Money invested in the new civil service savings plan will earn 8 5/8 percent this month, according to the Federal Retirement Thrift Investment Board, which is managing the multimillion-dollar tax-deferred pension option for U.S. civil servants. That rate of return is up from 8 3/8 percent in May, and April's 7 5/8 percent rate.
The board also announced that starting next year workers covered by the new Federal Employees Retirement System will be able to invest in a common stock fund, based on the Standard & Poor's 500 stock index, or a guaranteed fixed-income fund.
As of yesterday the thrift fund, including contributions from employes and Uncle Sam, had grown to $259 million. That includes $2.4 million in interest paid on the fund, which started only in April.
Because the fund is growing at the rate of more than $1 million per day, it promises to become one of the country's biggest employer-employe tax-deferred savings programs. It also could make civil servants major players in the stock market within a few years.
The federal thrift plan is modeled after 401(k) plans in the private sector. But it is more generous than most of those plans because of the relatively high contribution rate allowed, which is up to 10 percent for employes plus a generous government match of up to 5 percent.
Investments are made via payroll deductions. Employes have two open seasons each year when they can start, stop, increase or decrease their contributions. Because both the employe and government contributions are tax-deferred, most workers pay less taxes out of each paycheck because their taxable income is reduced. The contribution from the government amounts to a tax-deferred pay raise.
The second open season of this year runs through July 31. There will be another open season, for 1988 contribution rates, beginning Nov. 15 and running through the end of January.
The amount workers can contribute to the thrift plan, plus eligibility for the government match, depends on whether workers are under the old or new pension plans.
The 700,000 federal employes hired after 1983 (most of whom are automatically covered by the FERS plan) can invest up to 10 percent of salary, or a maximum of $7,000 this year. Those who put in 5 percent or more get a tax-deferred matching contribution from the government, meaning that up to 15 percent of their salary can be invested this year. Workers under the FERS plan who invest nothing still get 1 percent of salary invested by the government into their accounts.
Most of the 2 million civil servants hired before 1984 are now covered by the old pension plan. Those employes are allowed to put in up to 5 percent of salary to the tax-deferred investment program. They are not eligible for any government matching contributions, however, unless they elect to switch to the new FERS system. If they do not switch, their investments can only go into the so-called G-fund, which is made up of long-term (four years or more) guaranteed Treasury securities offerings. The G-fund interest rate changes monthly.
The open season for switching from the old plan to FERS starts next month and will run through the end of the year. Workers who go into FERS will be able to put more in the thrift plan and get the government match. They will also be able to invest in any or all of the three investment options available next year. In addition to the G-fund and the S&P stock fund it will include a guaranteed investment fund.