Leaving the TSP: Is that really a good idea? Or, engineering a 28 percent nose dive
Thursday - 5/28/2015, 3:00am EDT
Unless you are a D.C. lawyer, a reporter covering the judiciary or an inmate doing time in prison, odds are you don't routinely check out each and every ruling of the U.S. Supreme Court. Boring …
But if you work for the federal government, or are in the uniformed military services or you are retired, the high court issued a ruling May 18 that deserves your attention. The case: Tibble v. Edison International. If you read and heed its warning, it could prevent you from losing tens of thousands of dollars in your post-retirement investments.
The case was about 401(k) plans (like your TSP) and how well employers monitor them to get the best deal for their workers. Turns out in too many cases, the companies offered high-fee investments to their plan participates. The higher administrative fees (often hidden from or ignored by investors) eat into the earnings the workers/retirees received on their investments.
The Washington Post said the Labor Department estimated that a modest 1 percentage point increase in fees would, over time, reduce the investor's nest egg by 28 percent. That's 28 PERCENT you won't be getting!! That's a lot.
. Labor's example was based on a worker who had $25,000 in an account earning an average of 7 percent each year over a 35-year period. The typical federal investor (under both the CSRS and FERS programs) has a much bigger TSP account.
So, should TSP investors be worried about high administrative fees? Short answer: No! Not even close.
When it created the TSP program (which includes senators and representatives) Congress directed its board to keep administrative costs down. The Federal Retirement Thrift Investment Board, which runs the TSP, is regularly monitored by the Labor Department, Treasury and Congress itself.
In fact, the C,S, I, G and F funds offered by the TSP have the lowest administrative fees in the business.
When they retire or leave government, about 55 percent of the people with TSP accounts withdraw them. Some to spend down the amount, others roll them over into an IRA or other tax-deferred account where they have more "choices." Sometimes those choices come with a big price tag. And that higher cost is passed on to the investor.
John Bogel a founder of Vanguard and the godfather of indexed funds has, for years, warned investors about high-fee funds. Especially, when those managed (and more costly) funds don't match the returns of index funds, like those in the TSP, Vanguard, Fidelity and others offering index funds.
TSP managers are under constant pressure to increase the number of funds available to employees and retirees. Some of the requests come from members of Congress who, under pressure from the financial industry, want to give the outsiders a piece of the lucrative TSP payroll deduction investment dollars.
So, should you leave the TSP when you leave government? Do you think you can make more by investing in things like gold, REITs, dot-coms, green or socially-conscience funds? Even by taking more risk and paying higher fees?
Posted by: sarah_oz@yahoo.com
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