Delivered on: Thursday, May 12, 2022
New Options Offered by the TSP
The latest “upgrade” to TSP may surprise you
- WHAT STAYS THE SAME: review of the investment choices that have not changed in the Thrift Savings Plan (TSP)
- WHAT CHANGES: outline of changes coming to investment options
- COST: the fee structure for the new investment options
- TIMELINE: TSP temporary closure window and when changes will be allowed
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Prefer to read instead? Below is a transcript from the video:
Hey, everyone. Welcome to the FedImpact Webinar today. We’re delighted to have you all here. Boy, is this a popular topic for all of you to want to learn about. I suspect many of you are eager for this Mutual Fund Window that we’re going to talk about today to open in the TSP.
But a lot of you are pretty skeptical and probably for good reason. There are some very interesting things that happen with this new option that today’s session is going to cover. Now, of course, like I said, today’s topic’s super popular for so many of you are most registered for webinar yet. So that is great. Of course, our audience today, we’ve got lots of different types of federal employees at different stages in their career that might find different parts of this attractive, what we’re going to talk about today.
Now, like we always do, I’m going to stay focused on delivering today’s material. But our support team is standing by in the Q&A area to answer questions that you have like we do every session. All that I ask is that the questions that you ask of our team today are related to today’s topic, so that we don’t get way off track and not be able to get to everyone’s questions. So, we will do our very best to get to everyone’s questions. Of course, we can’t give advice. We can’t tell you what fund to choose or anything like that. But we’ll do our best to help you to understand the rules and what you’re facing when this Mutual Fund Window option really opens here in just a couple of weeks.
Our handouts are available for download. You can either go to the Handout section of the webinar portal right next to the Q&A area and download from there. Or there’s a link right at the bottom of your screen that will allow you to download as well. No worries, if you forget to download the handouts, maybe you’re watching from your phone and it’s not super convenient, we will send out the handouts and the recording of today’s session. So, you’ll be given instructions on how to get that replay emailed to you following today’s workshop.
Of course, I encourage you to stay till the end. I don’t always opine on topics, but I think that there’s so much new coming out with this Mutual Fund Window that I do have some thoughts of my take on things and kind of the feedback that we’re hearing from employees and our perspective on the investment options in the TSP. So, stay tuned for that at the end of today’s session.
Now, of course, I’m your presenter, Chris Kowalik, I’m the founder of ProFeds, and the developer of the Federal Retirement Impact Workshop. I’m also the host of the FedImpact Podcast. And so, if you’re a podcast listener and you haven’t tuned into that show, I encourage you to do so. We’re everywhere. You can find your podcast, iTunes, Spotify, iHeartRadio, and so on. So, we cover lots of different types of topics on the podcast versus what we cover in the webinars. So, stay tuned for that.
And like I mentioned, I am surrounded by a great support team. So, we’re standing by for your questions in the Q&A area and delighted to be able to help you with that today. Now, today’s session is all about these new options offered by the Thrift Savings Plan. And shockingly, this upgrade to TSP, may give you a few surprises that we’re going to cover today. And so, it’s not quite as simple as just adding some new funds to TSP, there’s a lot that goes into this, and we want to make sure that you are going in with eyes wide open on what this option really is.
Our agenda today, we’re not going to cover these in specific order. But generally, as we’re talking about the TSP and these new options, we’re going to talk about the timeline for the temporary closure of some options within the TSP, so that they can move over to their new processor.
And then when things reopen, we’re going to have the Mutual Fund Window available to you. So, we’re also going to talk about what’s going to stay the same in the TSP. Because with anything, when there are big changes, people are wondering like, “Does this jeopardize what I currently do?” And so, we’re going to talk about the investment choices and pricing that has not changed in the TSP. As well as the changes that are being outlined by the TSP for these new investment options. And of course, the big question that everyone has is what about the cost?
So, what’s the fee structure for the new investment options. And is there any affect for people who don’t choose to invest in this Mutual Fund Window, these new investment options, and does their pricing change for what they’re currently doing in the TSP?
