The participant statement that federal 401(k) plan investors will receive by mail this week will have good news, in addition to the increase in most investors' retirement nest egg account balances.
For the 12-month period ending in October, the C-fund (stock index) of the federal Thrift Savings Plan returned 25.56 percent. The G-fund (Treasury securities) return was 5.78 percent, and the F-fund (bond index) return was only 0.47 percent.
More than half of the TSP's nearly $90 billion value is in the C-fund. Most of the remainder is in the G-fund. Investment in the F-fund is relatively small.
But in addition to the happy growth news--from both returns and contributions--the 2 million-plus investors will receive details on some important year 2000 changes in their TSP. The changes include:
* The appearance in May of two new funds within the federal 401(k) plan. Currently employees (and retirees who had accounts when they left government) can invest in three funds: the C-fund (which tracks the Standard & Poor's 500-stock index), the F-fund (which tracks the bond market) and the G-fund (of guaranteed U.S. Treasury securities).
Beginning in May, TSP participants will be able to invest in two new funds--one a small-capitalization index S-fund and the other an international stock index called the I-fund.
Both new funds are considered high-risk but desirable for people who want to diversify their portfolios. Most of the stock market is made up of middle- and small-size funds, and most of the world stock market action is now outside the United States. Folks who want to cover their bets are often happy spreading their investments around.
The new I-fund will be invested in the Barclays EAFE Index Fund, which has stocks from Australia and 20 European and Asian countries. From 1989, when the TSP started, through the end of 1998, the index had an average compounded annual rate of return of 5.5 percent.
The new S-fund will be invested in an index fund that tracks the Wilshire 4500 stock index. For the period from 1989 through 1998, its compounded annual rate of return was 15.1 percent.
By contrast, the compounded annual rate of return for the C-fund was 19.1 percent during the same period; for the F-fund, 9 percent; and for the G-fund, 7.3 percent.
* The current open enrollment period--when employees can join the Thrift Savings Plan or reallocate where future payroll contributions will go--began Monday and will run through Jan. 31.
But starting next year, the open enrollment periods will change. The first one will be April 15 through June 30. The second open season will be Oct. 15 through Dec. 31.
* Beginning in May, the time lag for switching funds from one account to another and for making loans and withdrawals will shrink dramatically. Participants will be able to make daily interfund transfers, although almost all experts advise against trying to time the ups and downs of the market in a long-term investment.
Participants also will be able to receive payments faster. Now it takes from two to six weeks to make a fund transfer, and getting a loan or withdrawal can take a month.
Taking Stock of New Funds
Financial planner Paul Yurachek, with Dennis M. Gurtz and Associates in Bethesda, sounds a note of caution about the new S and I funds.
"This year the Nasdaq [made up of many small-cap, high-tech stocks] is up over 50 percent, with some aggressive, managed-growth funds up 30 to 70 percent. But the index funds tracking the small-caps and international indexes are not performing as well," he says.
Yurachek says small-cap and international index funds "need to be much more nimble" than an index fund that tracks the S&P 500.
"If the TSP is the only investment option you have, people should diversify and put some money in the S and I funds. But if you have other investment options available," he says, "I would recommend sticking with the existing TSP funds (preferably C and G) and doing your small-cap and international index fund investing elsewhere."
Health Plan Warning
Federal workers whose health plan is dropping out of the health benefits program this year must pick another plan--or lose coverage for the year 2000. Tuesday's column said, incorrectly, that feds who didn't pick a replacement plan would--like retirees in the same situation--be automatically placed in Blue Cross standard. While that is true for retirees whose health plan is leaving the federal program, it is not true for active-duty workers.
Active-duty feds who fail to pick a replacement plan during the open season won't be able to reinstate coverage until the year 2001.
Mike Causey's e-mail address is firstname.lastname@example.org