New federal hires - who formerly had to wait six months to a year to get matching government contributions to their 401(k) plans - will soon be eligible to get the government contribution shortly after they go on the payroll. Automatic enrollment in the Thrift Savings Plan for those new employees will begin next spring.
Currently, some new civil servants have to wait anywhere from six to 12 months to become eligible for matching agency contributions, depending on when they were hired. New employees - virtually everyone hired under the Federal Employees Retirement System - who contribute the maximum of 5 percent of their own money get a 5 percent employer match right off the bat.
The new perk means all new hires will get a head start on those matching contributions, which can be worth as much as 5 percent of their biweekly pay.
Backers of the change made sure that the Roth option will be part of the Thrift Savings Plan (TSP). Under the Roth TSP option there are no income limits on the amount of contributions. This will obviously benefit higher-income individuals who, under a Roth IRA, might not be able to contribute much or anything on an after-tax basis due to income limits on that program.
The immediate contributions feature was part of the so-called tobacco bill signed into law last month. In addition to giving the Food and Drug Administration more power over tobacco products, the bill contained several riders to make the Thrift Savings Plan even more attractive.
Federal, postal and military employees have more than $215 billion invested in their TSP accounts, and they continue to add an average of $1.5 billion to their accounts each month.
The biggest change affecting all these investors will be the addition of a Roth option to the TSP in mid-2011.
Right now the TSP operates like a traditional 401(k) plan, permitting investors to contribute money (via payroll deduction) on a pretax basis. That means that when they withdraw money from their accounts they will pay taxes on contributions and earnings based on their post-retirement tax bracket.
The Roth TSP option (it is not a Roth IRA) will also allow investors to make contributions to their retirement accounts with after-tax money, again via payroll deduction. Using that method, the money in their Roth accounts will be tax-free when they start withdrawing it, no matter how much the account is worth and what their tax bracket is.
Another change allowed under the new law would permit TSP investors to channel some of their payroll contributions into mutual funds outside of those already offered on the regular TSP menu. At present, investors are limited to stock-index funds (the C, S and I funds) that track the U.S. and international markets, a bond (F-fund) and the G-fund, which is unique to the federal TSP. The G-fund is invested in special U.S. Treasury securities, which have never registered a loss.
TSP investors also may invest in a series of “target” funds comprising a combination of the C, S, I, F and G funds weighted according to the date when investors believe they will start withdrawing their money. The fund mix, which is rebalanced daily, gradually gets more conservative as investors near their target date.
Some TSP investors have been champing at the bit to be given the option to invest in riskier funds that specialize in things like gold, technology and real estate or funds that target specific geographic areas or even specific countries.
Officials who run the TSP are moving cautiously in this area, as they do not want to undermine the highly successfully structure of the TSP. Many financial advisers, including index-fund founder John Bogle of Vanguard fame, praise the TSP because of the options it offers, the availability of the G-fund and its low administrative fees.
More than a million former federal workers still have TSP accounts. The TSP also remains a popular place for people to park money they already have in 401(k) plans or retirement accounts from former employers.
• Mike Causey’s Federal Report runs Mondays. Contact him at firstname.lastname@example.org or 202/895-5132.