Like we always do in these webinars, there’s of course, lots we’re not going to cover today. Like I mentioned a few minutes ago, we’re not going to be giving advice on which mutual fund you should choose, or if you should invest in them at all. We simply want to show you how they work and give a little bit of perspective on some things as an outsider, looking in, what you should think about before you make that decision? Whether you go in or stay out of the Mutual Fund Window, we want to make sure that we’re giving as broad of a perspective as possible. But honing in on some of those key areas that may cause you greatest concern, so that you can wrestle with that in your own mind and decide what’s best for you.
Timeline for TSP outage
Okay. So, let’s start with the easiest of these, which is this timeline for this TSP outage. Now, I want to dispel any myths, nothing’s happening to your money during this time. It’s not being moved. It’s not being paused. It’s continuing to be invested. It’s continuing to fluctuate up and down, depending on how you have it invested.
The outages are really about you going in and making administrative changes to your TSP during this short window. The timeline for the outage, this transition period for this new record keeper for TSP is going from May 16th (so here in just a couple of days) through the first week of June. So, they haven’t given a specific ready date, I’m sure that’s to give them a little bit of flexibility to get this up and running if they run into any snags. And those transactions for the TSP will be temporarily unavailable from May 26th, to the first week of June.
The transition begins 10 days before they halt those certain transactions to happen within the TSP, as far as like changing your investment choices, and making big moves of your money in the TSP. There’s a little bit of an overlap from when they’re starting to make the transition happen behind the scenes, then where they pause everybody May 26th, through that first week of June.
We’re anticipating that full access to your TSP and all of the things that you can do in TSP (and of course all your transactions) are restored by that first week of June. Okay. Now, one thing that we will want to caution everyone on you are going to have to set up online access again to the TSP. It is my true hope that the TSP makes this a simple online process, and we don’t go through any nonsense of having pins mailed to you, or any of that, that many of you experience when you first set up your TSP account.
We’re hoping, and I believe that we’re going to have some nice, streamlined account setting to regain access, to log into your accounts when that time comes. A lot has changed technology wise that I think will allow a lot of this to happen much more smoothly for you.
What stays the same in TSP
Let’s talk about, what’s going to stay the same in the TSP. We always want to know what’s our stable platform and then what’s the change. With respect to the TSP, the Core TSP funds, those are the funds we’ve known and loved or hated over all these years. So, we have the regular funds and the Lifecycle Funds. Those are unchanged.
And so, throughout today’s session, you’re going to hear us refer to the regular funds and the Lifecycle Funds as the Core funds in TSP. To delineate these from the Mutual Fund Window that we’re going to talk about today.
Of course, in these regular funds and the Lifecycle Funds, you are free to choose to invest in any combination that you wish for any of these funds. And that itself is unchanged as well as the cost to use these Core funds. The “Low fees,” in TSP, which one could argue, of what you’re getting for those low fees, but those, “low fees,” are unchanged in the TSP for the Core funds.
Mutual Fund Window
But let’s talk about the Mutual Fund Window, which is what all of you are here on this session to hear about, and let’s see how it works. So, the Mutual Fund Window, this is kind of interesting. So, the original legislation that allowed the Thrift Savings Plan to offer a mutual fund option was passed over a decade ago. But they’ve chosen to now roll it out next month (so June of 2022), and there’s some speculation as to why they’ve waited so long? Why they approved it to begin with by law? But then the board couldn’t get on board ironically, to be able to actually implement the mutual fund.
What was the hesitation? Why were they unwilling to implement this over the last decade? And what has caused it now to be a high priority? And I’m not going to get into the politics of that. But it is something that causes us to wonder, why did it take so long if this was really a big priority for TSP?
In this Mutual Fund Window, they will offer roughly 5,000 mutual funds that you can choose from. And there was a big push here lately for what’s called ESGs. So, these are specific types of investments or funds that… The ESG stands for Environmental, Social, Governance. And it’s this idea that you want to invest in environmentally sustainable companies that you prefer to invest in causes, that social/governance of things that matter to you. And all of those things are okay. And can be applauded in many respects.
