Thrift Savings Plan to Open Mutual Fund Window in Summer 2022

The Thrift Savings Plan's mutual fund window opens this summer. The new TSP option will feature over 5,000 mutual funds, but carry hefty fees and restrictions. Here's what we know now.
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Thrift Savings Plan Mutual Funds

Soon military and federal government employees can invest in more than 5,000 mutual funds through the Thrift Savings Plan, according to a proposed rule in the Federal Register.

Currently, Thrift Savings Plan participants can invest in any of five diversified index funds that contain investments in the S&P 500 (C fund), the Dow Jones Index (S Fund), international stocks (I fund) or government bonds and securities (G and F funds). Target-date retirement funds (L funds) are also available.

Beginning this summer, the TSP will offer a “mutual fund window” for investors to buy shares of mutual funds. However, the opportunity comes with more risk and additional fees.

Here’s what you need to know.

Table of Contents
  1. What is a Mutual Fund?
  2. How Much Do TSP Mutual Funds Cost?
  3. TSP Mutual Fund Requirements
    1. How the TSP Mutual Fund Window Works
  4. TSP Mutual Fund Manager Will Modernize Platform
    1. TSP Mobile App and More Ahead
    2. Transition May Limit TSP Access in May

What is a Mutual Fund?

Mutual funds are pools of investor money put toward other investments, including stocks, bonds and other securities. Investors purchase shares directly from mutual funds instead of buying from other investors on a larger market.

Mutual funds aren’t as diversified as the TSP’s core index funds, so they can be risky investments. But, they also give investors more control over the companies, causes and issues they want to direct their money toward, like environmental, social and governance (ESG) funds.

Responsible and sustainable investing is on the rise. In a 2021 investor survey, Callan, an institutional investment firm, found that a record 70% of respondents were either already incorporating ESG funds in their investment decisions or considering it.

How Much Do TSP Mutual Funds Cost?

By law, TSP participants using the mutual fund window must pay fees that don’t apply to core fund investors.

These include:

  • $95 annual maintenance fee
  • $28.75 per trade
  • $55 annual fee to cover administrative expenses so that traditional index fund investors don’t have to pay for an option they don’t use. The Board has proposed adjusting this fee every three years to keep up with the cost of service.
  • Any fees and expenses specific to individual mutual funds

This is inordinately expensive, according to The Military Wallet columnist and Certified Financial Planner Daniel Kopp.

“I’m thinking of a junior officer or enlisted service member with only $40,000 in the TSP. For the regular TSP expenses, they are paying less than $20 per year fees,” Kopp said.

Assuming 12 monthly mutual fund transactions, it would cost the investor in his example around $565 per year to participate in the new option – more than 30 times the price for index fund investing.

“The only scenario where I could see this making sense is for someone who has a major TSP balance of say $500,000 or more with little to no assets in an IRA, and wants to add in some specific investments,” Kopp said.

“Even then, I would just recommend they get access to those factors with an IRA through a custodian like Vanguard, Fidelity, or Schwab. Those custodians don’t have any trading fees for ETFs and have thousands of mutual funds without transaction fees.”

TSP Mutual Fund Requirements

The Federal Retirement Thrift Investment Board has proposed restrictions to minimize investor risk.

  • TSP investors must have at least $40,000 in their accounts.
  • The minimum initial transfer for the mutual fund window is $10,000.
  • Mutual fund transfers can’t exceed 25% of an investor’s TSP index fund balance.

Mutual fund transfers will also count toward the TSP’s maximum interfund transfer limit of two per calendar month (excluding the G fund).

How the TSP Mutual Fund Window Works

Under the proposed rule, TSP investors must create a mutual fund window account and sign an acknowledgment of risk.

Once you’ve done that, you can elect to transfer funds from your TSP balance to a sweep account. Sweep accounts are high-interest money market funds that hold your money until you choose your mutual funds.

You can’t direct automatic contributions to mutual funds or withdraw money from them. Your money has to be in an index fund first. (Remember: transfers back and forth can incur fees).

If you’re receiving payments from a TSP under court or IRS order, your index fund accounts must have enough money in them to cover it.

If the funds are insufficient, the Board will make an automatic “forced transfer” from your sweep account or mutual fund investments back to the index funds in your contribution allocation. If you’ve got less than $25,000 in mutual funds, the Board will forcibly transfer the entire balance.

TSP Mutual Fund Manager Will Modernize Platform

The TSP’s new mutual fund window has been about 13 years in the making.

In 2009, Congress authorized (but didn’t require) the Federal Retirement Thrift Investment Board to offer the option to TSP participants after a survey indicated investors’ interest.

The Employee Thrift Advisory Council and the Board – which runs the Thrift Savings Plan – at first disagreed on creating the program. In 2014, the Board presented the results of several years of study and the mutual fund window received unanimous approval the next year.

In 2019 recordkeeping service proposals started rolling in. The Board awarded the contract to Accenture Federal Services in 2020.

“It’s an honor to support the FRTIB to reimagine retirement services and improve the customer experience of the TSP,” Elaine Beeman wrote in November 2020.

Beeman is the civilian lead and senior managing director for Accenture Federal Services. She said Accenture will not only implement the mutual fund option but also create a more modern platform for TSP investors.

TSP Mobile App and More Ahead

Accenture aims to streamline routine TSP processes and reduce paperwork by introducing digital signatures, mobile check deposits for TSP rollovers and a secure digital mailbox.

Customer service expansions include 24-hour automated virtual assistance and a dedicated live chat “ThriftLine.” Users can also call ThriftLine’s hotline for phone assistance.

The TSP mobile app, slated for launch in mid-2022, will allow users to manage their TSP and communicate with virtual assistants on the go. The app will feature easy log-in options tailored to your smartphone’s built-in software, like fingerprint access and facial recognition.

“The new functions will give participants more self-service options to meet the expectations of an increasingly digital, savvy TSP customer,” Beeman said.

Transition May Limit TSP Access in May

In a February 2022 announcement to TSP participants, Ravi Deo, executive director for the Federal Retirement Thrift Investment Board, said some transactions won’t be available “for a brief period in May 2022.”

“But don’t worry, your money still will be invested during this time,” he said.

The expected transition dates were outlined in an email to TSP participants:

  • Expected transition dates: May 16 to the first week of June
  • All transactions temporarily unavailable: May 26 to the first week of June
  • Full access and transactions restored: first week of June

Deo said users must set up online account access again after the transition period.

“In the coming months, you’ll receive communications from us with instructions on how to complete those steps,” he wrote in the announcement.

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