Private money managers have targeted the federal government’s $221 billion Thrift Savings Plan (TSP) as a source of new cash investments they would love to handle — for a fee.
To say they are licking their chops would not be an overstatement.
Currently, there are 3.9 million account holders in the TSP, which is Uncle Sam’s in-house 401k retirement savings plan. Some of them have account balances of $1 million. Many are at the half-million-dollar mark.
The TSP is available to active and retired federal workers and military personnel. Some experts estimate that investments and earnings in the TSP (which include a generous 5 percent employer match for most employees) will provide at least one-third — and perhaps half — the money investors have in retirement.
Outside Individual Retirement Accounts (IRAs) have a lot to offer some retirees. Among them are more investment options, more flexibility in withdrawals and more hands-on investment advice.
The TSP, by law, cannot give investors advice about which funds to invest in.
To put the best foot forward, the private money managers say the TSP is too rigid, too narrow, perhaps too stodgy for folks who want to make real money.
But as with any major financial change, there are trade-offs to leaving the TSP for a more actively managed IRA mutual fund or funds. Chief among them are the costs — often hard to spot — the funds will charge.
People leaving the TSP to join one of the more flexible IRAs will wind up paying more — significantly more — for the privilege. Over time those costs, often listed as administrative fees, can reduce the overall return on a person’s investment by tens of thousands of dollars.
Various financial experts, from Vanguard fund founder John C. Bogle to syndicated columnists, have zeroed in on the high and often hidden or ignored fees charged by mutual funds or even IRAs. Mr. Bogle said Wall Street should be “ashamed of itself” because of the fees some firms are charging.
Alan Roth, a financial planner and columnist with WealthLogic LLC, said too many investors focus on gains and don’t pay any attention to costs.
A managed mutual fund that charges a 2 percent administrative fee “can mean that you are barely beating inflation” after taxes are figured in, Mr. Roth said. The average investor in a managed fund pays about 1.4 percent in fees and another 2 percent in taxes. That, he said, is a “guaranteed cost” even before the returns people hope for arrive — if they do at all.
He said some fees charged by highly regarded IRAs are 67 times higher than those charged by the TSP.
Mr. Roth said long-range investing should be as emotionless as possible. Hence his motto, popular with other financial planners, is “dare to be dull.”
He thinks the currently rocky stock market is more or less normal behavior over the long term. He says the five good years we recently experienced, a period of what he calls “relentless gains,” was unusual, but we grew accustomed to it because many investors suffer from what he termed “recency bias.”
So why are retired feds suddenly a takeover target?
A Washington-area financial planner who has mostly federal clients said: “The mutual fund industry isn’t dumb. It’s been watching the TSP numbers. Retirees make up nearly a quarter of the total investors, and some of them have accounts worth $500,000 or more. They may be anxious to get more active in investing.”
A longtime TSP watcher said that “for some people, some investors, a managed account may be a good thing. They may want more personal attention from a broker or adviser. They may need hand-holding, and some of them may benefit from it.
“But the retirees shouldn’t be spooked out of the TSP by ads or claims that their money isn’t growing once they retire. If they leave the TSP, they should understand why they are going, in part because there will be more active management. And they should look at the bottom line — the costs that will be taken out of their account for managing their account.”
• Mike Causey, senior editor at Federal News Radio AM 1050, can be reached at 202/895-5132 or mcausey@ federalnewsradio.com.
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