“It’s very inexpensive,” LaRandeau said of the Thrift Savings Plan. “There are a lot of sharks out there taking your money, and pretty soon it’s gone.”
Few people are as knowledgeable about the government plan as Turner, 65, who has devoted his life to studying pensions.
Turner, an economics Ph.D. from the University of Chicago, worked more than 20 years for the Labor Department and Social Security Administration before heading the Pension Policy Center. Its clients for research and consulting include AARP, the U.S. Chamber of Commerce, the International Brotherhood of Teamsters, the United Nations, Canada and Norway.
Calling Brokers
For two months, starting in January, Turner called up customer-service lines listed on the websites of nine financial companies, including T. Rowe Price Group Inc., Charles Schwab and Bank of America’s Merrill Edge. He told them he had $200,000 in his Thrift Savings Account and asked what he should do with it.
A representative of Baltimore-based T. Rowe Price recommended a rollover, Turner said. Part of the pitch: Turner would have access to small-company stock funds closed to new investors. Turner figured one of the funds had expenses more than 30 times that of a similar offering in the government plan.
Because Turner sought advice anonymously and did not note names of the employees he spoke with, the companies said they couldn’t determine what he was told. They said that their representatives provide appropriate information to callers.
‘Qualifying Questions’
T. Rowe Price noted in a statement that its small-company stock funds, after expenses, have outperformed the index tracked by the federal plan. Dennis Elliott, head of individual investor channels, said representatives determine prospective customers’ goals and offer options.
“We ask qualifying questions, but we do not provide advice,” Elliott said.
In an e-mail, Schwab said it educates potential clients about fees and services “to help them make an informed decision based on their specific circumstances.” Bank of America’s Merrill Edge said each customer’s goals are different and it provides information about choices, “including keeping their assets in place.”
Vanguard Group, known for its low-cost index funds, stood out for a more balanced approach, Turner said. The company’s representative asked about Turner’s tolerance for risk, he said. If it were low, the representative told Turner, he should stay with the government guaranteed fund. Otherwise, Vanguard could be a better choice.
Melissa Nassar, a principal with Vanguard’s retail investor group, said Turner would likely have been eligible for Vanguard funds with costs as low as .05 percent. While almost twice the price of the government plan, the increase would amount to only $40 a year. Turner then would have received the benefits of consolidated accounts and free advice from a financial planner - - something that could cost $100 to $200 an hour if done separately, she said.
Turner, who hopes to publish an academic paper based on his findings, isn’t following the brokers’ advice himself. Since his investigation, he took another $200,000 he had saved from other employers and rolled it over -- into the Thrift Savings Plan.
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.