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Aiding an Aging Community – TSP Decisions

Tiffany Jones
July 20, 2015

Protecting Federal Retirees and Their TSP

Many baby boomers are heading into their golden years of retirement. But often times the reality of retiring is not all it is cracked up to be. Many soon-to-be or newly retirees are dealing with the financial woes of not having a sufficient nest egg to support themselves. Due to this, Congress and the White House have turned the conversation towards the contributing factors of financial hardship for an aging generation.

Recently, Labor Secretary Tom Perez testified before the House committee on a new bill that would protect federal employees as they transition out of the workforce into retirement. Presently, many federal employees fall victim to poor advice given by their financial advisors especially as it pertains to their Thrift Savings Plan (TSP). The current standard allows financial advisors to recommend financial decisions to their clients that are more beneficial to the advisor versus the client. Federal employees are especially vulnerable to poor financial advice; often taking a financial misstep when deciding what to do with their Thrift Savings Plan accounts upon leaving the government. A recent study found that more than 75 percent of TSP account holders removed their investments from their Thrift Savings Account.

Often times, financial advisers may legally recommend that a federal employee’s roll over their TSP holdings into an Individual Retirement Account (IRA). The promise of investing the money into a mutual fund that will produce the same of similar return on investment. However, some of these accounts can cost the account holder up to 50 times more than leaving their investments in a Thrift Savings Plan. Financial planners giving this advice may profit from the higher fees and commissions.

The help protect retiring federal employees make the most of their retirement savings, the Federal Retirement Thrift Investment Board, which administers the TSP, has made it a priority to keep retirees’ money in the TSP.

As you can imagine, a number of large number of groups support successfully passing this new rule, including the NARFE and the American Federation of Government Employees. During the week of August 10^th, the department will open a public comment period and hold a public hearing. In the meantime, the department will continue to operationalize the proposed rule.

In addition TSP is modifying their policy for firefighters, certain border protection agents and law enforcement officers to withdraw funds from their TSP account for any amount without penalty. The catch to this updated policy is that the employee must be separated from federal service during the year in which they turned 50 years of age. The law only specifically mentions these four categories of employees. Other FERS participants and other special-category employees do not qualify under the Act.

The TSP, Defense Bill and Federal Employee Retirement Accounts:

A light is also being shone on a huge defect in the military compensation program. 83 percent of men and women who don the uniform exit the military without any type of retirement fund or pension in place. Only, the commonly referred to “lifers” who commit themselves to serving our country for 20 plus years receive a pension for life. More than directly hurting the separating military members who aren’t receiving any type of financial aid for their service, it hurts recruitment of new military members and does not reflect the modern workforce anywhere else. It is absurd to think that our uniformed men and women don’t have any options for retirement when even entry-level retail workers are offered a 401(k) with company matches for employee contributions.

These are the findings reported in January from the Congress-ordered group, Military Compensation and Retirement Modernization Commission. The Commission has recommended that the military transitions from the current inflexible benefit plan to a blended retirement plan that includes options such as 401(k) investment opportunities for all service members. Following the Commission’s recommendation, both the House and Senate versions of the Defense authorization bill use language that readily support the suggested changes. The proposed changes would be available to over 75 percent of service members who serve two or more years.

Armed Services Committee Chairman John McCain has been quoted as saying this one of the biggest leaps forward in military compensation and is one of the most significant parts of the Defense bill. The new system would vest service members in a thrift savings plan after two years of continuous service. At two years, all service members would start with a 1 percent monthly contribution from the government, with the potential for the military to match service member’s own monthly contributions up to 5 percent of their salaries.

The Defense bill has received little public debate in Congress, mostly because members of both the House and Senate Armed Services Committees waited two years to receive the recommendations from the Military Compensation and Retirement Modernization Commission before acting. Once the Commission’s report was published, the House and Senate Armed Service Committees adopted the recommendations in their entirety. While the report did not deliver any huge surprises, it did pave the way for lawmakers to have the ironclad justification they needed to put the thrift savings plan into the Defense bill.

The new system does have one drawback, service members who have served 20 years or more will see a reduction in their pension by about 20 percent. However, future retirees, who contribute to the TSP will receive pensions up to 20% higher than they are now – according to the Commission. Current or soon-to-be retirees do not need to fear for a reduction in their pensions, all pension promises will remain intact for service members. And current service member can also opt-in to the new 401(k) system at their discretion.

The proposed changes have received a stamp of approval from many military associations, such as, Veterans of Foreign Wars, the Reserve Officers Association, the National Guard Association, the Enlisted Association of the National Guard and the Air Force Association. Now, the Defense bill will just need to overcome a few more hurdles before being fully enacted.