But you’re going to see some restrictions on your ability to invest in these that may cause you to kind of shake your head.
Restrictions to invest in the Mutual Fund Window
Let’s talk about what those restrictions are. So, the first is, that you must have at least $40,000 in your TSP account to use the Mutual Fund Window. The reason is that the initial transfer over to the Mutual Fund Window must be at least $10,000. And one of the rules that they’ve put in place, is that you can’t invest more than 25% of your TSP in the Mutual Fund Window. And so that’s how all that math plays out. And the reason you have to have at least 40,000 to be in it.
If we look back to the previous slide where we talked about the ESG funds, the Environmental, Social, Governance funds, this idea that people want to be able to invest in funds that are more aligned with their beliefs, well, that’s all great, but the TSP’s saying, “Hey, only 25% of your money can be there.” So, what about the other 75% that you want aligned with your beliefs.
And so, it seems like kind of a halfhearted decision to do this. I know that there are protections that the TSP is trying to put in place, but it seems like they’re kind of using the ESGs to kind of push this along and give people what they want, but not really giving them the ability to get all the way into those funds within the Thrift Savings Plan itself.
So, kind of an interesting thing, I’ll let you read into that as you wish. But that it is important to realize that at any time that you are transferring money from your Core funds over into the Mutual Fund Window, at that moment in time, that transfer can’t cause more than 25% of your TSP to be in the mutual fund option. That’s looked at every single time that you do that transfer.
Let’s talk about the thing that everybody wants to hear about, which is the cost. So, if you’ve been curious about this, you’ve probably read about the cost up to this point. I have a lot to say about the cost of the Mutual Fund Window. I’m going to get into some more detail a little bit later in today’s session. But here’s the nitty gritty. There’s going to be an annual maintenance fee of $95 for anyone wishing to participate in the Mutual Fund Window.
Regardless of how much of your account is in the Mutual Fund Window, everybody pays the $95. There’s an additional $55 per year that is an “administrative fee.” That is to make certain that anyone who does not participate in the Mutual Fund Window, that they don’t end up bearing any of the extra administrative burden, that the TSP is going to incur, because of the labor that’s going to be necessary to transact all of these changes in the TSP.
And so, this is their way to offset that and make certain that that extra cost doesn’t bleed over into those who choose just to invest in the Core TSP funds. So that’s the regular funds G, F, C, S, & I, and the Lifecycle Funds.
Now, on top of those two annual fees, every time you make a trade in the Mutual Fund Window, so buying and selling diff the different mutual funds, there will be a cost of $28.75 cents. Every single trade. On top of that, each of the mutual funds, so those 5,000 or so, that are going to be included in this, they’re all going to have their own fund fees and expenses. It’s just going to depend on which mutual fund you choose and what the funds are associated with that particular mutual fund.
So, you might be scratching your head a little bit like, “Wow, that seems pretty expensive.” Especially for the TSP, who has long since touted how amazing their fees are. And this really is contrary to that. Which I’m sure was part of the reason that the TSP delayed bringing this to fruition, because it kind of messes up their narrative of how awesome their fees are and how simple the choices are in the TSP. So, this is no longer simple, and it’s no longer cheap when it comes to using the Mutual Fund Window.
Let’s look at an example of the TSP for cost. Because I want to put some numbers to all of this. So, let’s say you have a half a million dollars in the TSP. So, you’re well under your career and you decide that you want some access to these mutual funds. You are allowed to put up 25% of your account into the Mutual Fund Window, so that’s $125,000. If you do that, you’re going to incur all the fees that I talked about before. So, you’re going to have your $95 maintenance fee, your $55 admin fee, $28.75, a trade. And the question is like, how many trades are you going to do that year? Are you going to do one? Are you going to do 12, 24? What are you doing? That could be pretty expensive.
