There are massive changes coming to the TSP this year, and they’ve totally botched something that was supposed to be awesome!
For starters, They are going to raise the expense ratios on the funds. While that sucks, they are actually doing something much worse.
They are giving access to thousands of mutual funds.
That sounds awesome right? Wrong. They totally screwed this up. I’ll talk about how first.
Here’s some of other changes to TSP coming up this year:
- They are going to enhance online security – who cares
- Coming out with a mobile app, ok that’s kinda cool –
- And raising the contribution limit – about time
I’m going to quickly go over what’s important about each one of these, but I’ll start with the mutual fund offering, because it’s some juicy gossip and I want you to avoid getting screwed over by this.
Access to mutual funds
One of the biggest changes to the TSP is expected to hit this summer – the mutual fund window. In addition to the 5 investment funds currently available, there will be a way to take a portion of your TSP funds and invest them in regular mutual funds, with more than 5,000 to choose from.
Does this sound good!
Yes. It does.
Is it good.
The TSP has managed to royally screw up offering mutual fund investments by doing this. Drum roll please:
Charging absurdly high fees.
That’s right. The fees that I’m hearing we are going to pay for this option means I won’t recommend it to anyone I know. Yes, that means you.
Right now, as it stands, investing in the TSP family of funds is pretty. Less than one tenth of one percent. I’ll go more into this a little later.
So What will you have to pay to invest in this new mutual funds offering?
O, i’m almost embarrassed to say!
Here we go!
For starters, A $95 annual maintenance fee. Hell no. I’m out.!
O no, there’s more!
And A $55 annual fee to cover administrative expenses.
The hell you say? Let me get this straight.
There are two separate annual fees!
I’ve seen enough.
O there’s more!
$28.75 per trade.
That’s buying into or out of a mutual fund.
And, on top of all that, you still have to pay any fees and expenses specific to the individual mutual funds you choose.
What does that mean?
Well, some mutual funds have front end or back end loads. That means you pay a fee to the mutual fund company when you buy in or out of the fund. That will be in addition to the TSP charging $28.75 per trade.
These loads can be as high as 6%.
Never pay a load for a mutual fund!
Not even one percent.
Dave Ramsey’s mutual funds I believe are this high, and that’s highway robbery!
Let me get into some of the other specifics about how this mutual fund window will work.
God help us.
You can’t use it unless you have at least $40,000 in your TSP.
The minimum initial transfer amount is $10,000.
Your transfers can’t exceed 25% of your TSP balance.
In other words, you only invest 1/4 of your TSP balance in these mutual funds.
Mutual fund transfers count towards the TSP’s maximum interfund transfer limit of 2 per month.
This interfund transfer limit is kind of a lame and needs to go away.
The TSP mutual fund window has been 13 years in the making, and here’s rich on money’s take on this.
They totally effed it up big time.
It will not make financial sense for most people to invest in mutual funds in the TSP. The fees are absurdly, almost criminally high.
You are far better off sticking with the traditional C, S, I, F, G and lifecycle funds.
If you want mutual fund exposure, it makes a lot more sense to max IRA contributions each year at a company like Vanguard, Fidelity or Charles Schwab.
There are no fees for investing in their mutual funds, and their expense ratios are the lowest you can get.
Oooo TSP, I’m so disappointed in you.
Not to despair, just keep investing in the traditional TSP lettered funds and ignore this botched up mutual fund window idea.
Disclaimer: If the TSP decides to sponsor this youtube channel once I blow up and go viral, I will have to delete this video, make a new video supporting their high fees, and find a way to live with myself.
And as long as they pay me enough, I’ll find a way to justify it in my mind.
Let’s go over some of the other significant changes now.
Onto another juicy topic…
The TSP is raising its expenses on its traditional lettered funds.
Don’t get confused, this is a separate issue than the mutual fund window debacle.
I’m talking about the expense ratio for the C S I G F and lifecycle funds.
So how much are expenses going up?
Let me tell you.
The TSP administrators have lots of upgrades to TSP in the works.
These higher costs will ultimately mean higher expense ratios for the TSP’s 5 main funds:
Someone’s gotta pay for all these upgrades. News flash, that’s you.
Up until recently, the TSP expense ratio was about .05% for each fund. This is relatively low, but not super low.
It’s going to be raised to about .076% percent to pay for some of these upgrades.
Is that a lot? Well, let’s compare the C fund, or S&P 500 index to the expense ratios for identical funds at Fidelity, Charles Schwab, and Vanguard.
So C fund at the TSP is about .07%
At fidelity, it’s equivalent fund is .02%
and Vanguard .04%
To be clear, .07% isn’t gonna bankrupt anybody. It’s still very low.
We are talking about less than one tenth of one percent. It’s not worth worrying about. It’s far far less than most companies or especially what money managers or financial advisors would charge.
But the difference over a lifetime with TSP vs. these cheaper funds I mentioned can definitely be thousands of dollars. That might seem like alot, but your account should have a mil or 2 by the time you retire, so a few thousand dollars is small potatoes.
Verdict: this change is nothing to worry about.
Onto the next change –
Raised contribution limit
This happens every few years. The limit for contributing to the TSP last year was $19,500. It has been raised by $1,000 to $20,500 for 2022.
These contribution maximums mimic whatever the max is for 401ks. These are usually raised every two years or so.
To get the maximum contribution this year, roughly $1,708 needs to be contributed monthly.
Keep in mind, don’t contribute too quickly to your TSP. If you hit the max before the last month of the year, your contributions stop automatically, but so does your matching, if you get matching.
If you are looking to truly max your tsp and matching, you need to contribute the exact right amount each month, so that you don’t run out of contribution limit before the last paycheck of the year.
Get with a finance officer to make sure you set this up right.
Onto the next a change…
When surveying what TSP participants want, 57% of those under the age of 40 expressed a desire for a mobile app.
It will have a new chat tool that will be operated by TSP representatives, a virtual assistant that is run by artificial intelligence, secure log-ins that will utilize fingerprint and face recognition technology on users’ phones, so basically apple friendly.
They’ll also have a mobile check deposit for adding funds to TSP accounts.
Wait a second, this is starting to sound like a professional organization here!
Are you sure the tsp is linked to the federal government?
As a result of this, all federal employees, retirees, and beneficiaries that own TSP accounts will need to set up a new log-in to access their account online.
TSP account holders will also need to establish multi-factor authentication, and one-time passwords to confirm the user’s identity.
These new security procedures will also allow for more forms to be processed electronically.
This will require a blackout period where TSP participants won’t be able to access their accounts online. Not sure how long, maybe a day or two.
Don’t worry. We’ll live.
So in summary, the TSP is changing the following:
Offering mutual funds, which will suck.
Raising expenses on lettered funds, which is no big deal.
Raising contribution limits, which is awesome and
Setting up a mobile app with enhanced security features. Cool, but I kind of expect this from something as large as the TSP.
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Rich on Money