are, to me at least, worrisome.

MichDad

02nz
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Re: Increasing TSP Fund Expense Ratios

Post by 02nz » Mon Jul 27, 2020 10:42 pm

MichDad wrote:
Mon Jul 27, 2020 3:34 pm
retiredjg wrote:
Mon Jul 27, 2020 3:01 pm
The TSP, even with its clunkiness, is still an excellent plan.

As they have added new and more flexible features, costs have gone up. I don't find that surprising. While the TSP is no longer the lowest cost plan on the planet, it is still an excellent plan.

I think there is an inherent conflict between wanting more features and wanting the costs to go down.
Somehow, Fidelity, Schwab, and Vanguard have been able to introduce more features and reduce their expenses charged to customers at the same time. If the TSP was able to simply keep its expense ratios constant, I'd be happy. The increases are, to me at least, worrisome.

MichDad
See my post above. Employer plans have fixed costs. TSP has certain economies of scale but nothing like all the brokerage accounts at Vanguard added together. And Vanguard has ways to charge more to higher-cost customers ($3K minimum for Admiral funds; if you only have $1K you can use TDF funds but with higher ERs). TSP would probably get a lot of negative publicity if it charged a fee to offset, say, the higher costs (in percentage terms) associated with servicing the account of an E-1 vs that of a GS-15.

JDDS
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Re: Increasing TSP Fund Expense Ratios

Post by JDDS » Tue Jul 28, 2020 1:33 am

02nz wrote:
Mon Jul 27, 2020 10:42 pm
MichDad wrote:
Mon Jul 27, 2020 3:34 pm
retiredjg wrote:
Mon Jul 27, 2020 3:01 pm
The TSP, even with its clunkiness, is still an excellent plan.

As they have added new and more flexible features, costs have gone up. I don't find that surprising. While the TSP is no longer the lowest cost plan on the planet, it is still an excellent plan.

I think there is an inherent conflict between wanting more features and wanting the costs to go down.
Somehow, Fidelity, Schwab, and Vanguard have been able to introduce more features and reduce their expenses charged to customers at the same time. If the TSP was able to simply keep its expense ratios constant, I'd be happy. The increases are, to me at least, worrisome.

MichDad
See my post above. Employer plans have fixed costs. TSP has certain economies of scale but nothing like all the brokerage accounts at Vanguard added together. And Vanguard has ways to charge more to higher-cost customers ($3K minimum for Admiral funds; if you only have $1K you can use TDF funds but with higher ERs). TSP would probably get a lot of negative publicity if it charged a fee to offset, say, the higher costs (in percentage terms) associated with servicing the account of an E-1 vs that of a GS-15.
I'm sure there's lots of corporate entities and lots of accounting math around the revenue, but there's also other sources of revenue for Vanguard and/or Fidelity; example at Vanguard is PAS. If PAS makes more than it costs to run then perhaps it subsidizes ERs, I have no idea if this is true, just an example of a revenue stream that TSP would not have. It's also not surprising at more economies of scale at Vanguard (several times TSP assets) that they could have a lower ER. Vanguard is also able to price funds to be competitive on ER, rather than strictly allocating expenses to each fund; I'm unfamiliar with the TSP methodology.

It's encouraging if they are going on the record to say they believe expenses will only be elevated for a few years.

Overall annoying, but this is still an excellent plan.

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Re: Increasing TSP Fund Expense Ratios

Post by rkhusky » Tue Jul 28, 2020 6:32 am

JDDS wrote:
Tue Jul 28, 2020 1:33 am
Vanguard is also able to price funds to be competitive on ER, rather than strictly allocating expenses to each fund;
I was under the impression that Vanguard's ER's were based on the costs for each fund. So, they couldn't offer loss-leaders like Fidelity.

MrJedi
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Re: Increasing TSP Fund Expense Ratios

Post by MrJedi » Tue Jul 28, 2020 7:10 am

I think you are forgetting that 401k plans have administrative costs too. Many, if not all, of the good ones that you seem to be comparing to are subsidized by the employer so you don't really see the full cost of it directly, whereas it seems TSP puts the cost into the funds themselves. I believe it all washes out in the end. If there is a true cost to the end consumer, it's got to be essentially negligible. We are talking basis points here.

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Re: Increasing TSP Fund Expense Ratios

Post by alex_686 » Tue Jul 28, 2020 7:12 am

rkhusky wrote:
Tue Jul 28, 2020 6:32 am
JDDS wrote:
Tue Jul 28, 2020 1:33 am
Vanguard is also able to price funds to be competitive on ER, rather than strictly allocating expenses to each fund;
I was under the impression that Vanguard's ER's were based on the costs for each fund. So, they couldn't offer loss-leaders like Fidelity.
When I was a fund accountant, it was my impression that one had to allocate costs based on the fund's costs. Cross subsidization was not allowed. There is a little wiggle room for shared expenses in the choice of the allocation method, but that allocation method has to be neutral and objective.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: Increasing TSP Fund Expense Ratios

