- The Washington Times - Monday, September 7, 2009

Thanks to a major jump-start Congress ordered earlier this year, tens of thousands of current and future federal and postal workers will likely have bigger 401(k) account balances when they retire.

The centerpiece of the changes in the federal Thrift Savings Plan is the introduction of a Roth option. That is coming in mid-2011. It will mean federal investors can put money into a regular pre-tax 401(k) plan account or into the Roth option. Or both.

Under the current investment plan, which will continue, individual contributions to the 401(k) or TSP account are on an after-tax basis. That gives them a tax break now. But it means that when they begin withdrawals, they will pay taxes on the entire amount (both contributions and earnings).

Under the Roth option, taxes on biweekly payroll contributions are paid up front. Investors don’t get an immediate tax break. But, when they start spending down their Roth accounts none of it will be subject to taxes.

Many experts think we are currently enjoying the lowest tax rates we may ever see. In other words, taxes have nowhere to go but up. That makes the Roth option attractive to many other TSP investors regardless of age or time they have left to work and invest.

But of immediate and future benefit is the less-noticed provision that provides for automatic and immediate enrollment in the TSP for new workers. The government offers a 5 percent tax-deferred match for most federal workers who invest 5 percent or more of their own money. There is an automatic 1 percent match whether employees contribute to their accounts or not.

Before the change, new hires had to wait six months to a year before the automatic contributions started. That meant that many didn’t start investing until they had been in government a long time. Some never invest and get only the 1 percent match. That’s all changed.

Under the new system, newly hired individuals will get the government match immediately. And they will also be automatically enrolled in the TSP with 3 percent of their salary going into their account. That will entitle them immediately to a 3 percent match from the government. They can opt out any time, or raise or lower the amount they kick in with each paycheck to the TSP.

While some people think this is paternalistic, most financial planners say the earlier the better when it comes to investing.

“Invest regularly to take advantage of dollar-cost-averaging,” one planner said, “which is what all TSP participants are doing. Invest early to take advantage of compounding, and invest at least enough (5 percent) to take advantage of agency matching contributions.”

Because of the immediate enrollment/immediate contributions program (which began just a few weeks ago) more new people were enrolled in the TSP in the first six months of this year than normally sign up in a 12-month period.

When it was set up, in part to counterbalance the reduced retirement benefits of the then new Federal Employees Retirement System (FERS), it was estimated that investments in the TSP would provide one-third of the income employees would have in retirement. During the 1990s when the stock markets soared, that estimate was raised to predict that TSP income would provide 50 cents of every dollar retired civil servants had to spend.

FERS replaced the old Civil Service Retirement System for new hires. CSRS employees — who make up only 20 percent of the current work force — do not get an agency match for their TSP contributions. But they have a much more generous retirement computation formula and they get total inflation protection when there is inflation.

Because of deflation, actual decreases in living costs as measured by the Labor Department, federal-military and Social Security retirees will not be getting any cost of living adjustment in 2010. That will be the first time since the cost-of-living allowance (COLA) inflation feature was introduced that the retirees won’t get any adjustment.

While the amount in their retirement or Social Security checks may decrease, because of higher medical or medicare premiums, the actual benefit itself will not be reduced to reflect lower living costs. In other words if you got $1,000 a month this year in basic (before deductions) benefits you will get $1,000 a month in 2010.

So, how you doing? Do you wonder how your TSP balance compares with the guy in the next cubicle? Or with the lady who drives your car pool?

Mystery solved: As of Aug. 1, the average TSP account balance for investors under FERS was $64,025. For those under CSRS (people who don’t get a government match), the average balance was $63,465. For members of the uniformed military, the average was $9,471.

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

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