Lower TSP expense

[Johnphx]

The public wanted everyone to be shackled to the same system. I think that makes sense.

I see.

So the solution was instead of figuring out how to unshackle the majority, it would be better (or perhaps it was just more politically feasible) to shackle the minority.

Lets not fix the system if its broken, lets make sure everyone suffers equally!

 

[donheff]

Well, yes and no. Anyone who stays long enough to retire would be better off under the old program. But most Feds don't stay for an entire career.

Who is it that doesn't stay long enough? If you leave early there are significant penalties (5% per year before the MRA) that apply to the pension portion of the benefits. Unless you are talking about congressman and senators and I believe they just might vest differently than other members.

As I noted in my quote - most Feds leave for private sector employment before they are eligible to retire, often after just as few years, sometimes after 10 or 20 years. Under the new program, they take their TSP and social security with them. They can choose to leave the pension component in the system or take a lump sum. Under the old system, someone who left the system could take a lump sum of what they paid into the pension (a paltry amount that did not include the employer contribution) but they had no TSP style 401K and they had no social security for the period of Federal employment.Leaving your money in the system was an option. In that case you could take a deferred annuity at age 62. But the annuity was based on your earnings rate back when you worked for the government - inflation would have turned that into a pittance by the time you reached 62, and the rules gave less credit to early years of employment in calculating the annuity.

Combine all of those negative features for leaving with the very good results if you stayed and you can see why the old retirement system was described as "golden handcuffs."

 

[Texarkandy]

......

But most Feds don't stay for an entire career.

.....

Is that just your impression or are there some hard stats on that? (not being a smart-aleck - truly just wondering)

In my field most are in for an entire career.

 

[FUEGO]

Does anyone know if administrative expenses, record keeping, auditing, customer service, allocation to individual participants, etc etc are paid for out of the .015% expense ratio? Or does the government fund these "overhead" type expenses by calling them human resource expenses? In other words, is the .015% only paying for research and investment management/execution of the fund but not administrative overhead? Just curious...

I'll add that vanguard is currently offering sub-0.03% ER's on some funds for large accounts (institutional plus accounts w/ more than $200,000,000 and "employee benefit" accounts w/ $400 million in assets, the latter account having negotiable ER's). Definitely in line w/ what TSP is charging.

 

[Texarkandy]

In re: Social Security

I suspect as we get more towards a crisis it will be severely means-tested to make it a program for lower income folks only (though we'll all pay for it)

Something along the lines of - if you make less than 30K a year you get full with probably a 2% reduction for every $1K you make over 30K - so someone who gets 80K a year (earned or retirement - it won't matter) will get nothing.

I further suspect the earnings cap for paying into SS will be raised significantly or done away with all-together.

The under-50K a year voters & the politicians who pander them will make this happen. It will become the ultimate transfer-of-wealth program.

The govt has made promises to FERS employees as re: SS being the third leg of their retirement - but those promises can & probably will be broken

That pessimistic enough for ya?

 

[samclem]

I see.

So the solution was instead of figuring out how to unshackle the majority, it would be better (or perhaps it was just more politically feasible) to shackle the minority.

Lets not fix the system if its broken, lets make sure everyone suffers equally!

Like you, I'm a fan of increased privatization of old age support issues. However, we must face two facts (and I came to believe them after much kicking and screaming):
- 1) If there are poor people (young or old) the American public will vote to give them money. That money must come from taxes--probably on you and me.
- 2) Individuals have done a very poor job of taking care of their long-term financial health. Yes, a dose of some very bitter medicine may jolt the next generation to their senses, but for now, look at 401K participation rates, the degree to which people raid their 401Ks for various expenses, and the way people invest their 401Ks and you'll come to the realization that a complete hands-off approach to letting people manage their retirement accounts (in a private socail security setup) would lead to many people having very little at retirement. Then, see rule #1 above. You'd pay the bill.

Social Security (along with welfare benefits, food stamps, etc) is part of the safety net that allows the rest of our capitalist system to exist. These systems can be viewed as providing the assistance to those who have very little and who might be forming mobs in the street, breaking into stores, committing individual crimes, and voting for socialist governments. Basically, money spent on these programs keeps a lid on social dissatisfaction that has undermined many representative republics which tried pure capitalism.