Post by grabiner » Wed Jul 29, 2020 9:50 am

alex_686 wrote:
Tue Jul 28, 2020 7:12 am
rkhusky wrote:
Tue Jul 28, 2020 6:32 am
JDDS wrote:
Tue Jul 28, 2020 1:33 am
Vanguard is also able to price funds to be competitive on ER, rather than strictly allocating expenses to each fund;
I was under the impression that Vanguard's ER's were based on the costs for each fund. So, they couldn't offer loss-leaders like Fidelity.
When I was a fund accountant, it was my impression that one had to allocate costs based on the fund's costs. Cross subsidization was not allowed. There is a little wiggle room for shared expenses in the choice of the allocation method, but that allocation method has to be neutral and objective.
Cross-subsidization doesn't happen directly, but it happens every time there is a fee waiver. If a fund provider makes a temporary fee waiver on a fund, that is a subsidy coming out of the fund provider's profits; these profits include the fees it charges on its other funds. Because of the fungibility of money, it is not possible to specifically say that the fees on other funds are higher because this particular fee is being waived.

With Vanguard doing everything at cost, Vanguard's rare fee waivers (to prevent money-market yields from dropping below zero, for example) must increase the fees Vanguard charges on its other funds.
Wiki David Grabiner

alex_686
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Re: Increasing TSP Fund Expense Ratios

Post by alex_686 » Wed Jul 29, 2020 12:06 pm

grabiner wrote:
Wed Jul 29, 2020 9:50 am
alex_686 wrote:
Tue Jul 28, 2020 7:12 am
rkhusky wrote:
Tue Jul 28, 2020 6:32 am
JDDS wrote:
Tue Jul 28, 2020 1:33 am
Vanguard is also able to price funds to be competitive on ER, rather than strictly allocating expenses to each fund;
I was under the impression that Vanguard's ER's were based on the costs for each fund. So, they couldn't offer loss-leaders like Fidelity.
When I was a fund accountant, it was my impression that one had to allocate costs based on the fund's costs. Cross subsidization was not allowed. There is a little wiggle room for shared expenses in the choice of the allocation method, but that allocation method has to be neutral and objective.
Cross-subsidization doesn't happen directly, but it happens every time there is a fee waiver. If a fund provider makes a temporary fee waiver on a fund, that is a subsidy coming out of the fund provider's profits; these profits include the fees it charges on its other funds. Because of the fungibility of money, it is not possible to specifically say that the fees on other funds are higher because this particular fee is being waived.

With Vanguard doing everything at cost, Vanguard's rare fee waivers (to prevent money-market yields from dropping below zero, for example) must increase the fees Vanguard charges on its other funds.
Yes, but to JDDS's post they can't discriminate. If they lower money market yields to zero, they would have to distribute the costs across the fund complex. One can't directly fine tune ER expenses by shifting them from a slow flat profitable fund to one in a more competitive market. That would be unfair to the owners of the slow flat profitable fund.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

tj
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Re: Increasing TSP Fund Expense Ratios

Post by tj » Wed Jul 29, 2020 7:18 pm

Unlike many private 401(k) plans, we are required to transfer money to IRAs in order to make Roth conversions.
Required? We're not even allowed to transfer from TSP to an IRA unless we leave federal service.

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Re: Increasing TSP Fund Expense Ratios

Post by JDDS » Thu Jul 30, 2020 4:55 am

alex_686 wrote:
Wed Jul 29, 2020 12:06 pm
grabiner wrote:
Wed Jul 29, 2020 9:50 am
alex_686 wrote:
Tue Jul 28, 2020 7:12 am
rkhusky wrote:
Tue Jul 28, 2020 6:32 am
JDDS wrote:
Tue Jul 28, 2020 1:33 am
Vanguard is also able to price funds to be competitive on ER, rather than strictly allocating expenses to each fund;
I was under the impression that Vanguard's ER's were based on the costs for each fund. So, they couldn't offer loss-leaders like Fidelity.
When I was a fund accountant, it was my impression that one had to allocate costs based on the fund's costs. Cross subsidization was not allowed. There is a little wiggle room for shared expenses in the choice of the allocation method, but that allocation method has to be neutral and objective.
Cross-subsidization doesn't happen directly, but it happens every time there is a fee waiver. If a fund provider makes a temporary fee waiver on a fund, that is a subsidy coming out of the fund provider's profits; these profits include the fees it charges on its other funds. Because of the fungibility of money, it is not possible to specifically say that the fees on other funds are higher because this particular fee is being waived.

With Vanguard doing everything at cost, Vanguard's rare fee waivers (to prevent money-market yields from dropping below zero, for example) must increase the fees Vanguard charges on its other funds.
Yes, but to JDDS's post they can't discriminate. If they lower money market yields to zero, they would have to distribute the costs across the fund complex. One can't directly fine tune ER expenses by shifting them from a slow flat profitable fund to one in a more competitive market. That would be unfair to the owners of the slow flat profitable fund.
These quotes from the book have been posted before, but here's a recent one:
viewtopic.php?f=10&t=320558&start=50#p5380871
". . . 1993, when we gained approval to set the expense ratios of our individual funds, not entirely on their costs but also on the expense ratios charged by our competitors."
I have not seen anybody post that the policy has changed, but it has been 27 years, so you could convince me it has.

