How Defaults Effect Your Retirement Savings

September 20, 2019

[vc_row][vc_column width=”2/3″ el_class=”section section1″][vc_column_text]Your default contribution for your Thrift Savings Plan can affect how much your saving for retirement in ways you might not even be aware of. The default contribution refers to the amount that is taken from your check automatically and put into the TSP regardless of how much you opt to put in. It is, essentially, the contribution choice they choose for you. And, as shown in a recent study by the National Bureau for Economic Research, employees who contribute to the default fund end up saving less than other employees who take a more active role in their TSP.

The study made this determination by looking at the difference in the default contributions after the amount changed, for people working at the OPM. Recently the TSP was switched to a lifecycle fund, after being a less risk-averse fund government securities fund, as it was prior. What the study found is that the lifecycle fund should yield a higher percent return over the securities fund it was earlier, but employees are less likely to change their money allocation once it is set up and miss out on a lot of the benefits of such a fund, like getting a match-back percentage from your employer, thus maximizing the potential of your savings. Because it is all taken care of, employees spend less time thinking about it and therefore end up interacting with their savings less and end up with less money in their accounts come retirement time.

This comes on the heels of another study which suggested that automatically enrolling employees in programs like the TSP leads to greater participation. While that is true, it also leads to more passive investors, and people who are unaware of their savings potential. Most rates of contribution are not set to maximize and employees investment, and as such, there are a lot of federal workers missing out on future savings potential and might not even know it.

A good time to review your contribution is today, to make sure you get the biggest bang for your savings buck.[/vc_column_text][/vc_column][vc_column width=”1/3″][vc_single_image image=”36275″ img_size=”292×285″ style=”vc_box_shadow”][/vc_column][/vc_row]