Next, we don’t know what the mutual fund fee is, but let’s assume it’s 1%, that’s pretty standard across the board, out in the mutual fund world. So that’s $1,250, plus that’s just for your 125,000. Now, we’ve got the remaining $375,000 that’s in the Core funds. So, you’re going to have normal fees for those. And my question to you would be, does this seem worth it? And we can’t really answer that until we answer another question, which is, what do you get in return? And we’re going to talk about that here in just a couple of slides. So, hold that thought we are going to get to that. I promise.
Getting started with the Mutual Fund Window
If you decide to start this Mutual Fund Window, the very first thing you’re going to need to do is to create a Mutual Fund Window account, and you’re going to sign an acknowledgement of risk. The TSP needs you to understand that it is possible to lose money in the Mutual Fund Window, and we want to make sure that you are crystal clear on that as well.
Once that’s all been done, you’ll be able to decide to transfer funds from your TSP Core funds into a holding account. It’s called a sweep account. That is simply a temporary money market account, where the money’s going to be held until you then direct it to one or more of those Mutual Fund Window positions, one of those mutual funds. So, it just makes a pit stop there in the sweep account as a holding account and then you can decide from there where the money goes.
But it is important to realize that not just here at the beginning, but months and years down the road, the current rules do not allow you to invest directly into the Mutual Fund Window. So, your money first has to go into the Core funds, remember regular funds and lifecycle funds, and then you move it to the sweep account, then it goes to the Mutual Fund Window.
Transferring money back and forth
Next question, we get an awful lot of is am I able to still transfer money back and forth? So, if you choose to move funds from the Core, regular and lifecycle funds to the Mutual Fund Window or vice versa (you go the opposite direction), you are still subject to that inter fund transfer limit, two per month. After that, you can only go to the G fund.
You’re also subject to the trade fee of nearly $29 per trade. And I was asked this a couple of weeks ago, the question was when the money goes from the Core account to the sweep account, is that considered a trade? And then another trade when the money goes into the actual mutual fund. And the answer’s no, that is one trade. It’s just making a pit stop in a special account for administrative purposes. So that would be one trade, one charge of $28.75.
Now, once your money is in the Mutual Fund Window, if you want to move it back to the Core funds, you can decide which of those Core funds the money is deposited in. It doesn’t have to be the same proportion that it’s currently in. So, if you take your money from the C Fund and move it over to the Mutual Fund Window, and then later you want to move it back, you could decide to move it all to the G Fund, if you wish. Or any of the other funds that are available.
Withdrawing money from the TSP
Now, when money is withdrawn from the TSP, here, we’re talking about now you’re retired. You’re wanting to take money from the TSP. If you decide to take money voluntarily from the TSP, you can do one of the following, if you have enough money in your Core funds to cover the withdrawal amount that you want, you can withdraw directly from your Core funds. You don’t have to cash out your mutual funds to make the withdrawal.
If you don’t have enough money in your Core funds to cover however much you want to withdraw, you have to transfer money from that Mutual Fund Window, back into the Core funds and then withdraw the funds. So, it’s kind of a weird dynamic there. A couple of steps that you have to take to be able to get that money out. So, for those of you who have a long time before you plan to retire, this is probably not top of mind. But this adds a little layer of complexity to you, if you’re not exactly sure how to manage all of this on your own, when it comes to taking your money out.
So, this slide is all about you voluntarily taking money out of the TSP, but what happens when you have some involuntary withdrawals? So, if the TSP has to distribute money by court order, you have a required minimum distribution, you have a lien from the IRS… These are all considered involuntary actions. So, if there’s enough money in the Core funds, the TSP will pay that involuntary action, that involuntary withdraw from the Core funds.
But here’s something interesting. If there’s not enough in the Core funds to satisfy the withdrawal that has to happen, if the mutual fund balance is at least $25,000, the TSP will only take from the Mutual Fund Window what’s required for that withdrawal. Let’s say you have a $15,000 IRS lien that’s getting paid. So, $15,000 will come out plus the TSP is going to move an extra $1,000 over into the Core fund and then they make the payout. But this is not ideal for you. They’re not taking the $1,000 away from you, but they are shoving it over into the Core fund, whether you like it or not.
