- The Washington Times - Monday, December 14, 2009

Starting next year, the surviving spouse of a federal worker or retiree will be able to set up a spousal account to keep a deceased spouse’s money in the federal Thrift Savings Plan.

That is a very big deal for thousands of people who lose their loved ones each year. They are often required to make important and sometimes speedy financial decisions that will effect them for years while on an emotional roller coaster.

The change will mean they can leave the money in their late spouses’ federal 401(k) plan until they can decide whether to keep it there, as a spousal account, or withdraw the money.

Because the TSP is such a good deal — with low fees and a special, ultrasafe investment option — thousands of workers leave money in the TSP when they retire or move to another job. Many federal workers also transfer outside money into the TSP. A good number have moved more than $1 million each from outside accounts into the TSP.

Until the spousal account change is formally implemented next year, surviving spouses may request to leave their funds in the G-fund option of the TSP. The G-fund is invested in special U.S. Treasury notes that are not available to the general public.

Previously, when a TSP investor died, the surviving spouse had to withdraw all of the money in the TSP account. The survivor could put the remaining after-tax money into some other investment vehicle, but none of them approaches the TSP in terms of safety or return.

Unlike the TSP’s other funds that are linked to the stock and bond markets, the feds-only G-fund never has a bad day. The government sets the rate of return each month, and the TSP has never had a loss.

While TSP stock funds were hammered last year, losing anywhere from 37 percent to 42 percent, the G-fund returned 3.75 percent.

For the 12-month period ending in November, the G-fund returned 3.02 percent compared to returns of 10 percent to 25 percent for the C, S and I funds which are indexed to domestic and foreign stock markets.

In addition to the safety of the conservative G-fund, the TSP has another feature unavailable in other mutual funds: the lowest administrative fees in the business. Over the span of a career, those low fees can boost the value of an account by thousands of dollars. The TSP charges about half the handling fees charged by Vanguard, the industry leader in low-cost funds.

When fully in place next year, the spousal accounts will:

• Be available to spouses who are the sole or partial beneficiary of the deceased TSP participant.

• Be subject to the same cash-out limit of $200 that applies to separated participant accounts.

• Not be required to make an affirmative election to stay in the plan. Thus, spousal benefits will remain in the plan unless the death benefit is less than $200 or a withdrawal form is submitted for the spousal account.

• Have the same withdrawal options as separated participant accounts. Eligible spousal beneficiaries may make a one-time partial withdrawal of a specific dollar amount, or they can take a full withdrawal of the entire account in the form of a single payment, an annuity, a series of monthly payments, or any combination of those withdrawal options known as a mixed withdrawal.

• Be subject to the same interfund transfer rules that apply to all participant accounts, meaning spousal beneficiaries can make up to two interfund transfers per month.

• Be prohibited from receiving loans, age-based withdrawals and financial hardship withdrawals. Those options are reserved for active — as in still alive and still working — federal investors.

2010 federal pay raise

The battle over next year’s federal pay raise is being fought quietly and underground. That’s because federal unions (all of whom supported President Obama ) don’t want to anger or embarrass their members’ CEO.

By the same token, the administration doesn’t want to send the wrong signals to a sagging economy with high unemployment that it is giving away the store here in Washington.

To that end, President Obama proposed a flat 2 percent pay raise for most white-collar federal civil servants even as he was signing into law a 3.4 percent military pay raise.

Unions wanted two things: 1) Pay raise parity (meaning the same percentage increase as the military) and 2) a locality pay component within the 2 percent amount that would translate into bigger raises for some feds in some cities.

The unions agreed to wait until next year for military-civilian pay parity part, but they went to Capitol Hill to restore the locality component to the 2010 pay raise. Looks like they will get their way. House Majority Leader Steny H. Hoyer of Maryland and the master at getting maximum pay raises for feds, led the quiet charge.

Under the Obama plan, most white-collar feds would have gotten the same 2 percent raise, plus or minus a few dollars. But it would have been 2 percent.

Under the House-Senate plan, the total raise is still 2 percent. But by earmarking some of it for locality pay (0.5 percent) it is possible, depending on city-by-city private-sector salary changes, that feds in some cities such as Washington, Los Angeles, San Francisco, Chicago and Houston will get raises higher (in some cases maybe much higher) than 2 percent.

Keep in mind that the federal pay raise this year (for 2009) was 2.9 percent. But when the locality pay component was factored in, raises varied across the nation. But nearly everyone got more than 2.9 percent, and Washington-Baltimore area feds came out on top with a total 4.8 percent increase.

Mike Causey’s Federal Report runs Mondays. Contact him at [email protected] or 202/895-5132.

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