Understanding the Limitations of the Thrift Savings Plan (TSP)

The Thrift Savings Plan, or TSP, is an excellent retirement plan which is available to military servicemembers and many government employees. It features similar rules to a 401k or 403b plan, though it is only available to certain federal employees. The TSP follows similar contribution rules with the same contribution limits. In general, it is a simple retirement plan which offers good investment opportunities and extremely low expense ratios (among the best in the industry). However, there are also several drawbacks to using the TSP as your retirement plan.

1. Limited investment options. The first, disadvantage is the number of ways TSP participants can invest their funds. Not counting the Life Cycle Funds, which are basically target date funds, there are only five different investment options. This feature is both a positive and a negative. The limited number of funds makes it easier for most people to choose a basic investment (all investments are index funds based upon certain popular stock indexes). This can also be a disadvantage for investors who prefer a more “hands-on” investment approach with investments outside of index funds. The solution for this is to also invest outside of the TSP – either with an IRA, or other investment.

2. Limited availability of matching funds. Civil Service members are currently the only TSP participants eligible to receive matching funds on all contributions. Many TSP participants are better off maxing their Roth IRA contributions before contributing to the TSP. The military can offer matching contributions to service members, but these must come out of the personnel budget, and there isn’t room for each branch to offer this to all service members. The Army has offered matching contributions as a retention tool, but only in select cases. In general, it is not available to most military members.

3. Track investments isn’t always easy. The TSP doesn’t interface well with automated tracking programs such as Quicken, MS Money, Mint.com, or other online software. You can get around this by making manual additions to your tools, but there is no automated process at the current moment. Much of this has to do with the TSP not supportng this as a way to keep management fees lower. Because it must be done manually, you will need to make changes to your records each month – whenever you make new contributions, change your holdings, or when you make withdrawals.

4. No cost basis tracking. This one is an extension of the limitation listed above. The TSP only offers limited investment tracking, and one thing it doesn’t track is cost basis. It isn’t essential to track cost basis since this is a tax deferred retirement plan, but it is important if you are the type of investor who wants to know how well your investments are doing compared to other investments or the broader market as a whole. You can track your investments manually with a tool like Quicken or by using a spreadsheet, but it can be cumbersome to do so because you must track each purchase, transfer, etc. It won’t be possible to have completely accurate data if you didn’t start tracking your cost basis when you began investing with the TSP. Your best bet would be to start from a point in time and track from there.

5. You can no longer contribute when you leave government service. Because the TSP follows very simliar rules to a 401k plan, you must stop making contributions once you leave eligible employment. You have options though. Your funds can remain in the TSP without any additional fees, of you can roll your Thrift Savings Plan account into an IRA, into a new TSP (if you go from one branch of government service to another, or from the military to civil service), or you can roll them into a 401k if your next employer offers one. Again, since the rules are similar to 401k plans, you have similar rollover options.

Overall, the Thrift Savings Plan offers servicemembers and civil service employees a good way to invest for retirement with a tax deferred retirement plan. With a little planning and steady contributions, TSP contributions should go a long way toward helping out government employees have a stable retirement fund.