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TSP moves to expand investment, withdrawal choices

More options for investing and withdrawing retirement savings are planned for federal employees and retirees, including the freedom to invest in funds other than those offered by the Thrift Savings Plan itself.

The TSP’s governing board on Monday endorsed opening a “window” through which account holders could invest in a wide range of mutual funds, as well as new options for taking withdrawals both while still employed and after retiring or leaving for other reasons.

The moves would modernize the program and respond to demand from investors, many of whom abandon the program after they leave the government by transferring their money to IRAs that offer more flexibility.

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The changes, long under consideration, were previewed two months ago at a briefing the TSP held for the board and an outside advisory group. The board on Monday gave formal approval to pursue them, although in the case of the investment window, the approval was contingent on seeing further details.

Both changes are long-term projects that likely would take more than a year to carry out. While a law creating authority for an investment window passed in 2009, expanding the withdrawal options further would require new legislation to pass even before the implementation process could begin.

The TSP is a 401(k)-style retirement savings program for federal and military personnel and retirees that as of the end of June held $455 billion in assets.

The TSP presented to the board a report spurred by a finding that 41 percent of investors who left the government in 2012 transferred their money out of the TSP within a year, rather than leaving it in place as is allowed. At the May briefing, officials added that percentage since has increased to 55.

TSP executive director Greg Long said that by transferring the money out, account holders are giving up the low administrative fees they pay in the TSP and paying much higher fees to the IRA provider.

“These are big dollar amounts generally going into IRAs,” he said. “We have an advantageous design, yet we have a substantial amount of dollars leaving to what appears to be a less advantageous design.”

He added: “It’s not about asset accumulation [in the TSP]. I don’t care about that. What I care about is outcome” for investors who end up paying more in account fees outside the program.

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Of those who transferred their money to other institutions, 27 percent “cited a desire for additional withdrawal flexibility as a motivating factor,” the report said, adding that those who do so tend to be among those with the largest accounts.

The TSP wants to allow investors to make multiple withdrawals after separation, in contrast to the current policy under which only one partial withdrawal is allowed and a second withdrawal must apply to the remaining balance. Withdrawals can be made as lump sums, in equal monthly amounts, as an annuity, or in a combination.

Further, investors could make multiple withdrawals after age 59 ½ without a tax penalty while still working. Currently only one is allowed, and taking one means that only one post-separation withdrawal is allowed, for the entire balance.

The TSP meanwhile offers far fewer investment funds than are available through other types of accounts: five investment funds tracking broad stock and bond market indexes and five “lifecycle” funds that mix investments in the underlying funds in ratios that vary according to the projected withdrawal date.

In 2008 and 2013 polls, about two-fifths of TSP account holders said that allowing outside investments would improve the program, and there is a “vocal minority” who advocate for it strongly, the report said.

About 30 percent of 401(k) plans have such features, said Veronica Mance, a policy and research officer, although in practice only about 1 percent of their participants actually use them. “The numbers of people who say what they want is different from what they do,” she said.

Long added that creating the window is a “close call” policy decision given the increased complexity, the higher overhead cost to investors and the risk they will make poor decisions. But the option would respond to a demand and should help keep more participants in the program after they leave government, he said.

The TSP envisions issuing a contract to a large mutual fund provider, which would allow investors to steer money into any of its offerings, although not into those of other financial firms.

Several board members stressed that both sets of changes will require technical changes as well as an educational campaign for investors, while asking for more specifics on the investment window — which Long promised to produce. Under prior plans, there would be a minimum on investments made through the window, investors would be limited to a percentage, possibly 25 percent, of their total accounts in outside investments, and those who use the window would pay a fee.

Long agreed that the projects would require a high level of coordination, and that another change under consideration, adding automated or personal investment advice, also would be in the mix if approved. The TSP continues to study that idea and did not have a proposal ready for a board vote Monday.