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Re: Increasing TSP Fund Expense Ratios

Post by Redlion » Thu Jul 30, 2020 2:08 pm

ionball wrote:
Mon Jul 27, 2020 2:34 pm
I think your increased expense will be more than $40 on that $500k balance. Up from $210 to more than $250.
$40 on 500K is a small difference, Fidelity and Vanguard could also change their fee structure at some point. If retired once you get out of TSP you cannot get back in.

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MichDad
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Re: Increasing TSP Fund Expense Ratios

Post by MichDad » Thu Jul 30, 2020 3:39 pm

Redlion wrote:
Thu Jul 30, 2020 2:08 pm
ionball wrote:
Mon Jul 27, 2020 2:34 pm
I think your increased expense will be more than $40 on that $500k balance. Up from $210 to more than $250.
$40 on 500K is a small difference, Fidelity and Vanguard could also change their fee structure at some point. If retired once you get out of TSP you cannot get back in.
$40 over twenty years is $800, without compounding.

I'm sure that competition for assets under management will greatly deter Fidelity, Schwab, and Vanguard from increasing the expense ratios of their zero or lowest expense index funds. In Fidelity's case, it would have to change the names of its zero cost index funds to do that. The trend among these private brokerage firms has been to reduce their expense ratios. In fact, I'm not aware of a single instance where any of them increased the expense ratios of their lowest cost index funds. This is clearly not the case with the TSP.

TSP participants only need to keep a minimum balance of $200 to keep their accounts open.

I greatly appreciate the 24/7 customer service I get from Fidelity, Merrill Edge, Schwab, and TD Ameritrade. This is especially helpful when I live in Europe, which I generally do six months each year. By contrast, the TSP's customer service is limited, slow, cumbersome, and quite poor.

MichDad

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Re: Increasing TSP Fund Expense Ratios

Post by MichDad » Thu Jul 30, 2020 4:27 pm

Let's set aside Fidelity's zero expense index funds for the moment. Let's look instead at Fidelity's regular, low expense index funds and compare them to the TSP.

Fidelity 500 Index Fund (FXAIX) has an expense ratio of 0.015% versus the TSP C Fund's expense ratio of 0.042%.
Fidelity Small Cap Index Fund (FSSNX) has an expense ratio of 0.025% versus the TSP S Fund's expense ratio of 0.042%.
Fidelity International Index Fund (FSPSX) has an expense ratio of 0.35% versus the TSP I Fund's expense ratio of 0.042%.
Fidelity US Bond Index Fund (FXNAX) has an expense ratio of 0.025% versus the TSP F Fund's expense ratio of 0.042%.

Remember, the TSP's expense ratio will likely increase soon to some amount over 0.050%.

Imagine how much a TSP participant with a $500,000 account balance would save over 20 years with Fidelity-like expenses listed above rather than the TSP's increasing expenses. It would be in the hundreds of dollars each year.

The above expense comparison, plus the TSP's refusal to allow participants to make in-plan Roth conversions, is what caused me to withdraw well over $800,000 from the TSP last year after the liberalized withdrawal rules became effective. Transfer bonuses and better customer service at private brokerage firms were additional factors supporting the TSP withdrawals.

The only thing that is keeping me in the TSP today is its unique G Fund. I cannot think of another reason to maintain my TSP account.

MichDad

02nz
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Re: Increasing TSP Fund Expense Ratios

Post by 02nz » Thu Jul 30, 2020 4:44 pm

MichDad wrote:
Thu Jul 30, 2020 4:27 pm
Let's set aside Fidelity's zero expense index funds for the moment. Let's look instead at Fidelity's regular, low expense index funds and compare them to the TSP.

Fidelity 500 Index Fund (FXAIX) has an expense ratio of 0.015% versus the TSP C Fund's expense ratio of 0.042%.
Fidelity Small Cap Index Fund (FSSNX) has an expense ratio of 0.025% versus the TSP S Fund's expense ratio of 0.042%.
Fidelity International Index Fund (FSPSX) has an expense ratio of 0.35% versus the TSP I Fund's expense ratio of 0.042%.
Fidelity US Bond Index Fund (FXNAX) has an expense ratio of 0.025% versus the TSP F Fund's expense ratio of 0.042%.

Remember, the TSP's expense ratio will likely increase soon to some amount over 0.050%.

Imagine how much a TSP participant with a $500,000 account balance would save over 20 years with Fidelity-like expenses listed above rather than the TSP's increasing expenses. It would be in the hundreds of dollars each year.

The above expense comparison, plus the TSP's refusal to allow participants to make in-plan Roth conversions, is what caused me to withdraw well over $800,000 from the TSP last year after the liberalized withdrawal rules became effective. Transfer bonuses and better customer service at private brokerage firms were additional factors supporting the TSP withdrawals.

The only thing that is keeping me in the TSP today is its unique G Fund. I cannot think of another reason to maintain my TSP account.

