Like most plans, the federal program offers general education on its website about investing but leaves decisions to workers. Current and former employees can choose to roll money from other sources into the plan, as well as out. To fight against defections, Thrift Savings officials are considering adding more investment options.
“Why are people taking money out when they don’t need to?” said Kim Weaver, a spokeswoman for the plan. “Our concern is the Thrift Savings Plan is the lowest cost plan in the country. To move out, you should be doing it for a good reason.”
‘Don’t Move Out’
Alicia Munnell, director of Boston College’s Center for Retirement Research, has some simple advice for anyone approached by a broker seeking to roll over money from the government plan: “Don’t move out. You can’t duplicate those fees anyplace else.”
That’s not the advice that federal employees are likely to find on the Internet. From January through April, the Navy Federal Credit Union, which caters to the military, offered up to $200 to those rolling over their retirement plans and opening their first IRA, which would be invested in certificates of deposit.
“Time is running out!” the ad on the credit union’s website said, next to a photo of a hand grasping two $100 bills. “Start saving today!”
The Vienna, Virginia-based company, the largest U.S. credit union, says the campaign was aimed at getting young soldiers to open their first IRAs. They could have received $100 for starting an account with as little as $50.
Older Clients
Those who rolled over retirement plans tended to be older and looking for the convenience of consolidating their investments, as well as the safety of certificates of deposit that paid as much as 3 percent annually, said Sharon Sutherlin, who manages Navy Federal’s IRA business.
“It depends on what’s right for the member,” Sutherlin said. “That’s what the bottom line is here.”
In his memo, Long, the Thrift Savings Plan executive director, expressed concern about another financial company focusing on the military: the United Services Automobile Association. Its website cites the advantages of an IRA over the federal plan, such as “thousands of investment choices, including stocks, bonds and no-load mutual funds.” It also provides a link to the government forms needed to transfer.
USAA’s stock mutual fund that tracks the Standard & Poor’s 500 Index costs about 9 times as much as the one in the government plan. Funds with managers who pick stocks are even more expensive.
Until recently, a military retirement guide that the company distributed online urged service members to roll over their thrift savings plan to a “USAA no-fee IRA.”
Misleading Term
In 2013, the Financial Industry Regulatory Authority, the industry’s self-policing group, said the term “no-fee IRA” could be misleading when there are management fees and other expenses associated with the account.
In an e-mail, Laura Propp, a USAA spokeswoman, said the company had distributed the guide from 2005 until September 2012, when it published a new guide without the “no-fee” language. On Aug. 1, after Bloomberg News asked about it, the company removed a link to the older guide that USAA had intended to deactivate, she said.
“The advice given in the new guide shows that USAA recommends a member contact an adviser to get advice that is tailored to their situation,” Propp said. Its website features a pro and con list for customers considering rolling over from the Thrift Savings Plan that mentions its low fees, she said.
‘Ridiculously Cheap’
Scott Halliwell, a financial planner at San Antonio, Texas- based USAA, said the government plan is “ridiculously cheap” and his company wouldn’t “go out and say, ‘Just roll it over.’”
Still, Halliwell said many former federal employees don’t have the time, expertise or inclination to manage money themselves and could benefit from a rollover to USAA.
Companies such as Regal Assets LLC are encouraging Thrift Savings Plan members and others to put their retirement money into “Gold IRAs,” which invest in bullion and coins. Under a banner headline, “Rollover your IRA or 401(k) into inflation- proof gold and silver,” the company’s website provides a testimonial from a former Thrift Savings Plan participant who transferred money to Regal Assets. Identified as “Dennis R.,” he is quoted as saying that he was “very happy with the outcome and would recommend Regal Assets to anyone wanting to invest in precious metals.”
Finra and the Federal Trade Commission warn investors about gold’s price swings and the possibility that dealers may be selling at inflated prices.
Regal Assets
Regal Assets customers typically pay a markup on gold coins of 5 percent to 9 percent, Tyler Gallagher, chief executive officer of the Waco, Texas-based company, said in an interview. In addition, they pay $250 annually for storage and an administrative fee, he said. Investors are looking for a hedge against inflation and a decline in the dollar.
“People are paying for peace of mind,” Gallagher said.
