TSP: Keep it simple?

Our only occasionally curmudgeonly federal beat columnist joins some readers with a bone or two to pick with the "new and improved" TSP.

Are you still trying to figure out, or learn how to cope with, the major changes that are happening with your Thrift Savings Plan account?

If so, welcome to the club.

And if you are not confused, or hesitant, maybe you are doing something wrong!

Case in point: Although the TSP has 6.6 million participants, as of last week fewer than 2,000 had taken advantage of the new option to invest part of their nest egg in any of the 5,000 new mutual funds that will be available soon. 

So does that small number actually trying out the big TSP innovations mean that feds are timid? Or smart? Maybe both—all adding up to what could be the right move.

When the TSP was set up in the 1980s, Congress insisted it be kept simple. And inexpensive to operate. That translated to a small selection of generalized stock market funds, plus the treasury G fund and the F fund invested in bonds. Later a group of “target date” funds (composed of the C, S,I, F and G funds) were added. By the way, these self-adjusting target funds are based on the date you think you will start tapping your TSP account—not (as many think) the date you will retire. That’s because some people, especially those with large accounts or who fall under the old CSRS retirement plan, won’t need the extra income for years.  

Bottom line is that, for decades, TSP investors paid the lowest administrative fees in the business. Which is a big $$$$ deal. And I heard it directly from the proverbial horse’s mouth: John Bogle the founder of Vanguard and of the index-fund concept. During our interview Bogle, a legend then and now, said that many investors were paying too much in administrative fees. In many cases he said the costs associated with managing accounts and transfer fees cost investors tens of thousands of dollars. Money they wouldn’t end up with in retirement. Bogle also said that he was a great admirer of the federal Thrift Savings Plan and, tellingly, that he wished he could get in it. Short of actually going to work for the government, of course. Now when John Bogle envies your mutual fund operation, you listen.  

But back to the KIS (Keep It Simple) rule Congress imposed on the TSP. Experts that trumpeted the rule were aware of how administrative costs and trading fees can eat into an account.  Members of Congress were, still are, participating in the TSP along with their staffs, U.S. ambassadors, air traffic controllers, cabinet officers—including POTUS—park rangers, NASA workers, CIA staff and your USPS letter carrier. Some of the most important people around,  and people who, from their topside jobs, designed the best, least costly retirement vehicle around. For them and for you. 

Since then, over the years there has been tremendous pressure from Congress to expand the TSP. For example, some politicians proposed ESG—environmental, social and governmental—funds be added to your investing mix. Some out of the goodness of their hearts, and to give you more options. Some instead perhaps to help a constituent, industry or cause, get a piece of the TSP action. Finally, after decades of adhering to the KIS principle, Congress voted to explore expansion. And now it’s here.  

Among the many changes are the addition of a mind-boggling 5,000 new funds you can shift your investments into. Many people will welcome these, both as a chance to support a cause and also—hopefully—to make money in the process. But many financial planners warn that the kind of thing that leads to investing in ESG funds—passion in investing—can be a problem because it clouds clear thinking. Alan Roth, a well-known financial planner—on CBS MoneyWatch, AARP, The Wall Street Journal—coined this motto for investors: “Dare To Be Dull.” His point is that investing shouldn’t be fun or exciting. You should do it with a clear head, thinking long-range and saving the world some other way. Many ESG’s fit that description.  The cover story in last week’s Economist magazine was headlined: “ESG Investing Is In Need Of a Rethink.”  In it, a respected group of investors and experts point out the pitfalls of ESG—from an excess of emotion to stumbles into criminal activity.

The same article noted that “One of the hottest areas of investing in recent years has been ESG: using environmental, social, and governance metrics as ways to assess potential investments. But the idea that you can make profits with purpose has recently come under pressure. Elon Musk has called ESG a scam; German police have just launched ‘greenwashing’ raids; and insiders are spilling the beans. For something with hints of a moral crusade, ESG is in danger of turning into an unholy mess.”

Bottom line, some of the smartest people in the world of making money are flashing a yellow caution light that all investors—especially feds new to the social, governmental, environmental universe—should study. And approach the new TSP very carefully, remembering John Bogle’s envy of the old. 

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