MichDad
Again, not a fair comparison. The correct comparison is with 401k plans, which will have admin costs on top of the expense ratios you listed. If your employer doesn't pick that up (the federal government doesn't for TSP), then it's another cost for the employee. In most cases it's going to come out to more than the 2 basis points or so difference between TSP and Fidelity ERs. There are a lot of people who would be ecstatic to have a total cost of 0.042% in their 401k.

Yes, I know, if you've left federal service then you have a choice. And if Fidelity or Vanguard or whatever works for you, by all means roll out what you don't intend to keep in the G Fund, but TSP isn't supposed to or trying to be a competitor to Fidelity or Vanguard.

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MichDad
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Re: Increasing TSP Fund Expense Ratios

Post by MichDad » Thu Jul 30, 2020 6:42 pm

02nz wrote:
Thu Jul 30, 2020 4:44 pm
MichDad wrote:
Thu Jul 30, 2020 4:27 pm
Let's set aside Fidelity's zero expense index funds for the moment. Let's look instead at Fidelity's regular, low expense index funds and compare them to the TSP.

Fidelity 500 Index Fund (FXAIX) has an expense ratio of 0.015% versus the TSP C Fund's expense ratio of 0.042%.
Fidelity Small Cap Index Fund (FSSNX) has an expense ratio of 0.025% versus the TSP S Fund's expense ratio of 0.042%.
Fidelity International Index Fund (FSPSX) has an expense ratio of 0.35% versus the TSP I Fund's expense ratio of 0.042%.
Fidelity US Bond Index Fund (FXNAX) has an expense ratio of 0.025% versus the TSP F Fund's expense ratio of 0.042%.

Remember, the TSP's expense ratio will likely increase soon to some amount over 0.050%.

Imagine how much a TSP participant with a $500,000 account balance would save over 20 years with Fidelity-like expenses listed above rather than the TSP's increasing expenses. It would be in the hundreds of dollars each year.

The above expense comparison, plus the TSP's refusal to allow participants to make in-plan Roth conversions, is what caused me to withdraw well over $800,000 from the TSP last year after the liberalized withdrawal rules became effective. Transfer bonuses and better customer service at private brokerage firms were additional factors supporting the TSP withdrawals.

The only thing that is keeping me in the TSP today is its unique G Fund. I cannot think of another reason to maintain my TSP account.

MichDad
Again, not a fair comparison. The correct comparison is with 401k plans, which will have admin costs on top of the expense ratios you listed. If your employer doesn't pick that up (the federal government doesn't for TSP), then it's another cost for the employee. In most cases it's going to come out to more than the 2 basis points or so difference between TSP and Fidelity ERs. There are a lot of people who would be ecstatic to have a total cost of 0.042% in their 401k.

Yes, I know, if you've left federal service then you have a choice. And if Fidelity or Vanguard or whatever works for you, by all means roll out what you don't intend to keep in the G Fund, but TSP isn't supposed to or trying to be a competitor to Fidelity or Vanguard.
You're looking at this from the provider's (the TSP's) point of view. I'm looking at this from the participants' point of view. My comparison is fair for at least three groups:

1. Anyone who has retired or otherwise separated from federal or military service who has a TSP account.
2. Anyone who's still a federal employee or in the military and is over age 59.5.
3. Beneficiary participants.

Everyone in any of these three groups, which includes millions of people, has the option to move TSP assets to lower cost brokerages and, in many cases, receiving thousands of dollars in transfer bonuses.

I've been carefully reading the FRTIB's monthly minutes for at least the past ten years. I sometimes post on this forum about issues addressed in them. I can report with a very high degree of confidence that the FRTIB is acutely aware of the competition it faces from brokerage firms such as Fidelity, Schwab, and Vanguard. That competition played a big role in the promulgation of last year's additional withdrawal options rule. One of the main purposes of that rule was to allow participants to make multiple partial TSP withdrawals rather than completely close their accounts and move all their TSP assets to private brokerage firms.

MichDad

stan1
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Re: Increasing TSP Fund Expense Ratios

Post by stan1 » Thu Jul 30, 2020 7:00 pm

TSP absolutely wants retirees to keep their money in the TSP so they can spread the plan's fixed costs across more AUM. That's exactly what Vanguard has done to become the low cost leader in the commercial investment world. TSP doesn't have enough AUM to be as efficient as Vanguard, and has some unique requirements like educating 18-30 year old military on why they should invest in the TSP for retirement under the blended retirement system.

Helo80
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Re: Increasing TSP Fund Expense Ratios

Post by Helo80 » Thu Jul 30, 2020 7:13 pm

There was a good quote given to me by another BH that I'll shamelessly steal and paraphrase.... Some BHs simply over-engineer their financial lives to their own detriment.

By in large, TSP has more pros than cons and despite its idiosyncrasies, it's better than your average private plan. Many here would be thrilled to have TSP level fees in their DC plans. Sometimes, career feds lose sight of what the private sector is like.

