Late-arriving feds converting 401(k)s

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Despite — or maybe because of — the stock market’s ups and downs, thousands of federal workers are rolling millions of dollars into the Thrift Savings Plan. The money comes from tax-deferred retirement with private firms the feds had built up before they became feds.

During the first quarter, there were 5,887 transactions that rolled $104 million into the TSP, which is the government’s version of a 401(k) plan. The TSP has 3.9 million account holders, ranging from senators and scientists to postal clerks, FBI agents and officers and enlisted personnel in the military.

Federal and military investors in the TSP first got the chance to roll outside tax-deferred money into their government accounts in July 2001.

Because the average age of new federal hires is 32, many of them have retirement accounts, or 401(k) plans from previous jobs.

At first, the roll-in pace was slow, but as people learned more about it, the money started flowing in.

From mid-2001 until the end of last month, there have been 96,000-plus transactions worth $2.2 billion.

The TSP says the “average” amount feds rolled into the TSP — taken by dividing the number of transactions by the dollar amount — is $22,487.31. But averages can be deceptive.

More than a dozen “new” feds — likely, successful lawyers-turned-federal judges — rolled in accounts each worth more than $1 million.

The lure of the TSP is twofold. First is the G-fund. It is guaranteed by the U.S. government in the form of special Treasury certificates available only to people who invest in the G-fund of the TSP.

The second is the TSP’s lowest-in-the-business administrative fees, measured in basis points. Low fees mean more money in your account earning (hopefully) more money.

Investment guru John Bogle, founder of the Vanguard Group (which has some of the lowest fees in the business) says that excessively high fees “are a scandal.” Other financial planners say that over a career of investing, high fees can drain thousands of dollars from an investor’s account.

With many mutual funds reporting smaller gains (or worse, losses), more people are becoming aware of the plus side of low fees. The effect of fees on a portfolio is an important topic in the popular financial press.

In a story for the Orlando (Fla.) Sentinel, reporter Richard Burnett, citing a Government Accountability Office report, wrote that “even a single percentage-point increase in fees can cut into future retirement benefits by nearly 20 percent.”

Paying fees of 2 percent or 3 percent wasn’t a big deal in the 1990s when many funds were returning 20 percent to 30 percent, but now that many are in negative earnings territory, or barely beating inflation, it’s a different ballgame.

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