‘Best’ 401(k) plan is at hand

Several national magazines and financial columnists have rated the "best" 401(k) plan around. Guess what it is? The TSP.

The Thrift Savings Plan is available only to government employees and uniformed military personnel. It was designed by Congress -- and includes members of Congress -- to ensure that federal and military personnel, who get inflation-indexed pensions for life, will have enough money to live well in retirement.

Analysts say that investments in the TSP over a career will provide one-third to one-half of a federal retiree's money.

So what makes the TSP so good? A couple of things:

• Contributions in the TSP, like other 401(k) plans, are not taxed until investors start making withdrawals.

• The government offers the majority of workers (post-1993 hires under the new Federal Employees Retirement System) an automatic 1 percent match, and will contribute another 4 percent to their account if they put in at least 5 percent of their own money. A total 5 percent match is rare in most private-sector 401(k) plans. And many don't offer any employer match.

• The TSP offers the G Fund, a super-safe, inflation-proof investment that is available only to federal and military investors. The G Fund invests in special Treasury securities whose rate is set monthly.

• A couple of years back, as first reported here, a federal worker transferred $1 million from a private-sector retirement plan into the TSP. That's faith.

• The TSP charges the lowest administrative fees -- the amount they charge you for handling your account -- in the business. The fees are about half the amount of the next lowest charge in the private sector. What that means is that at the end of the day you will have tens of thousands of extra dollars in your account because of what the TSP did not charge you.

• Senators, political appointees, CIA agents, astronauts, postal workers, generals, admirals and privates are part of the TSP. Active-duty personnel and federal and military retirees hold more than 3.7 million accounts.

• Investors are pumping $1.5 billion into the TSP every month. It's a steady flow because it comes from payroll deduction. As a result of that, and gains in the stock market over the past few years, the size of the TSP has nearly doubled to $206 billion in the past 3 years.

• In addition to the five traditional funds -- the C, S, I, F and G funds -- the TSP also offers the target L funds. The C Fund is indexed to the S&P 500, a constantly changing group representing the largest corporations in America. The S Fund in effect covers the rest of the U.S. stock market. The I Fund is indexed to foreign companies. The F Fund is a bond index and the G Fund is, well, the G Fund.

• The L Fund is really a fund of funds. The mix in each fund is based on the year individual investors intend to start withdrawing money from their accounts. The most conservative -- with the smallest mix of stock-based funds -- is for people about to retire, or who have retired, who plan to start spending down their accounts in the next five years.

• Other funds -- the 2020, 2030 and 2040 -- are progressively more aggressive, having the biggest chunk of investments in the stock markets. All of the funds are rebalanced regularly and grow more conservative in their allocation as the investor approaches his or her target date. A half-million investors have moved some or all of their 401(k) money into one of the L funds.

• If nothing else impresses you, consider one more time the "million-dollar baby." The obviously sharp, well-heeled fed (maybe a political appointee, maybe a federal judge) who moved $1 million into the TSP. Obviously he or she knew something even before the financial writers caught on to the charms of the federal 401(k) plan.

• Mike Causey, senior editor at Federal News Radio AM 1050, can be reached at 202/895-5132 or mcausey@ federalnewsradio.com.