TSP (almost) Enters the 21st Century
If your hobby isn’t following TSP news releases, you may want to read on because the TSP will rollout two sets of major changes this summer and you’ll be affected regardless.
The TSP takes a lot of incoming rounds for how Byzantine its processes can be. Paper forms and phone calls still dominate most transaction options, whereas, for two decades commercial brokerages have been perfecting smartphone apps and slick websites—all while driving costs into the dirt.
For all of its flaws, the TSP has persevered as the largest employer defined contribution plan in the U.S. and it’s helped millions of civilians and service members save for their retirement with a simplicity that can usually be counted on your fingers: C, S, I, F, G.
The changes will come in two rounds this summer. You’ll want to know about both, but only the first round will touch all users.
Beginning May 16, 2022 and (hopefully) ending in the first week of June 2022, the TSP will add the following features:
- Mobile Phone App
- Online Chat (both with a human and a Bot)
- Online transfers both in and out of the TSP
- Online (vs paper) forms
- Electronic (vs wet ink) signatures
To execution the transition, the TSP will not accept transaction requests from 26 May through the end of the transition. Thus, if you need to rebalance, rollover an IRA, or create a distribution, the time is now. Some transactions such as loan requests are already suspended, so check the TSP website if you think you need to make changes.
Finally, when the TSP emerges from its cocoon in June, you’ll need to create a new set of credentials. Any major website upgrade can be a mess, so I recommend downloading a recent statement to ensure you have a copy of your account status and account number.
While the exact date has not been announced, later in the summer the TSP will rollout the ability to invest in funds other than the C, S, I, F and G funds. The promise of additional investments has been on the horizon since 2009, but it now looks like a reality.
The ability to invest your TSP funds in other assets will be called a “Window” and but if it rolls out as proposed, you’ll likely want to keep this particular window closed.
Instead of adding missing asset classes to the TSP such as Real Estate, Emerging Markets, or even more granular asset class divisions such as Small Cap Value, the TSP will allow you to purchase mutual funds from other vendors. Sounds good, but the drawbacks will probably offset the juice versus squeeze ratio:
- $95 Annual Account Maintenance Fee for using the Mutual Fund Window
- $55 Fee to prevent Mutual Fund Window costs from increasing costs of other TSP users
- $28.75 Transaction fee for purchases and sales of mutual funds through the Window
- Expense ratios of funds available through the Mutual Fund Window
- Minimum of $10,000 investment into the Mutual Fund Window
- Maximum of 25% of the TSP balance can be invested in the Mutual Fund Window
- Minimum balance of $40,000 to start using the Mutual Fund Window
- Limit of 2 transfers into the Window per month
- Money cannot be pulled directly from the Window, it must be invested back into TSP core funds prior to distribution
The Mutual Fund Window will not be a good fit for many investors. First, in the modern era, paying account maintenance fees and transaction costs to invest inside a qualified retirement account is anachronistic. There are just too many brokerages offering IRAs with no fees or transaction costs on a wide range of funds.
Second, the gymnastics required to move money back and forth through the Window and the implied costs could force investors to make sub-optimum investment decisions to avoid costs or trading restrictions.
Third, investors that already have IRAs or taxable accounts can usually achieve their diversification goals by using those accounts rather than trying to shoehorn a solution into an expensive and complex ruleset in the TSP.
Fourth, if adoption is low, it’s reasonable to assume the costs will increase in order to prevent the Mutual Fund Window from adding costs to the rest of the TSP user population.
The Mutual Fund Window could be a good fit for an investor that truly wants to keep their number of accounts to a minimum and is willing to pay the new fees for that convenience. If the Mutual Fund Window evolves and finds ways to suppress costs, a future 2.0 version could be more compelling.
Fortunately, there is no compulsory reason to use the Mutual Fund Window and current investors can take a wait-and-see approach.
Cleared to Rejoin
The TSP interface is finally coming into the 21st Century (22% of the way through the century…) and once any changeover kinks are worked out, the user community will likely appreciate the modernization. Unfortunately, the TSP Mutual Fund Window appears poised to do an investment world evolutionary U-turn by imposing fees and transaction costs that simply don’t exist in much of the commercial brokerage world.
Action steps that users should take today include:
- Make needed transactions and investment changes before 16 May 2022
- Download your most recent statement
- Expect friction and login changes as the TSP comes back online in June 2022