Federal employees would have more options for withdrawing their retirement savings from the Thrift Savings Plan, their 401(k)-style program, under a new bill designed in part to encourage more of them keep their money in the TSP after leaving the government.
A bill offered Thursday by Sens. Rob Portman (R-Ohio) and Thomas R. Carper (D-Del.) on the 30th anniversary of the TSP’s launch seeks to bring the program — whose terms are set by law that has changed little over that time — more up to date with similar programs.
The TSP is open to federal employees and military personnel and allows investments of up to the same annual limits that apply to other retirement savings programs. At the end of February, just above 5 million investors had accounts totaling $490 billion.
Those leaving for retirement or other reasons may keep their accounts open — although they may not add to them — or transfer the money to an individual retirement account or other tax-favored retirement plan.
“The TSP has been instrumental in helping federal employees maximize their retirement security, and to mark the 30th anniversary of this critical savings vehicle this bill takes important steps to modernize this system to benefit them in the future,” Portman said in a statement.
“Making smart choices to prepare for retirement can be difficult, but everyone deserves to have financial stability at the end of their career,” Carper said in the statement. “The Thrift Savings Plan is a tool our hard-working federal employees count on to plan for their futures, but we need to make it work better for them.”
One goal of the bill is to reduce the numbers of investors who take their money out of the TSP after retiring or leaving for other reasons, even though the TSP’s investment fees generally are well below those of other investment options such as mutual funds.
The TSP found in 2015 that 41 percent of investors close their accounts within the first year after leaving government; a survey showed that lack of withdrawal choices was a main reason.
Currently, investors may take only one withdrawal while still working, after age 59½. After retirement, they may take only one partial withdrawal, and the next withdrawal must be for the remaining amount — and only one withdrawal is allowed for those who took a partial withdrawal while working. Withdrawals can be taken as lump-sums, as equal monthly payments, or used to purchase an annuity.
The TSP has been seeking legislation for several years to expand the options.
“Right now our withdrawal options are very limited. That just doesn’t work for many people. What this does is allow them to take it out as they need it,” TSP spokeswoman Kim Weaver said. “Our participants have been asking for more flexibility and this will allow them to use their retirement savings as they see fit.”
For example, she said, many investors who retire before being eligible to collect Social Security benefits take out monthly TSP withdrawals as a bridge until that point, but would like to stop those withdrawals when those benefits begin — which currently is not allowed.
The bill would let investors take multiple withdrawals after age 59 ½ while still employed and also multiple withdrawals after leaving. It also would create new options for taking regular payouts, including allowing investors to choose quarterly or annual payments; change payments at any time; stop them while leaving the remaining money in the account; or choose an annuity or lump-sum even after taking out regular payments.
The bill does not address another complaint frequently voiced by TSP investors, the limited investment options. The TSP offers five core funds, all index-based, which track the U.S. and international stock markets, the bond market and government securities. It also offers five “lifecycle” funds that mix investments in the five basic funds in ratios that vary depending on a projected date to begin withdrawals.
The TSP has had authority for years to create a “window” through which participants could invest some of their money in mutual funds available in the open market. The program’s governing board committed in 2015 to using that authority but Weaver said that outside investing is not expected to be available until 2020.
The TSP in 2015 also laid out a long-term plan for improving its customer service along with widened investment and withdrawal options.