Ask The Experts: Money Matters

By Mike Miles

Don’t overlook TSP for lowest-cost investment

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Did you know that the Thrift Savings Plan puts free money into the account of every investor? It’s true! And, I’m not talking about the automatic 1 percent or matching funds contributed to the accounts of FERS-covered employees. I’m talking about something different. Even participants covered by CSRS get this free money. Every participant gets it every day, every week, every year they maintain a TSP account. And the more money in the account, the more free money you earn. Technically, the money isn’t contributed to your account — it’s just not taken out of your account, as it would be anywhere else.

So, how much free money are we talking about? A lot, actually. The TSP’s most recently published expense ratio, a measure of the cost of investing through the TSP, is 0.025 percent. That’s 25 cents per year, for each $1,000 you have in your account. A $100,000 TSP account incurs, or loses, only $25 per year to costs. To anyone familiar with the investment industry, this is nothing short of phenomenal. To anyone who makes his living from a percentage of investor assets, it’s terrifying.

Consider a typical investor with $100,000 invested at a major brokerage firm, bank, insurance company or investment adviser. Even if he doesn’t pay for investment advice or account management, sales loads or commissions, and manages his own account using mutual funds, he is likely paying at least 0.8 percent per year — paid daily — to those mutual funds for expenses.

According to Morningstar, that’s about the average cost of a retail mutual fund these days. On $100,000 of invested assets, that’s a cost of $800 per year, or $775 more than a comparable TSP account would cost, each and every year.

Pay for investment advice or account management services on top of the fund costs, and it’s even worse — often much worse. The industry norm for investment advice and account management is around 1 percent — usually on top of any fund or transaction costs. One percent is an additional $1,000 per year, on top of that $800.

The TSP offers the benchmark for low investment costs. It is the lowest-cost investment environment available. If you believe, as I do, that a penny saved is a penny earned, then the TSP pays you a whole lot of pennies every day of every year you’re invested there.

So, what does this mean to you? It means that anyone who’s proposing that you leave the TSP and move your money to an individual retirement account has some serious explaining to do. What is worth paying hundreds or thousands of dollars a year for? If the answer is “better performance,” you should keep in mind that the mutual fund industry has what can best be described as a miserable track record of beating low-cost index portfolios like the ones you can’t help but build in the TSP. You should ask for a guarantee. Millions of American investors pay for better performance from mutual funds year in and year out, only to be shortchanged. If you review the history of fund performance objectively, you’ll find that the odds of spending more than you’ll earn by using managed mutual funds are 4-to-1 — not a smart bet. Try asking your mutual fund or stock-picking advocate to give you a money-back guarantee on the results and see what happens. Not a chance.

The investment industry is doing and saying anything it can to get at your TSP account, and it’s not your benefit it has in mind. I urge you to resist the temptation to believe there is some better solution to the problem of saving and investing for retirement. There is not.

At 2.5 basis points per year — those are one-hundredths of a percent — the TSP is the envy of private-sector investors and kryptonite to brokers, bankers and insurance agents. Make the most of the TSP, and you’ll reap the rewards. Fall for the sales pitch, and you’ll pay the price — literally.

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