The next is that the Mutual Fund Window balance, if it’s less than $25,000, the TSP will move the entire Mutual Fund Window balance to the Core funds, and then they will make the payout. So, kind of a weird thing that happens automatically without your approval, without your even knowledge, it’s just going to happen.
What happens when you die
Of course, the next thing we have to talk about, unfortunately, is when you die. So, when a participant dies, the Mutual Fund Window funds are automatically closed and returned back to the Core funds. And where it goes in the Core funds is based on the investment allocation that you had in place at the time that you died. That that’s the decision of where all the, “New money” goes when you invest in the TSP. That’s the same percentage that the money’s going to be put back into the Core funds.
So, if you were investing 50% in the C fund and 50% in the S fund, then that is exactly the percentage that money is going to be shoved into from the Mutual Fund Window, back into the Core funds. But I have a question for you, how does this affect your beneficiaries when the market is up or down? Let’s say, we’re in a situation where you’re maxed out at the 25% of your total account that’s in the Mutual Fund Window, and you went really aggressive over there. And the market just took it in the shorts, and you die.
You’re going to be forced, or it’s automatically going to happen to you, that you’re going to be forced to sell those shares when the market is down, which is never what we want to do. We want to buy low and sell high. But in this case, your beneficiaries, your spouse, your children, whomever else you’ve named, they don’t have the opportunity to wait for the market to come back. Maybe it was a temporary downturn, and we’re waiting for the share value to come back up before we withdraw the money, they don’t have that choice. This is automatically happening upon your death, that money is coming back into the Core funds.
This is not ideal by any stretch when it comes to the strategic use of your money and where investment strategy plays a big role in this of getting the timing right, of when certain actions are taken. And in this case, your beneficiaries have no control at all over this decision. I don’t love that. But it’s something that you need to be aware that is inherent in the Mutual Fund Window.
Giving perspective on these changes
So, I’m asked a lot about my opinion on different parts of federal benefits. And like I said, in the beginning, I don’t opine very often, but there are some things from a perspective standpoint that I do want to share with you so that you can, like I said, go with your eyes wide open to the Mutual Fund Window and decide for yourself whether this makes sense.
My take on “The Why”
The first thing I’m going to cover is my take on “the why.” It feels to me like the TSP is desperately trying to fit a square peg in a round hole. They’re kind of suffering from FOMO that fear of missing out. They’re like, “Oh man, all these feds want these mutual funds. We better offer that.” And the thing is what the TSP board thinks is the problem, is that they think feds want mutual funds. Well, you guys can get mutual funds out in the private sector. There’s nothing special about these mutual funds that they’re offering. They’re private sector mutual funds, that don’t carry any lower fees, in fact, much higher fees than what you would have out in the private sector.
But what the problem really is in the TSP that the board is not addressing, is that the reason that feds move their money out of TSP in retirement, is because they want control of their money. They want control over where the money is invested, how they have access to it, and all of the fund choices that go with that, of having total control of your money – that you don’t have in the TSP.
And so I think it’s kind of ironic that the TSP has taken such great lengths to modify the funds that are available, thinking that they’re solving a problem when they’re not really solving the biggest problem that the TSP has. It’s that the employees don’t have total control over their money, certainly, when they retire and are going to take it.
So as far as the why, I’m not convinced that the board has really thought this through. But they didn’t ask me.
My take on “More Freedom”
So, we’ll move on to the next thing. And that is my take on, “More Freedom.” Here’s the deal, in your investments, ideally, we want those investment assets to operate independently of one another. And the idea is that in different market conditions, those assets could be leveraged differently.
Let me give an example, I’m going to start with the private sector, because of course, there’s lots of options out there. So, in the private sector, we would ideally want an investor to have money in lots of different buckets. Call it diversification, call it whatever you want. The idea is that you have different buckets of money that behave independently of one another. So, some examples would be you have a money market account, which is a super powered savings account. You’ve got a mutual fund; you’ve got a brokerage account. You might have an IRA; you have an annuity. There’s all sorts of different products out there that behave differently, and all operate independent of one another.