Among those forsaking the federal plan is John R. LaRandeau, a civil engineer from Omaha, Nebraska, who left the Army Corps of Engineers last year and rolled over $200,000 into an IRA. First, he chose a brokerage account he managed himself and then an account with Omaha-based Carson Wealth Management Group, which charges 1.8 percent of assets under management for accounts up to $2 million.
LaRandeau’s adviser at Carson, Phil McBride, said customers want to protect themselves because bonds, the traditional choice for conservative investors, could lose value when interest rates rise. Carson hedges against that risk, he said.
Downside Risk
“If you’re looking for active management -- something that really protects you from downside risk -- we have strategies that make sense,” McBride said.
Worried about such losses, LaRandeau, 67, said he is pleased with the arrangement. Still, he’d advise 95 percent or more of account holders in the government plan to stay put, he said.
Brokers Lure Soldiers Out Of Low-Fee Federal Retirement Plan
August 12, 2014
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Comments
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I made two comments 4 months ago. Why are you running this garbage again. Don't you have anything better to print or is it too close to the holidays and you are desperate for filling space. It was totally invalid 4 months ago and nothing has changed.
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I am surprised the article mentions nothing about the distribution options to non-spouse beneficiaries. Seems to me, this is important for participants to understand.
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Well, now it's tomorrow, and I wanted to review this again to see if it was truly as offensive as I originally believed. The title jumped right out at me as soon as I logged on. "Brokers LURE Solidiers..." LURE. That's what tricksters, hucksters, con men, and thieves do. They LURE their prey. I am glad I slept on it. This is so much more offensive than I originally thought, even as offended as I was. This magazine owes a lot of people a HUGE apology for this.
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I am still fired up about this article having been prominently advertised by FA Mag in an email i received. Sounds like it struck a chord with others as well. I have taken myself off the distribution list going forward. Truly unfortunate that absolute garbage is emailed out to a wide audience like this and allowed to go. I'd love to know the authors name so i can personally reach out to him/her and express how truly insulted I am.
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There is so much inaccurate with this article that I forgot several key points in my initial discussion. In the case of the military they do not receive any sort of matching dollars to their TSP contributions like civil service employees so that incentive is not part of the equation. TSP like other 401K plans do not have as much plan flexibility as IRAs do concerning stretching assets to beneficiaries and even the Roth version requires mandatory distributions beginning April after the 70th birthday. When the owner dies the beneficiary has to roll the TSP over into a IRA anyway and the list of differences goes on....... not to mention all the investment flexibility and much better client service offered by many fund companies versus the TSP administrator. It would be interesting to have Dalbar do an assessment of the TSP administrator for customer service support. All that without going into the customer service and advice offered by the financial planner.
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The most amazing thing about this article is the fact that Bloomberg News .... who claims to be a financial media outlet actually printed this trash without vetting the content. The TSP may have done well in 2013 but then almost everything did well. Obviously Turner read the thrift saving plan false advertising discussing that their fees are only .25%. That is the fee the Thrift Saving Plan administrator assesses for operating the plan and does not include any of the expenses associated with the funds that make up the Thrift Savings Plan. One of the other com mentors discussed the results of the Congressional Budget office study that documents the overall cost to the participant being around 7% (not counting the Government subsidy). That same Administrator had to relocate their operations from Louisiana when hurricane Katrina flooded their operations building. Participants were assessed the cost of rebuilding the operation in Alabama. I think the total cost for the new operation was around $35 million. If any other administrator tried to bill participants for a facility loss they would be barred from the industry. If memory serves, the S fund and the I fund were both under performing Desdner funds with little cash in them that were offered with incentives to the government by the purchaser of the defunct fund company assets. In the case of index funds unless the fund has significant new cash flow the adjustments made based on the cap weighting of the index most likely results in having to sell something that has gone down in value to buy more of something that has gone up in value. Just backwards to the intended goal. Vanguard is one of only a few that has the tremendous cash flow to not be affected by this much. In 2013 there were S&P index funds that had tracking errors as high as 9% because of this cash flow problem. Indexing did well in the 90's when the index industry went from only the Vanguard 500 fund to over 300 S&P index funds and many hundreds of ETFs tracking indexes as the sheer volume expanded the bubble at the top of the index. Many stocks in that bubble still have not come close to selling for the same offering price 14 years later. Most ETFs are synthetic meaning they don't actually own the stocks in the index so do not receive dividends. If dividends represent 40% of the overall return of the S&P then ETFs that don't own stocks probably won't match the long term returns of the S&P. At any rate, indexing makes up about 20% of all transactions on the market today .... which in many ways artificially moves the indexes. As someone that has worked in the industry for a couple decades when some light weight says brokers are not held to the same standard as investment advisers it makes me ill. Between firm supervision and FINRA every client transaction has many more "eyes" on them than a fee management shop. In fact, two FINRA representatives spent the day in my office last month and in addition to reviewing every client transaction my brokerage firm inspects my complete operation every 3 years. Many investment advisers will never be "inspected". Simple math proves that paying a small commission up front is much cheaper over the long term than paying some fee manager 1% or much more out of the individual's growing assets especially if a fund company is used that offers all the required investment categories. The more the individual has under investment the better the break point. Invest a million dollars with a fund company and there is no sales charge. Many fee managers won't even handle clients under a million dollars.
