- The Washington Times - Monday, April 18, 2005

Have you ever gone shopping only to be confused by the number of choices you have?

Studies conducted by mutual funds indicate investors in many 401(k) plans, especially younger workers and people without any investment experience, are turned off by too many choices.

The result: Many of them pick a “safe” option — like a low-yield money market — when they should be investing long term in funds that offer potentially higher rewards along with higher risks.

The millions of federal workers and military personnel who are investing in the Thrift Savings Plan don’t have the problem of too many choices, but it could happen if the multibillion-dollar optional retirement fund offers more options.

That will be the subject of House hearings this month as the Government Reform Committee’s civil service and agency reorganization subcommittee weighs the pros and cons of a proposed new fund.

The R Fund, as it is being called until its name is decided, would invest in real estate — either in actual properties or in mortgages. Real estate investment trusts have done well in recent years thanks to the housing boom.

Getting into the TSP for any fund is manna from heaven.

The government handles the administrative costs of the program — for the lowest fees in the mutual fund business — and extracts money from employee paychecks electronically through regular payroll deduction.

The argument against setting up the R Fund is that the C Fund and S Fund already have large real estate holdings, and it would be unwise to offer funds with a more narrow focus on real estate.

The argument in favor of the R Fund, and other options, is that employee investors should be presumed to be smart enough to make their own choices and live with the results.

Federal workers as a group are among the highest-paid employees in the nation, and the government permits the vast majority to invest a large percentage of their salary.

Workers under the old Civil Service Retirement System can invest 10 percent of pay, up to a maximum of $18,000 tax-deferred this year if they are 50 or older, or up to $14,000 if younger than 50. Those under the newer Federal Employees Retirement System program can invest 15 percent of pay and get a tax-deferred match from the government of 5 percent.

A half-dozen federal agencies regularly take the pulse of the TSP and make sure it is run properly. They include the Internal Revenue Service, Securities and Exchange Commission, Government Accountability Office, Labor Department and Congress.

Several years ago, TSP managers rejected the idea of including a high-tech mutual fund — which crashed the following year — and also the idea of a fund made up of companies run my members of minority groups.

Most members of Congress and most congressional staffers have some or all of their optional retirement money in the TSP. One well-heeled employee last year moved $1 million into the TSP, presumably because of its low administrative fees and the safety of its government-backed Treasury securities fund.

The TSP also allows workers to invest in the 500 largest U.S. companies via a Standard & Poor’s-indexed C Fund, invest in the next 4,500 largest firms through the S Fund, and invest in the bond market and the international stock market. But many outside groups would like to get inside the TSP by offering specialized investment options.

Although the R Fund is a long way from being approved, the life cycle or L Fund is just around the corner. Sometime this year, the TSP is expected to offer investors the option of putting some or all of their funds in an L Fund wraparound that will allocate the percentage of their investments based on how many years away they are from spending the money.

Newer workers with a long investment horizon would have more of their money in higher-risk investments like the C, S and I funds, and that would grow more conservative through regular automatic rebalancing as the employee gets closer to retirement.

So, the L Fund is a good bet. The R Fund is still up for grabs.

Mike Causey, senior editor at FederalNewsRadio.com, can be reached at 202/895-5132 or mcausey@federalnewsradio.com.

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