Tuesday, August 12, 2014

Undermining One of the Best Retirement Plans in the U.S.: Federal Thrift Savings Plan

Undermining One of the Best Retirement Plans in the U.S.:  Federal Thrift Savings Plan

The Federal Government runs one of the best 401(K) programs in the country. It’s inexpensive and offers a broad but manageable number of options.  The long-term performance is good, which should come as no surprise since the fees are extremely low.  The plan has $4.6 million members and over $400 billion in assets.  However, Bloomberg reports that Wall Street brokers are targeting retired federal employees and veterans with marketing pitches.[1] 



There’s only one reason for this activity.  Separating a former federal employee from the Federal Thrift Savings Plan is good for the bottom line at Bank of American, Wells Fargo, Charles Schwab, and Vanguard.   According to Bloomberg’s reporting, the average fee charge by a Wall Street firm is 20 times higher for an equity-oriented investment option.  Even low-cost Vanguard charges about twice as much as the Federal Thrift Savings Plan.  John Turner, a former economist at the Department of Labor exposed these practices.   Mr. Turner posed as a prospective customer in order to receive the firm’s pitches.

When confronted by Bloomberg, the banks defended their practices.  One spokesperson tried to argue that their firm had better investment performance.  Eventually they were reduced to arguing that one of their small cap options had better long-term performance.  Pretty lame.  Even Vanguard had to admit that the Federal Thrift Program is less expensive than its own offerings.  Vanguard argued that it might provide value for someone seeking financial advice.  It’s a pretty weak argument.  The Federal Thrift Program has financial planning tools and plenty of background material on its website.[2]

The federal government is often maligned.  In many instances, the criticism is deserved.  However, when it comes to administering a retirement system, the private sector could learn a thing or two. If brokers adopted the FTP’s practices, it would be good for investors and not so good for Wall Street’s bottom line.  Instead, Wall Street will continue to try to pry federal employees away from the Federal Thrift Program.  Given the marketing programs, resistance is probably futile.









[1] http://www.bloomberg.com/news/2014-08-12/brokers-lure-soldiers-out-of-low-fee-federal-retirement-plan.html
[2] https://www.tsp.gov/index.shtml

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