This article by William Bernstein is interesting. I don't agree with all of it, but it does shed some light on a different way of thinking about the purpose of SS.
God Bless this Ponzi Scheme

I'd be in favor of a slowly phased-in privatized adjunct component to SS. Younger workers could put a small portion into private accounts, with the proportion increasing in coming years. Everyone would still pay into something like the present system, though in decreasing amounts. The present system is slowly morphing to a needs-based system of inter-generational wealth transfer--another welfare system. That's okay as long as people can build wealth in their private accounts. The investments would have to be in a fixed set of regulated investment choices, like TSP, but with some rules on asset allocations and withdrawal rates.

 

[W2R]

In re: Social Security

I suspect as we get more towards a crisis it will be severely means-tested to make it a program for lower income folks only (though we'll all pay for it)

Something along the lines of - if you make less than 30K a year you get full with probably a 2% reduction for every $1K you make over 30K - so someone who gets 80K a year (earned or retirement - it won't matter) will get nothing.

I was thinking about this and you know, they could do something along these lines by just making one simple change. Remember how they can reduce your SS checks if you work and earn over a certain amount? They could just say, "Oops! Investment or pension income isn't any different from earned income, since it's all money and income is income, so we'll continue just as before but now we will include all income sources in SS reduction computations".

 

[ats5g]

Does anyone know if administrative expenses, record keeping, auditing, customer service, allocation to individual participants, etc etc are paid for out of the .015% expense ratio? Or does the government fund these "overhead" type expenses by calling them human resource expenses? In other words, is the .015% only paying for research and investment management/execution of the fund but not administrative overhead? Just curious...

I'll add that vanguard is currently offering sub-0.03% ER's on some funds for large accounts (institutional plus accounts w/ more than $200,000,000 and "employee benefit" accounts w/ $400 million in assets, the latter account having negotiable ER's). Definitely in line w/ what TSP is charging.

From Summary of the Thrift Savings Plan

Administrative Expenses TSP expenses (i.e., the cost of administering the program) include management fees for each investment fund and the costs of operating and maintaining the TSP’s record keeping system, providing participant services, and printing and mailing publications.

These expenses are paid from the forfeitures of Agency Automatic (1%) Contributions of FERS employees who leave Federal service before they are vested, and — because those forfeitures are not sufficient to cover all of the TSP’s expenses — earnings on participants’ accounts.

The effect of administrative expenses (after forfeitures) on the earnings of the G, F, C, S, and I Funds is measured by the expense ratio of each fund. The expense ratio for a fund is the total administrative expenses charged to that fund during a specific period, divided by that fund’s average balance for that period.

 

[Robert the Red]

When noting the low ER for TSP, it is also important to realize that some of the expenses are 'paid' by employees who forfeit the 1% contributions the Government puts in for all employees -- if someone quits (or is fired) before the probationary period is over. In principal, if enough of this stuff happened, the reported ER could go to zero. This is a cost recovery mechanism not available to mutual funds.

 

[donheff]

Is that just your impression or are there some hard stats on that? (not being a smart-aleck - truly just wondering)

In my field most are in for an entire career.

This was in response to my quote that "most Feds don't stay for an entire career." As specifically worded (most= more than 1/2) that is my impression, not a fact. But I do know the separation rate in early years of employment (less than 10) is high and I believe it is over 50%. I was a Federal HR Director for many years and was working in employee relations (includes retirement system administration) at the time the new FERS system was adopted. I read many of the studies that went into the system design and can remember being surprised at how high the turnover rate (out of government, not between agencies) was. The numbers were regularly cited to show employees the portability benefits of the new system. A substantial number of employees with few years of service, and even a fair number with many years of service, elected to move into FERS rather than stay in the the old system. They wanted the portability so they could leave government for those lucrative private sector jobs. I know quite a few who stayed with the government or returned after a brief absence who regretted switching to FERS.

 

[samclem]

. . . some of the expenses are 'paid' by employees who forfeit the 1% contributions the Government puts in for all employees --

Very minor correction: The military services have elected not to provide any TSP match for military personnel who participate in the TSP. But, since they aren't commonly thought of as "employees," I suppose your statement is correct after all.

I guess military folks benefit from the lower ER produced by civilians who abandon the program early.

