What are the fees for thrift savings plan?

When you take up a job in the federal government or uniformed services, you will have access to a thrift savings plan (TSP) as part of your benefits. TSP is the equivalent of the 401(k) plan for private sector employees, but TSP has considerably lower fees than a 401(k). So, what fees do you pay for a thrift savings plan?

The fees charged by TSP retirement plans include administrative and investment expenses. Administrative expenses pay for the cost of operating recordkeeping systems, offering participant services, and mailing notices and statements. On the other hand, investment expenses are the fees incurred to pay investment managers. Administrative and investment expenses are expressed as a percentage called expense ratio, which is expressed as a percentage of the fund’s account balance.

What is a Thrift Savings Plan?

The Thrift Savings Plan was established in 1986 to help federal employees invest in a tax-advantaged retirement plan with similar benefits to a 401(k) plan. TSP participants can contribute to the plan directly from their paycheck, and still collect a match from their agency. These contributions are invested in various funds to earn a return.

To participate in a TSP plan, you must be a federal government employee or a member of the uniformed services. If you recently joined the federal government, and don't have access to a TSP plan yet, you should check with the benefits office in your agency.

Generally, TSP provides a traditional and Roth option, and each option has different rules on how contributions and investment earnings are taxed. With a traditional TSP, you defer paying taxes when you contribute to the account, and you will only pay taxes when you retire and start making withdrawals from the account. In contrast, a Roth TSP is funded with post-tax dollars, meaning you pay taxes on the contributions before they reach your account. The Roth contributions grow tax-free, and you won’t pay taxes when you take money out of the account.

Thrift Savings Plan Fees

All retirement plans charge a variety of fees to meet their operating expenses. These fees may be charged as a fixed fee or as a percentage of your TSP balance. When deciding how to invest your TSP money, you should consider the fees you pay since paying too much fees can reduce the growth of your investments.

Thrift savings plan fees comprise administrative and investment fees.

Administrative fees

Administrative fees are costs incurred to maintain the TSP account, and they may include recordkeeping fees, the cost of providing participant services, and the cost of printing and mailing statements, notices, and publications. These costs are paid primarily paid by forfeitures of the agency and TSP loan fees. The net administrative fee is what is left after forfeitures.

Investment fees

Investment fees are the costs incurred to manage the plan investments. They are charged as a percentage of the assets involved, and they are paid as an indirect charge against the participant’s account since they are deducted from the investment returns.

Expense ratio

The impact of the net administrative fees and investment fees on the earnings of each fund is expressed as a net expense ratio. All TSP participants in a specific fund are charged a similar percentage of their assets to meet the plan’s expenses.

The expense ratio is calculated by taking the total administrative and investment expenses charged to a fund over a period divided by the fund's average balance for the same period. For example, if the G-fund’s expense ratio is 0.055%, it means you pay 55 cents per $1,000 of your G-fund balance.

How TSP expense ratio compares to other investments

TSP has among the lowest fees among retirement plans, and this allows participants to keep most of their earnings. As of Dec 2021, the total TSP expense ratio was 0.49%, comprising $0.043% net administrative expense ratio and 0.006% investment expense ratio.

An expense ratio of 0.049% represents 4.9 basis points or $0.049 per $1000 TSP account balance. If you have a $100,000 account balance, the expense ratio totals $49, which has a negligible impact on your net worth.

You can compare TSP’s expense ratio with other investment platforms like the Vanguard Balanced Index Fund (VBIAX). VBIAX invests in stocks and bonds, and its expense ratio is comparable to the TSP at 0.07%. Though this ratio is significantly lower compared to other investment platforms, it is still higher than TSP.

For example, with a $100,000 asset value, you will pay an expense ratio of $70 with VBIAX, higher than the $49 you will pay with TSP for an equivalent asset value.

TSP Investment Options

TSP participants have access to five core funds that are designed to meet their investment objectives and risk tolerance levels. The TSP funds are managed by Blackrock Capital Advisers, and none of the funds are available for trading on a public exchange; the funds are designed primarily for TSP participants.

Here are the five TSP funds:

G Fund

The Government Securities Investment Fund (G Fund) invests in short-term US debt securities that are issued by the federal government specifically for the TSP. The G Fund carries the lowest risk of all five funds, and it guarantees the return of the investor’s principal.

F Fund

The Fixed-Income Investment Fund (F Fund) invests in a variety of debt instruments including municipal bonds, corporate bonds, and mortgage-backed securities. This fund tracks the performance of the Bloomberg Barclays US Aggregate Bond Index. The F Fund pays higher monthly interest than the G Fund, but there is no guarantee that the issuer will refund the investor’s principal.

C Fund

The Common Stock Index Investment Fund (C Fund) invests in large and mid-cap companies that make up the Standard and Poor’s 500 index. The C Fund has higher volatility than F Fund and G Fund, and it has earned higher returns over time.

S Fund

The Small Cap Stock Fund (S Fund) tracks the performance of the Dow Jones US Completion Total Stock Market Index, which provides exposure to small, domestic stocks that are less established than the S&P 500 companies. The S Fund has one of the highest risks in the TSP.

I Fund

The International Stock Index Investment Fund (I Fund) tracks the performance of the Morgan Stanley Capital International EAFE. The S Fund is a high-risk fund, and it has yielded higher returns than the C Fund.