- The Washington Times - Monday, June 15, 2009

Within the next two years — and maybe even sooner — federal-military personnel with be able to invest in a Roth option within their Thrift Savings Plan. Congress has also give the green light for the TSP, the government’s in-house 401(k) plan, to permit employees to direct their pretax contributions to mutual funds outside of the giant TSP.

All of the above, plus some other TSP-related features, are part of the tobacco bill that cleared the Senate last week. Many other features that would have benefited federal workers and retirees were stripped by the Senate from the House version of the tobacco bill. Still, the TSP-related items that remain represent a major victory for the largest number of federal workers, most of whom are investing in the plan already.

Normally, the difference between the two bills would be subject to a joint House-Senate conference committee. However, after approving their plan, House leaders agreed in advance to accept whatever the Senate approved.

Having a Roth option means that federal-military investors will be able to invest, as usual, pretax dollars into funds offered by the TSP or, eventually, in outside mutual funds. The Roth features means they will invest after-tax dollars in the same fund or funds. The difference under Roth is that whatever they invest and earn from their investments will be tax-free — regardless of how much they have in their accounts — when they retire and start withdrawing from that account.

The Federal Retirement Thrift Investment Board, which manages the TSP, agreed to both of the new options, subject to approval by Congress and the White House. Both of the new options are part of the tobacco bill that could be signed into law as early as this week.

The new features would also permit the surviving spouses of federal TSP investors to leave their money within the federal program. Under current tax rules, survivors must withdraw that money from the TSP and roll it over into an outside IRA within a certain time period. One advantage of keeping it in the TSP is the option of investing in the supersafe G-fund, which invests in Treasury securities and has never posted a loss. Another plus is that the TSP’s administrative expenses are dramatically lower than most mutual funds.

New hires would be automatically enrolled in the TSP with 3 percent of salary going into the supersafe G-fund. The government would match those contributions up to 5 percent of salary. Those matching contributions would start immediately upon hire, not after a period of months as the plan works now. Workers could opt out of the TSP if they choose.

However, some employees believe they can do better investing outside of the funds offered in the TSP by diverting some or all of their biweekly contributions into active-managed, more aggressive funds. Unlike the TSP index funds, which mirror the performance of entire markets, many mutual funds concentrate on things like real estate, precious metals, health care or in specific country or regional funds.

Many financial planners say going outside the TSP subjects investors to greater risk and fees as high as 2 percent per year, far in excess of what the TSP offers or charges.

The drive to give feds the option to expand their investments within the TSP — but with money going into outside mutual funds — came from the fund families themselves, led by the formerly high-performing real estate sector. They would naturally like a piece of the $213.5 billion TSP fund. Currently federal investors are pumping $1.8 billion per month into the TSP. Outside mutual funds would love to have a piece of that action.

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