The Thrift Savings Plan Model

Adam Doverspike

The TSP is still being touted as a model for personal accounts, and rightfully so. The federal employee defined contribution retirement program is well-liked, easy to understand, and has returns that Social Security could only dream about. In two more ways, it could be a model for personal accounts in social security: the foot-in-the-door model and the lifetime investment plan. The Washington Post today reports that TSP is evolving and expanding in its second decade. In addition to new customer friendly reforms including allowing participants the chance to change their investments and contributions on a daily basis, the "limits on the percentage of salary that can be earmarked for the TSP will disappear -- hopefully ending an irksome restriction for some employees. TSP participants will simply observe the Internal Revenue Service's dollar limit on contributions, which will be $15,000 in 2006." Senator DeMint's plan calls for saving the Social Security surplus by creating small personal accounts to store the money in instead of letting Congress squander it. If TSP proves to be a good predictor of personal accounts appeal, then the "irksome restriction" on personal accounts will fade away as participants fall in love with them. Secondly and more importantly are the new "life-cycle funds" that are being created. TSP accountants realized that many investors were being too risk averse for their position in life. They are rolling out 5 "L funds" that will allow investors to put their money on "cruise control."

Each L fund will invest in the existing TSP funds, and, over time, will shift from aggressive to conservative investments. TSP officials plan an extensive educational and communications campaign, hoping to show federal employees that L funds will provide them with diversified accounts that could increase their retirement income with as little risk as possible. As of May, 40 percent of TSP account balances were in the G Fund, a super-safe government securities fund, and 41 percent of account balances were invested in the C Fund, a common stock index that tracks the S&P 500 returns. TSP officials see the tilt toward the G and C funds as a sign that numerous participants could benefit, and protect themselves, if they allocated their assets across more funds. For example, the L fund being created for people planning to retire in 20 to 29 years would strive for high long-term growth and capital appreciation. It would allocate 38 percent to the C Fund; 21 percent to the TSP's international stock fund; 16 percent to the small and mid-size stock fund; 16 percent to the G fund; and 9 percent to the bond index fund.

For those who think that many Americans are too dumb to invest, the L funds should reassure them that stocks and bonds are for everyone. And for the lazy investor, these L funds will make personal investing even easier. If only Social Security made as much sense. Maybe by the time I retire in 2048, it will. Here's to hope.
Posted by Adam Doverspike on June 27, 2005 7:06 PM to Social Security Choice