The financial pressure of the partial government shutdown in early October caused some federal employees to tap their retirement savings in a way that could harm their long-term financial security, members of an advisory board said Monday.
Officials of the Thrift Savings Plan, a 401(k)-style retirement savings plan for federal workers, told the board that about 14,000 employees took hardship withdrawals in October, the highest number in the TSP’s more than two decades of existence. A normal month is in the 10,000-12,000 range, and the October withdrawals averaged about $9,300, about $400 above average.
To receive a hardship withdrawal, an employee must document a serious financial need. There are potential tax penalties; the money cannot be repaid into the account, and for six months afterward the individual is not allowed to make new investments.
For employees under the Federal Employees Retirement System, which covers about nine-tenths of the workforce, that also means losing out on matching agency contributions of up to 4 percent of salary; they get an agency contribution of 1 percent regardless of whether they invest personally.
The restrictions apply even though employees later were paid for the shutdown days whether they had stayed on the job unpaid or whether they had been sent home on furlough.
“We’ve worked very hard to help individuals to prepare for retirement, and then to have them have to take it out in order to just survive is very unsettling,” said Clifford Dailing, chairman of the Employee Thrift Advisory Council and secretary-treasurer of the National Rural Letter Carriers’ Association.
“It’s almost like a double whammy,” said Patricia Niehaus, president of the Federal Managers Association and a member of the advisory board. “You’re taking money out of your retirement account, you’re paying a tax penalty and you can’t make contributions for six months afterward. For people to be backed into a financial corner by a furlough, to have to do that, it really has an impact on their long-term retirement.”
Officials meanwhile said that that loan activity was little changed and that the percentage of employees who make investments in the TSP held about steady; the TSP does not keep data that would show whether the percentage of salary invested was changed.
Earlier, the TSP had reported that loans and hardship withdrawals spiked in the spring and early summer when many agencies imposed unpaid furlough days due to budgetary sequestration.
TSP officials added that that beginning in September as the shutdown and debt ceiling limit approached, some investors engaged in a flight to safety by shifting more than $3.4 billion from stock and bond funds into the government securities fund, the safest of the TSP’s offerings. Much of that money was moved back to the other funds following the budget deal that ended the shutdown and pushed back the debt ceiling deadline, they said. The 225,000 total transfers in October were the most in a month in more than two years.
“We’re very pleased it’s over and we hope it never happens again,” TSP Executive Director Gregory Long said.
As of the end of September, the 4.6 million account holders had nearly $376 billion on investment, making the TSP “the largest defined contribution plan in the world by far,” Long said.
The advisory board meanwhile endorsed a change that has been under consideration for several years regarding newly hired employees, who are automatically enrolled in the program unless they opt out. Currently, if they make no choice among the available investment funds, their investments go by default into the government securities fund and some never change to capture the higher growth potential of the other funds.
Under the potential change, the default fund would be the TSP “lifecycle” fund appropriate for the person’s age; the five lifecycle funds consist of differing mixes of the TSP’s stock, bond and government securities funds.
The TSP governing board is to meet soon on the issue, which would require a change in law. The new policy would apply only to those hired after enactment, and those employees would remain free to choose among any of the funds.
Separately, Long said the TSP has decided to revise the mix of investments in the lifecycle funds, raising the share of the government securities fund while decreasing the share of the bond fund. That change does not require legislation and can be carried out over the upcoming months.