Thrift Savings Plan Crackdown Is Working

Efforts to discourage "market timers" in the Thrift Savings Plan are showing progress.

Only 549 people last month defied a new policy limiting trades in the TSP, a 401(k)-type program used by government employees, the plan's executive director said yesterday.

That's down from the 3,775 whom the TSP had identified as frequent traders, who shift their investments every few days in an attempt to beat the stock market.

The TSP became alarmed last year by such practices, contending that a relatively small number of government employees were driving up the plan's transaction costs, such as commissions to brokers, to the detriment of all of the plan's 3.8 million participants.

A letter was sent in late January to the frequent traders, asking them to adhere to a policy adopted in November that limits plan participants to two stock trades per month.

The number of interfund transfers dropped after that, but there were 549 who did not comply with the policy. Some of them have been moving large sums among the TSP's funds, with one account holder transferring $1 million in and out of the funds.

As a result, the TSP will reprogram computers to block the 549 participants from making electronic transfers, effective March 31. To order an investment change, they will have to mail in a paper form, said Gregory T. Long, the TSP's executive director.

Because of mail-delivery and handling times, it should effectively stop participants from using a long-term savings program for short-term purposes.

The crackdown has led to about 100 complaints from participants and the formation of an Internet-based campaign to protest trading restrictions. But the protests do not seem likely to derail the TSP's policy.

On March 10, the Federal Retirement Thrift Investment Board, which sets TSP policies, published a proposed rule to limit trading in the plan. Under the rule, participants may make two interfund transfers in a month. After those two trades are made, the participant may make an additional transfer into the plan's government-securities fund, which the rule describes as a "safe harbor" because it has been designed to never lose money.

The thrift board will accept comments on its policy change through April 9.

The restriction should not affect most government employees who invest in the plan. According to the rule, more than 99 percent of the TSP's participants requested 12 or fewer interfund transfers in 2007.