Three reasons to roll over a Thrift Savings Plan in retirement
Published
From 2000 through 2013, at least 40,000 federal employees retired each year, with nearly 62,000 retiring in 2013. As of July last year, 14% of federal employees were eligible to retire, with that number expected to jump to 30% by 2023. With the impending retirement of hundreds of thousands of federal employees, the Thrift Savings Plan (TSP), a 401(k)-style plan for federal employees, has begun encouraging participants to keep their balance invested in their TSP upon retirement.
While the TSP board, the body responsible for administering it, touts advantages such as straightforward choices, freedom to stay with the plan in retirement, and the ability to transfer funds into the plan, these apparent advantages also can create investment setbacks that unfortunately are not often brought to the attention of federal retirees.
1. Limited investment options
While federal employees enjoy the distinct advantage of having access to the lowest cost employer-sponsored retirement plan in the U.S. (average cost on a balance of $1,000 is 30 cents), the plan maintains a limited selection of only five basic investment options. Although this helps keep costs low, it also creates a significant lack of exposure to important asset classes, including medium-sized companies, emerging markets and alternative investments. Eliminating these asset classes means that investors are vulnerable to possible market fluctuations.
One way the TSP keeps its plan so affordable is by making all available funds, except the G Fund, index funds. Although index funds have positive attributes, investors should be wary of owning only index funds. For example, in 2017, six companies accounted for 25% of the S&P 500’s return for the year, and, at one point in early 2018, three companies were responsible for nearly half of the index’s positive return. Having individual companies account for such a large portion of your portfolio and blindly following a market index without professional management can unnecessarily expose investors to increased market volatility, especially in unpredictable or negative market environments.
2. Inadequate financial services
The TSP Board recently encouraged federal employees to keep their funds invested in their TSP account at retirement. However, participants should understand the limited withdrawal options, lack of critical investment management guidance, and absence of financial planning support they could encounter.
While TSP participants will have greater flexibility come Sept. 15, thanks to a new law governing withdrawals, even with these changes, participants still will have comparatively limited access to their funds. According to recent guidance from the rollout of new distribution rules, “you’ll still need to provide notarized signatures or other materials in paper form” for withdrawal requests or changes. On the other hand, investors with a financial advisor can simply call to request a distribution.
Additionally, the TSP board does not provide investors with any investment management or financial planning advice. Instead, participants are left to make critical investment decisions on their own. Plan participants also can be left unaware of gaps in their financial plan because they do not have a professional financial advisor proactively searching their plan for weaknesses that should be addressed.
3. Incomplete consolidation
I encourage investors to consolidate their investments at one financial institution with a fiduciary advisor. Advantages of consolidation include simplified statements, straightforward total returns for the portfolio, and ease of estate planning administration. But with the TSP, participants can only consolidate their retirement assets, forcing them to turn to a different institution for nonqualified investments.
True financial consolidation should involve all investment accounts, not just retirement accounts, in order to build a comprehensive financial plan. Considering investment accounts in isolation opens investors up to tax, investment and estate planning risks. Having all these accounts consolidated within one institution, however, allows these items to more easily be addressed in concert with one another. With the ease and peace of mind that comes with consolidation, investors are empowered to spend their time with family or pursuing their passions rather than overseeing multiple financial relationships.
Despite the Thrift Savings Plan’s advantages, federal employees may be getting what they pay for with the TSP. The interrelated nature of financial planning calls for investors to turn to a qualified financial professional to create a full financial plan that encompasses the participant’s goals. Integrated wealth management can provide TSP participants value through more expansive investment choices, professional financial planning and investment advice, and the benefits of true consolidation.
Consult with a financial professional to determine if consolidating your TSP account is in your best interest and to ensure that your investments are meeting your and your family’s goals and needs.
Steven Ulrich, CFP, a financial planner at Cassaday & Company Inc. in McLean, is a Chartered Federal Employee Benefits Consultant (ChFEBCSM), a specialization that focuses on retirement benefits, including the Thrift Savings Plan.