The TSP Mutual Fund Window

The Thrift Savings Plan (TSP) introduced additional investment options back in June of 2022 that left many with mixed feelings. This feature, allowing folks to choose from thousands of mutual funds, comes with its own set of challenges. Participants face contribution limits, additional fees, a vast array of options, and minimal guidance – essentially presenting a ‘here’s what you asked for, now you’re on your own’ scenario. Let’s examine the pros and cons of this new development…

First, and we know, this states the obvious but…the TSP Mutual Fund window can only have – you guessed it – mutual funds. This is important to clarify because one could easily think they have a brokerage account now so they can do whatever they want with it – it is not the same. A brokerage window has restrictions, mostly to protect plan participants. In the case of TSP, Congress excluded all categories of investments except for mutual funds. However, it does allow for more flexibility and choices than sticking with the TSP core funds.

TSP participants had long advocated for a broader range of investment options. In response to these persistent requests, Congress passed legislation in 2009 to explore this possibility. The Federal Retirement Thrift Investment Board (FRTIB) then conducted extensive research and deliberations, ultimately deciding in 2015 to implement a mutual fund window within the TSP. This new feature was finally made available to participants in 2022, marking the culmination of a lengthy process that spanned over a decade from initial concept to realization.

Too Narrow

Some have complained about the restrictions: 25% of your TSP balance can be in the mutual fund window at any time. However, the FRTIB commented that the role of this window is simply for enhancement – it is not an alternative. Also to be fair, if they let everyone run loose and things didn’t go well, they would be held accountable in some way. In fact, they did receive comments asking the funds to be vetted by fiduciaries. As you can see, they were in a tough spot to balance freedom with protection. They have been transparent about all of it and the full history and commentary is available on the Federal Register.

Too Wide

On the other hand, some have complained there are too many funds to choose from (apx 5000).

There are roughly 300 mutual fund families, including Fidelity, T. Rowe Price, and Vanguard. For funds with multiple classes, the lowest expense ratio class is offered. They are rated and have risk scores but other than that you are on your own with an overwhelming amount of information.

Now what?

According to TSP’s most recent annual report, at the end of 2022 there were 2,615 funded MFW accounts with $149 million in assets. That is pretty small considering for the same time period there were 3,901,387 FERS participants with a traditional account and 916,713 participants with a Roth account. That said there have been reports suggesting the number of participants in the MFW have since grown to about 4500.

There is also some tricky legislation being introduced (the “No ESG at TSP Act”) asking that the TSP MFW exclude ESG investing. This brings up a bit of a political debate but also an administrative challenge one which could force the TSP to shut the window completely.

These legislative processes can be complex and unpredictable. While it’s important to stay informed, it’s equally crucial not to overemphasize speculative outcomes. For investors interested in ESG principles, it’s worth noting that even if such options become limited within the TSP, there are numerous alternatives available in other investment accounts. Many brokerages and financial institutions offer a wide range of ESG-focused mutual funds and ETFs, allowing individuals to align their broader investment strategy with their values, regardless of potential TSP restrictions.

The fact is that the TSP has indeed expanded your investment choices, and while the amounts of your investments may be restricted, the choices of what to invest in are quite comprehensive. For many folks this was not necessary – plenty are growing their retirement nest egg with just five little letters. For others they want choices and well, they have them. So whether you are perfectly content with G, F, C, S, and I or you needed to spice things up, that as with everything comes down to what works best for you.