Thrift savings plan more investor-friendly

By Tom Philpott: Military Update

The number of active duty and reserve component members enrolled in the federal Thrift Savings Plan will hit a half million this month. Recent improvements could encourage many more to join, say plan administrators.

In July, TSP began year-round enrollment, in place of twice-yearly “open seasons.” The open seasons didnít always coincided with periods of transition, like boot camp or reassignment, when members are dealing with personnel offices and opening a TSP account is more convenient.

A second, more important change was the introduction in August of “Life Cycle” or L Fund options. Designed by experts, the funds will keep TSP savers on the “efficient frontier of investing” by providing “all of the investment return they should get for the risk theyíre taking,” said Gary Amelio, executive director of the Federal Retirement Thrift Investment Board.

The board administers TSP for 1.9 million federal civilian employees and, since March 2002, for the military. While TSP is integral to a healthy retirement plan for many federal civilians, because it combines with their more modest defined benefit plan, for service members itís an opportunity to save and invest in quality funds at minimum expense. And though TSP is intended to boost retirement wealth, participants can borrow against accounts at attractive rates to buy a car, finance college or make a down payment on a home.

The Navy leads the services in touting TSP. Through September, 41.1 percent of active duty sailors had TSP accounts versus 30 percent of Marines, 26.6 percent of Air Force members, 25.6 percent of Coast Guard personnel and 18.7 percent of soldiers. TSP popularity climbs with rank. About 55 percent of all field grade officers have accounts compared with 25 percent of non-commissioned officers. Again, the Navy leads. Twenty-nine percent of junior enlisted sailors invest in the TSP versus just 6 percent of soldiers.

Carl Witschonke, the uniformed services representative to a TSP employee advisory council, provided examples of how the money can grow.

A new recruit who contributes 5 percent of basic pay each month, about $57, and earns a modest return of 7.5 percent annually, will have $83,000 in a TSP after 20 years. If the member retires, making no more contributions, the account still will climb to $440,000 by age 60.

A typical officer will accumulate $163,000 in 20 years, which would grow to $643,000 by age 60. If the officer stayed 10 more years, TSP would climb to $483,000 by the 30-year mark and reach $927,000 by age 60.

Until August, TSP offered five investment funds, listed here with average annual returns over the last 10 years: Government Securities Investment or “G” Fund (5.75 percent); Fixed Income Index Investment or “F” Fund (7.72 percent); Common Stock Index Investment, or “C” Fund (11.99 percent); Small Capitalization Stock Index Investment or “S” Fund (11.84 percent) and International Stock Index Investment or “I” Fund (5.45 percent).

Amelio, when he became executive director in June 2003, wanted to address two problems. One was that 52 percent of all assets were invested in government securities, the G Fund, which isnít intended for long-term investing. Military savers are particularly cautious, with 57 percent still keeping 100 percent of their TSP accounts in the G Fund.

His second concern was that TSP investors were “overwhelmed” by the fund choices and uncertain how to allocate assets effectively.

“Most participants are not investment professionals. They donít have the time to read up on everything and make intelligent decisions,” he said.

His solution to both problems, Amelio said, is the new Life-Cycle or “L” funds. To create them, Amelio hired investment professionals to mix five existing TSP funds in combinations that maximize returns and minimize risk based on when investors expect to retire and start to draw down TSP. L Funds have been explained in marketing materials and at the TSP Web site:

Tom Philpott can be contacted at Military Update, P.O. Box 231111, Centreville, Va. 20120-1111, or by e-mail at: