Sticking to the TSP: to be or not to be?
When it comes to being a smart and successful investor, your typical federal bureaucrat may leave other professions – doctors, lawyers, and even private sector rocket scientists – in the dust. The vast majority of current and retired Feds have or had a Thrift Savings Plan account. The TSP is the federal version of a 401k plan. But on steroids thanks to its very low administrative costs and government matching of up to 5%. At last count, there were over 75,000 workers or retirees with accounts valued between $ 1 million and $ 6 million. Almost 90,000 had accounts worth $ 750,000 to $ 1 million. Most were invested in TSP stock index funds – C, S, and I funds. And most had been investing regularly for decades in good times and bad times in the market.
TSP monitoring is 20/20. Its attendees include members of the House, Senate, and occupants of the White House – as well as members or staff of the Supreme Court, FBI agents, IRS auditors, astronauts, lawyers for the SEC and CIA agents. Many leading investors and financial experts have said they would love to be able to participate in a low cost fund with such a generous employer. And yet, upon retirement, some 22% of participants withdraw all their money from the TSP within a year of leaving government and invest in an external account. How to come? Many say they get more flexibility outside of the TSP. Others say they want more investment choices. Or more active management advice from professionals.
So we asked a pro, Arthur Stein. He is a well-known financial planner in the DC area and his clientele includes many active and retired federal workers. Including some members of the self-made millionaires club. He will be my guest today at 10 a.m. ET. The show will air live here or on radio at 3:00 p.m. in the DC-Baltimore metro area. It will also be archived so that you can listen to it again, or refer it to a friend or colleague.
To describe what he’s going to talk about, he wrote this:
Is advice worth a price?
By Arthur Stein, CFP
One of the most controversial and difficult decisions for federal retirees is whether to transfer their TSP investments to an IRA. Mike’s May 25 column sums up some of the issues involved and the differences between TSP (which is a 401k pension plan) and IRAs (which are not).
TSP versus IRA comparisons typically deal with expenses, withdrawal options and restrictions, investment options, and RMD requirements. It is often not mentioned that the TSP does not provide individual investment advice. Participants in the TSP must make and implement their own investment decisions.
One of the advantages of transferring TSP funds to an IRA is that IRA investments can be directly managed by a professional investment advisor. Choose an advisor who is a “trustee”. Advisors meet with trustee standard can only recommend what is in the best interests of its customers. They cannot recommend an investment because it pays them more or offers some kind of bonus.
Doctors, lawyers and CPAs are trustees. Investment managers should meet this same high standard. And yes, my firm is a fiduciary. I wouldn’t do it any other way.
Many federal retirees reject hiring investment managers because investment advisers charge fees to manage investments. Surprisingly, this objection is often made by TSP investors who admit that their own decisions have cost them hundreds of thousands of dollars in lost returns.
A current federal employee wrote to me that due to his mistakes he now estimates he will have to work until 78 instead of 63. His mistakes included selling all of his equity funds after a stock market crash (“I sold on the lowest point and stuck in my losses”) and the recovery of the equity fund investing in February 2021 at the highest share price. He estimates that these and other investment mistakes cost him around $ 400,000. He then asked me for free advice on a proper TSP allocation and how quickly his G fund balance gets back into equity funds.
But he doesn’t want to pay for the management of the investments because he thinks it’s too expensive.
Well, expensive can mean a lot of different things. A $ 5 cup of coffee and a $ 1,200 smartphone are expensive. Paying an advisor a 1% annual management fee to manage your $ 1 million retirement fund can seem expensive. But $ 400,000 lost because of your investment mistakes costs much more. Why accept this expense to avoid paying much lower fees to hire a good investment manager – trustee – who will help you avoid such mistakes?
Moral of my story: don’t lose a lot in order to save a little.
Note: Hiring an Investment Advisor does not guarantee against loss. Past performance is no guarantee of future performance.
Almost useless factoid
By Alazar Moges
Super Glue was accidentally invented by Dr. Harry Coover in 1942. During World War II, Dr. Coover and his colleagues were working on making transparent plastic for precision sights using chemicals called cyanoacrylates. . During their testing, they had issues with the chemicals that got sticky and moved on. Years later, while working for Kodak, he returned to chemicals and realized their potential. He received a patent for the adhesive, and after some refinement, the product was packaged and began to be marketed in 1958.