For most participants, it’s safe to say, a Thrift Savings Plan account is a pension fund. It is a fund intended to provide living income in retirement. And like any good pension fund, the benefits it pays will be a direct result of the decisions that are made in managing the way it is invested from the beginning.
Back in 1987, when the Federal Employees Retirement System and TSP were created, employees became pension fund managers, whether prepared for the job or not. Similarly, private-sector employees once covered by professionally managed company pension plans were moving to self-directed 401(k) accounts. Most studies confirm that the vast majority of these personal pension fund managers lack anything resembling the knowledge, skill and other resources that would usually be expected from someone applying for the job.
In my experience, most amateur investment managers and so-called investment advisers obtain what they know about investing from marketing materials developed by sellers of investment products and services. The result is that too many TSP participants manage their accounts using approaches designed to further the interests of the purveyors of investment products rather than their own interests.
The point of this is not to embarrass you over any shortcomings you may have as a pension fund manager. Many professional advisers who would love to be receiving a percentage of your account balance every month for “helping” you are no more qualified than you are. Managing a pension fund is not easy. Just ask those fund managers over at General Motors and any number of other pension funds that imploded because of avoidable management errors.
A pension fund is managed to deliver a specific set of benefits. In the case of your TSP account, those benefits are your unique financial goals. Good pension fund managers do not adopt a one-size-fits-all or rule-of-thumb investment strategy for their funds. They carefully adapt their investment strategy to meet the often changing demands that are being, or will be, placed on the fund – at least they do if they want to keep their high-paying jobs.
When you’re trying to figure out how to manage your TSP account, or considering a proposal from someone who would like to be paid to do so on your behalf, I urge you to ask yourself if the strategy being considered seems like something that a professional pension fund manager would use.
While it’s impossible to make prudent pension fund managers out of every reader with a single column, it would be a huge leap forward if everyone who reads this column begins to think of himself or herself as manager of his or her own personal pension fund.
As a pension fund manager, you have a responsibility to yourself as the beneficiary of the fund. You should act prudently, which means you should understand the probabilities associated with various future events and conditions, and then manage the fund to align those probabilities with your interests. Good fund management seeks to match the level of risk endured by the fund to that necessary to meet the fund’s objectives. Not enough risk, and the benefits delivered by the fund will fall short of its objectives. Too much risk, and the fund might fail to deliver any meaningful benefits at all.
Take a cautious and somewhat cynical approach when deciding how to manage your TSP account. There are as many ways to go wrong out there as there are schemes to make money from providing investment advice. Take your lead from those who are paid by institutions to actually produce the benefits that are expected from an investment fund – pension fund managers. Doing so will help you avoid the mistakes and capitalize on the opportunities that will make the most of your TSP pension fund account.
Written by Mike Miles
For the Federal Times
Publication March 10, 2008