By George Ray

Federal employees generally love their Thrift Savings Plan, and most are participating in it (recent stats say 89% of the total Feds who are eligible to participate are contributing). But there is one complaint that I hear that, if fixed, could dramatically improve the program, and decrease the amount of money that leaves the TSP after Feds retire (stats say that over $ 9 billion is withdrawn from accounts annually).

Since the inception of the Thrift Saving Plan, distribution options have been strict and rather limited. Choices after leaving service include:

A lump sum distribution of all the funds in your account (which will permanently closes the account),
A partial withdrawal (one-time only), unless you had previously made a partial withdrawal while in-service after reaching age 59 ½,
A series of monthly payments (which may be determined by you, or can be determined based upon your life-expectancy) but can only be changed once per year,
Annuitize the balance or some portion of it to receive monthly payments for life (and include survivorship options if desired),
Request some combination of the above choices.

These options would seem to give retirees enough flexibility to allow their savings to remain in the plan throughout retirement, but most would like the ability to request multiple partial withdrawals throughout retirement as the need arises for larger sums of cash (e.g., a cruise, major purchase or repair, family gifts, etc.)

For many years, the folks at the TSP have promoted the low costs of the plan as a reason to keep money in it and there is no doubt that the expenses here are lower than any retail investment accounts (unlike most retail investment firms, the TSP isn’t in business to make a profit). And while keeping investment and custodial expenses low are important, the Thrift Savings Investment Board has learned nothing is as important to a retiree than the peace of mind of knowing that he can get access to hard-earned savings when needed.

The good news is that the TSP Modernization Act of 2017 was recently introduced by Senators Rob Portman (R-Ohio) and Tom Carper (D-Del.) Because the bill simply proposes changes to existing language, there isn’t much to read, although you can download a copy here if you want.

The idea behind the bill is to make some small, but valuable changes to the existing rules to:

Allow multiple age-based withdrawals while a participant is still working
Eliminate the restriction that participants cannot take partial post-separation withdrawals if they’ve already taken an age-based in-service withdrawal
Permit multiple partial post-separation withdrawals
Allow participants to stop monthly payments and elect to purchase an annuity while receiving monthly payments.

Will the bill pass? It would certainly seem to provide benefits to both the TSP and the Feds who keep money in the program. It also seems harmless enough considering all the other major news and events that are happening in the US, but how will Wall Street weigh in? Will options to help retired Feds keep their money invested in the TSP lead to fewer dollars flowing to the Street?

Just as importantly, does the bill have any positive or negative ramifications around budget issues? The Congressional Budget Office has yet to score the Portman-Carper bill, but the senators project the changes to the TSP distribution rules could achieve cost savings if it results in earlier, taxable withdrawals from the TSP. OK, maybe. But more likely, it will lead to additional expenses for the TSP who may need more customer support personnel to deal with retirees taking out money whenever they need it.

Let’s keep an eye on this, and hope that it passes because it’s about time you had more TSP distribution choices.