 

[Texarkandy]

... Social Security (along with welfare benefits, food stamps, etc) is part of the safety net that allows the rest of our capitalist system to exist. These systems can be viewed as providing the assistance to those who have very little and who might be forming mobs in the street, breaking into stores, committing individual crimes, and voting for socialist governments. Basically, money spent on these programs keeps a lid on social dissatisfaction that has undermined many representative republics which tried pure capitalism. ....

"and voting for socialist governments"

This is the thing I wonder about

(and further makes me ponder whether everyone's vote should really count the same - particularly re: folks who are are on the dole)

I wanna be a super-delegate - my one vote should count for three

 

[donheff]

"and voting for socialist governments"

This is the thing I wonder about

(and further makes me ponder whether everyone's vote should really count the same - particularly re: folks who are are on the dole)

I wanna be a super-delegate - my one vote should count for three

Better watch out, we had another thread in which some economist accused all of us FIREees of being selfish nincompoops ruining the country. He would take the vote away from us and give it to people who never saved a dime but work into their 70s

 

[Johnphx]

I was thinking about this and you know, they could do something along these lines by just making one simple change. Remember how they can reduce your SS checks if you work and earn over a certain amount? They could just say, "Oops! Investment or pension income isn't any different from earned income, since it's all money and income is income, so we'll continue just as before but now we will include all income sources in SS reduction computations".

This would unabashedly discourage (and discriminate against) savers.

I would of course need to continue saving. It is in my nature to do so (although it wasn't always) and current estimates of SS don't satisfy current estimates of my expenses.

But wouldn't such a system encourage the young to make every effort to keep regular expenses as low as possible and spend every dime for the present without thought to savings because they would then get a free ride in retirement?

 

[Texarkandy]

I was thinking about this and you know, they could do something along these lines by just making one simple change. Remember how they can reduce your SS checks if you work and earn over a certain amount? They could just say, "Oops! Investment or pension income isn't any different from earned income, since it's all money and income is income, so we'll continue just as before but now we will include all income sources in SS reduction computations".

This would unabashedly discourage (and discriminate against) savers.

I would of course need to continue saving. It is in my nature to do so (although it wasn't always) and current estimates of SS don't satisfy current estimates of my expenses.

But wouldn't such a system encourage the young to make every effort to keep regular expenses as low as possible and spend every dime for the present without thought to savings because they would then get a free ride in retirement?

A non-saver socialist society would be a good thing according to more & more people in this country. Give your all to the Central Government & the Central Government will ensure you have your bread & circuses (& a big screen TV).

Personally, I blame the public education system & the "Great Society" agenda for creating those people.

(BTW I did get a big-screen a few months back )

 

[Nords]

When noting the low ER for TSP, it is also important to realize that some of the expenses are 'paid' by employees who forfeit the 1% contributions the Government puts in for all employees -- if someone quits (or is fired) before the probationary period is over. In principal, if enough of this stuff happened, the reported ER could go to zero. This is a cost recovery mechanism not available to mutual funds.

IIRC Vanguard turns their 2% early-redemption penalties over to their mutual funds as well.

 

[clifp]

Yeah, I bet that TSP is a heckuva recruiting incentive to get people to forsake private enterprise for public service.

I think Clif's question is well put. If the federal govt is capable of finding contractors to administer a tax-deferred fund with rock-bottom expenses and index choices, how hard would it be to make a similar program available for a portion of Social Security payroll taxes... or indeed, for any employee's tax-deferred contributions?

I think we've all seen how capitalism has served the "civilian" 401(k) system. Just about every day we see a post on this board asking whether an employee should hold their nose and invest in their 401(k) for the tax deferral, or just go with a taxable Vanguard index fund.

Nords has it exactly right.

If you asked my to design the perfect saving plan for the 99% of my fellow American who are less financially sophisticated than the board members, I'd be hard press to come up with something better than the current TSP.. I felt this way before they lowered the expense ratio even further.

TSP provides exactly the right choices and the right number of choices not too few not too many. The choices are obvious (e.g I fund international stock S fund Small companies), and have virtually no overlap. If you don't want to do your own AA, target retirement is also available at very low cots. It is easy to transfer money but not so easy to encourage day trading your retirement.

AFAIK, other than various federal government departments providing matching funds I believe the TSP is self-supporting, Federal employees pay all the fees associated with the administration.

