Q. My question deals with transfers from the government’s Thrift Savings Plan (or TSP) into other investments.
The Thrift Savings Plan (TSP) seems to provide a no-lose investment strategy for retirement saving, with its conservative selections such as government bonds with guaranteed principal protection and seemingly low-cost expense ratios. Should a retiree rollover their TSP to an IRA? More precisely, what are your thoughts in this regard, and how would you handle such matters? —M.M., Newark, New Jersey
A. Recent stories about financial sales people taking government employee retirees out of the TSP are a clear example of how commission driven (and borderline criminal) the financial services industry can be. Taking money out of this program is indefensible.
It does not make sense for the vast majority of government employees most of the time. The reason for this is simple: there is no way that you can replace either the safety of the government bonds fund or the low cost of the low cost index funds with a product available in the private market.
Sadly, the most actively pitched alternatives— fixed-index annuities— are products that saddle the buyer with effective annual expenses that are more than 100 times as great as the expenses of the TSP. While the TSP costs less than 0.03 percent, many fixed index annuities have effective all-in costs in excess of 3 percent a year.
To make matters worse, government employees have less need for commercially supplied sources of income security than most private sector workers. Let me be specific. If you are a federal government worker you will get a pension. You will also receive Social Security benefits. The pension provides a lifetime income. The size of the pension is depends on your length of service and the average of your highest three years of compensation.
A 20-year employee, for instance, can expect to have a pension equal to 22 percent of his or her highest three years of compensation. An additional 10 years would add another 11 percent, bringing the total to 33 percent. Social Security benefits would typically cover another 40 percent of pre-retirement income. This means many long-term federal employees can retiree with a pension and benefit income that is around 73 percent of pre-retirement income. Guaranteed. Inflation-adjusted.
Some of that pre-retirement income went to pay the employment tax of 7.6 percent. It also went to TSP contributions. And to work-related expenses. So it’s not difficult to see that many federal employees will have very secure retirements. They don’t have to worry much about the market ups and downs of their TSP accounts. For a long-term federal employee, income security products such as fixed index annuities are good examples of inappropriate sales. They are the proverbial equivalent of selling a refrigerator to an Eskimo.
Q. In February I positioned an IRA account into the following funds:
- 40 percent: Fidelity Spartan Bond Index (FSITX)
- 20 percent: Fidelity Spartan International Stock Index (FSIVX )
- 5 percent: Vanguard REITs (VNQ)
- 35 percent: Federated Short-Term Income Institutional (FSITX)
Now it appears that the average total return from this portfolio is 5.7 percent. FSITX has a return of just 0.34 percent and FSIVX a return of 2.97 percent.
What benchmark should I be measuring this against? The returns seem a little low. —RM, San Antonio, TX.
A. Morningstar might classify your portfolio as “conservative allocation.” It would be in the same group with mutual funds that have more fixed income than equity, typically averaging 60 percent bonds and 40 percent equity.
But your portfolio, with only 25 percent in equity funds (including international stocks and REITs) would be much more conservative than the 40 percent equity average of that group. With no domestic stock funds, your portfolio would also be considered a bit eccentric since the vast majority of funds are more likely to have domestic stocks than international stocks.
Judging any portfolio’s performance over a short period of time is pure folly. Using long-term historical returns on each asset class, what you might expect from this portfolio is an annualized return that is a bit over 6 percent. Expecting that return during a period when international stocks are swooning under both regional angst and a soaring dollar would not be reasonable; particularly since fixed income yields are now much lower than their historical averages.
Correction: An earlier edition used a crediting rate for government pensions that is used for a small group of employees. The figures have been corrected using the crediting rate for most government employees.