Helo80
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Re: Increasing TSP Fund Expense Ratios

Post by Helo80 » Thu Jul 30, 2020 7:15 pm

stan1 wrote:
Thu Jul 30, 2020 7:00 pm
TSP absolutely wants retirees to keep their money in the TSP so they can spread the plan's fixed costs across more AUM. That's exactly what Vanguard has done to become the low cost leader in the commercial investment world. TSP doesn't have enough AUM to be as efficient as Vanguard, and has some unique requirements like educating 18-30 year old military on why they should invest in the TSP for retirement under the blended retirement system.


Sure, I can imagine from a USPS savings alone, it's cheaper to have one BH with a $500,000 account than 500 E-2's with $1,000.

When BRS came around, I figured that TSP was going to raise their rates with an influx of low-dollar accounts. Let's face it, retirement is a million years away to most lower enlisted. Now, they're all getting TSP accounts.
Last edited by Helo80 on Thu Jul 30, 2020 7:16 pm, edited 1 time in total.

02nz
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Re: Increasing TSP Fund Expense Ratios

Post by 02nz » Thu Jul 30, 2020 7:16 pm

MichDad wrote:
Thu Jul 30, 2020 6:42 pm
Everyone in any of these three groups, which includes millions of people, has the option to move TSP assets to lower cost brokerages and, in many cases, receiving thousands of dollars in transfer bonuses.
The difference in cost is truly minuscule - if TSP is more expensive by 0.03%, that's $150 a year on $500K. That same $500K will gain, on average (at 8% per year) about $150 per trading day, meaning if you transfer out and are out of the market for two weeks (pretty standard since a check has to be mailed), on average it will take you around a decade to make that money back through the lower ER. So, yeah, I'm still having a hard time working up outrage here.

As for bonuses, sure, that's exactly what I've done by rolling out, I've collected a couple of thousand dollars easy in less than 2 years. But I'm hardly going to fault TSP (or even Vanguard) for not being able to compete in this way.

UpperNwGuy
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Re: Increasing TSP Fund Expense Ratios

Post by UpperNwGuy » Thu Jul 30, 2020 7:19 pm

I'm utterly astonished by this thread. I'm a retired Fed, and my experience has been that people all over America would absolutely love to be able to participate in the TSP, and they are jealous of those who are allowed to participate. The TSP is so much better than so many other employee plans. Yet here on bogleheads there is discontent over minor changes to the TSP.

Helo80
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Re: Increasing TSP Fund Expense Ratios

Post by Helo80 » Thu Jul 30, 2020 7:22 pm

UpperNwGuy wrote:
Thu Jul 30, 2020 7:19 pm
I'm utterly astonished by this thread. I'm a retired Fed, and my experience has been that people all over America would absolutely love to be able to participate in the TSP, and they are jealous of those who are allowed to participate. The TSP is so much better than so many other employee plans. Yet here on bogleheads there is discontent over minor changes to the TSP.

Yup. Like I said earlier... Sometimes, career feds lose sight of what the private sector is like.

Or worse, some have never worked for a private employer.

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vineviz
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Re: Increasing TSP Fund Expense Ratios

Post by vineviz » Thu Jul 30, 2020 7:24 pm

UpperNwGuy wrote:
Thu Jul 30, 2020 7:19 pm
I'm utterly astonished by this thread. I'm a retired Fed, and my experience has been that people all over America would absolutely love to be able to participate in the TSP, and they are jealous of those who are allowed to participate. The TSP is so much better than so many other employee plans. Yet here on bogleheads there is discontent over minor changes to the TSP.
I’ve always worked in the private sector, including several financial services firms, and can say with confidence that very few 401k plans have the quality fund lineup of the TSP at anything close to the same low cost.

If the TSP had a decent bond fund, I’d be REALLY jealous . . . .
Last edited by vineviz on Thu Jul 30, 2020 7:30 pm, edited 1 time in total.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

02nz
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Re: Increasing TSP Fund Expense Ratios

Post by 02nz » Thu Jul 30, 2020 7:29 pm

vineviz wrote:
Thu Jul 30, 2020 7:24 pm
UpperNwGuy wrote:
Thu Jul 30, 2020 7:19 pm
I'm utterly astonished by this thread. I'm a retired Fed, and my experience has been that people all over America would absolutely love to be able to participate in the TSP, and they are jealous of those who are allowed to participate. The TSP is so much better than so many other employee plans. Yet here on bogleheads there is discontent over minor changes to the TSP.
I’ve always worked in the private sector, including several financial services firms, and can say with confidence that very few 401k plans have the quality fund lineup of the TSP at anything close to the same low cost.

If the TSP has a decent bond fund, I’d be REALLY jealous . . . .
And many teachers would be delighted to pay 0.42% in their 403b plans, never mind 0.042%.

qwertyjazz
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Re: Increasing TSP Fund Expense Ratios

Post by qwertyjazz » Thu Jul 30, 2020 7:30 pm

vineviz wrote:
Thu Jul 30, 2020 7:24 pm
UpperNwGuy wrote:
Thu Jul 30, 2020 7:19 pm
I'm utterly astonished by this thread. I'm a retired Fed, and my experience has been that people all over America would absolutely love to be able to participate in the TSP, and they are jealous of those who are allowed to participate. The TSP is so much better than so many other employee plans. Yet here on bogleheads there is discontent over minor changes to the TSP.
I’ve always worked in the private sector, including several financial services firms, and can say with confidence that very few 401k plans have the quality fund lineup of the TSP at anything close to the same low cost.

