Most of the top government officials you see on nightly TV — whether elected, appointed or regular civil servants — belong to the government’s in-house 401k plan. They may not be financial gurus, but they are trying to guide the nation through the current pandemic, keeping an eye on China and India’s face-off, monitoring the status of the European Union and spiking coronavirus cases in 21 states. The fact is some of the smartest people in the nation, probably the world, work for Uncle Sam, and belong to the Thrift Savings Plan. For some — millionaire politicians — it is a nice option. For most civil servants it is their primary retirement nest egg. It along with Social Security and a civil service annuity based on salary and length of service, will provide them a guaranteed life-time annuity, partially indexed to inflation — for life. Longer if they designate a survivor benefit.
When the federal Thrift Savings Plan was setup it was designed to be a low-fee, easy-to-use investment vehicle for active and retired civil servants ranging from NASA rocket scientists to Senators, letter carriers, NIH researchers. It is monitored by several federal watchdogs, all of whom have employees who are participants. It was designed so that the fees to users would be among the lowest in the investment business. And with 5-funds covering the U.S. and international stock markets (C,S and I), a bond fund (F-fund) and a special Treasury securities fund (G-fund), available only to feds — it in theory covers the investment options waterfront. It doesn’t have some of the bells and whistle options, which are nice, but add to the administrative fees workers and retirees pay. The people who run the TSP don’t get commissions because they are part of it. Combined with the government-matching contribution, the TSP — to many private sector investors — seems too good to be true. And yet…
When they leave government, either for other jobs or to retire, more than half of all TSP investors take some, most take all, of their money with them. They invest it elsewhere for a variety of reasons even though, in some cases, they pay more, sometimes lots more, for the privilege. How come? Today’s comments are from a recently retired TSP investor — who made it to the millionaires club — who said he couldn’t wait to leave the federal 401k plan. And here’s why:
I just wanted to follow up with you. I retired 30 April 2019 as a FERS employee, and I don’t miss federal service one bit.
I was in the seven digit TSP club. However, after careful research I moved 90% of my TSP balance to Fidelity investments. I kept the other 10% in the TSP because I’m not 59 1/2 and didn’t want to give the IRS the 10% early withdrawal penalty.
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The TSP needs a wake-up call. I discovered there are much better options than the TSP funds. The reason retirees sprint out of the TSP. The TSP funds are so limited. I’m a huge believer in exchange traded funds (ETFs). The additional cost around .07 is offsetted by the higher returns and less risk. I back tested the TSP funds vs some ETFs for 5 and 10 years. I found that ETFs were so much superior.
The TSP doesn’t have a technology fund. I found that VGT is so much superior than the C or S fund. BLV, BND or VGLT BLV, BND or VGLT BLV, BND or VGLT exceed the F fund.
If I were a current federal employee, I would take the 5 percent match. Then I would open up a discount brokerage account with any of the big companies, (Vanguard, Fidelity, Schwab or Merrill Edge etc). Then invest the delta into ETFs. With no trade fees now, it makes a win-win situation.”
-Dave “The Dummy” Retired US Army TACOM Employee