The Republican wet dream of transforming social security into private saving accounts, was pretty much doomed once you had the Democrats special interest + AARP pitted against Wall St brokerages. As the plan was sinking to the bottom of the Potomac, President Bush floated one excellent idea, unfortunately the trail balloon never made it to the surface.

In response to the demigogually "no we can not have people bet their retirement on stocks, look at what happens to the stock market a few years ago". He suggested that the folks have the option to invest 2% of their SS funds into a program just like TSP. I suspect that it is virtually impossible for somebody who has regularly contributed to the TSP for 20 year to have not made a lot of money.

Forget the linkage to social security. Why not allow all working American the option to contribute a portion of their salary to TSP? It is not like expanding the $225 billion in the TSP is going to cost existing federal employees any money. Presumably a large asset base would result in even smaller fees. There are already a lot of funds in the (50-100 billion range.)

Now it might upset Wall St firms, but that is part of the idea.
Imagine if 30 something worker looks at his SS statement and see his $20K invest in the TSP L fund get charged $3 in expense, while his 20K in the Merril Lynch Large Cap Growth fund gets charge $300 in expense (i.e. typical 1.5% mutual fee). If TSP L also outperforms the Merril Lynch a bit of pressure might be put on the employeers to make better 401K options.

 

[clifp]

IIRC Vanguard turns their 2% early-redemption penalties over to their mutual funds as well.

I think many if not most employeer 401Ks do something similar. But you are right without the forfeiture the ER might be higher than what we see.

 

[ats5g]

In response to the demigogually "no we can not have people bet their retirement on stocks, look at what happens to the stock market a few years ago". He suggested that the folks have the option to invest 2% of their SS funds into a program just like TSP. I suspect that it is virtually impossible for somebody who has regularly contributed to the TSP for 20 year to have not made a lot of money.

Forget the linkage to social security. Why not allow all working American the option to contribute a portion of their salary to TSP? It is not like expanding the $225 billion in the TSP is going to cost existing federal employees any money. Presumably a large asset base would result in even smaller fees. There are already a lot of funds in the (50-100 billion range.)

Now it might upset Wall St firms, but that is part of the idea.
Imagine if 30 something worker looks at his SS statement and see his $20K invest in the TSP L fund get charged $3 in expense, while his 20K in the Merril Lynch Large Cap Growth fund gets charge $300 in expense (i.e. typical 1.5% mutual fee). If TSP L also outperforms the Merril Lynch a bit of pressure might be put on the employeers to make better 401K options.

clifp,

While I agree that much lower expenses in retirement plans is warranted, I'm not so sure that allowing everybody to only have a DC plan for retirement is such a good idea. I've stolen the following example from PIMCO:

A DC plan participant’s retirement income is highly sensitive to the savings end-point. When a DC plan participant retires plays a significant role in determining the final value of their retirement portfolio and therefore the income they will receive in retirement. This is particularly true for those who invest heavily in equities, which have volatile returns. Some are lucky enough to save and retire in an equity bull market; others are not.

For example, assume a DC plan participant has $50,000 by age 45, saves $5,000 in inflationadjusted dollars/year each year until he retires at age 65, and has invested 100% of his portfolio in the S&P 500. Table 2 shows the final value of those savings and the resulting annual income, in the form of a 30-year real annuity stream that eliminates inflation risk and longevity risk up to age 95 for two different periods. As the table shows, the variability of the (ex-post) equity risk premium (for example, the excess returns equities provide compared to bonds) resulted in significantly different returns, retirement portfolio values and post-retirement income depending on the investment period.

For our hypothetical plan participant, the difference between being born in a “good” year versus a “bad” year, means that he would retire on $38,576/year versus $9,627/year in inflation- adjusted dollars, respectively – despite their choosing the same investments and contributing the exact same real amount of money.

*see table 2 on page 7.

Instead of writing a long piece on what I think future retirement vehicles should look like, I'll just offer what Paul Samuelson and Robert Merton said at the Life cycel investing conference.

For starters, how about just letting everyone who wants to transfer their 401(k)'s, etc., to the TSP, since most of our options could be improved by switching, and we've already got our 401(k)'s invested in stocks and bonds. Or just have give our plans access to the cheap funds run by Barclays.

- Alec