If the TSP has a decent bond fund, I’d be REALLY jealous . . . .
https://www.tspfolio.com/tspgfund
G.E. Box "All models are wrong, but some are useful."

AlwaysLearningMore
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Re: Increasing TSP Fund Expense Ratios

Post by AlwaysLearningMore » Thu Jul 30, 2020 7:38 pm

MichDad wrote:
Thu Jul 30, 2020 4:27 pm
Let's set aside Fidelity's zero expense index funds for the moment. Let's look instead at Fidelity's regular, low expense index funds and compare them to the TSP.

Fidelity 500 Index Fund (FXAIX) has an expense ratio of 0.015% versus the TSP C Fund's expense ratio of 0.042%.
Fidelity Small Cap Index Fund (FSSNX) has an expense ratio of 0.025% versus the TSP S Fund's expense ratio of 0.042%.
Fidelity International Index Fund (FSPSX) has an expense ratio of 0.35% versus the TSP I Fund's expense ratio of 0.042%.
Fidelity US Bond Index Fund (FXNAX) has an expense ratio of 0.025% versus the TSP F Fund's expense ratio of 0.042%.

Remember, the TSP's expense ratio will likely increase soon to some amount over 0.050%.

Imagine how much a TSP participant with a $500,000 account balance would save over 20 years with Fidelity-like expenses listed above rather than the TSP's increasing expenses. It would be in the hundreds of dollars each year.

The above expense comparison, plus the TSP's refusal to allow participants to make in-plan Roth conversions, is what caused me to withdraw well over $800,000 from the TSP last year after the liberalized withdrawal rules became effective. Transfer bonuses and better customer service at private brokerage firms were additional factors supporting the TSP withdrawals.

The only thing that is keeping me in the TSP today is its unique G Fund. I cannot think of another reason to maintain my TSP account.

MichDad
Looks like you've done quite a bit of research and felt there was a compelling reason to move substantial assets from the TSP to a civilian mutual fund company.

For comparison:
"According to an analysis by BrightScope (https://tinyurl.com/jzmu2uq ), large 401(k) plans with $100 million or more in assets typically charge less than 1% in annual fees. This is a generally competitive rate, and the biggest plans regularly charge under 0.50%.

As plans get smaller, fees go up. The BrightScope study found that small plans often charge between 1.5% and 2% per year, with many charging in excess of 2%.

While 2% may not sound like much, it adds up to a lot in the long run. If you have a $10,000 balance today and plan to add $5,000 per year to your 401(k) over the next 30 years, a 2% fee will cost you an estimated $153,218 over time, according to a calculator on investment website Blooom."
https://tinyurl.com/yyzwkr68

UpperNwGuy wrote:
Thu Jul 30, 2020 7:19 pm
I'm utterly astonished by this thread. I'm a retired Fed, and my experience has been that people all over America would absolutely love to be able to participate in the TSP, and they are jealous of those who are allowed to participate. The TSP is so much better than so many other employee plans. Yet here on bogleheads there is discontent over minor changes to the TSP.
Indeed!

Topic Author
MichDad
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Re: Increasing TSP Fund Expense Ratios

Post by MichDad » Thu Jul 30, 2020 7:41 pm

Helo80 wrote:
Thu Jul 30, 2020 7:22 pm
UpperNwGuy wrote:
Thu Jul 30, 2020 7:19 pm
I'm utterly astonished by this thread. I'm a retired Fed, and my experience has been that people all over America would absolutely love to be able to participate in the TSP, and they are jealous of those who are allowed to participate. The TSP is so much better than so many other employee plans. Yet here on bogleheads there is discontent over minor changes to the TSP.

Yup. Like I said earlier... Sometimes, career feds lose sight of what the private sector is like.

Or worse, some have never worked for a private employer.
For much of my career with the federal government, my wife worked in the private sector. She participated in her firm’s 401(k) plan that was administered by Fidelity. She invested in Fidelity index funds that had lower expense ratios than the TSP. She could also make in-plan Roth conversions, which she did the last three years before she retired.

Yes, her plan was probably an outlier. I agree. But the TSP is not better than all 401(k) plans.

MichDad

Katietsu
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Re: Increasing TSP Fund Expense Ratios

Post by Katietsu » Thu Jul 30, 2020 8:04 pm

MichDad wrote:
Thu Jul 30, 2020 7:41 pm
Helo80 wrote:
Thu Jul 30, 2020 7:22 pm
UpperNwGuy wrote:
Thu Jul 30, 2020 7:19 pm
I'm utterly astonished by this thread. I'm a retired Fed, and my experience has been that people all over America would absolutely love to be able to participate in the TSP, and they are jealous of those who are allowed to participate. The TSP is so much better than so many other employee plans. Yet here on bogleheads there is discontent over minor changes to the TSP.

