Thrift Savings Plan

Thrift Savings Plan
The Federal Thrift Savings Plan (TSP) is a retirement savings plan for civilians who are, or previously were, employed by the United States Government and for members of the uniformed services. It is similar to a 401(k) in that it is a defined contribution plan that is managed by the employee.

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--The G Fund offers the opportunity to earn rates of interest similar to those of long-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.
 * F Fund--a fixed income index fund that tracks the LBA 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 maintains 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).

Characteristics
TSP funds are operated with extremely low expense rations, currently at 1.5 basis points (compare to a typical Vanguard index fund at ~20 basis points, which is already quite low by industry standards).

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, the employee may receive up to 1%+3%+1% = 5% of his/her salary in matching contributions.

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.

TSP and Vanguard Funds
In addition to the government match rates and low expense ratios (already described), there are two other features of TSP funds worth keeping in mind for joint TSP/Vanguard investors. One is that the G fund serves as an intermediate bond fund with no risk of principal. It is designed, but not guaranteed, to keep pace with inflation, so it is almost TIPS-like, though not identical to a TIPS fund. (To date returns have always exceeded inflation.)

A second feature is the lack of emerging markets in the I fund. TSP/Vanguard investors seeking exposure to emerging markets can either do so by holding the I fund and a Vanguard emerging markets fund or by placing international investments with Vanguard (e.g., in the Vanguard Total International Stock Index Fund).

Finally, note that holding the C (tracks the S&P 500) and S (tracks the DJW 4500 ) funds in a 3/1 ration approximates the total stock market. As stated in this S fund fact sheet, "The DJW 4500 Index made up approximately 24% of the market value of the U.S. stock markets; the S&P 500 accounted for the other 76%."

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

 * Link to TSP main page