Thrift Savings Plan Cracks Down on Frequent Traders

There is now a rule: Trading curbs will be placed on "market timers" in the Thrift Savings Plan.

The rule, scheduled for publication today, is aimed at federal employees who shift their investments every few days in an attempt to beat the stock market. The TSP became concerned last year about frequent trading, saying that a relatively small number of government employees were driving up the plan's transaction costs and diluting returns for other participants.

Under the rule, TSP participants may make two interfund transfers each month. After those two trades are made, a participant may make an additional transfer into the plan's government securities fund, which is designed to never lose money and serves as a hedge against inflation.

"The view that exceptional costs generated by 1 percent of participants should be viewed as inconsequential if they can be charged off to 100 percent of plan participants is troubling," the rule said. Costs "can be very high depending on how funds are invested on a particular day."

In comments filed in recent weeks on the rule, some federal employees have portrayed trading costs as small, considering that the TSP has $223.7 billion in assets.

But the TSP rejected that argument. For example, on Aug. 16, 2007, the actions of frequent traders helped drive up transaction costs for the TSP's international stock fund to $9.5 million -- an amount that was absorbed by all investors in that fund, the rule said.

"That is in one DAY, not in one year," the rule said, using capital letters to emphasize how the timing of stock trades can increase a fund's costs.

The rule was posted yesterday on an electronic docket at the Federal Register, with a notation that it is scheduled for official publication today.

The Federal Retirement Thrift Investment Board, which oversees the TSP, has taken interim steps to crack down on frequent trading in recent months. The board sent letters in January to 3,775 TSP participants identified as frequent traders, asking them to voluntarily reduce their interfund transfer requests. According to the rule, 85 percent complied.

The agency posted the rule last month for public review and received 290 comments in opposition to and 31 in support of the regulation. One of the opposition comments, however, included a petition with 3,944 signatures from a Web-based group, TSPShareholder.org, which opposes trading restrictions.

Opponents of the rule suggested raising the monthly limit on trades to five, imposing transactions fees of $10 or $20, allowing 24 trades per year rather than two per month, and adding new investment options, such as a real estate fund.

"I don't understand your rationale in penalizing those of us who act aggressively in the management of our fund," wrote Subra Avani of Oxnard, Calif. "When you think about it we are our own fund managers when it comes to the TSP and the job of a fund manager is to seek out the best investment opportunities for that fund."