Yup. Like I said earlier... Sometimes, career feds lose sight of what the private sector is like.

Or worse, some have never worked for a private employer.
For much of my career with the federal government, my wife worked in the private sector. She participated in her firm’s 401(k) plan that was administered by Fidelity. She invested in Fidelity index funds that had lower expense ratios than the TSP. She could also make in-plan Roth conversions, which she did the last three years before she retired.

Yes, her plan was probably an outlier. I agree. But the TSP is not better than all 401(k) plans.

MichDad
But her employer was picking up the administrative costs. Or her coworkers who selected high ER funds were subsidizing the costs. While lowered mutual fund costs have occurred in our employer plans over the last decade, other fees have been added to make up for that loss of revenue. One employer has added a flat fee of $20 a quarter. Another employer has added a small AUM but you get credit towards it if you pick a high ER fund. Incorporating these additional fees means that the net has never been 0.05 even in our relatively good plans.

Helo80
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Re: Increasing TSP Fund Expense Ratios

Post by Helo80 » Sat Aug 01, 2020 9:15 am

MichDad wrote:
Thu Jul 30, 2020 7:41 pm
Yes, her plan was probably an outlier. I agree. But the TSP is not better than all 401(k) plans.


Several points....

1. Most people should not choose an employer purely for retirement benefits --- either DB or ultra-low cost/generous DC offerings
2. Nobody has ever said TSP is perfect. You will find much angst on this board over TSP withdrawal rules and what not
3. When noobs here ask for guidance on navigating a new employer's 401k, usually ERs are higher than TSP

I do think if you make a Venn Diagram of all of the employers that offer a DB plan, as well as, a DC plan with matching... you won't find too many that do that.

Overall, TSP is superior to many, many 401k style plans as you admit. I don't think getting frustrated or calculating out how much you're "losing" by being a participant of TSP versus your wife's even lower cost provider is worth sweating it.

I'm not going to worry about $500 in ERs for every $1 million invested in C-Fund versus $150 for every $1 million invested in an S&P500 at Fidelity. I've had private sector employers that jack up ERs (not by much, but 10-40+ bps) on Vanguard funds in their 401k offerings. So, somebody is skimming something, somewhere, but it still is overwhelmingly beneficial to participate.

Notice how when people ask what broker to use ---- generally Vanguard, Schwab, and Fidelity are the top 3. There's a bit of difference in their S&P500 and TSM ERs, as well as, minor tracking fund tracking differences, but it's not something to sweat over. Yeah, maybe if you're rolling over high 7-digits and 8 or 9 digit figures, you should calculate this all out.... but most of us are small beans and $350 is not going to make or break my retirement.

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vineviz
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Re: Increasing TSP Fund Expense Ratios

Post by vineviz » Sat Aug 01, 2020 9:27 am

qwertyjazz wrote:
Thu Jul 30, 2020 7:30 pm
vineviz wrote:
Thu Jul 30, 2020 7:24 pm
UpperNwGuy wrote:
Thu Jul 30, 2020 7:19 pm
I'm utterly astonished by this thread. I'm a retired Fed, and my experience has been that people all over America would absolutely love to be able to participate in the TSP, and they are jealous of those who are allowed to participate. The TSP is so much better than so many other employee plans. Yet here on bogleheads there is discontent over minor changes to the TSP.
I’ve always worked in the private sector, including several financial services firms, and can say with confidence that very few 401k plans have the quality fund lineup of the TSP at anything close to the same low cost.

If the TSP has a decent bond fund, I’d be REALLY jealous . . . .
https://www.tspfolio.com/tspgfund
The G fund is not a bond fund.

It is, however, a very good stable value fund/money market fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

megabad
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Re: Increasing TSP Fund Expense Ratios

Post by megabad » Sat Aug 01, 2020 9:45 am

Agree with other posters. Doesn’t sound like you understand 401k plans vs the TSP. I have worked for several megacorps with very good 401ks. Overall expense ratio inclusive of admin fees were in the 0.1 range for someone with 100k or so who is in basic index funds. This is on the low end. You would have to be in the top few 401k plans in the US to have any chance at 0.04 inclusive of all fees and in most cases that would simply mean the employer takes money out of their budget and subsidizes (meaning employees pay it indirectly). Also ER and admin fees have stayed roughly the same (ie gone up in the absolute sense) for many years in our plans despite increasing assets. This is like someone in a Ferrari complaining that their car is not faster than the speed of light...yes the potential increase sucks but at least they have a reason, it may be temporary, and you still have a better plan than basically everyone.
Last edited by megabad on Sat Aug 01, 2020 9:56 am, edited 2 times in total.

Buford T Justice
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Re: Increasing TSP Fund Expense Ratios

Post by Buford T Justice » Sat Aug 01, 2020 9:50 am

Thanks MichDad I appreciate your TSP updates and taking the time to post them here.

feehater
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Re: Increasing TSP Fund Expense Ratios

Post by feehater » Sat Aug 01, 2020 10:08 am

Katietsu wrote:
Thu Jul 30, 2020 8:04 pm
MichDad wrote:
Thu Jul 30, 2020 7:41 pm
Helo80 wrote:
Thu Jul 30, 2020 7:22 pm
UpperNwGuy wrote:
Thu Jul 30, 2020 7:19 pm
I'm utterly astonished by this thread. I'm a retired Fed, and my experience has been that people all over America would absolutely love to be able to participate in the TSP, and they are jealous of those who are allowed to participate. The TSP is so much better than so many other employee plans. Yet here on bogleheads there is discontent over minor changes to the TSP.