That way, when the market’s up, or the market’s down, you have complete control over where and how you take money from those individual buckets. That’s in the private sector.
In the TSP, you don’t have that freedom. So, let’s look at the Core funds, just as an easy example here, it works exactly the same when we talk about the Mutual Fund Window. When you go to take money out of the TSP, you are not allowed to dictate to the TSP which fund bucket the money comes from. So if you have half of your money in the G fund and half of your money in the C, as in Charlie fund, when you go to take the money out, if the market just took it in the shorts and that value of the C fund just plummeted for you, you are not allowed to ask the TSP to just give you money out of your G fund.
And the same thing is true if the C fund just took off. We have huge market gains. We’re rallying. Every day you turn on the news and the market’s up and the market’s up and record highs. You’d probably want to take the money out of the better performing fund, which would be the C fund. It certainly performs better in a high market than the G fund does. But the TSP doesn’t allow you to pick and choose which fund you take the money from. I don’t buy that the Mutual Fund Window gives you more freedom. Because they didn’t fix the very thing that makes the TSP unattractive to the people actually using the money from the TSP account.
So hopefully that makes sense. There’s a lot that goes into this. But I think we can put a cloak on all of this and say, “Wow, look at this new option that gives me more freedom on how I invest my money.” But the real problem hasn’t been fixed here.
My take on “More Choices”
Next thing, my take on “more choices.” Too many choices can be pretty dangerous. Because when you have more options, it means more complexity. If you’re out there by yourself, looking at not only your 15 Core funds, so the regular funds, and then the 10 Lifecycle Funds, you’re now looking at 5,000 mutual funds. Yikes. If you don’t have anybody helping you figure out what’s appropriate for your financial situation, the TSP is not going to give you that advice. That’s not their role. That’s not their responsibility. But here we have an ever-complex choice now, because we have so many options to choose from. This can be very overwhelming.
And ironically, it kind of goes against the beauty of the TSP that’s been there for so long, which is its simplicity. You had the five funds. Then you had the 10 lifecycle funds that were just a combination of the regular funds. And that in and of itself gave a really broad index and employees could kind of pick and choose between those. But now we’re adding a whole other layer that’s very, very heavy where we’ve got 5,000 to choose from. Most people would simply guess, they pick a name that they like without really understanding financially how they work.
Now, these Mutual Fund Window investments are not as broad as the index funds that you currently have in the TSP. So, for instance, the C fund is a mixture of the 500 largest publicly traded companies in the US Stock Market. It’s the S&P 500. 500 companies in this index is big. Then we move to the S fund, this is the rest of the US Stock Market, aside from the 500 largest publicly traded companies.
And so, we’re talking about every publicly traded company in the United States being in the C or the S fund. That’s very, very broad. But when you look to Mutual Fund Window investments, here, we’re going to be talking about much more specific sectors. So, for instance, technology, healthcare, real estate, there’s all sorts of different types of investments out there that are not nearly as broad. And so, there’s some very inherent risk that comes into not having as broad of an index.
The extreme of this, would be if you bypass mutual funds all together, and bought individual stocks. There’s no diversification there as far as the stock itself, that is tied to one single company. So, it’s not a total deal breaker for this Mutual Fund Window investment, but we do need to understand that it’s not the same as investing in the C, S, &I funds in the Core part of the TSP.
My take on “More Flexibility”
Next take here is, my take on “more flexibility.” So, here’s our friend Gumby, we like the idea of being flexible. The TSP offering this Mutual Fund Window is nothing magical. Mutual funds have existed for many, many years. So, it’s not like the TSP created some magical option where you could invest in hundreds or thousands of different companies at the same time, which is what a mutual fund is. There’s nothing special here.
It’s also important, I think, for us to recognize something that we don’t talk about a lot, but probably should. And that is that you probably should not have all of your money in the TSP. And I’m not talking about your house, but when we’re talking about investible assets, if you shove all of your investments in the Thrift Savings Plan, you have no flexibility to be able to use that money for other purposes outside of your retirement.
