Thousands of middle- and upper-income federal workers have an added incentive to switch to the new Federal Employees Retirement System now that Congress has exempted its Thrift Savings Plan from rules covering similar tax-deferred private sector investment plans.
The stopgap funding measure sent to the president yesterday contains language that guarantees anyone participating in the thrift plan option of the FERS plan can put up to 10 percent of pay (to a maximum of $7,000) now and in the future in the thrift plan. Under the FERS investment option, workers who contribute at least 5 percent get a matching 5 percent contribution from the government, which is also tax-deferred. The exemption becomes law now that the president has signed the so-called continuing resolution.
Federal workers who remain in the old Civil Service Retirement System would, under the budget agreement, continue to put up to 5 percent of pay in their thrift plans but would not get matching contributions from the government.
People under the old CSRS plan have until Dec. 31 to move into the FERS system, which covers new employes. It's modeled after private pension plans, although its 401(k) investment option is more generous than most industry plans.
Without the exemption, proposed by Sen. Ted Stevens (R-Alaska), the thrift plan would have been less attractive to federal workers making $50,000 per year or more. That's because antidiscrimination rules covering similar private plans limit the percentage of income high-paid employes can contribute to no more than 2 percentage points above the overall percentage contributed by eligible lower income workers.
Because many lower income federal workers haven't joined the thrift plan or are putting in minimal amounts, the average contribution rate for both the FERS and CSRS plans is expected to be low. That low average would limit amounts that upper-income federal employes, including members of Congress, could put in the thrift plan to around 4 percent, according to some estimates.
Uncertainty over the contribution rate was a major reason many middle- and upper-income federal workers shied away from joining FERS. Generally speaking, the old CSRS plan is better for people planning to retire from government after long service. FERS was designed for workers who do not plan to retire from government, because they can transfer their thrift plan accounts (including earnings and government contributions) to another qualified pension plan, or roll it over into an Individual Retirement Account.
Meantime, the Thrift Investment Board says the fund, which opened in April, now exceeds $1.3 billion and is growing about $5 million a day. The fund is invested in Treasury Department securities that are paying 9 percent interest.
Starting next month workers who are covered by FERS will have two new investment options, one a fund based on stocks and the other on corporate bonds. Thrift Board managers announced yesterday that those two new fund options will be managed by Wells Fargo Bank of California.