Upcoming big changes to savings plan
Have you heard about the upcoming big changes to the Federal Government Savings Plan (TSP)? If you haven’t, this article is for you. And even if you have, read as you might learn something you didn’t know. Not every day big changes happen to the TSP.
What will change?
There are several expected changes to the TSP expected this summer. For a summary of TSP changes and new features, see the TSP Connection site. I would also check their website for updates and expected schedules. Here is a list of the main changes:
- Improved support with virtual assistant and live proxy chat
- Updated mobile-friendly interface
- New TSP mobile app
- Enhanced support for investment service such as online transactions and switching to TSP
- Access to over 5,000 additional mutual funds
This happens a lot, but most of the hype surrounds the number 5. For years, I’ve heard from members of the military that they’d like access to more investment options through their TSP. Now, they will have. When eligible, TSP participants will have access to over 5,000 mutual funds, in addition to the 5 standard funds and 10 lifecycle funds, a pre-selected mix of standard funds.
The 5000 mutual funds are accessed through the TSP mutual fund window. According to the TSP Federal filings, a window mutual fund is “a type of self-directed brokerage account that gives individuals the ability to purchase mutual fund shares through a broker-dealer selected through their retirement plan or by one of their retirement plan service providers.”
In short, this is what allows TSP participants to purchase shares in a non-TSP mutual fund through the TSP. These are the mutual funds that TSP provides for access to buy or sell that are different from what is available today. The term “Mutual Funds Window” is important, because it is used so often.
Does this sound exciting to you? Well, as with most benefits, there is often a cost associated, in which case, these costs are relatively high when compared to the lower costs associated with the core offerings.
The good news is that if you stick with the standard five funds or lifecycle funds, there will be no change in the TSP fee. You still get the same low cost that TSP is known for. However, if you choose to participate in the mutual fund window and invest in other mutual funds, you will incur additional expenses. As I write this in June 2022, these are the suggested expenses compared to the actual historical TSP expenses.
|Historical TSP funds only||Participation in new investment funds|
|Annual maintenance fee||0 dollars||$95|
|Trade Fee||0 dollars||$28.75|
|Mutual Fund Fees||Differs||Differs|
|Administration fee for the TSP mutual fund window||0 dollars||55 dollars|
|the total||range from 0.043% to 0.058%||$150 + $28.75 per trade + mutual fund fee|
TSP says the initially proposed additional cost of $55 is for what it calls “a fee designed to ensure that the availability of the mutual fund window does not indirectly increase the share of TSP administrative expenses borne by participants who choose not to use the mutual fund window.”
Essentially, this means that all expenses for providing additional mutual fund options will be paid by those who choose to participate in them. This enables them to continue offering standard TSP funds at a reduced cost.
This is where it can get tricky and only you can analyze, based on your unique choices. But it’s safe to say that the new fees make the mutual fund window more expensive than the traditional TSP fund route. Only you can decide if this option is worth the extra cost.
How can I participate in the mutual fund window?
There are some stipulations about when and how you can participate in the mutual fund window.
- Fund transfers to mutual funds must be in full dollar amounts.
- A Subscriber’s initial transfer to their mutual fund window must be at least $10,000 but may not exceed 25% of their TSP account balance. Subsequent transfers should not cause the mutual fund window to exceed 25% of the TSP balance.
Applying the restrictions in point two, TSP participants must have at least $40,000 in their TSP to participate in the mutual fund window, where 25% of $40,000 is $10,000.
Questions to ask yourself
1. Do I need a mutual fund window to achieve diversification?
Mostly not. TSP’s standard offerings are extensive and cover a significant portion of the global equity and fixed income markets. More mutual funds does not automatically mean more diversification. You can have 10 mutual funds all investing in the same stocks, and you’re not diversified. On the other hand, there may be mutual funds out of 5,000 that offer investments or asset classes not available today. Careful analysis is justified.
2. Do I believe in active versus passive management?
TSP funds are passively managed index funds. However, with a mutual fund window, it is likely that TSP participants will have access to actively managed mutual funds. I say probably because at the time of writing this article, I didn’t see a list of mutual funds that TSP participants have access to. There is a debate in the investing world about which is better: active or passive management. Check out this article from Schwab that can help explain some of the differences.
3. Are the fees worth it?
Only you can decide this. However, in today’s environment of low- or no-cost mutual fund transactions, the $28.75 trade fee is prohibitive. You can do a quick search on the internet and find reputable investment companies that offer mutual funds with no purchase cost and low fees. Remember that this is the only variable you control, so beware.
Is Window Mutual Fund Right For You? Only you decide, and we suggest speaking with your financial planner to understand how this might affect your retirement plan before taking any action. The key thing to remember is that no matter what you choose, saving for retirement is important. If you are starting and are not sure where to start, check out this article.
Keep up with military salary updates
Military salary benefits are constantly changing. Make sure you are always up to date on everything you have earned. Subscribe to Military.com to receive updates on all of your military pay and benefits, delivered straight to your inbox.
Show full article
© Copyright 2022 Military.com. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.