Lawmakers continue to push for changes to the Thrift Savings Plan — primarily the addition of a fund that
invests in real estate. These changes, if implemented, may have a significant impact on your retirement
plans and deserve your understanding and consideration. You may even want to voice your opinion about
one or more of these changes to try to protect your interests in the plan.
More is better, right? Well, not necessarily, although it is the approach taken by many private-sector
retirement plans and retail savings vehicles like variable annuities and life insurance policies. These plans
offer dozens of fund investment choices to participants, primarily for marketing purposes. The plans’
sponsors like the approach because it helps to relieve them of any liability from failing to offer adequate
investment choices, and it appeals to participants who agree that more is better. Also, the image of
investment plans is elevated when recognized brand names like Morgan, Fidelity and others appear in the
plan’s fund roster.
The investment companies that manage these funds also like the “more is better” approach since it helps
them to position their funds in more plans and attract more assets to manage — which means more
revenue and, potentially, more profits.
But is this approach good for TSP participants? In this case, the benefit is not so certain. As a retirement
planner, I find one of TSP’s greatest strengths to be its simplicity. There are now enough markets
represented in the TSP’s five funds to implement a well-diversified and efficient investment strategy
appropriate to any stage of the retirement savings and spending lifecycle. Is it an improvement to offer
additional funds that invest in subsets of these markets? Not if it causes expenses — your costs — to rise.
And not if it results in further indecision or counterproductive investment behavior from participants. Both
would be likely, if not certain, outcomes.
Given my experience with TSP investors, I seriously doubt that splitting up the C Fund, for example, into a
variety of funds representing the economic sectors or industries that make it up would improve the longterm investment results, and corresponding retirement income stream, for many participants. If costs rise,
then the expected value of those investment results would, by necessity, fall.
With the exception of certain emerging foreign economies, every mainstream investment class is
represented in the current TSP offerings. TSP has successfully avoided the temptation — and pressure —
to sacrifice the interests of participants for the benefit of those who would seek to profit from them. At a
certain point, the cost of adding new investment choices outweighs the potential benefit. TSP has
reached that point, and its administrators recognize this.
Lawmakers are pushing to add a TSP fund that invests in real estate investment trusts (REIT). It’s no
coincidence that this push comes on the heels of one of the hottest U.S. real estate markets on record.
Real estate is, in spite of growing concern, one of the investing “flavors of the day.” Those who manage
funds that invest in real estate, as well as the current owners of interest in those funds, would love to see
a REIT index added to the TSP — not because it’s good for participants, but because it will help to deliver
profits to those outside it.
Would it have been beneficial to participants to have added a technology sector fund to TSP in 1999? It
could have been a disaster. Not only is a REIT fund unnecessary to the long-term success of plan
participants, but adding it at this point may be the equivalent of buying a ticket on the Titanic.
It might be beneficial, however, to broaden the scope of foreign investment opportunities beyond those
offered by the I Fund, which tracks investments in the developed economies of Europe, Asia and the Far
East. Conspicuously absent from TSP offerings are the developing economies in those areas and any
significant investment in Canada or Latin America.
There are practical reasons why this omission exists, but TSP management has expressed an interest in
filling the gap when valuation and reporting capabilities improve enough to make an appropriate fund
According to participation statistics, one of the biggest challenges facing TSP participants is under-diversification. Too many participants are invested in only one or two funds — often including a large over-investment in the G Fund — to their potential detriment. TSP took a huge step toward solving this problem with the introduction of the L Funds. Adding unnecessary fund choices at this point will only distract
participants from the truly important goal of effectively using the excellent tools they have already been
Written by Mike Miles
For the Federal Times
Publication January 30, 2006