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Additionally, if we're talking about costs and the TSP, there is a Congressional Budget Office study on the program that indicates that the overall cost to the participant in the TSP is about 7 percent and to the government the cost is about 26%. So, no matter how low the internal fund management fees are, there is still a substantial cost involved in this program that nobody is addressing. I am a member of a retired senior military officers group where I have found that even at the high ranks involved, many of these people do not understand even the basics of the TSP, especially the ramifications after leaving service, and if they stay in the TSP it's because they are afraid to take any action due to lack of knowledge. They are bound to run into major problems trying to navigate a government program on their own in retirement. After all, it is a government program, and we all know how well they work.
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It is quite possible to hire a financial planner and stay in these low cost, strongly performing investments. Planners have the option of working with clients on a fee based, hourly based, commission based, or other arrangement. Why are so many planners "stuck" in a commission mode and feel compelled to take a large lump sum and roll it over to a product that can actually be a windfall for the planner. You might feel it is appropriate to have a client lose $5750 per $100,000 rollover. I would rather receive an hourly amount paid for with non-invested assets. If that sounds not self-centered enough for you, so be it!
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I cannot begin to explain how insulting this article is to my profession. Are doctors evaluated based on "cost" vs the government?! it seems to me this is the govt trying to keep investors assets, and only telling a small part of the story (fees), vs all the value that financial planners offer (eg. cashflow analysis, risk analysis, determining how much income should be withdrawn, how to interpret daily news and volatility)...the list goes on - it's almost to suggest that a financial planner should work for FREE or they are a crook.....wow, I really hope the author (could not locate conveniently.....) gets better educated before they write something like this again. I have literally never taken the time to write a response post, but I had to...I'm literally stunned and insulted....
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Correction to my initial post: ""Paying a lower expense ratio does not mathematically insure higher returns or better quality management"> I mistakenly said "higher"
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I don't understand why the only qualitative and/or quantitative consideration regulators and other pundits focus on is the expense ratio. It is only a small part of the issue, and paying a higher expense ratio does not mathematically insure higher returns or better quality management. The TSP is a great program for those who are currently in the employment of the Federal Government, but being familiar with the TSP as a former service member, and understand the inner workings of the TSP, the whole story is not in the expense ratios of the funds. The booklet entitled "Withdrawing Your TSP After Leaving Federal Service" published by the TSP needs to read and understood by participants and advisors. There are features, complexities, and more importantly limitations and restrictions that the participant may not have in an IRA account. I don't believe the average participant can navigate this or understand the ramifications, let along keep track of all of it over time. For some individuals the right answer may be to leave their money in the TSP, but for others, the choice to leave may provide more security and YES, MORE OPTIONS in the future, with fewer trip wires to created irreversible mistakes. Expense ratios are not the holy grail of investing, and not necessarily the holy grail of fiduciary responsibility either.
