Big Changes Coming to the Thrift Savings Plan

Have you heard about the big changes coming to the Federal government's Thrift Savings Plan (TSP)? If you haven't, this article is for you. And even if you have, read on as you might learn something you didn't know. It's not every day that major changes come to TSP.

What's Changing?

There are several changes coming to TSP anticipated this summer. For a summary of TSP changes and new features, check out the TSP communication site. I would also check its website for updates and anticipated timelines. Here's a list of the major changes:

1. Enhanced support through the virtual assistant and live-agent chat
2. Refreshed interface that's mobile friendly
3. New TSP mobile app
4. Enhanced investment-servicing support such as online transaction and rollovers into TSP
5. Access to an additional 5,000-plus mutual funds

That's a lot going on, but the most buzz surrounds number 5. For years, I've heard from military members that they desire access to more investment choices through their TSP. Now, they'll have it. When eligible, TSP participants will have access to more than 5,000 mutual funds, in addition to the standard five funds and 10 lifecycle funds, which are a preselected mix of the standard funds.

The 5,000 mutual funds are accessed through the TSP mutual fund window. According to the TSP federal filings, a mutual fund window is "a type of self-directed brokerage account that gives individuals the ability to buy shares of mutual funds through a broker-dealer that has been selected by their retirement plan or by one of their retirement plan's service providers."

In short, it's what allows TSP participants to buy shares of a non-TSP mutual fund through the TSP. These are mutual funds that TSP is providing access to buy or sell that are different than what's available today. The term "mutual fund window" is important, as it's used often.

Is this something that sounds exciting to you? Well, as with most benefits, there's often a cost associated and, in this case, these costs are relatively high when compared to the lower costs associated with the core offerings.

The New Costs

The good news is that if you stick with the standard five funds or the lifecycle funds, there's no change in TSP fees. You still get the same low cost that TSP has become known for. However, if you choose to participate in the mutual fund window and invest in other mutual funds, you'll incur additional expenses. As I write this in June 2022, these are the proposed expenses compared to the actual historic TSP expenses.

TSP says the $55 initially proposed extra cost is for what it calls a "fee designed to guarantee that the availability of the mutual fund window will not indirectly increase the share of TSP administrative expenses borne by participants who choose not to use the mutual fund window."

Basically, that means that all expenses of providing the additional mutual fund options will be paid for by those who elect to participate in it. This enables them to continue to provide the standard TSP funds at low cost.

Comparison of Fees

This is where it can get tricky and only you can analyze, based on your unique choices. But it's safe to say that the new fees make the mutual fund window more expensive than the traditional TSP fund route. Only you can determine whether this option is worth the extra cost.

How Can I Participate in the Mutual Fund Window?

There are a few stipulations on when and how you can participate in the mutual fund window.

• Fund transfers to the mutual funds must be in whole dollar amounts.
• A participant's initial transfer into their mutual fund window must be at least $10,000 but may not exceed 25% of their TSP account balance. Subsequent transfers must not cause the mutual fund window to exceed 25% of the TSP balance.

When you apply the restrictions presented in the second bullet, TSP participants must have at least $40,000 in their TSP to participate in the mutual fund window, as 25% of $40,000 is $10,000.

Questions to Ask Yourself

1. Do I need the mutual fund window to achieve diversification?

Probably not. The standard TSP offerings are broad-based and cover a significant part of the global equity and fixed-income markets. More mutual funds doesn't automatically mean more diversification. You could have 10 mutual funds all investing in the same stocks, and you're not diversified. On the other hand, there may be mutual funds among the 5,000 that offer exposure to investments or asset classes that aren't available today. A careful analysis is warranted.

2. Do I believe in active vs. passive management?

TSP funds are passively managed index funds. However, with the mutual fund window, TSP participants will probably gain access to actively managed mutual funds. I say probably because, at the time of writing this article, I haven't seen a list of the mutual funds TSP participants will have access to. There is a debate in the investing world on which is better: active or passive management. Check out this article from Schwab that can help explain some of the differences.

3. Are the fees worth it?

Only you can decide that. However, in today's environment of low- or no-cost mutual fund transactions, a trade fee of $28.75 is steep. You can do a quick internet search and find reputable investment firms offering mutual funds with no cost to purchase and low fees. Remember, this is the one variable you control, so tread cautiously.

Is the mutual fund window right for you? Only you can decide this, and we suggest speaking with your financial planner to understand how this might affect your retirement plan before taking any action. The key thing to remember is that, no matter your choice, saving for retirement is important. If you're starting out and not sure where to begin, check out this article.

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