As part of modernizing the Thrift Savings Plan (TSP), participants now have access to a mutual fund window that vastly expands their investment options from the standard five to over 5,000!
For years, many participants clamored for a wider range of investment options and increased flexibility with TSP withdrawals. On the surface, the mutual fund window seems like a great opportunity, but the Thrift Board expects only about 3% of participants to enroll. The question is why?
How the TSP Mutual Fund Window Works
The mutual fund window is geared toward TSP participants who are interested in greater investment flexibility. It is essentially a separate account where you can transfer funds from your TSP and invest as desired.
TSP participants who use the mutual fund window must complete their due diligence. Countless new options exist, and many involve complex strategies (options, long-short trading, and trend following) with higher expense ratios.
Participants need to fully understand how these options work before investing. This need even applies to the more basic mutual fund offerings in the window—the pros and cons should be weighed compared with the standard TSP options.
Fees
In the end, much of this due diligence comes down to cost. One of the biggest detractors of the mutual fund window is the various fees:
$28.75 per-trade fee
$95 annual maintenance fee
$55 annual fee that varies depending on the number of participants in the new window
Mutual fund expense ratios (internal fees that can be found in the fund’s prospectus)
While the fees above are not egregious on their own, they are significantly higher than the ~.043% to .059% all-in fees associated with the standard five options. Most options in the window have expense ratios of .5% or greater, which is roughly 10 times the cost of the standard TSP funds.
Complexity
It is important to understand how the window works. It is not as simple as allocating and investing your desired amount. The window is a separate “account” with a $10,000 minimum and capped at 25% of your TSP balance.
Said another way, your TSP balance must be at least $40,000 to participate (25% of $40,000 = $10,000). This means that unless you have a large TSP balance, you won’t be able to allocate much to the window.
To move money in and out, you will need to perform a fund transfer each time. You are generally limited to two fund transfers per month, so you must plan properly.
You are NOT able to elect your contributions directly into the mutual fund window. All contributions are deposited into your TSP and then can be transferred to the window.
In addition, you can’t request loans, distributions, or withdrawals from the mutual fund window. You will need to sell the shares first and then transfer the proceeds to the TSP. If you plan to tap into your TSP, this process can become cumbersome.
Bottom Line
The mutual fund window was created to appease TSP participants’ requests for greater investment flexibility. The issues for many are the higher fees, limitations, and complexities associated with participating.
Truth be told, the rollout of the revamped TSP website came with many complications, some of which have been improved while others continue to linger. As they get resolved, more participants may look at utilizing the mutual fund window.
The TSP keeps it simple with five vanilla options. This can be enough for some accumulators. For those who desire a higher degree of investment complexity or want to be more hands-on, the window provides this flexibility, albeit at a higher cost and with a few more steps.
However, if you are no longer employed by the federal government, you have another option. You can roll over your balance into an IRA, which when coupled with professional planning advice, could be a great option.
If you are wondering whether the mutual fund window or an IRA is right for you, we encourage you to discuss your situation with a fee-only financial advisor.
The commentary on this website reflects the personal opinions, viewpoints and analyses of the Divergent Planning, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Divergent Planning, LLC or performance returns of any Divergent Planning, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Divergent Planning, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Divergent Planning, LLC provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. Divergent Planning, LLC is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.
Divergent Planning, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Divergent Planning, LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Divergent Planning, LLC unless a client service agreement is in place.
General Notice to Users: While we appreciate your comments and feedback, please be aware that any form of testimony from current or past clients about their experience with our firm on our website or social media platforms is strictly forbidden under current securities laws.