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If your only concern is fees then stick with the TSP. If you want someone to explain options, provide monitoring and asset allocation, other benefits/features, different investment options then you'll have to pay for them. This is the typical federal employee/retiree who thinks because they have an advanced degree, they are suddenly a financial guru. While he may be able to figure out how much longer we have until the financial apocalypse occurs due to excessive government borrowing, what he DOESN'T have access to is the myriad choices and financial tools that come available to market all the time. The agent/broker/advisor has a CAREER to evaluate these new plans and price is certainly not the sole determinant. This is like saying, "I keep getting these terrible headaches, but the doctor charges $300 for an appointment and diagnostic tests. So instead, since I took some courses 30 years, I self-diagnosed, took two aspirin and saved a lot of money!" Yeah, okay sport.
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I have one more comment. Your assessment is identical to saying that every employer should hire the cheapest worker they can find, regardless of any other factors including skill, motivation, desire for advancement, reputation, work ethic, and so on. No criteria other than anyone who walks through the door willing to take the lowest wage. You'd be out of business in no time.
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This story would make sense if fees were the only factor in determining results. But it isn't. "Low fees" does not necessarily equal good performance. It also does not necessarily indicate suitability. I do not know, but would guess that none of these funds equal that of Warren Buffet, or John Templeton, or many other outstanding investors who charge higher fees. But even if it does, a broker has to consider many more factors than fees. For example, volatility, conflicts, cash flow requirements, tax consequence, and time remaining before change in any of these factors may occur. Your assessment based on no factor other than fees shows your lack of investment knowledge, and concern for customer satisfaction.
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What the studies fail to address is what Carl Richards calls the "behavior gap." Left to themselves, Federal Employees' returns do not match those of the funds--because they chase returns and sell at the bottom or try to avoid risk at all cost, and thus miss available returns. What is missing from the Federal plan as well as most 401(k) plans is the personal advice that addresses this behavior gap. The true cost of the Federal Plan includes the return lost to neglect, fear, greed, and misinformation.
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This seems like an incredible stretch. Almost slanderous and definately should be considered financial planning although not a financial plan, therefore carelously close to CFP board infringement. This article is upsetting in many ways, despite being a one trick, non-informing piece af trash one dimension article, it paints the entire industry in a bad light as money grubbing capitalist pigs only feasting on the hard work and sacrifice of our countriy's most proud and brave citizens. Shame on you.
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Does anyone but me get sick to high heaven of all these articles and supposed "research" done by academicians who have never, ever done a single financial plan, nor ever, ever sat in front of a client - about how financial advisors are "evil" because they don't offer the cheapest possible products all of the time - AND work for free to boot? While the TSP is certainly a low-cost solution - it isn't all that and a bag of chips. So the G fund outperformed most money-market equivalents! How did it do against low-duration funds that also included high yield bonds in the portfolios? Not well. So the S fund outperformed 90% of the small-cap funds last year? So - big deal - so did the ETF's that track that index. Lets discuss the I fund - the international fund within the TSP. How well did it do against most top tier, actively managed international funds like Oakmark or Dodge and Cox? VERY poorly. Let's talk about asset allocation. Show me the following investment options within the TSP: Total Return, High Yield, World Bond, Mid Cap, Floating Rate/Bank Loan, Emerging Markets, Real Estate, and Utilities. Where are these BASIC building blocks of a well-diversified portfolio?? They don't exist. The TSP does well in a bull-market if one is invested only in the C,S, G, and F funds - and suddenly all of these academicians suddenly think they are Einstein because they say "The TSP is Cheap. If you compare only FEES, the TSP is cheaper and it must be better." This is research? This is journalism? No. This is TRIPE. Hogwash. Wikipedia research and should be thrown into the garbage can where it belongs. Instead, show me where the TSP portfolio optimizes on the Efficient Frontier, compared to professionally designed portfolio using all of the available asset classes. Show me how we can insulate the TSP portfolio against rising interest rates while still generating a return for conservative investors! Show me how the TSP is superior in its ability to allow an investor to to pick and choose WHICH countries one can invest in - and which countries one can avoid - based upon active management needs and varying economic cycles instead of being stuck to an arbitrary index. Show me those things, and perhaps I'll respect your research and your journalism. But stick to the same tired old "hey this account is cheaper so it must be better" and I'll keep throwing your articles and your research into the garbage where it belongs.