Retirement funds: Beware the fees!

Federal beat columnist Mike Causey explores some of the hidden costs of the latest, and at times over-hyped, TSP offerings—and remembers a favorite uncle's advice along the way.

A favorite saying of one of my uncles was, “if you are so smart, why ain’t you rich?” I cleaned his words up a little but that’s pretty much it. He was a cool guy, survivor of the Depression.  Did military service in the Pacific theater in WWII. One of the Greatest Generation. And he said the why-ain’t-you-rich thing often. I remember when I was about 8, I thought it was among the wittiest, yet profound, things I had ever heard. Now that I’m much older and, hopefully wiser, I still think of it. Like when it was announced that sometime this summer, the federal Thrift Savings Plan will add approximately 5,000—that’s FIVE THOUSAND—new funds for active and retired participants to consider.
When the new options are in place, investors can withdraw up to 25% of their TSP funds and invest them, tax-deferred, in any (or in theory all) of the 5,000 new options. So, will that huge array of choices paralyze them? And drastically reduce their future earnings?  Or dramatically increase them—as investors narrow their investments of the S&P 500 and the rest of the stock market to green or socially active funds? Will that reduce, or increase, the amount of money federal retirees ultimately have to spend? For a retirement that could easily last 20 or even 30 years.
A report last week said that returns to investors in passively-managed funds, like the TSP’s stock market-tied C and S funds, beat actively-managed portfolios 79 percent of the time. And the stock-indexed funds had much, much lower administrative fees. Meaning you the investor get to keep more of your higher gains.  I ran that by several top financial planners and they said that’s about right.
The TSP (which includes members of Congress and their staffs among participants) was set up in the 1980s. Among the instructions was to “Keep It Simple” (KIS). Which made me think of my old uncle. And they did. But over the years, there were hundreds of major efforts—some with big bucks lobbying efforts—to introduce the special-interest funds into the TSP’s portfolio of choices. Powerful members of Congress pushed for REIT funds (real estate investment trust) funds run by wealthy campaign donors. They said putting money into REITs, like oil, is always a good investment. Until it isn’t, as we found out during the Great Recession of 2008-9.  More recently, oil had dropped in value to the point where for a very brief period, people could get a barrel for a few dollars if they’d haul it away to make room for more oil. Now it’s back to around 100 bucks a barrel—and we are paying 6 or 7 dollars a gallon of gas! And these may turn out to be the good old days. Point is oil is a volatile investment. 
Feds who choose to invest in any of the 5,000 new funds (environmental, social or devoted specifically to fighting climate change) will pay an annual $95 maintenance fee. Also, there is a $28.75 per trade fee. That’s to keep the KIS promise to Congress. And to insure that investors who stick with the C, S, I, F and G funds, or the target date funds, aren’t paying expenses incurred by those who want to support the causes of the new funds—or those who believe they can pick future winners by getting in, and when necessary out, of specific funds quickly. You know, by buying low and selling high. Market timing, which some investors think they can do and win more often than lose. We’ll see about that. 
Meantime lots of people are excited by the prospect of investing their money into specific funds that support their social views. How many will join the new parade, and whether they might make big bucks some hope for, is yet to be determined.
Sure wish my Uncle was around. He probably would know what to do. Or not do!
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