So, let’s say you’re 40, 45 years old, and you’re listening to this webinar, and you’re like, “Man, I’ve got a long time before I retire. I’m going to shove more, and more, and more money, in the TSP. And I’m going to take advantage of this Mutual Fund Window.” You’re locking up your money until the time that you either retire or turn 59.5. Well, you’ve got a lot of years ahead of you between now and that point that you might need money for other reasons. You might have kids going to college. You might have a spouse who decides to open a business and needs cash. You might have a slew of other reasons why you would need money prior to retirement.
And you can accomplish all of that by putting money into private sector accounts, whether they’re mutual funds, we have brokerage accounts, there’s IRAs, there’s all sorts of other options out there available in the private sector for various reasons. But the TSP only operates like an IRA. You have the restrictions on when you can access the money. So if you have short term and medium term goals, that don’t put you all the way into retirement, that you need to have access to your money, you need to think carefully about putting too much money in the TSP, where you don’t have enough money in other buckets to be able to pull from when you need it.
Again, having more flexibility on the types of funds that are in TSP isn’t necessarily bad. But what we really want is the flexibility to use the money when it’s most appropriate for us. And that is something that hasn’t been fixed in the TSP. Again, it’s considered a retirement vehicle. So, I’m not suggesting that they make it easy to access all of that. That can be dangerous too for people who are not disciplined and will take money unnecessarily. But if you really do have some short- and medium-term goals, and you find yourself several years from retirement, we need to think carefully about having all of your money locked up in a retirement vehicle like the TSP.
My take on “Higher Costs”
Last take that I have is on these “higher costs.” I would offer to you that high fees in the absence of real value are wasteful. Warren Buffett says, “Price is what you pay, but value is what you get.” And boy, this couldn’t be more true. So, I want to talk a little bit about that balance between cost and value. That price and value. So, two questions you have to ask yourself when you’re thinking about the Mutual Fund Window and the cost associated with that is, first, what does it cost you? And second, what do you get in return? What does it cost you and what do you get in return?
So, we have a pretty good sense of what it’s going to cost you. We covered that in a previous slide. We had to make some assumptions because we don’t know all the details yet on what these mutual funds are going to charge. But if it costs you $1,300, $1,400, $1,500 a year to have that money invested, that’s on its face, isn’t necessarily a bad thing. But what did you get for that $1,200, $1,300, $1,500 that you paid? Were you still left to do it all on your own and try to guess? And every time you get spooked and you’re moving money around, it’s costing you more, and more, and more money, every trade.
What I fear is that employees try to compare these higher costs to what you get out in the private sector. And you say, “Well, it costs me just as much to do this in the private sector, roughly.” And that may or may not be true. We don’t typically have those higher annual fees. But an investment charge for an investment advisor, 1% is not unheard of some go higher, some go lower. But what do you get in that transaction with a financial professional? You’re getting guidance. They’re looking at your big picture and seeing, how does this one piece of the pie that you have in the TSP, affect the rest of your financial life? How do we put all those goals together to make it work?
And that’s really what we need to make sure that we’re thinking about when we’re deciding whether the Mutual Fund Window is right in the TSP, or do you look to the private sector to get a different value? The value is guidance. The value is having somebody to call before you make a decision on an investment, good or bad. To make sure that what you’re doing is aligned with the goals that you have and the other parts of your financial life.
So, listen, guys, I’m not opposed to paying higher fees for things. It’s just what do you get in return? And years ago, when I was still out doing the retirement workshops for our company, I’ve got great speakers that go out and do it now. But when I was talking about the TSP and someone would say, “Yeah, but you have these low fees.” Well, that’s true. You do have pretty low fees in the TSP, but what do you get in return? I mean, I’m not talking about the market return. I mean, that’s going to happen whether you are in the TSP, or you are in another index fund.
But do you get anybody that you can call and ask those questions of? To talk about tax strategy and the idea of passing this money on to your successors, your family. You don’t have those conversations with TSP. But those are the exact conversations you should be having with a financial professional. That’s why we work with a network of them. Because we can teach benefits all day long. But if you don’t know how this stuff applies to you, and how the decisions you make with your benefits, TSP or otherwise, and how those affect other parts of your financial life, you’re going to be making poor decisions, because you don’t have all the facts.