Yup. Like I said earlier... Sometimes, career feds lose sight of what the private sector is like.

Or worse, some have never worked for a private employer.
For much of my career with the federal government, my wife worked in the private sector. She participated in her firm’s 401(k) plan that was administered by Fidelity. She invested in Fidelity index funds that had lower expense ratios than the TSP. She could also make in-plan Roth conversions, which she did the last three years before she retired.

Yes, her plan was probably an outlier. I agree. But the TSP is not better than all 401(k) plans.

MichDad
But her employer was picking up the administrative costs. Or her coworkers who selected high ER funds were subsidizing the costs. While lowered mutual fund costs have occurred in our employer plans over the last decade, other fees have been added to make up for that loss of revenue. One employer has added a flat fee of $20 a quarter. Another employer has added a small AUM but you get credit towards it if you pick a high ER fund. Incorporating these additional fees means that the net has never been 0.05 even in our relatively good plans.
Yep, the same thing happened with Vanguard administered 403bs. First they didn't allow you to invest in admiral shares. Later, they subcontracted it out to a third party and allowed any investments, but added a $5/month fee. And I assume that is in addition to administrative fees my employer is covering.

Topic Author
MichDad
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Re: Increasing TSP Fund Expense Ratios

Post by MichDad » Sat Aug 01, 2020 2:35 pm

I appreciate all the comments this thread has generated. Truly, I do.

In my original message, I labeled the increasing TSP expense ratios “disheartening.” That was the strongest adjective I used. I stand by it. In an environment where 401(k) plan expense ratios are, in general, declining, it’s disheartening to me that the TSP’s expense ratios are increasing.

I agree with everyone who has posted that with respect to individual TSP participant’s accounts, the increases are small in absolute terms. They are, however, large in the aggregate across the entire TSP.

This said, the increasing TSP expense ratios are not, in my opinion, the most significant area of concern for participants. For me, the biggest problem is the TSP’s refusal to allow participants and beneficiaries to make in-plan Roth conversions. Many private 401(k) plans allow their participants to make in-plan Roth conversions. The FRTIB has the authority to do this for the TSP under existing legislation but chooses not to. I have confirmed the preceding sentence with the FRTIB. Indeed, when the FRTIB staff first studied ways to improve and modernize the TSP several years ago, the staff recommended that the FRTIB add an in-plan Roth conversion feature. The FRTIB is no longer considering this.

I retired from decades of federal service in 2018 at age 62. My TSP account at that time was well over $1.8 million. I knew that I needed to make serious Roth conversions in the years before I would turn 70 and begin to collect my maximum Social Security benefits. When I retired, the law required TSP (and 401(k)) participants to begin taking their Required Minimum Distributions at age 70.5. That’s now changed to age 72.

In order for me and thousands of other TSP participants and beneficiaries to avoid high tax bills from age 72 and later, we need to convert significant chunks of our TSP accounts and tIRAs to Roth assets. Because we cannot do that within the TSP (as my wife was able to do in her private employer’s 401(k)), we need to transfer those assets to traditional IRAs or directly to Roth IRAs. We cannot (rather, should not) maintain those assets in the TSP without suffering negative tax consequences. Using myself as an example, after the Additional Withdrawal Options rule took effect in September 2019, I transferred over $800,000 from my TSP account to brokerage firms that cumulatively paid me thousands of dollars in bonuses.

Yes, I’m aware that Roth TSP assets (unlike Roth IRA assets) will be subject to RMDs beginning at age 72. However, I would have liked to maintain my G Fund holdings for a few more years in the TSP rather than have to transfer them to a tIRA or a Roth IRA years earlier.

As a retiree, the only thing that the TSP offers me that I cannot do better with in a tIRA or a Roth IRA at Fidelity, Merrill Edge, Schwab, TD Ameritrade, or Vanguard is the G Fund. FYI, I live in a jurisdiction where IRA asset protections are strong.

If I may summarize:

1. Increasing TSP expense ratios are disheartening.
2. The inability of TSP participants and beneficiaries to be able to make in-plan Roth conversions is a significant impetus for participants and beneficiaries to transfer assets from the TSP to tIRAs or Roth IRAs.
3. Number 2 is one of the causes of increased TSP expense ratios (#1).

MichDad

tj
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Re: Increasing TSP Fund Expense Ratios

Post by tj » Sat Aug 01, 2020 5:04 pm

In an environment where 401(k) plan expense ratios are, in general, declining,
Where are you seeing this? My 401ks in the private sector were drastically worse, and they certainly didn't offer in-plan Roth conversions.

You speak as if these are common features when they are probably the exception rather than the norm.

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