Thrift Savings Plan Approves Trading Restrictions

Alarmed by a surge in stock and bond trading by a small group of government employees, the board that oversees the Thrift Savings Plan voted yesterday for a crackdown on participants who try to beat the market by jumping in and out of the plan every few days.

The day traders or market timers, as these employees are popularly called, have been driving up the plan's operating costs for all TSP participants, plan officials said.

Out of a plan with more than 3.8 million members, fewer than 3,000 government employees are responsible for much of the increased trading volume, the officials said.

"It is real," Gregory T. Long, executive director of the Federal Retirement Thrift Investment Board, said. "A small group of people are causing damage to hundreds of thousands who don't do this."

The TSP is a 401(k)-type retirement savings program for civil service, postal and military personnel. It features three stock index funds, a bond index fund, and a U.S. Treasury securities fund. The index funds essentially produce returns that track domestic and international market trends. The plan also offers "life-cycle funds," targeted for retirement purposes, that are a mix of the index funds and the government securities fund.

Congress designed the 20-year-old plan on the theory that employees would buy and hold stocks and bonds for the long term, building a nest egg for retirement. The plan began providing daily, rather than monthly, valuation of participant accounts in 2003, when officials upgraded the TSP's record-keeping system.

The switch to daily valuation has made it much easier for some federal employees to use the TSP as a buy-and-sell stock machine, apparently in hopes of reaping bigger returns.

In the change to the daily system, the TSP did not place a limit on the number of transfers among its funds. In contrast, officials noted yesterday, most mutual funds restrict the number of trades their members can make each year. Some mutual fund companies also charge redemption fees for shares held less than 30, 60 or 90 days.

Officials said trading volume in stock and bond funds in the TSP has grown substantially since 2005 and has expanded disproportionately to market value. More large trades also are taking place, they said.

For example, on Oct. 19, $371 million of the plan's assets were transferred into an international stock fund. Three business days later, on Oct. 24, $391 million was transferred out. Officials said 2,018 participants who sold their international stock on the 24th had purchased the stock on the 19th.

Of that group, 323 were trading $250,000 or more. During the previous 60 days, these 323 traders had made 5,804 exchanges in the international fund worth $1.9 billion, the TSP officials said.

The daily trading, and the size of the trades, have led to higher broker fees and transaction costs, especially in the international fund, where it's more difficult for the TSP's investment manager to match buy and sell orders, a study by the TSP staff found.