The Thrift Savings Plan is imposing a new trading restriction next spring that may seriously limit your ability to manage your account. According to TSP’s governors, this move – limiting the number of interfund transfers, or trades, to two per month per account – is intended to prevent the vast majority of participants from subsidizing the expense generated by a small minority of active traders. While this is a goal that I strongly support, I don’t agree that this tactic is a reasonable way to get there.
The new rule will most certainly eliminate frequent trading by participants and, in doing so, will effectively prevent some participants from doing exactly what TSP has obligated them to do – manage their own accounts and take responsibility for the outcomes produced by that management.
By stepping in with this new restriction, TSP is, in effect, making investment management decisions on behalf of participants by telling them that they can’t implement their chosen strategy. I don’t support the practice of active trading in retirement accounts, but I do support investors’ right to manage their money as they see fit.
I find the TSP board’s rationale for its decision, which is explained under a special link at www.tsp.gov, to be weak. It claims that the new rule is consistent with the practices of other mutual funds and that it will have no effect on 99 percent of TSP participants. TSP has departed from its previous leadership in providing examples of better ways to run a retirement plan and is now willing to follow its inferior private-sector counterparts. One of the problems with many mutual fund investments is that their redemption restrictions make it difficult to rebalance a portfolio. This is one of the reasons I prefer exchange-traded funds to mutual funds – no restrictions on trading.
While it is not made clear in any of the published information I can find, TSP officials have stated that by two interfund transfers per month, they mean rounds of rebalancing among any or all of TSP funds. As TSP points out in the material on its Web site, this is more than adequate to meet the needs of most investors. While this may be true, it skirts the real issue.
As obsessed as I am about keeping TSP’s cost to participants low, it appears the chosen approach is to cure a headache by chopping off the head.
The headache in this case is the subsidizing of the activity of a few by the many. The head is participants’ freedom to act in their own self-interest. For participants to accept responsibility for managing their accounts, they must have sufficient freedom to do so effectively and according to their choice.
Who will be responsible for the loss of retirement income that ensues from this new rule? If the TSP board is going to dictate how you manage your account, shouldn’t it also be held accountable for the outcome?
Rather than taking away a participant’s freedom to trade within the capabilities of the current system, the costs associated with a participant’s trading activity should fall where they belong: in the participant’s account. The cost of active trading is currently artificially low to the trader and is, for the most part, borne involuntarily by innocent bystanders through expenses deducted from the value of each share of every fund. If the cost of trading were shifted from the plan’s general expenses to the trader’s account, the expense ratio for the funds would be lower. Most participants would save money and the active traders would have to bear the true cost of their investment strategies.
This approach would allow participants the freedom to manage their accounts the way they choose without giving them the ability to do it at another participant’s expense.
Keeping TSP’s costs low is an important objective – one that I have actively supported over the years – but not one worth sacrificing the basic freedom that forms the core of the plan’s value to its participants.
Written by Mike Miles
For the Federal Times
Publication December, 17, 2007