And so, an example that I would use in the workshops were these cell phones that we have. It used to be that a phone was corded to a wall. And if you wanted to get a phone call, you had to be standing right there waiting, you couldn’t run out to the grocery store. You couldn’t run and pick up the kids. You had to wait there. Well, you know what? Things are different now. We have computers in our pockets. And these phones don’t just ring and give us a phone call. We have texting. You can level a picture with it. You can get directions to wherever you’re going. There’s a million things these phones do. And guess what? The price reflects that.
We’re willing to pay more for a product, because of what it gets us in return versus just the thing that we’re buying. So hopefully you picked up on that analogy there. And for those of you who have not been around where you had phones corded to a wall, I applaud you for being so early on this webinar in your career, because chances are, you’re pretty young. So, thanks for entertaining me on that analogy there.
But don’t let price scare you, but you really have to ask that second question, which is, what do you get in return? And if you’re happy with what you get in return in the Mutual Fund Window, then that’s up to you. But we have to ask ourselves that question, and don’t be afraid of what answer you come up with. If it turns out that you just can’t justify paying that extra fee for a fund that might not beat your index fund, which will likely not beat your index funds in the TSP, just statistically, it’s very hard to beat the index consistently, then that’s a decision that you’re going to make.
Well, it is certainly my hope that this was helpful to you today. A lot that we covered and a lot for you to think about if you are considering the Mutual Fund Window, for sure. Quick wrap up, please, please, please consider all of your investment options before you decide to invest in the Mutual Fund Window in the TSP. If you decide after everything that you read and listen to that the Mutual Fund Window is right up your alley, then go for it. But be sure to weigh the cost versus the value that you get. If we’re going to listen to anybody’s advice, it should be Warren Buffet, not Jimmy Buffet, don’t confuse the two, but Warren Buffet, price is what you pay, value’s what you get. So, we want to make sure that we’re considering all of that. And of course, for everybody, regardless, if you decide to use the Mutual Fund Window option or not, be sure to set up your new TSP login, when you get those instructions from the TSP.
Of course, we want you to get the rest of the story. We want to make certain that when we’re considering the TSP and using the money in retirement and all of that we realize that this is part of the bigger process of planning for retirement. So, we want you to get the rest of the story, the Paul Harvey of the matter. So please, if you haven’t already, please, please, please attend one of our in-person workshops. There is no cost to attend. And every one of our workshops covers all of the federal benefits topics and those decisions to be made.
So, you have a clear path to start to make those decisions that are aligned with what you want in retirement. So, you can see all of those details at fedimpact.com/attend.
All right, next up, handouts and replays. We will send out an email to everyone that will include the handouts and a link to the replay. If you’re still on the session and you haven’t already, and you wish to download the handouts, you can still do so while the webinar is still open. But don’t worry if you’re not able to, we will send those out to you.
Our next webinar is all about Your Retirement Scorecard. This is going to be on June 9th, one o’clock Central. And this session is going to be a diagnostic assessment of your retirement readiness. And this idea came to me when… You go to the mechanic, and they do some diagnostic assessments of your car. And you get a reading of like, “Most of these things are okay. These things we need to be looking at, and these things are real red flags.” We can do that same type of assessment on the retirement side. And I want to show you exactly how to do that. So that you know the things you need to work on to get closer to that readiness goal that you have to be able to retire. So, you can sign up for that webinar at fedimpact.com/webinar. That is open right now to be able to register and hope to see you on June 9th.
Thank you very much for being here. I love these webinars and being able to have a platform, to be able to chat with each of you, and share some of what we’re seeing kind of from our level, given the vast amount of work that we do with federal employees.
So again, to find a workshop nearby that we do in-person, you can go to fedimpact.com/attend, and to come to that next webinar that we have on your retirement scorecard on June 9th, go to fedimpact.com/webinar. Thank you all very much, and we’ll see you next month.
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